The Cedar Lounge Revolution

I like the Euro, perhaps you do too… but that may not be enough… June 22, 2011

I’ve been reading Larry Elliott in the Guardian in recent times, and what’s striking to me is how much my view of him has shifted. I used to see him, and sometimes dismiss him, until relatively recently as euro-sceptic, but these day’s he seems to be in a sense euro-realist. Because the unpleasant sense has been growing for me that he has been correct and my own attachment to the European project blinded me to the realities of the situation, at least as it has developed in the early 21st century.

In referendum after referendum I voted for the deepening of the EC and EU. Not unthinkingly, but certainly with an attachment that now seems at odds with the actuality of that institution.

But if this was a blind attachment I’ve been far from alone. It would seem that the political ‘elites’ of the continent for the most part felt much the same. How else to explain the adherence to it by those of varying political persuasions of centre left through to the right?

For myself my europhilia I suspect came from a sense that the European project was a short hand for modernity, and even in some ways a short hand for a style of European social democracy that was fairly alien to this polity. Allied to that was a belief that Ireland as a peripheral economy would do better within the European Union and a sense that the issue of the North could be better addressed within that context.

Well, I’m not recanting on all of that, though some of it would be now strongly open to question. What has taken the gloss off – from my perspective – I think was the running of referendums on the same issue far too frequently in the last decade, the sense that there was only one ‘right’ answer – even if this was one I agreed with – and that all would be done to ensure that it was arrived at. Having argued the opposite I understand entirely that there are different perspectives on this, but it seems to me that there is a democratic deficit – an inevitable outworking of a situation where the requirements of national sovereignty must compete with a supranational, but not federal, political structure. To be honest I’d sooner go to a genuinely federal structure but that’s not an option and short of that I think making haste slowly might be a better way. Ironically enough that’s precisely what has happened to the EU project. We are now stuck, caught between national sovereignty and federalism and arguably mired in the worst of both worlds. Despite the overheated rhetoric of its proponents (and opponents too), Lisbon has not delivered the streamlined outcomes that were meant to follow on from it. Indeed there’s a strong case to be made that what the crises of the past 36 months or so have demonstrated is that the EU is a structure made for stable times and unable to respond effectively under pressure.

Now, that doesn’t mean that the EU is destined for inevitable break up, or any such. But it does perhaps mark the limits of the project in one area.

But the European Union is one thing and the Euro is quite another. Ireland managed for over a quarter of a century to muddle along within the EEC/EC/EU before the euro was introduced. And even if I also have to admit to an affection for the currency, mostly it must be said for its utility when abroad, well there it is. Nor is the situation in Northern Ireland demonstrably worse because there are different currencies in use on the island – as there were in any case before the euro (though the number of places that seem not just willing but eager to use the euro in the North always surprises me on trips there).

But Elliott doesn’t make it easy to have much faith that the Euro project is going anywhere – and if that analysis is correct it has significant ramifications as regards the European project more widely.

The Maastricht criteria were really economic window dressing for a politically motivated concept, and politics decreed that there should be as many members of the euro area as possible. Perhaps five or six countries were in a fit state to cope with the rigours of the euro; 11 – including Greece, Portugal, Italy, Ireland and Spain – were founder members.

Who could possibly argue that it was otherwise?

Monetary union did not lead to convergence; rather it exacerbated existing differences. A heavy price is being paid for failing to try out the idea of a single currency in a hard core of countries where economic performance was broadly similar. The failure to make the single currency work with a wider group of countries means that the attempt to muddle through has reached the end of its natural life.

And in light of that Elliott makes a crucial point:

No country is prepared to have a pan-European taxman take all their dough, so full political union is not on the agenda. That means there are really only two logical ways forward. Either there needs to be a plan B in which the euro area is pared back to a group that includes Germany, France, Austria, the Netherlands and perhaps a couple of other countries, or there will be an uncontrolled break-up with dire consequences.
Europe’s leaders have no plan B. They see no need for it because they are still committed to plan A – the European dream of fraternity and solidarity. This must be defended at all costs, even if it means permanent austerity for Greece, Ireland, Spain, Portugal and any other country that can’t cut the mustard.

