A number of economic writers have been making the point that one of the reasons the euro zone is struggling is because it's not an optimal currency area. Business cycles have differing impacts across the euro area, which lacks the necessary fiscal institutions to cushion the blow in places hit relatively hard. Paul Krugman (left) makes this point in his most recent column, in which he explains how federal government transfers across states fill in the gaps left by the common monetary policy. States that are struggling more receive more in transfers from the federal government, which prevents, say, California from suffering from a dramatically worse recession than the rest of the country, of the sort that would generate Greece-like complications. This story is correct, but it's not the whole story. As Greg Mankiw writes today, another key to American success is the thinness of state borders. The differences across American states, in terms of language and culture, are far smaller than those between European nations. Americans can discuss their nation's inter-regional cultural variation at length, but the fact is that a suburb in Pennsylvania is very similar to a suburb in Georgia, which is very similar to a suburb in California. The language is the same (if not the accent), the television programmes are the same, the structure of the educational system is basically the same (high school is high school, college is college), and so on. – Economist

Dominant Social Theme: The problem with the EU is lack of centralization and coordination.

Free-Market Analysis: We have been predicting along with others in the alternative media that the drumbeat for further consolidation (of the political kind) within the EU would rise steadily as this latest financial crisis unfolded. We have seen signs of it, though few full-blown articles. Now, however, it seems the battle may be beginning in earnest, with twin blasts being fueled by the New York Times and the Economist (see article excerpt above).

It's no secret at this point that the EU powers-that-be intended for crisis to spur the EU toward closer political union. We're on record of course as writing that the crisis seems to have been worse than what the EU bargained for and the leaders of this questionable union seem truly rattled by what has occurred. But of course, being who and what they are, they are not giving up. Power elite promotions never seem to subside like that.

Before we continue our analysis of the Economist article, let's make a quick digression for the latest on how the EU is responding to the unfolding sovereign debt crisis that (so far) is affecting Greece the most. As of the Bell deadline, EU leaders were said to be busy at work crafting some sort of additional bailout package on top of what has already been agreed to regarding Greece by the EU and the IMF. The numbers are huge, up to 500 billion euros, but questions about legalities also loom large. According to Chron.com:

European Union finance ministers were considering a euro 500 billion ($645 billion) defense package for the embattled euro, hoping it will suffice to keep markets from targeting the eurozone's weaker members, EU sources said late Sunday. Rushing to finalize an agreement before Asian markets officially open Monday, the ministers were discussing an aid plan that would have the EU Commission make euro 60 billion ($75 billion) available while countries from the 16-nation eurozone and the IMF could combine with a promise to back bilateral loans and guarantees for up to euro 440 billion ($570 billion).

Spanish Finance Minister Elena Salgado, speaking as she arrived for an emergency meeting of the European Union's finance ministers in Brussels, said they were determined to safeguard the currency used by 16 of the EU's 27 member states. The euro has come under increasing pressure since the financial meltdown of one of its members, Greece. France and Germany, the two largest members of the eurozone, agreed on measures to resolve the European financial crisis, according to a two-sentence statement from French President Nicolas Sarkozy's office Sunday.

But Britain sought to maintain a clear monetary line between the problems of the euro and its cherished pound. "I am very, very clear that if there is a proposal to create a stability fund for the euro, that has got to be a matter for the euro-group countries," British Chancellor Alastair Darling told the BBC. "What we can't do is to provide support for the euro. That has got to be for those countries that use the euro."

And here is a further analysis by the Wall Street Journal, also appearing around the Bell's deadline:

The measures being discussed in Brussels make clear how far the financial crisis is stretching the founding principles of the common currency. Those principles emphasize that each euro-zone country is committed to managing its own fiscal affairs. This fiscal independence, however, has been one of the principal causes of the current crisis, allowing Greece to generate budget deficits and build up government debts to levels that many investors view as unsustainable. In an effort to correct that fatal flaw, euro-zone governments are becoming more dependent on one another, a step that seems likely to require much closer coordination over fiscal policy and penalties for spendthrift governments. Until now, governments have resisted this interference with their independence to tax and spend as they choose.

