Crisis exposes the rot at euro’s heart
EVER since it was created, the Eurozone’s mission has been to defy economic constraints in the name of politics. Whenever they were told by economists that the euro wasn’t an optimal currency zone, the Euro-establishment would simply shrug, rejecting technical economic arguments out of hand. Anything is possible with enough political will, they would say, in their hubristic folly. Currencies are a tool of politics, an instrument by which countries can be moulded together, they genuinely believed. To them, it was a case of get the politics “right” and the economics would follow; rather than seeing economics as a set of natural laws akin to those of physics, never to be defied, they saw it instead as something they could easily control, mould and manipulate. The euro was thus an anti-economic and anti-economics project.
The French establishment were the worst: their aim always was to “tame” capitalism, “the law of the jungle” and to reorder the messy political map to create a more “logical, rational” system. Yet pushed too far, Cartesian logic becomes destructive; human beings begin to believe that they have total power over their environment. Inevitably, reality eventually reasserts itself – and the conceit ends in tears, unemployment, poverty and chaos.
That is why EU policymakers are so nervous. They were programmed to think and operate in a certain way; now their hard-drives have crashed. The error is fatal. Countries are bust, owing hundreds of billions; financial institutions, which own the debt, are in trouble. The euro itself has failed.
Until now, the process of European integration has largely taken place via regulatory harmonisation, not fiscal transfers. While the amount of taxpayers’ cash handed over to the EU for subsidies has been growing, such direct transfers have nevertheless been secondary compared to legal centralisation. This actually helped the pro-EU establishment: fiscal unification and substantially higher taxes to pay for people in other countries was always going to be the hardest policy to sell to the people. The Maastricht Treaty specifically had a (toothless) no bailout clause to reassure the Germans on this point. If this is seen to change, many previously pro-EU and pro-euro populations across Europe may suddenly become more Eurosceptic.
The primary problem is straightforward and has only two possible solutions: several countries have too much sovereign debt and will never be able to pay it back. The first option is for all the other countries to take on the debt, spreading it across the region, preventing an immediate crisis. But apart from the unfairness of such action, it may eventually bankrupt other nations, thus just kicking the can down the road. The second option is to default on a large amount of debt, which will be painful and possibly cataclysmic. All other “third ways” – Eurobonds, European Central Bank bond purchases, using a leveraged-up EFSF to step in, and so on – are variants of these two options.
The second big problem is that some countries are uncompetitive. They can only fix this by cutting their wages or by quitting the euro and devaluing.
The European establishment spent decades telling voters that European integration was a free lunch. Now they expect them to pick up a massive bill. It will be political suicide. Those investors who still expect a sweeping solution to the crisis under such circumstances are deluding themselves.
allister.heath@cityam.com
Follow me on Twitter: @allisterheath