Recent news this week that German exports crumbled and that the continent looks like it may be on the verge of a “triple-dip” recession has added to the fears that have caused the stock markets to decline over the last 3 weeks. However, Europe faces some real long term challenges that are going to provide significant headwinds to economic growth over the next 5 to 10 years. These challenges relate to the viability of the Eurozone (and E.U. as a whole) as a viable economic bloc.

The first thing to bear in mind when discussing the European economy in the context of the E.U. or the Eurozone is that we are talking about something that can’t possibly work in the long-term, if what is meant by “work” is a large, integrated, dynamic economy along the lines of the United States. The United States became the “United States” as a culture and economy expanded across a continent that was essentially empty. The European project, on the other hand, has attempted to fuse 28 countries with existing economies, political structures, histories, and cultures into a single whole by force of law. The Greeks didn’t stop being Greeks and the Germans are not going to stop being Germans simply because they are told that they are now in a single economic entity.

The second thing to bear in mind is that the Eurozone has essentially created a single monetary policy for multiple economies that are not integrated. The Germans may want a tighter monetary policy and the Italians may want a looser one. They can’t both get what they want (and may in fact need). The European Central Bank (ECB) essentially needs to balance competing needs/wants which means that it will not be able to produce a monetary policy suitable for all countries that use the Euro. Add to this the fact that the economic structures of many countries are so different from each other and it is likely the ECB will produce a monetary policy that is positively harmful to some countries. When one considers the different cultures and different political realities faced within each country, it is no wonder that many hard-right (and a few hard-left) anti-EU political parties have risen over the last 10 years; parties that would have been nothing but small inconsequential splinter parties 10 or 15 years ago.

The third thing to bear in mind is that the Eurozone has many economies that are over-leveraged and in massive need of economic reform. However, went not facing a flaming Greek-style crisis, the impetus for economic reform seems to be lacking. Many of the economies have been largely stagnant for many years, and entrenched interests (such as those in Italy) are making economic reform all but impossible except by force in the wake of Greek-style meltdowns. The fact that the countries don’t seem to be able to embrace much needed reforms makes it only a matter of time before we have another Greek-style meltdown with all of economic problems that will come with it.

Simply put, the internal contradictions within the E.U. (different economies, different cultures, etc.) mean that there will always be devolutionary tendencies and resentments. Trying to force integration means that there will continue to be an unnecessary source of tension and instability as countries are put through wrenching changes to their economic structures without the benefit of controlling their own monetary policy that would allow them to choose the appropriate monetary policy for themselves at any given point in time. This will result in less legitimacy for the E.U. and Euro both in countries being forced to adopt policies that they don’t want, and in countries being forced to bail out certain other countries. As long as countries are locked into a system that forces inappropriate monetary policies on them, they will be susceptible to melt-down style crisis. As long as this continues to be the case, the E.U. will continue to be economically unstable with the reduction in investment (and lower economic growth) that will result.