The ‘Beneficial Crisis’
On the road to the European superstate.
May 31, 2010, Vol. 15, No. 35 • By ANDREW STUTTAFORD
The Greeks, Portuguese, and Spanish have all announced new austerity measures, but, even if we make the optimistic assumption that the recent riots in Greece will be the exception rather than the rule, these steps are unlikely to be enough to bring this story to happy ever after. Piled on top of existing budget cuts, the fresh rounds of slashing and taxing run the risk of crushing what’s left of domestic demand and with it an essential element in these countries’ ability to generate the additional tax revenues their treasuries so badly need. The usual remedy for such a predicament is devaluation and an export-led recovery, but with the PIIGS yoked to the euro that option is not available. The euro may be weakening against currencies outside the zone, but against their competitors within, the PIIGS are as uncompetitive as always.
It’s not easy to unscramble an egg. For one of the PIIGS to quit the euro would almost certainly mean both default on its public debt and the bankruptcy of wide swaths of its private sector. The domino effect across the rest of the continent, and beyond, would be appalling. Another, more promising, alternative, albeit one freighted with severe technical and practical risks of its own, would be for a German-led group to depart the euro and form a separate “hard currency” union of its own, leaving the PIIGS with the deeply depreciated (down perhaps 30-40 percent) euros they so obviously need. This would be tough on the PIIGS’ unfortunate creditors, but there would be a chance that default, and all its attendant dangers, could be sidestepped.
Yet no such alternative is on the menu. In confronting the hole into which joining the euro has dropped them, the eurozone’s leaders seem determined to dig ever deeper. We can debate their rationale, in all probability a mix of cowardice, conviction, careerism, and delusion, but not the likelihood of the conclusion to which they will come. Speaking in Aachen—the burial place of Charlemagne, an early Eurocrat—on May 13, Merkel made clear that she was still drinking the Kohl-Aid: “If the euro fails,” she warned, “Europe fails too, [and so does] the idea of European unification. We have a common currency, but no common political and economic union. And this is exactly what we must change. To achieve this, therein lies the opportunity of this crisis.”
Long before Rahm Emanuel’s infamous dictum, the idea of a “beneficial crisis” (to borrow the terminology of Jacques Delors, a former president of the EU Commission) was common in Brussels. Indeed, there is evidence to suggest that some smarter Eurocrats saw the flaws in the way that the euro had been set up as a feature, not a bug. The crisis to come would create the conditions in which the nations of the EU could be persuaded to submit to further federation.
On May 12, the current president of the EU Commission, José Manuel Barroso, argued that “member states should have the courage to say if they want an economic union or not. Because without it, monetary union is not possible.” The commission’s proposals include greater macroeconomic supervision, increased emphasis on deficit reduction, and the establishment of a permanent emergency financing mechanism. The most controversial idea is the suggestion EU governments submit their national budgets for review by their counterparts within the union before presenting them to their own parliaments. Whether this review would be merely advisory or carries a veto power has been left conveniently vague.
Barroso also wants a more punitive regime imposed on governments that persist in breaking the budgetary rules that supposedly underpin the euro. There are limits, however. The commission did not back Merkel’s call for provision to be made to allow the eurozone’s more persistent reprobates to be expelled from the currency union. Permitting such a procedure, even in theory, would imply that the grand European project could sometimes go into reverse, and that would never do.
Most of these measures will edge forward at best. Not all member states are enthusiastic about the push for what Herman Van Rompuy, the president of the EU’s council, has referred to as a European “gouvernement économique,” an elastic term capable of, in Van Rompuy’s sinuous prose, “asymmetric translation” in different languages, from the comparatively nebulous English “governance” to something altogether more concrete.
But, if some governments are not enthusiastic, it’s difficult to see what else they can do—unless they are prepared to quit the eurozone. And they are even less enthusiastic about that.
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