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Europe heading for the rocks: a reply to Varoufakis and Galbraith

Frances Coppola responds to ‘Whither Europe?’, authored by Yanis Varoufakis and James Galbraith. The Euro crisis is over, yes? Not so fast. It has simply moved from acute to chronic.

Things are quiet in Europe. Inflation is under control, there are signs of recovery in some periphery countries, unemployment though still too high is not rising any more. Banks are being brought to heel by the ECB, forced to clean up their balance sheets and raise more capital to protect sovereigns from the costs of bank failure. And there are baby steps towards a banking union and even towards fiscal union. The Euro crisis is over, yes?

Not so fast. It is not over – it has simply moved from acute to chronic. The southern European economies are terribly fragile: debt-to-GDP remains on an unsustainable path for many, a path that will not change while growth remains on the floor. Fiscal austerity alone cannot restore their public finances: as Eichengreen and Panizza explain, achieving the sustained fiscal surpluses required to bring debt-to-gdp down to Maastricht limits would be unprecedented. I would add that it would be disastrous not only for those countries but for the Euro area as a whole, creating a seemingly endless depression in the periphery. ‘Endless’ depressions do eventually end – in political unrest, war and revolution. The biggest threat to the Euro's continuing existence, and indeed to the European Union, is the creeping devastation of the southern European economies - now beginning even to draw in the mighty France. I could even view this as the biggest threat to peace in Europe, were it not for President Putin. But we should not underestimate the strains that the now chronic Euro crisis puts on the European Union. The Franco-German alliance is the core of the union. If it fractures, it is hard to see how the union could survive.

This is of course where the French economist Thomas Piketty and his associates are coming from in their proposal for radical reform of European institutions. Their solution to the strains on the Franco-German alliance is to strengthen it through closer union. This is perhaps understandable. But it is far from clear that a closer union is achievable at the moment. The heart of the Euro area's problem lies in the attitudes of its peoples. Until there is a common sense of ‘Europeanness’ and a shared concern for people in all parts of the union there can be no real political or fiscal union such as that suggested by Piketty.  Reconstructing institutions will not unite hearts and minds across Europe. 

The Glienicke group of economists goes straight to the heart of the matter. The very first paragraph of the Glienicke group's proposal is entitled “Crisis, what crisis?” and warns about the complacency of Germans. There is no sense of solidarity with other Euro members: depression in Spain or Italy is not the concern of prosperous Germans. The Glienicke group rightly argues that Germans should be concerned about economic troubles elsewhere in the bloc.

But I would go even further. What I see is not complacency so much as righteous anger. Righteous, because of German belief that their prosperity is their just reward for the painful reforms that they went through after reunification: and anger, because of other countries' inability – or in the case of France and Italy, outright refusal – to implement similar reforms. Why should Germans, who accepted economic pain in order to rebuild their country, support countries that balk at the same pain? While the debate is couched in these terms, no attempt to reform the Euro area will work. Not until the majority of Germans see that the prosperity of Spain, Italy and France is in their own best interests will the Euro area look viable as a currency union.

But worse, even those who do see the prosperity of periphery countries as in their own best interests still believe that fiscal reforms alone will bring about that prosperity. Yet there is zero evidence to support this. On the contrary, the reduction in incomes and shrinking of state safety nets necessary to achieve external competitiveness will force many into poverty. What sort of ‘prosperity’ is it that leaves millions facing malnutrition, disease and shortened lifespans? 

The truth is that the attitude of Euro area policymakers, and indeed of many northern Europeans, to periphery countries owes little to common sense, or even good economics, and much to moral and ideological belief in hard money, tight budgets and mercantilism as the path to prosperity. When macroeconomics becomes a morality play, debt is equated with sin, and debtors must atone for their crime with hair shirts and self-flagellation. The Glienicke group's call for creditors to be held responsible for excessive lending inevitably falls on deaf ears.

And so, sadly, does Varoufakis and Galbraith's “Modest Proposal”. Modest it may be, but it still amounts to a ‘get out of jail free’ card for highly indebted periphery states. When even the ECB will not provide the Euro area with the monetary expansion it desperately needs because of worries that this would reduce the pressure on fiscal authorities to make painful reforms, what hope is there for political approval of any programme of debt relief and reconstruction for shattered economies, however modest?

Varoufakis and Galbraith's argument that debt restructuring and a New Deal should precede any deepening of the union makes both economic and social sense. And it is financially well thought through, though hard-money aficionados will no doubt look askance at the idea of pan-European bodies financing states without any backing from taxpayers. But I fear that because it kicks the future of the European project into the long grass, their proposal will be condemned without trial. And that is because the only plans for resolving the Euro crisis that will be acceptable to European policy makers are those that further the political objective of closer union.

The long-standing political dream of a ‘United States of Europe’ which can challenge the USA for political and financial supremacy seems to outweigh all social and economic considerations. And there is nothing quite so good as a crisis for bringing it closer.  As Jean Monnet put it: “Europe makes itself in crises”. Varoufakis and Galbraith's proposal would waste a perfectly good crisis.

This is, of course, fundamentally undemocratic. No-one in Europe has voted for closer union. Indeed, in the most recent European elections, the success of nationalist parties suggests that many Europeans want a looser union, or even no union at all. There is nothing democratic about using a crisis to force through a political and fiscal union for which the people of Europe have not voted and it is far from clear that they actually want. And if the European Union is not democratic in practice, how can it require ‘democracy’ as a condition of membership for its member states?

The history of the crisis in Greece and Cyprus shows how fragile democracy really is. Voters in these countries no longer have the right to decide how their governments use their money: that is dictated by Brussels.  And the fiscal compact now means that all countries in the European Union are subject to Brussels' surveillance of their budgets. The opinions of unelected Eurocrats are of the same or even greater importance than those of elected politicians charged by their voters with managing their economies. There is a democratic deficit developing at the heart of Europe. And proposals for closer union would make this deficit worse.

All proposals for closer union seem to involve a commitment from periphery countries to endless fiscal consolidation in return for debt restructuring (not relief) and a vanishingly small amount of investment. Varoufakis and Galbraith point out that such a commitment would lock the periphery countries into an “iron cage” of austerity.

Strong though it is, iron is brittle. Denied a real democratic voice, and facing the prospect of lifelong hardship apparently imposed by external parties, it would be hardly surprising if the people of periphery countries increasingly turned to nationalism. Indeed, the connection between long periods of fiscal austerity and the rise of far-right nationalist parties is well established – the early 1930s in Germany is a good example. Tightening the iron bands around 'profligate' governments may eventually result in their peoples saying: “Let us break their bonds asunder and cast away their yoke from us”.  And at that point the austerity cage would break, and with it the European Union.

I fear that, because of the unholy alliance between those who want closer European union and those who want tight money and mercantilism across the whole of Europe, Europe is heading for the rocks. And this ship is not for turning.  

About the author

Frances Coppola is the author of the Coppola Comment finance and economics blog, which is a regular feature on the Financial Times’ Alphaville blog and has been cited in The Economist, the Wall Street Journal, The New York Times and The Guardian. Coppola is also Associate Editor at the online magazine Pieria and a frequent commentator on financial matters for the BBC.


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