With Sunday's agreement, they have effectively signaled that even the smallest members of the euro zone are too big to fail. Germany, in particular, saw to that. In the early days of the debate over the euro, Germany feared that by giving up the Deutsche mark, it would find itself pushed to yield its own fiscal rigidity in the name of the collective good. Thus the EU treaties contain a so-called no-bailout clause, which forbids the bloc itself or any member to "be liable for or assume the commitments of" another EU country. The treaties also prohibit the European Central Bank from either extending credit to countries or purchasing their debt directly.

To work around these obstacles, European officials appear to be relying on vaguer parts of the treaties, or on novel interpretations. Officials say "bilateral loans" – that is, lending from one country to another – are permitted because the lending countries aren't actually purchasing existing debt. Or, they argue that a part of the treaties permitting assistance in case of "exceptional occurrences" can apply, even though it seems intended for use when the exceptional occurrence is a flood, fire or hurricane.

One complication Sunday was that, while the mechanisms were being designed for the 16 countries of the euro zone, they also needed agreement from at least some of the other 11 EU countries that don't use the common currency, such as the U.K.

Wow, this sounds very much like the same type of editing Winston used to perform in the Ministry of Truth. We can see from all this that the EU is scrambling to set up a monetary fortress that simply can't be breached. But we can also see from the above commentary that the EU leaders have taken the EU into a legally questionable place. It is quite likely that the EU's measures, even if taken, will not go unchallenged in Germany and even in Britain.

But to return to the Economist article, what is going on in the EU is quite expected. While there are plenty of bright lines written into various EU agreements that ensure that the EU in aggregate does not pay for the profligacy of one or more countries, these bright lines are being ignored in the general panic to make sure that the EU hangs together and the banks involved in sovereign lending not-so-incidentally get bailed out.

All this is being done in the name of keeping the EU together and functioning as an increasingly solid and single entity. Which brings us back to the Economist article and the predictable swelling of mainstream media support for ever-greater EU political integration. It is the power elite itself, which is determined to keep these currency regions in effect and to build more of them. There is already one in South America and one in the Middle East that have come into existence fairly recently. But there are others as well.

The elite's mad rush toward a few currencies or a single currency continues apace – whether or not current EU agreements legally permit it or not. If a single currency cannot be knitted together from myriad currencies, then the elite will cry havoc about a "currency crisis" and use the hubbub to try to declare that the IMF should create a single currency, etc. But one way another, those who have been driving the globe toward a one-world order are determined apparently that the momentum not cease.

Of course, as we have pointed out many times, the elite does nothing without some sort of justification. Pure money power is not supposed to be used to hammer together and implement a policy. A dominant social theme – a fear based promotion – is always to be brought to bear. (It makes things stick.) In the case of the EU, the elite's mainstream media seems to be mustering the US as an example of how a functioning entity can successfully incorporate many disparate power centers (ie: the states).

Paul Krugman's article (to which the Economist refers) is blunt about a "bold" solution. He writes for the NY Times (May 6): "I remember quipping, back when the Maastricht Treaty setting Europe on the path to the euro was signed, that they chose the wrong Dutch city for the ceremony. It should have taken place in Arnhem, the site of World War II's infamous 'bridge too far,' where an overly ambitious Allied battle plan ended in disaster. The problem, as obvious in prospect as it is now, is that Europe lacks some of the key attributes of a successful currency area. Above all, it lacks a central government."

There it is again. What the EU needs is a central government. And of course, this is the last thing that the EU needs. For all those who back the increasingly authoritarian European Union, no government is ever enough, no centralization is ever sufficient. The ties between what were separate countries for centuries must be tightened until they positively creak with tension. And tension is what they will get – in the form of continued protests and even violence (though we are suspicious of the violence thus far). That's what is occurring in Greece, and will likely occur elsewhere. Some observers say that the protests are pro-forma actions of socialist and communist unions. But we don't think so. We think it runs deeper than that.

