Friday, 11 May 2012

Quote of the day - euro complacency

From David Frum on Twitter:

"Weird punditry moment. I just taped a segment for Fareed Zakaria's weekend show in which 2 distinguished Europeans refused even to take notice of my suggestion that the employment crisis in southern Europe was attributable to the Euro. It was as if I'd committed some horrible social gaffe, from which decent people must avert their eyes.

Totally agree (obviously!) that countries like France have deep structural problems, need more flexible labor markets, etc. But Europe is like a patient with high blood pressure who has just been hit by a truck. Diet and exercise will only do so much..."!/davidfrum

In a nutshell, this captures the problem with the EU: a self-appointed elite is dogmatically pursuing its warped vision of European unity come what may, and no evidence or opinion which challenges that dogma is allowed to be taken seriously.

If half of Europe hadn't decided to band together in a single currency, today's problems would be serious but solvable. Instead, the Euro club has turned a difficult problem into a borderline unsolvable problem - the burning building with no exits, in Mr Hague's shrewd analogy. Meanwhile, the refusal to accept even the possibility that the Euro currency is part of the problem means that far from working towards a solution, the EU's cheerleaders continue to make things worse.

There are only 3 possible solutions to the problem:

1. Rich eurozone countries agree to large, permanent subsidies, called transfer payments, to the poorer countries. This would continue for ever, or until the poor countries become as rich as the rich countries (ie: for ever).

2. Rich eurozone countries guarantee to underwrite the credit risk of poorer countries, by issuing joint debt: so-called eurobonds. So euro countries wouldn't issue their own debt, it would be issued centrally and all of the countries would be jointly liable.

3. The eurozone breaks up.

Basically, option 1 means that rich countries give cash to the poor countries to cover their debts, option 2 allows weak countries to shelter under the strong credit rating of richer nations, option 3 means that poor countries gain a floating exchange rate to ease pressure on national finances (ie: devalue their currency) and are no longer in a position to drag richer countries under.

Anyone who talks about solving the European economic problem without doing one of those or a combination of them, is not actually talking about solving the European economic problems. There are no alternatives.

Option 1 is how Germany mainly dealt with reunification: the richer West Germany has so far spent about €1.4 trillion rebuilding East Germany's infrastructure and economy. Rapid catch-up growth and "a flowering" in the east were promised, but more than 2 decades later the former East German areas are still the poor relation, still needing transfer payments, still lagging far behind their western compatriots. Worse, the process seems to have stagnated. Hardly surprising that Germans suspect that if the same experiment were tried again, but this time with Greeks, Spaniards, Portuguese, etc, it would be even less successful. Throw in that some southern Europeans are retiring to a life of Mediterranean sunshine in their 50s while Germans would toil into their late 60s to pay for it, while still carrying former East Germany, and it's easy to see why Germans aren't rushing to sign up.

Germany has point blank refused option 2, which is sensible because it would be reckless to take on liability for another country's debts unless you control their spending. It would be like agreeing to become jointly liable for your over-spending cousin's credit cards: unless you can gain control of his overspending, he'll just drag you down with him. Interestingly, this is a big part of why Greece got itself into this difficulty in the first place: the presumed guarantee from creditworthy eurozone countries allowed Greece to borrow far more (and at far lower interest rates) than it could have as an independent nation. Chaos broke out when it became apparent that the presumed guarantee was not really there. So the eurobond plan is unlikely to fly unless eurozone countries give up most of their autonomy and become states within a federal EU with the bulk of spending and taxation policy decided at the EU level. The EU Fiscal Pact and associated budget monitoring powers are designed as a major step in that direction, but it's still a long way short, and already it is proving difficult to agree.

More to the point, the flurry of Euro summits over the last 12 months has proven that Germans in particular are unwilling to countenance either option 1 or option 2, and for sensible reasons. So that leaves option 3: breakup. But no one wants to talk about that either.

Instead people are sipping their wine, nibbling their canapés, making polite conversation about the weather and pretending that this is just a liquidity problem. One last heave on the Borrow & Bailout Plan, lads, I think it might work this time!

The problem behind all of this is the point made so often that it has become a cliché, but it is no less true for that: there can be no European democracy because there is no European demos.

When push comes to shove, Greeks, Germans, French and Portuguese will each vote in their own national interest, so even if national leaders agree on a way to face down a difficult problem, that agreement is always at risk of voters deciding to renege on their commitments and replace their leader. I predict that we will see that happening again and again in elections across Europe.

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