AUSTAN Goolsbee, former chairman of President Obama’s council of economic advisers, is hardly a virulent eurosceptic. However, his assessment of the prospects of the common currency is very stark: in his view, as long as European leaders remain wedded to a utopian vision of political union in Europe, they will have to keep fighting off fiscal and financial panics. But that can’t go on forever.
Last week’s summit of European leaders was supposed to deliver a definitive solution to the Eurozone’s financial woes. It didn’t, and it would be preposterous to blame David Cameron for that outcome. The crucial element of last week’s fiasco is the commitment of European political leaders to an unworkable model for the Eurozone.
The main conclusion of the summit is strengthened fiscal governance within the Eurozone – or rather an illusion thereof. In theory, no future structural deficits will be allowed, and violations of the 3 per cent deficit rule would trigger automatic sanctions. Furthermore, the European Commission is to be empowered to interfere with the budgeting process in individual member states whenever fiscal performance is unsatisfactory.
Of course, these commitments are not credible and are going to fail, for the same reason as most New Year’s resolutions do. Just as you’re not going to lose weight by merely saying so, Europe is not going to solve its fiscal and structural problems by fiat. After all, the Eurozone already has a set of fiscal rules, which have been ignored by most member states for a decade.
But there is another, deeper flaw, to the agreement reached on Thursday night. The periphery of the Eurozone has an immediate solvency problem, which is not going to be solved by better fiscal rules. And the Eurozone’s approach to this solvency problem is just as unconvincing as before. Neither the EFSF nor the ESM are serious mechanisms for solving the problem: their whole point is to mask the fact that there is no one willing to pay for the debts of the Eurozone’s periphery.
What if last week’s summit had agreed to the creation of a closer fiscal union? A solution to the problem in the form of fiscal transfers would require that the Germans commit to pay not only for the existing Greek debt but also that it will always provide the ailing periphery with funds in the future. In other words, the fiscal union would mean transforming the peripheral countries into the equivalent of those parts of the UK permanently dependent on fiscal transfers from London and the southeast.
Europe will not become a well-functioning union. By now, everyone should see very clearly that it lacks the elements that would make it work as a monetary union. It also lacks the elements that would make it work as a political union – common electorate, shared narrative and moral like-mindedness. And unless European political elites renounce their ideological commitment to this utopia, we are all going to get badly hurt.
Dalibor Rohac is the deputy director of economic studies at the Legatum Institute. Follow him on Twitter at @daliborrohac.