Summary: The last act of the EMU’s death throes has begun. We already knew the two possible endings: further unification or fragmentation. Now we can see far enough to guess about when and how it will end. Probably in a crisis, in which the odds of policy errors will be high — and the odds of unification are low.
“It is a national and imperative need to officially ask our partners in the EU for the activation of the support mechanism we jointly created.”
— Prime Minister George Papandreou, requesting a 45 billion euro loan from the Troika (EU, the European Central Bank, and the International Monetary Fund), 23 April 2010
- Summary of the Euro-crisis
- What will resolve the situation?
- What about the magic of Central Bank action?
- For more information
(1) Summary of the Euro-crisis
Those words of Prime Minister Papandreous marked the beginning of the end for the European Monetary Union. Now, two years later, it enters what looks like its final stage. Here are forecasts about the next steps. We cannot see the ending, but unification or fragmentation seem likely alternatives. The current system is dying.
The European Economic and Monetary Union (EMU) was born on 1 January 1999 as a bold attempt to unify Europe by monetary policy as an intermediate step between a loose confederation and full political union. Many experts said it would fail (see here for details).
The 2008 – 2009 crash exacerbated imbalances that had accumulated from the EMU’s flawed design (for details see the articles at the end of this post). Each stage of the EMU’s death throes was a crisis, met by measures that were slow, late, incremental, and too small. Each crisis larger than the previous in both euros and territory.
Each response was known to be inadequate when made (despite the giddy applause greeting each new package). Nothing more was possible. The leaders of the EU, ECB, and IMF — like ours — operate within narrow ranges of freedom. Bold actions work only when a nation’s leaders and people will support them. Europe’s elites and peoples want two incompatible things.
- They want unification (to avoid war and control their destiny in a world of giants).
- They don’t want what goes with it — the transfer payments (eg, as California taxes go to spending in Mississippi & New Mexico), the central control of spending (ie, by Germany), and the need to get along with one another.
Political science is, in a sense, the study of how people resolve incompatible goals and values. Europe has been unable to do so for two years. Nothing can be done until they square this circle. The current EMU is a jury-rigged halfway house, now in ruins. Europe must unify or fragment. Each crisis provides an opportunity to take decisive steps, but the necessary political consensus remains elusive. So Europe’s leaders glue together the widening cracks in the EMU while planning for the future (ie, the European Fiscal Compact; see Wikipedia).
That’s probably all they can do now. Many people believe that leaders have the ability to mold public opinion. A large body of research shows this to be false. Events often shape public opinion; political theater and pretty speeches seldom do.
(2) What will resolve the situation?
“I don’t know if we’re on the edge of the precipice, but we’re in a very, very, very difficult situation. … What this shows is not capital flight, but the financing difficulties of Spanish banks in money markets. … Spanish banks are having growing difficulties accessing money markets mainly in Europe: in the U.S. the money markets are very much closed to all European banks.”
— Spanish Economy Minister Luis de Guindos on 31 May 2012, about the IMF report showing 97 billion euros left Spain in Q1 (66 billion of that in March). From Bloomberg.
I believe that only a crisis will force radical change. The most likely spark: a large-scale run on the banks of one or more of the PIIGS. This is a common ending for currency unions, and may have already begun. Greece has seen steady outflows of funds. A run may have started in Spain. Runs are a mob event, mass hysteria — but mobs often develop in response to real dangers.
Unfortunately, few people make quality decisions during the pressure and rush of a crisis. More likely are unwise or even disastrous choices (for an example see The Titanic’s lessons for us about the coming economic crisis). Worse for the long-held dreams of its people, during a crisis the ambit of people’s love tends to narrow. Not a propitious time for unification. The people might cry Every nation for itself; let the weak of Europe fend for themselves.
The history of America provides a cautionary example. Both of our two Republics were conceived in relatively calm times. The First in 1776, before the revolution got rolling. The Second (our current one) in 1783, after the war’s end.
(3) What about the magic of Central Bank action?
“If he’s alive or dead it doesn’t matter. If he’s dead, just prop him up and put some dark glasses on him like, like ‘Weekend at Bernie’s’”.
— John McCain worshiping Alan Greenspan, 18 June 2009 (from CBS)
Elected officials have come to rely on Central Bankers’ policy action as crutch, as an escape from making necessary changes in national policy. Monetary and bank regulatory policy can do many things, but to have beneficial long-term effect it must be part of a larger package of regulatory, tax, and fiscal spending policies.
Also, Central Bankers have little legitimacy. Especially in troubled times. Unelected bankers, they’re inherently undemocratic and easily become targets for public anger. This makes them even less interested than usual in decisive action.
Plus they tend to have narrow backgrounds and training. Money is not God, even when worshipped. Knowledge of money does little to make effective public policy on earth or gain the keys to heaven.
For More Information
(a) Articles about Europe’s march to unification
- “France’s Broken Dream“, Martin Feldstein (Prof Economics, Harvard), Project Syndicate, 26 May 2012
- The End Of The Euro: A Survivor’s Guide“, Peter Boone and Simon Johnson, The Baseline Scenario, 28 May 2012
- “The Euro: an alternative moral tale“, Simon Wren-Lewis (Prof Economics, Oxford), 1 June 2012
- Important: Remarks by George Soros at the Festival of Economics, Trento Italy, 2 June 2012 — Deserves attention, as he has proven to understand currency unions better than almost everybody.
(b) Forecasting the crisis in Europe:
- The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
- Can the European Monetary Union survive the next recession?, 11 July 2008
(c) Posts about Greece:
- A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
- The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
- Important: Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
- Hot news! The Wehrmacht failed to take Greece. Now Germany tries again, with a different method., 28 January 2012
- Europe has chosen a harsh future. All the paths for Greece lead into darkness., 24 February 2012
- A note from Athens: Feeling on the ground has palpably changed, 1 March 2012 — A clear sign that the Greek people are ready for change
(d) Analysis and forecasts about the crisis in Europe, reporting their slow march to the cliff:
- The periphery of Europe – a flashpoint to the global economy, 8 February 2010
- Governments cannot go bankrupt, 2 April 2010 — But they can default.
- About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
- The Fate of Europe, nearing the point of decision, 13 September 2011
- Europe drifts towards the brink of a cataclysm, 26 September 2011
- Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
- Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
- Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
- Where to from here, Europe? Some experts share their views., 8 November 2011
- Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
- Looking ahead to see the new shape of Europe, 22 November 2011
- Europe passes the last exit. A great crisis lies ahead., 21 February 2012
This post originally appeared at Fabius Maximus and is posted with permission.