Much of the construction and the future design of a United Europe dreamt of by the elites is too absurd to take at face value
Germany has a new government.
As far as one can foretell, its byword for the next four years will be
"steady as she goes". Forty per cent of the electorate voted
center-right, 25 per cent center-left. For most practical purposes it looks
that the bulk of the electorate is quite content to have the country go on
becoming like a greatly enlarged Switzerland. There is less and less left of
the romantic, passionately patriotic, dutiful and a little maladroit German of
history. The modern German is mostly inward-looking, more interested in his
hobby than in national affairs, and pragmatic rather than highly principled. He
does his duty reliably as in the past, but does so because that is the way
quietly to get richer and not because he feels under moral compulsion. He does
not see why Germany should have a foreign policy, and he is quite content to
witness the process by which she is getting ever closer to becoming a member of
a federal Europe provided this does not call for one-sided financial sacrifice.
Paying dearly for it would, of course, be most un-Swiss.
However,
embedded in all this prosaic sobriety and practical sense is a minority of
opinion-makers, jurists, civil servants and other elements of the elite who
persist in believing in a tightly-knit federal Europe as an ideal for which
they will strive at any reasonable cost and that the present opportunity to create
such a Europe is a chance which must not be missed. Though in a minority, they
are highly influential and have very little opposition from the mostly passive
majority. It is they who spread the belief that allowing Greece to default,
France to be humiliated, and deficit countries to be squeezed beyond the
politically tolerable would be fundamentally mistaken. At times, their
arguments seem to lack any reference to reality and resemble delirious
fantasies of the sectarian. A somewhat similar clinging to a delirious dream
also characterizes the non-German federalists who make the running in their
respective countries, though their motives are dissimilar and much less
idealistic.
The European
Union is, of course, a larger and looser entity than the Eurozone. Three of its
important members, Great Britain, Poland and Sweden have stayed outside the
zone and so far they can only rejoice in having escaped it. The rest of the
membership is, at least officially, unwilling to admit that joining may have
been a great foolishness. This is a refusal to confess that one has bought a
pig in a poke and may perhaps be pardonable, but it further insulates the
debate from reality and keeps it at the level of wishful dreams.
Two
fundamental motives had led to the creation of the Eurozone. One was the
credulity accorded to the statistics put forward in support of Robert Mundell's thesis about optimum
currency areas.1These purported to show
astronomical benefits from trade between separate countries being transacted in
the same currency and escaping the costs of currency exchange. Believing these
numbers was grossly naive and betrayed a lack of feel and flair for judging
orders of magnitude. The other motive, very much the opposite of naive, was the
calculation that since a common currency is not viable without the pooling of a
good deal of fiscal sovereignty, ensuring the viability of the Eurozone will
force the member states to allow their taxing and spending powers to slip out
of their hands and gravitate to a federal body. It is this necessity that is
behind the turmoil of the last few years, the submission to a dose of
"austerity" by Greece, Ireland, Portugal, Spain, and Italy, and the
strange assurances by France that she will meet the norms of fiscal rectitude
tomorrow or the day after without yielding an ounce of fiscal sovereignty to
Brussels or Berlin.
One
thoroughly puzzling aspect of these hardly credible assurances is that the
financial markets do not punish the country that trumpets them; the French
state can still borrow for ten years at a rate of only a mere 0.9 per cent
dearer than the rate the German state has to pay for the same maturity and
actually less than the rate on ten-year U.S. Treasury bonds. A country in large
chronic deficit in its budget and, more pertinently, in its current balance of
payments, may either quit the Eurozone, devalue its currency, and thus accept
worse terms of trade and reduced consumption; or allow itself to be
"rescued" by Berlin through the various salvage mechanisms set up in
recent years. This involves a partial loss of budgetary sovereignty and painful
"austerity" for an uncertain number of years.
The only
immediate remedy is inflation. However, inflation has the unpleasant habit of
taking off when one would want price stability, and refusing to raise its head
when one could do with more of it. Japan's two decades of deflation, and the
total lack of incipient inflation in response to the orgies of
"quantitative easing" by the world's major central banks in recent
years, is an example of how inflation may be as hard to start as it is to stop
once it has got going.
There is an
intrinsic obstacle to the Eurozone becoming viable without first-aid mechanisms
being kept at the ready and salvage actions having to be mounted by Germany to
bail out some delinquent member state from time to time. The obstacle, which
may well be insurmountable, is that unlike the United States, where the Civil
War has settled the question of sovereignty once and for all in favour of
Washington, Eurozone countries are sovereign and no civil war is in prospect to
deprive them of it. The power to tax and spend, and also to borrow from
domestic sources (in the last analysis, from the young generation) is the milk
and honey of the political classes. Without these powers, their very existence
is emptied of purpose and they are forcibly retired to obscurity. They will
hold out to the last.
The
federalist dream does not reckon with this obstacle. Having drunk the heady
brew of a future United Europe, they see a fairy tale castle where treasure
awaits those who call. Overcoming the opposition of dismal bean counters and
economists, Eurobonds will have been created. Member states will borrow
according to their needs by issuing Eurobonds that will be jointly guaranteed
by all member states. This ultimately means a guarantee of everybody else's
borrowing and hence potentially the bankrupting of the German state. This is a
contingency that dreaming about the beautiful European fantasy-land will not
acknowledge.
Much of the
construction and the future design of a United Europe dreamt of by the elites
is too absurd to take at face value. The future seen by the federalists will
not happen. The sole safe prediction is that permanent muddle will happen and
we will all permanently muddle through it.
Footnotes
1. Robert
Mundell is Professor of Economics at Columbia University in New York. In 1970,
he was a consultant to the Monetary Committee of the European Economic
Commission, and in 1972-73 a member of its Study Group on Economic and Monetary
Union in Europe. His writings on optimal currency areas include "A Theory
of Optimum Currency Areas," The American Economic Review,
November 1961; "A Plan for a European Currency" in The
Economics of Common Currencies (London: George Allen & Unwin,
1973).
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