When Angela Merkel and Nicolas Sarkozy tabled a proposal at Feb. 4's European Union summit for more closely harmonizing Europe's economic and social policies -- for "strengthening the euro zone's economic governance" in Euro-speak -- they confirmed the two basic truths about European integration.
First, France and Germany are always the drivers of the process. Decisions may require consensus among the member states, but France and Germany have always been the ones shaping that consensus.
Second, whenever the status quo proves untenable, Europe, rather than turning back, forges ahead toward deeper integration. After more than 50 years, regional integration is integral to the identity and worldview of Europe's leaders. When the going gets tough, they instinctively redouble their efforts to deepen and strengthen the European project.
That's not to say, of course, that this latest plan resolves the root causes of Europe's economic problems. In fact, it leaves some of the major issues unaddressed.
What the French and German governments offered last Friday was an unprecedented proposal for more closely coordinated economic policies. Tax and public expenditure policies will be more closely harmonized. Pension costs will be contained by raising the retirement age to 67, the standard set by Germany. To prevent labor costs from getting out of line, Brussels will exercise oversight over the structure of wage bargaining.
Predictably, Belgium and Luxembourg screamed about the proposal to eliminate wage indexation, while Ireland objected to the proposal to harmonize tax rates. To reach the necessary consensus, France and Germany will now have to make some concessions. But it is clear once again that the two countries have set the integrationist agenda.
This outcome is a rebuke to the many skeptics who have repeatedly predicted the euro's collapse. When the crisis erupted in 2010, these supposedly astute observers said that European countries would never contemplate tax harmonization because it would infringe on national sovereignty. They claimed that Brussels would never be given the right to interfere in national wage-setting arrangements. But in a region as deeply integrated as Europe, sovereignty is only meaningful -- it can only be used to achieve something -- when pooled. European leaders understand this, even if their North American critics do not.
On the question of whether this type of "economic governance" will resolve the euro's current struggles, the answer, inevitably, is yes and no. Making Europe's monetary union work requires finishing what remains incomplete. Economists, if not politicians, have known from the start that an effective monetary union requires institutions to ensure fiscal discipline, because member states no longer have the option of printing money to bail themselves out of budgetary difficulties. That's why, in the United States, 49 of 50 states have self-imposed debt and deficit limits.
An effective monetary union similarly requires arrangements to keep regional wage differentials from exceeding those justified by productivity differentials. To achieve this in the United States, the country has similar contracting arrangements across states and large flows of labor from low- to high-employment regions.
Europe will now have its own mechanisms for achieving similar ends. Each member state will adopt policies inspired by a German measure limiting deficits to 0.35 percent of GDP. There will also be similar wage-contracting arrangements across member states and strong oversight of national wage trends by the European Commission, which should compensate for the relative lack of labor mobility that Europe, with its various languages and national cultures, is burdened with. To all of this, the proponents of monetary union can only say "about time."