And he notes that since neither devaluation nor default are ‘allowable’ for Eurozone members – and perhaps not for EU members either at that, then the only option left is deflation and all this to ‘fix’ the Greek economy and ‘ensure the single currency remains intact’.

As he further notes:

This is a crackpot idea for two reasons. First, it runs counter to the basic principles of democracy; the Greek people are clearly not in the mood to bear the spending cuts, the reductions in wages and the sweeping privatisation being demanded of them by the European Union and the IMF as the price of a fresh bailout.
Second, deflation has already made Greece’s debt problem worse and more deflation will make it worse still. It is worth spelling out exactly why this is so. The public finances of a country are made up of two components – the annual current budget and the stock of national debt. The national debt is simply the total of all the previous budget deficits or surpluses and is measured as a percentage of overall output. As an example, the UK ran a budget deficit of about £140bn last year, pushing up national debt to just over £900bn. The output of the economy was just short of £1.5tn so the national debt is about 60% of GDP.

And…

Running a primary budget surplus requires revenues from taxes to be higher than government spending. What then are the chances of Greece running a primary budget surplus of 7-10% of GDP if subjected to further austerity measures? None whatsoever, which is why either default or devaluation – and perhaps both – seem increasingly likely.

I don’t think the first point he makes about democratic mandate should be dismissed. A lamentable aspect of this entire process has been the one which has seen democratic control and opinion sidelined. Our most recent election demonstrated that the opinion of the Irish citizens in this state was for an alternative to the terms we currently labour under. That vote, though, appears to have been interpreted by the ECB and others as a legitimation of their calls for ‘political stability’.

The left [and in fairness important parts of the right and center] both here and elsewhere, has incorporated a spectrum of opinion from those arguing that the debts piled upon peoples are wrong to those who will accept part or all of those debts but demand that the timelines for repayment and the structures of repayment should be ameliorated to ease the burden on citizens. But those arguments have been brushed aside by the ‘hurry, hurry’ school.

But this is where his second point comes into play. That ‘hurry, hurry’ school cannot even by its own lights work – and here hardly more than in Greece. Indeed one could enquire as to whether all this has been in some respects a rather cynical ploy in order to squeeze as much from national governments in the PIGS before the financial and economic realities of policies that depress and kill growth are put aside. And this speaks of a poisonous inversion of the proper ranking that these polities should make as regards who pays what and why.

But in all this it now seems to me difficult to disagree with Elliott’s contention that …

…monetary union is fundamentally flawed, with zero chance that the weaker members can become as competitive as those at the core.

And it seems to me also that it is near impossible given the nature of the sovereign states which make up the EU that for any but a very few states a monetary union can operate as it does in the US, where there is the necessary rebalancing from the centre to smooth out certain negative economic effects. But then that merely points to the reality that the US isn’t simply a monetary union, but also a genuine political union.

For the EU to achieve that would appear to be an almost utopian goal. Our own experience underlines that. Our leaders have sallied forth to protect corporation tax in the last two months, but in a genuine political/economic union there would be no question of such a measure being protected.

And here is where Elliot may be wrong. I think that the attempt to muddle through, which has been the primary characteristic of the EU in the past three years when faced with what is rapidly assuming the look of an existential crisis to the project, will continue. I suspect that given the intrinsic paradoxes and contradictions between an EU and Eurozone project and the reality of nation states there is no other way. One could even posit that the appalling mess that was the Cowen/Lenihan government in its last two years is indicative of how the EU and ECB will continue to act, all half-truths and evasions and bluster as the fundamentals go south. Which will lead precisely nowhere good.

And in that last respect I fear that Elliot will most likely be proven all too correct.