So here’s an early New Year’s resolution: let’s stop saving the euro, end the cycle of crisis summits, and instead begin a serious rethink about how to re-launch European unification. And this time, supporters of Europe must avoid the huge mistake at the root of today’s impasse: that of trying to advance European integration without popular involvement and democratic legitimacy.
Last week’s summit may have taken a bolder stance on the issue of government budgets, initiating tougher fiscal rules to enforce “discipline”. But while trampling further over popular sovereignty and promising more pain and hardship for Europeans within the weaker regions, the summit once again failed to address either the short-term or the deeper-rooted challenges for Europe.
It had little specific to offer on the immediate difficulty of resuming the normal funding of today’s public borrowing. The European Central Bank’s actions last week to ease liquidity in the credit markets may encourage some banks to buy more sovereign bonds, but any such indirect, or, potentially in the future, direct extension of ECB support for sovereigns is only patching over a debt problem with more debt. This type of action rarely ends well.
Moreover any European version of quantitative easing would bring the same drawback as has been the case in the US and Britain. It would put off further the necessary economic restructuring that western economies need. Even a bigger financial bazooka would not get to these deeper economic problems of slow sluggish growth that long preceded the financial crisis.
This is the crux of the failures of all summits so far. The almost obsessive focus on levels of government deficits and debts fails to address the underlying problem of the Eurozone: the lack of economic growth that exacerbates the tensions caused by the unevenness across the region in productivity levels and competitiveness.
State deficits are a secondary matter for the future of the euro. With the partial exception of Greece, these deficits only started to grow as a result of the economic recessions in 2007/08. They are symptoms of deeper economic difficulties and a return to reasonable levels of growth would be their best antidote. However, what has been pretty much ignored by the euro elites throughout has been the lack of potential in many countries for adequate and durable growth.
The external current account deficits run by the weaker nations throughout most of the 2000s should have been the tell-tale sign of these more fundamental economic weaknesses. However, they were downplayed during the debt-financed first half-decade of the euro’s existence because everyone seemed to be winning. Weaker peripheral countries could borrow their way to prosperity while the consequent demand was artificially supportive to the export industries and to growth in Germany and other northern countries.
This takes us to the simple, essential flaw at the heart of the euro: you can’t have a stable currency union across economically uneven countries without previously establishing a political union. Only on the basis of a legitimate political union will transfers be possible from rich to poor parts. Without it – and we clearly don’t have this in euro land – there is no basis for intra-region solidarity. Instead as economies languish, we’ll see the escalation of resentment, inter-country tensions and instability.
After two unsuccessful years of effort surely the intractability of finding a solution to euro stability seriously calls into question the reformability of the euro as constituted. It is long overdue to question the big assertion that the euro must be saved in order to avoid economic catastrophe on a global scale. Currency unions have dissolved before without armageddon. A controlled return to national currencies as an interim step before re-forging a new, democratically legitimate and therefore stronger political, economic and monetary union would be a much better – although still painful – outcome than anything else on offer.
Phil Mullan is an economist, business transformation director of Easynet Global Services and author of The Imaginary Time Bomb.
Phil Mullan will be one of three lecturers, with Simon Nixon and Mark Seddon, this Thursday 15 December at the Institute of Ideas Christmas Lecture, It’s Christmas in Euroland. For full details and tickets: http://www.instituteofideas.com/events/xmaslecture2011.html
It’s time to question the big assertion that the euro must be saved to avoid meltdown