As Pete noted yesterday, things are never quite as they seem with the Eurozone. Paul Krugman writing in today’s New York Times bemoans the shortsightedness of Europe’s politician, but in it he makes an important category error when he describes the ECB as the European equivalent of the Fed… But he does suggest what has previously been thought unthinkable:
“…in the 1930s — an era that modern Europe is starting to replicate in ever more faithful detail — the essential condition for recovery was exit from the gold standard. The equivalent move now would be exit from the euro, and restoration of national currencies. You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what’s truly inconceivable.
So if European leaders really wanted to save the euro they would be looking for an alternative course. And the shape of such an alternative is actually fairly clear. The Continent needs more expansionary monetary policies, in the form of a willingness — an announced willingness — on the part of the European Central Bank to accept somewhat higher inflation; it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it. Even with such policies, the peripheral nations would face years of hard times. But at least there would be some hope of recovery.
What we’re actually seeing, however, is complete inflexibility. In March, European leaders signed a fiscal pact that in effect locks in fiscal austerity as the response to any and all problems. Meanwhile, key officials at the central bank are making a point of emphasizing the bank’s willingness to raise rates at the slightest hint of higher inflation.
In Standpoint magazine, Christopher Caldwell has a much more subtle analysis of what is at base as much an economic manifestation of a European political problem as an economic one:
The euro tethered non-creditworthy economies with lots of growth potential — such as Ireland, Spain and Greece — to sluggish, predictable, reliable Germany, at a time when Germany was struggling for oxygen under the weight of reunification. In other words, the new currency took a set of rules that were appropriate for an order of cloistered nuns (the Germans) and applied them to a bunch of randy teenagers (the Southerners).
The result, in the best of cases, was excessive borrowing and a housing boom more excessive than even that of the United States, but minus its reserve currency. In the worst of cases — where political corruption was added, as in Greece — the money didn’t even go into anything as real as Spanish beach condos and Irish country clubs. But once their economies collapsed into debt, these countries found themselves without the traditional instrument for exporting their way out of financial messes: devaluation.
As with Krugman, Caldwell offers two solutions; disbanding the currency or consolidation:
You can adjust the currency to match the government, scrapping the euro and reintroducing the old national currencies. Or you can adjust the government to match the currency, transforming the European Central Bank into a lender of last resort (like the US Fed) and giving Brussels budget-making power over the whole continent. Germans want no part of reforming the ECB — that would mean having prudent countries cover the debts of profligate ones. But Germans are intrigued by the other idea — that of a full-blown fiscal union.
In their minds, it will involve nothing more disruptive than inserting punctilious German accountants into ministries in Athens or Lisbon. But they are wrong. Fiscal union means surrendering national budget authority, and a state without authority over its own budget is not a state. Disbanding their nation-states was not the deal the peoples of Europe thought they were making when they consented to “ever-closer union”.
Germany is not pursuing these manoeuvres out of malice. Nor did it design the infernal machine that makes them necessary. The main thrust of European consolidation has always been anti-democratic, whether avowedly or not. But the move away from democracy, sovereignty and accountability has taken on a new élan as Germany has moved to Europe’s fore.
Let us face squarely the way that Germany’s neighbours see its role: Germany re-emerges on to the scene of European power politics for the first time in well over half a century, and its first project — which it pursues with a culpable zeal — is that of depriving various southern European peoples of their statehood.
Wherever democratic forms have been flouted, Germany has been a pivotal actor. Last summer, Italy’s elected (remember that word) prime minister, Silvio Berlusconi, agreed to a fiscal consolidation package in exchange for the ECB purchasing some of Italy’s €2 trillion in outstanding debt. Once his financing was secured, he reneged. It was a dastardly trick, one for which Italians should have held Berlusconi accountable. Instead, Germans held Berlusconi accountable. [Emphasis added]
And Germany is trapped in the grip of a number of cleft sticks, not least the one created by it’s own, post war federal constitution:
On the one hand, it wants to show itself a good European partner, just as it did throughout the Kohl era. Europe’s ruling elites insist on it. On the other hand, Germany cannot surrender its veto over changes in its economic policy. It cannot submit to a eurobond, or any pooling of debt that would allow the southern European countries to make free with Germany’s money. And not just because Germany would suffer economically.
If the German government was to accept eurobonds, it would alienate three important constituencies. First, of course, are the voters, for reasons that go without saying. Second are the economists. Not only the supermarket-carousel economists with their neon-coloured paperbacks full of exclamation points, but also the orthodox university economists and the central bankers. Third is the German constitutional court. In the early days of the Greek crisis certain measures were passed by regulatory authority.
But the court ruled last autumn that only the federal parliament, the Bundestag, has the constitutional authority to send Germany’s money to Greece, not the chancellor or her ministers, or any hand-picked Bundestag “special committee” either. The court wanted to ensure that the economic benefits of the euro, such as they were, cannot be turned into costs for its democracy.