razeen

A BRIEF POLITICAL ECONOMY O F T H E E U R O Z O N E C R I S I S ecaf_2142 102 Razeen Sally The EU seems totally consumed by an existential battle to save the euro. But there are other symptoms of European malaise. There is no serious agenda of structural reforms to tackle ‘unfinished business’ in the Single Market. Climate-change policies are increasingly costly. And the EU is taken even less seriously than before as a global force. Whatever next? The rootstock of the euro zone crisis is a failed political project – the Euro itself. It was pushed through for political reasons. There was the naïve expectation that a single currency would ensure monetary stability, induce domestic structural reforms and boost EU competitiveness. Quite the opposite happened: there was no structural adjustment in most of the EU and governments went on a borrowing spree at artificially low interest rates. The global financial crisis exposed these flaws. The result is a triple crisis – of sovereign debt, banks and the single currency. Europe’s third-rate political and bureaucratic elites are purblind to the root causes of the crisis – the euro, unsustainable tax-and-spend policies and repressed markets. Hence the resort to half-baked solutions since Greece erupted in 2010 – a drip-feed of EU bailouts in return for unfulfilled reform promises, and ECB buying of government debt. Only very belatedly was there the reluctant admission that the EU periphery suffered from a sovereign-debt crisis rather than a liquidity problem and that this compromised the solvency of highly indebted European banks. The conventional wisdom, inside and outside the EU, is that monetary union needs the foundation of fiscal union. That means harmonising fiscal policies among Eurozone members through ‘automatic’ rules, centralised monitoring and enforcement, and tough sanctions for those who break the rules. This will have to be backed up by bigger EU ‘firepower’: much more liquidity for severely indebted governments through the European Financial stability mechanism and additional doses of liquidity from the ECB for sovereign debtors and banks. Sovereign-debt restructuring and bank recapitalisation will be needed as well, as might new ‘Eurobonds’. This is the logic of the treaty being negotiated. Will it save the Euro? I doubt it – for three reasons. Firstly, ‘firepower’ will have to be in the €trillions, not hundreds of billions, to be credible. The Germans will not accept that. The resources of the virtuous will flood into the pockets of the profligate. Secondly, common fiscal rules will never be automatic. Inevitably, they will be bargained over and watered down to a low political common denominator, and broken by countries that are unable or unwilling to stick to the rules. Thirdly, fiscal union is disastrous political hubris. It is a product of elite negotiations behind closed doors, in the expectation that European publics will meekly follow. But this latest march of top-down integration is probably a bridge too far. It goes deep into national fabrics of taxation and expenditure. My sense is that it will spark a populist backlash in the heart of the Eurozone – not just in Greece and other parts of the periphery, but even in Germany. That leads me to think that the Eurozone will break up sooner or later. Any breakup will be very messy. It will reverberate around the world. Most worryingly, an anti-EU backlash in the member-states would ratchet up internal protectionist pressures and threaten the future of the Single Market. That would spill over into EU protectionism against the outside world. One of the dreadful errors of the EU elite is not to have a Plan B. A sensible Plan B would smooth the transition to post-euro currency arrangements, protect the real gains of the Single Market, proceed with long-delayed structural reforms, and keep the EU open to the outside world. It would also eschew further top-down integration with its centralised, one-size-fits-all bureaucratic nostrums that emerge from Byzantine political decisions taken far away from the ordinary citizen. Rather, power in the EU should be limited and decentralised to unfetter markets, give individuals more economic freedom and make politics and policies less cartelised and more competitive. That would breathe life into the ‘subsidiarity’ principle – so far most honoured in the breach. Razeen Sally is director of the European Centre for International Political Economy (razeen.sally@ ecipe.org). Globalisation © 2012 The Author. Economic Affairs © 2012 Institute of Economic Affairs. Published by Blackwell Publishing, Oxford

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