The band plays on the broken Eurozone

The post-1999 currency union is easily the costliest mistake in the history of the European integration process, as Tom Gallagher's new book demonstrates with alarming clarity. Damage, damage, nothing but damage

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The eurozone is broken, and so is the EU
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Tom Gallagher
On 9 November 2014 08:34

This article summarises several of the main arguments in Tom Gallagher’s book ‘Europe’s Path to Crisis’, on the long-term origins and impact of the Eurozone crisis, just published by Manchester University Press in paperback and hardback.

The post-1999 currency union is easily the costliest mistake in the history of the European integration process. It’s right up there with Napoleon’s invasion of Russia or indeed Edward Heath’s decision to take Britain into a European Community whose governance and economic priorities were completely at variance with Britain’s.

The level of ideological enthusiasm meant to turn the currency union into the economic foundation of a supra-national order was not matched by equivalent practicality to accomplish such an audacious feat. The respective competences of the European Central Bank, created to manage the currency union, and other EU pillars, were never properly worked out or applied (as the crisis from 2009 starkly revealed).

The member states shared a currency and operate a single monetary policy. But fiscal policy – taxation, spending and debt issuance – remained the responsibility of the individual states.

Today, preserving the Euro is of primordial importance to political insiders whose grasp of economics is just as shaky as that of its main founders, Helmut Kohl and Jacques Delors. Even in pre-crisis times, the currency fetish failed to promote the solidarity which a nation normally invokes.

The eurozone members jockeyed among themselves to derive the most advantage from it and rarely thought in terms of any larger European cause. 

The currency scheme marked the culmination of ever closer ties between top EU officials and post-national politicians on the one hand, and corporate and banking interests on the other.

Big capital glimpsed huge benefits from internationalising production and even labour forces in the name of globalisation. It even saw merit and profit opportunities in backing the EU’s social and environmental agendas which have saddled European citizens with white elephant projects, not least the renewable energy obsession.

Before 2008, unprecedented levels of cross-national investment occurred with the banks of the peripheral Eurozone countries being favoured destinations for the savings and investments of North Europeans.

A crisis stemming from state and private indebtedness, starting in Greece, fashioned a response based on protecting the insider interests which had betted so heavily on the Euro providing the impetus for a European state enjoying a permanent place at the world economic table.

The customary IMF response to countries in economic trouble, that of re-structuring debt so as to revive growth and lower unemployment was never contemplated. It would have been a humiliating reverse for the EU’s pre-eminent political project.

Instead, emergency cash loans were provided to prop up banks and state balance sheets in one country after another – Greece, Ireland, Portugal, Spain, and Cyprus. Useless debt-ridden financial institutions, along with an unworkable monetary system, were kept going by piling debt on citizens who were soon reeling  from crippling levels of austerity.  

The EU dressed up a stance that benefited a key insider interest – namely some of the leading banks of core members France and Germany – by insisting that the lack of confidence in the Eurozone caused by debt restructuring would cause capital flight and threaten national economies with meltdown and the currency union with a messy dissolution.

A policy that was sold as ‘help for Greece’ enabled assets to be recovered and in the process, the destruction of a large part of the Greek economy would take place.

Debt restructuring eventually occurred but as a 2013 IMF report put it: ‘the delay provided a window for private creditors to reduce exposures and shift debt into official hands’.

Banks, enjoying favour at the top of the EU, would receive trillions of Euros in bail-out money. Meanwhile, collapsing production and falling tax receipts drove peripheral Eurozone states towards outright depression.

Biting austerity, leading to youth unemployment of 25 percent across the EU (and no less than 70 percent in Greece in 2013) failed to have any positive impact in the stricken Eurozone. Domestic consumption collapsed along with investment. Young people abandoned any hope of starting families, emigrating or, facing long-term unemployment, staying with their parents.

An entity with the vaulting ambitions of the EU might have paused and considered a relaunch in order to try and overcome this calamity. The monetary leviathan might have been reduced in size, members suffering from its rules given a sabbatical, or indeed the fiasco might have been scuttled.

Instead, the EU decision-makers have hunkered down in their trenches and fought for the Euro with even more dogmatic zeal than World War I generals displayed in sacrificing huge armies to acquire control of blood-soaked patches of battlefield.

Arguably, Mario Draghi is one of the few capable economic minds at the EU helm. As head of the ECB, he has sought to prolong the life of the currency. At the end of 2011, central banks were instructed to release huge amounts of funds so as to purchase bonds from struggling Eurozone countries.

This move appeared in contravention of the rules set out in the 1991 Maastricht Treaty for monetary union just as the bail-outs indeed were. But this Italian Mephisto interpreted them in a Jesuitical manner.  

It recalls Giovanni Giolitti, the Italian politician whose corrupt liberal regime was swept aside by Mussolini in 1922, who had once observed: ‘laws are applied to enemies, but only interpreted as regards friends’.

But Draghi now scarcely bothers to hide his despondency. Earlier this month, he gave a stark warning: ‘The eurozone is at a critical stage, the recovery has lost its momentum, confidence is declining, unemployment is high. Commitments were made but often words were not followed by deeds’.

The currency union has a lead state Germany which now commands the institutional strength which the project was originally meant to keep in check. But throughout the crisis Germany’s priorities have been national ones.

Monetising the enormous debt by going for a gentle inflationary policy that might lift the Mediterranean members from the floor, is ruled out. Angela Merkel and Wolfgang Schauble speak the rhetoric of European solidarity by way of structural reform. But they have deliberately opted for a shell banking union which not only vetoes risk-sharing but prevents far from robust German banks being effectively supervised.

There is now a European Banking Authority which on 26 October announced that  no serious problems had been found. These stress tests have been dubbed a PR-stunt by independent commentators.

A light-touch methodology overlooked the impact of a worsening global economic picture on banking asset values, especially in France and Italy. Recent big falls in share values and energy prices could trigger fresh bank runs. No reforms have been introduced in these years of crisis which could prevent large amounts of public money being used to salvage an improvident Eurozone financial sector. 

Draghi’s public angst suggests that there are no tricks left in this magician’s hat. With much capital having been repatriated to home countries and national tax-payers finding that they are on the hook for vast socialised private debts, the Eurozone is itself becoming a shell construct.

Yet technocrats and political and economic insiders pursue their  grandiose and expensive projects as they seek to remake a Europe based around renewable energy and a multi-cultural rewiring of most societies. The rule of the strong prevails: the Cameron government has just emerged from nerve-wracking negotiations over a £1.7 billion surcharge which took it completely by surprise.

If it had been one of the insiders, this demarche would never have occurred or else would have been finessed without the desperate grandstanding of recent days. Although  Brussels has made token concessions, there is a deep dislike of a British system where genuine, though diminishing pluralism, hangs on and the national parliament is not merely a rubber stamp for corporate interests.

France and Italy, who unlike Britain possess officials in the European Commission still determined to act in the national interest, continue to bend the opaque rules of Brussels to prop up their dysfunctional economies.

Tom Gallagher is an Edinburgh-based political scientist. Manchester University Press has just published  his latest book, Europe’s Path to Crisis: Disintegration Through Monetary Union, which can be purchased by clicking on this link

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