Here at the Daily Bell we have often pointed out that the greatest nations and regimes were the after-effect of small nation-states coming together freely and within a free-market context. Egypt became great because of the competition between the upper and lower Nile, in our opinion – and was less of a force after the merger between empires. The Greek golden age was fostered by separate nation states with the same language. Rome had its seven hills and seven separate towns with discrete ruling classes. Italy's Renaissance was comprised of numerous city-states. The United States was built out of 13 separate colonies.

In each case, the genius of the agglomeration was fostered by small, regional entities with separate ruling conventions but the same language. This made it very easy to pick up and go from one entity to another if rulers became despotic. The resultant culture between these geographical entities over time became one of republicanism. The tradition was one of a light-handed rule. And when these entities merged, or formed a closer union, the republican tradition remained, at least for a while. The "empires" that were thought to have resulted from some of these unions actually represented the dying carcasses of greatness long past.

This is the case we would venture to say in the United States where the republican genius of a pre-Civil war nation created a great entrepreneurial energy that existed far into an era of post-war consolidation. While the US's success is seen today as one that somehow has to do with a massive federal government and a trillion-dollar-a-year military industrial complex, we would argue that the greatness was generated long ago and the current national success is merely an ghostly cultural excrescence of a previous entrepreneurialism.

In the case of the EU, things are even worse. The nation-states that the EU has gathered together were already sclerotic and authoritarian to a degree. There was no culture of republicanism in Europe, even after World War II and the resultant consolidation is merely reinforcing the authoritarianism that was latent in Europe. The idea, therefore, that further consolidation and a weakening of the continent's nation states will somehow ease the strains that Europe is undergoing is most questionable in our opinion.

The EU's bureaucratic corruption and overlays of draconian regulation are gradually bringing Europe to its knees. The end result of the EU will be in large part a group of pan-European state-sponsored corporations – banks, airlines, car companies, energy companies, etc. Everyone else in the EU – those "proles" that are not privileged to work for these massive entities – will have a hard time surviving and will basically eke out a living. A Westernized version of the horrid South American economic model.

From a positive perspective, however, we're on record that those at the top of the EU – and the Western elite generally – probably did not anticipate the fierceness of the current economic unraveling and have been forced to reveal their collective hands in ways that maybe they did not count on. In fact, the powers-that-be have been forced to take numerous actions under the white-hot glare of the Internet that have revealed the essential bankruptcy of the system as it is. There are millions now who may not understand that central banks can print money at will, but who do understand the essential unfairness of a system that allows a small circle of men to distribute trillions to cronies at financial institutions while raising taxes and cutting social benefits for everyone else.

We don't know if the moves that the EU is currently making to shore up Greece and the rest of the PIGS will work – or stick. But we do know, as we have written many times, that Internet coverage of what's actually taken place in the past two years has been very damaging for the elite's mercantilist central-banking money system. It's spawned a tremendous backlash in the states and increasingly that backlash is taking hold in Europe as well. We know we are not alone in these opinions.

EU leaders may believe they can still jam through the political centralization that they counted on producing when the euro hit a crisis point (with the help of the mainstream media in both the EU and the US). Yes, we're seeing signs that this sort of promotional campaign is underway. But we wonder if a dominant social theme arguing that the EU is better off under a strong central government is going to fully gain traction either in Europe or America.

Conclusion: Once again, it's the Internet (a historical communication's revolution) versus power elite fear-based promotions. (What's the theme? "If we in the EU do not hang together, we shall surely hang separately.") More fear folks ... just a bit more fear. For citizens of the West and especially for those trying to figure out where to place investment bets, these are confusing times, and, probably, they're only going to get moreso but one thing you can do is reject the fear.

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