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Euro Trashed

Europe’s rendezvous with monetary destiny

Dec 20, 2010, Vol. 16, No. 14 • By CHRISTOPHER CALDWELL
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The euro, whatever else it may have done for good or ill, should have spelled the end of a lot of European welfare protections. Without the instrument of devaluation and revaluation, a country can fiddle with its exchange rate only by making internal adjustments. In practice, this means cutting public spending, trimming labor costs, and making it easier to fire people. The so-called Lisbon agenda of deregulation, meant to make Europe more competitive by 2010, was not just a sideshow, or the hobbyhorse of free-marketers, as such agendas tend to be in the United States. As long as Europeans were not willing to have a strong, Europe-wide government, the Lisbon agenda was a sine qua non of monetary union. Trotskyists and other leftists tried to rally the French electorate to vote against the European constitutional referendum in 2005 by arguing that somewhere in this European project there lurked an iron capitalist logic. They were essentially right. The French voted against the EU in a landslide. The Dutch vote was nearly 2-to-1 against. At that point, other countries cancelled their referenda.

Next to nothing was ever done to enact the Lisbon agenda. In fact, the countries with the most sclerotic labor markets—Spain, most glaringly—were the slowest in reforming them, and macroeconomic instability was a result. 

We’ve now listed about a half-dozen conditions that are indispensable to maintaining the euro as it stands, and Europe has fulfilled none of them. There is only a series of ad hoc improvisations—the responses to crises that Monnet said would create the rules of Europe. This is not “bold, persistent experimentation” of the sort that Franklin Roosevelt claimed an overwhelming electoral mandate for. It is a displacement of the democracies that people think they’re living under. So we should ask whether it is intentional or incidental.


Democracy against economics

The euro is an end-of-history currency. The late Dutch central banker Wim Duisenberg called it “the first currency that has not only severed its link to gold, but also its link to the nation state,” and other economists have been just as forthright. The very capable economist Tommaso Padoa-Schioppa, probably the leading Italian champion of the euro, wrote a column last spring entitled, ominously, “The euro remains on the right side of history.” Padoa-Schioppa complained about the way both defenders and detractors of the euro believe that the traditional nation state “is and will continue to be the absolute sovereign within its borders.” He himself believes no such thing. “The advent of the euro is just an episode—a most significant one—in the building of a post-Westphalian order,” he writes. “At stake in this struggle, ultimately, is the ideology of the omnipotent nation-state.” 

Fans of the euro used to sell this post-national vision as a matter of hope. But today they are just as happy to sell it with fear. France’s finance minister, Christine Lagarde, told a German newspaper recently that any wavering from European unity would be a “disaster.” She said, “We need to go further towards a convergence of our economic policies.” One need not be particularly ideological to feel this way. One need only assume that, when economics speaks, politics must fall into line. 

Last summer, at the height of the Greek debt crisis, economists looked ahead to other problem countries and came to the uncomfortable conclusion that most of them had not been badly, incompetently, or corruptly run. There were exceptions, of course. Greece was corrupt by any historical or geographical standard. It would today be a basket case whether it had been using the euro, the drachma, or wampum. Ireland’s ruling Fianna Fáil party certainly retained elements of the traditional cronyism that is Irish political culture’s besetting sin, and which no one who has observed Boston politics for even a week will fail to recognize. 

But these are not the main problems the euro has wrought. The big damage has been in the private, not the public, sector. Politicians in Ireland may have got the occasional backhander from an unscrupulous property developer, but in the quantitative terms of balancing the budget, the Irish were model fiscal stewards until the property market collapsed. Greece itself proved contagious partly because of the private-sector trade imbalances the euro created, which left French and German banks searching for debt to invest in. It was the Western private sector, as much as the Greek public sector, that rendered Greece too big to fail and put an end to the EU’s no-bailouts rule. And then there is Spain, the other country whose rescue appears to be coming as inevitably as Christmas. Spain not only balanced its budget—it took precautions to keep its home lending sector from overheating. Unfortunately, even that was not enough to keep the artificially low real interest rates that the euro gave it from doing their damage. According to the Spanish macroeconomist Angel Ubide, Spain “probably should have been running fiscal surpluses of the order of 5-6 percent of GDP to offset the negative real interest rate its borrowers enjoyed.”

Well, as an economic matter, yes. Just as, as an economic matter, the United States should probably have been running surpluses to prepare for the wave of Baby Boom retirements that are fast approaching. But how would you have explained that to the Spanish people? Money burns a hole in the pocket of a democratic electorate. Voters hate reserves, surpluses, or any kind of money lying around. What do they call a 5-6 percent surplus? They call it “my money.” This, incidentally, is why Keynesianism, while logical in theory, is impractical in an open democracy. Demand cannot be “managed”—it can be stimulated, but voters will not tolerate seeing it dampened. “In a democracy at least,” as the wise economist Wyplosz writes, “fiscal profligacy is not a story of ‘politicians gone crazy.’ It is the rational outcome of the interplay between elections and pressure groups.” (Last week’s mad bipartisan tax giveaway in Washington provides further evidence that Wyplosz is right.)

The euro created a situation under which the democratically logical thing to do is economically destructive, and the economically logical thing is opaque to even the most well-meaning and well-informed elected representatives. When Ireland promised to stand behind its domestic banks in the immediate aftermath of the Lehman Brothers collapse, what was a member of the Dáil supposed to think? Was this a “bold” and “generous” way of protecting “the little guy” against the ravages of the global economy? Or was it a way of assuring that the two-dozen sybaritic Fianna Fáil cronies who drove the country into the ground would get bailed out by the taxpayer? The answer is the same as the one that any independent-minded U.S. congressman voting on the bailout package in 2008 could have honestly given: It would take weeks of study to come to a decision, and even that might be falsified if the markets turned fickle. 

It may be that the better an economist one is—certainly, the more focused an economist one is—the more one underestimates the complexity of this political problem. Last spring, one suggestion frequently advanced for reforming the euro was the establishment of “independent fiscal councils” at the European level, with veto power over budgetary decisions made in national parliaments. Representatives could still decide what they would spend money on, but only within parameters set by expert macroeconomists. Not surprisingly, economists thought this was a terrific idea. The Trinity College (Dublin) economist Philip Lane opined, “The establishment of a fiscal framework does not constrain the fundamentally political nature of decisions over public spending and taxation.” The Berkeley economist Barry Eichengreen agreed with Lane. “Europe will need fiscal rules with teeth,” he wrote. “The [European] Commission will have to be strengthened to where it has veto power over those pre-legislative submissions.” 

It is hard to quarrel with Eichengreen on the economics of the European finance crisis. He has written classic books on currencies and on crashes and on European economic history. Lane is as good an economist as any in Ireland. But the issues they are addressing are not primarily economic. In a democracy, the size of the budget is a political decision. Empowering a body of economists to overturn that decision would be an antidemocratic constraint. So a question of proportion arises: You’re going to rob a dozen ancient democracies of a large part of their sovereignty in order to salvage a ten-year-old accounting convention? That is what is at stake with the euro. Europe must now choose between its traditions of self-rule and promises of a radiant economic future that may not include self-rule. 

Christopher Caldwell is a senior editor at The Weekly Standard and the author of Reflections on the Revolution in Europe: Immigration, Islam and the West.

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