Monday, 5 December 2011

On the Euro crisis


Mainstream opinion seems to be as follows:

  1. Creating the Euro was a mistake.
  2. We should save the Euro at all costs.

“At all costs” means:
  • In the short run, the ECB to buy member states' bonds, or to issue Eurobonds.
  • In the long run, centralized budgetary discipline in the Eurozone...
  • … and perhaps much greater transfers to provide “automatic stabilizers”

On the face of it (1) and (2) do not sit well together. The argument for combining them is that the alternative is disastrous: government default, one or more countries leaving the Euro, bank runs which governments can no longer prevent, and perhaps a second Great Depression.

Almost anything would be justified to avoid a really serious depression, because events on that scale do not just impose economic hardship – they also risk devolving into political chaos. For instance, I have heard the Great Depression and the collapse of world trade cited as a cause of World War Two, though I don't know enough history to evaluate that claim.

On the other hand, the argument is not completely obvious.

First, it isn't necessary to leave the Euro in order to default. Greece, for example, is keen to stay in the Euro. The cost of staying in the Euro is being stuck with an uncompetitive exchange rate. But countries have survived that. By defaulting they would at least rid themselves of the debt overhang that is forcing them to cut, cut, cut government spending in the midst of a recession. The cost of leaving the Euro is being stuck with a less credible currency, and probably facing bank runs as a result.

On the other hand, if countries do leave the Euro, that may not be disastrous for them. (Or why would they do it voluntarily?) Britain was forced to float its currency 20 years ago; the Conservative government was humiliated, but the economic results were actually beneficial, weren't they? There is a trade-off: chaos at exit versus increased competitiveness with your own currency afterwards.

At the very least, the economic tail is wagging the political dog. European government structures are being created as a panicked response to a crisis. These structures are likely to be less democratic, more centralized (with Germany being the centre), and also to set in stone the Eurozone's problems, as follows:
  • There will still be a single currency without the integrated labour markets that would help it to work.
  • There will still be the temptation to fiscal indiscipline, which will have to be prevented by centralized control.

Fans of democracy, freedom and responsible politics should not find this an appealing prospect. It would also be a national defeat for Britain, because we would be on the periphery of a large centralized Eurozone with very different economic interests and values to our own.

If the alternative is really a global economic collapse then perhaps this is the best choice of a bad bunch. My personal nightmare is different:
  • Europe centralizes;
  • Established parties, and elites more generally, face an ever-stronger backlash from their “angry and defrauded young”;
  • A new generation of populists enters national governments. They offer fantasy solutions, play fast and loose with deficits, and fail to exercise mutual discipline at European level.
  • We have a century of Argentina-style distributive politics, relative decline, and domination by a resurgent Russia.

My instinct is that failed ideas should be discarded; but if we are going to have the Euro, it seems better to have fiscal discipline and a hard budget constraint – a core condition for “market-preserving federalism”. The US has achieved this, so why can't Europe?

Perhaps I am missing something and there's an obvious reason that a default means a Euro collapse, and that Euro breakup must inevitably be an economic catastrophe. Certainly lots of people think so. However, perhaps some of the current panic comes from businessmen and bankers who naturally confuse short-term harm to themselves with the end of civilization.