The perilous politics of the euro
SANTIAGO - The jury is still out on whether Greece will manage to avoid default, remain in the eurozone and reverse the brutal contraction of its economy. But any fair panel already would have issued a verdict on the political consequences of the common currency: utter failure.
Of course, the case for the euro was always political and came in two varieties: earthy and lofty.
The earthy case, seldom made clearly in polite company, was that the countries in southern Europe spent too much, taxed too little, and thus borrowed in excess. So long as they could finance deficits by printing a local currency and devaluing it from time to time, they would stick to their free-spending ways. Only the straightjacket of the euro and a monetary policy governed from Frankfurt could discipline them.
That was the theory. The practical result was precisely the opposite. With the risk of devaluation gone, interest-rate spreads dropped precipitously, and so did borrowing costs. Cheap money from abroad flooded into Europe’s lower-income countries. In some places - Greece, Italy, and Portugal - the money financed an unsustainable public-spending binge. In others - Spain and Ireland - it financed the delusions of private real-estate developers. Debts ballooned everywhere.
The lofty political case for the euro was uttered most pleasingly in French. It promised peace, prosperity, and growing mutual respect, with political union as the ultimate goal. It did not matter that no one seemed to know how to get there. As I heard at countless conferences over the years, European will and determination would do the trick. As a non-European, I was told (sometimes politely, sometimes less so) that I could not possible understand that.
Well, the results are now visible, and even non-Europeans can grasp what has happened. European institutions’ legitimacy is down, and neo-fascist movements are up. Anti-immigrant prejudices and cliches about tight-fisted northerners and lazy southerners proliferate. Even proper newspapers are not above depicting German politicians in lederhosen and Hitlerian moustaches. There may well be a worse outcome for the project of building an integrated and tolerant Europe, but I have trouble imagining it.
It did not have to be this way. Monetary union was always a risky bet, but it did not necessarily have to produce mass unemployment (more than half of all young people in Greece and Spain do not have a job). A significant part of the problem reflects the eurozone’s flawed design, and that failure, too, is political.
Yes, many of Greece’s troubles were of its own making. Pension benefits have been widely abused, tax collection is a mess, and (aside from beautiful beaches) the country offers few goods and services that the rest of the world wants to buy.
But the depression - now a half-decade old - also has external causes. Other European countries are not just buying too little from Greece; they are buying too little everywhere. As Martin Wolf of the Financial Times never tires of pointing out, there is a massive imbalance in Europe, and it is not the one you might think.
Since the current crisis erupted, the eurozone’s current account has gone from a small deficit to a surplus of nearly 2.5 percent of gross domestic product. As countries like Greece have cut their expenditures, others, like Germany, have not expanded theirs. Northern Europeans are proud of living within their means - never mind that in doing so they are helping to sustain a regional crisis.
This kind of problem already worried John Maynard Keynes at the time of the post-World War II Bretton Woods negotiations. Outsiders can force a country to spend less by refusing to lend to it. But how do you force a country or group of countries to spend more? The eurozone does not have an answer for this inherently political conundrum, and therein lies one of its fundamental flaws.
Nor does the eurozone have the automatic fiscal shock absorbers that - as is widely understood by now - are essential to stabilize incomes across the union. When the price of oil drops and Texas and Oklahoma fall into recession, money flows their way on a moment’s notice and without any political vitriol. But such a transfer union will not happen as long as a single northern European citizen is left standing. So the eurozone will be forever plagued by economic imbalances and the political tensions that inevitably accompany them.
And, speaking of political tensions, Greece’s negotiations with the EU broke new ground. The new Syriza government caved after barely two weeks, when confronted with the ultimate nuclear threat: misbehave and the European Central Bank will stop funding your banks. Not even finance ministers in leather jackets are willing to countenance a bank run and the financial chaos that follows.
Independent central banks are a great thing, and ECB President Mario Draghi is a great central banker. But that independence is meant to apply to monetary policy (jacking up interest rates if necessary, however unpopular it may be) and not to fiscal policy (forcing a country to cut expenditures and raise taxes to pay outstanding debt). Did anyone say democratic deficit?
Of course, none of this means that Greece’s exit from the eurozone would be desirable. As the old joke goes, if you want to go there, I wouldn’t start here. But here - in the monetary union - is where Greece finds itself, and leaving in a lurch without a plan B would be disastrous.
Bad economics easily turns into bad politics. Owing to its flawed design, the common currency now threatens to abort the very project of political union that it was meant to advance. Now that would be a Greek tragedy.
Copyright: Project Syndicate, 2015.
*The author, a former finance minister of Chile, is professor of professional practice in international development at Columbia University.
by Andres Velasco