It’s been a tough year for Europhiles, especially those, like me, who have always supported the single currency and thought Britain should have been part of it. Most of them have been very quiet, and no wonder. Whatever one says quickly has the feel of being out of touch and in denial. And now this week the Economist asks in a leading article Is this really the end? that has been tweeted over 1,200 times and picked up over 500 comments. In today’s FT Wolfgang Munchau article is headlined: The Eurozone really has only days to avoid collapse (paywall). Is now the moment to finally let go, and admit that the whole ill-fated enterprise is doomed?
There is no doubting the seriousness of the current crisis. While most of the headlines have been about sovereign debt (especially Italy’s) what is actually threatening collapse is the banking system. It seems to be imploding in a manner reminiscent of those awful days of 2007 and 2008. The Germans’ strategy of managing the crisis on the basis of “just enough, just in time” seems to be heading for its inevitable denouement. Unless some of their Noes turn to Yeses soon there could be a terrible unravelling.
The most urgent issue is to allow the European Central Bank (ECB) to open the floodgates to support both banks and governments suffering a liquidity crisis. “Printing money” as this process is often referred to, seems the least bad way to buy time. Two other critical elements, both mentioned by Mr Munchau, are the development of “Eurobonds” – government borrowing subject to joint guarantee by the member states – and fiscal integration – a proper Euro level Finance Ministry with real powers to shape governments’ fiscal policy in the zone. Most commentators seem to be convinced that some sort of steps in both these directions will be necessary to save the Euro.
I have a lingering scepticism about these last two. I thought that the original idea of allowing governments to default, and so allowing the bond markets to act as discipline, had merit. The problem was that the ECB and other leaders never really tried it before the crisis, allowing investors to think that all Euro government debt was secure.
Still the short term crisis is plainly soluble, and most people will bet that the Germans will give the ECB enough room to avert collapse. But that leaves the zone with a big medium term problem, and two long term ones. The medium term one is what to do about the southern members whose economies are struggling: Spain, Portugal and Greece especially, with Italy lurching in that direction. The stock answer, which is to enact is reforms such that their economies become more competitive, seems to involve such a degree of dislocation that we must ask if it is sustainable. This treatment is not dissimilar to that meted out by Mrs Thatcher to Britain in the 1980s (an uncompetitive currency was part of the policy mix here, deliberately or not), for which she is still widely loathed. And she was elected (though “democratically” is a stretch given Britain’s electoral system). How will people react to unelected outsiders imposing such treatment? Better than Britons would, no doubt, since there is so little confidence in home grown politicians , but it’s still asking a lot.
And that leads to one of the two long-term problems: the democratic deficit. A lot of sovereignty is about to be shifted to central institutions, and it won’t be possible to give electors much say. The second long term issue is dealing with the root cause of the crisis in the first place, which is how to deal with imbalances of trade that develop within the Euro economy. Germany simply cannot have a constant trade surplus with the rest of the zone without this kind of mess occurring at regular intervals. But there is no sense that German politicians, still less their public, have the faintest grasp of this. For them the crisis is the fault of weak and profligate governments elsewhere.
So if the Euro survives the current crisis, there is every prospect of another one down the road, either political (one or more countries wanting to leave the Euro and/or the Union) or financial (say an outbreak of inflation).
My hope earlier in the crisis was that it was part of a learning curve for the Euro governments. As they experienced the crisis institutions would be changed and expectations made more realistic, such that zone could get back to something like its original vision. I am afraid that there is a lot more learning to do.