Beliefs and non-beliefs (2): the Eurozone

Here's the widely-held view. Germany must stop being intransigent, bail out the Southern Europeans (and thereby save the world economy) by standing behind their debt and/or issuing new Eurobonds. The political price for that is some degree of fiscal and political union. (Yesterday's agreement is a step along this path.)

This is nuts.

First, it doesn't solve the problem except in the short-run. Eurozone debt in the aggregate is about 80% of GDP and this is being bandied about as less than the US and therefore somehow manageable. Well, yes it is better than the US, but that does not necessarily make it manageable with low European growth rates. And this number does not include the very large off-balance-sheet liabilities from e.g. public pensions. There is a story from The Big Short about a trader who decided that some of these US mortgage securities were going to blow up. This smart guy therefore planned a massive swap for other, safer mortgage securities, which he had to accumulate in large quantities. Unfortunately he missed the big picture: all the mortgages were crap. He ended up buying a load of junk from the book's autistic Goonie heroes.

For mortgages, read Euro debts. What if they’re all crap? (Le Monde Diplomatique describes a French movement to “re-examine” their public debt.)

The political side of the Grand European Compromise is equally unappealing. What Greece, Spain et al. are being offered is essentially “Germany chooses how much you can spend”. This is not democratic, and there is no way it can be made so. (The European Parliament? Please.) Even if these decisions were made by an elected body at European level, this would still be a massive increase in centralization, with a concomitant massive decrease in human freedom. The famous EU “democratic deficit” has deep causes: no European public sphere, not enough common interest and/or mutual altruism for a true European demos.

In better times, the lack of democracy would just be a worry for earnest political theorists. Most people care about “output legitimacy” i.e. bread and butter. Unfortunately we are going through a very painful crisis and there is no output legitimacy: all politics has to offer European nations at the moment is blood, toil, tears and neoliberal reforms. That offer is far from attractive when made by your own politicians. Even less when it comes from foreign politicians and bureaucrats. In tough times, communal solidarity is not a luxury but a necessity.

Conclusion: we are trying to avoid ten years of economic pain, by setting ourselves up for a century of political disaster.

Why David Cameron is going along with this and demanding that Europeans implement the Grand Compromise, I do not know. The best outcome possible is that Britain ends up with a politically unified Eurozone as its nearest neighbour, thus defeating our central foreign policy objective for the past three hundred years. The more likely outcome is that we end up as neighbours of a continent-sized Argentina. This suits the short-term interest of the banks, not the long-term interest of the nation.