Euro economies must come before Euro debts

Ultimately, the size of debts accrued in the Eurozone has become too large for any credible rescue plan that does not include substantial write-offs far beyond Greece. The idea that Germany can hold together both the currency and the union whilst still protecting a mountain of sovereign and banking debts seems increasingly fantastical. To avoid decades of stagnation drastic action is needed - the first stage of which should be public audits of sovereign debt.

Oliver Huitson
19 July 2012


Though Soros’ speech is framed around three central themes – failure of economic theory, failure of economic policy post-crisis and the political bubble of the Euro project – our present situation aslo calls for recognition of a fourth element: the collapse of democratic power. For decades not just wealth but also control has been hoarded into ever fewer hands. The silver lining of the crisis, if there is one, is that it has sent the process into overdrive rather than retreat, and the end game has become more readily visible. What may have begun with the intent of rolling us back to some 19th century model of capitalist vigour now looks more akin to a project of feudalisation.

Economic theory, in its orthodox, rational, efficient market form has collapsed. Nothing Soros says here is especially new or controversial but some of his comments are worth emphasising. In its natural science form, economics may be said to be an early “bubble” of Enlightenment thinking, the desire to spread the precision and power of the scientific method to areas largely unsuitable. But even Adam Smith had a strong social element in his analysis, a recognition of human passions and frailties largely absent from his modern day disciples.

Within the framework of efficiency and rationality, the conditions of both markets and participants modelled are not just occasionally missed, or suffering slight abnormalities, but never achieved anywhere except the textbook. It is said, and rightly, that economists do not really believe the model to hold in reality, but the problem is that too many decide to act as if they do. In his dismissal of Hyman Minsky’s ideas on instability, Ben Bernanke, Chairman of the Federal Reserve, writes that he accepts the importance of irrationality, “however it seems that the best research strategy is to push the rationality postulate as far as it will go”. Much as someone may well know it often rains in an English winter, but decide to visit the country in December with nothing but shorts and t shirts. It’s not unthinkable that someone would do this, it’s just that you wouldn’t want them in charge of the world super power’s money supply.

With economic actors both seeking to understand and influence the economic situation simultaneously, Soros’ describes the process as one of “reflexivity”; reality cannot be independent of observation when the observer is also an intentional participant. Again this is not new, and was neatly analogised – as Soros notes - by Keynes in the form of a newspaper poll: vote for the most attractive woman from six faces; vote for the winner and you may receive a prize. It is not simply the voters’ subjective view of the women in question, nor any objective measure of their qualities that matters, but an accurate prediction of other voters’ views on the women themselves, and other voters’ views on the views of other voters. This is why assets must be differentiated from goods and services, assets have a fundamental social element: they are not purchased merely for use value but for their predicted exchange value within a social context. Assets and bubbles go hand in hand. When this reflexivity is combined with his notion of ‘fallibility’ – inherent ignorance and lack of objective measures of validity – economic behaviour cannot be modelled as a physical science because it is a social phenomenon with cognitive, fallible and reflexive participants.  

So what? Ultimately, the debate goes to the centre of “bubbles” versus “equilibrium”, the political ramifications of which are hard to overstate. In the land of imperfection and bubbles, the state is sovereign and the market its servant. In the land of equilibrium the market rules and government intervention inevitably distorts the “natural”, and hence optimal, functioning of the market.

But the significance of the division goes much further, impacting on everything from wage levels and unemployment to tax and regulation. Critically, Soros posits a “boom bust process or bubble which is endogenous to financial markets, not the result of external shocks”. Markets do not take care of themselves, they are not shepherded by benign providence and, as the last 5 years have shown, they can malfunction on a breathtaking scale. “The idea that laws or models of universal validity can predict the future”, he continues, “must be abandoned”. This may seem obvious, but in its impact on regulatory measures and banking structures it has clearly not sunk in fully in the corridors of power. The failure to enact any fundamental reform of finance is a tribute to the growth of non-democratic actors moulding state policy for private ends. Legislative capture has rarely been so brazen and any analysis of the Great Recession and its aftermath must surely look beyond mere battles of academic theory. Pushing £92m of funds in the UK alone the financial lobby is on a war footing, and it’s a war it has been winning.

On to Europe. A political “bubble”, as Soros suggests? Yes. Its over-ambition is acknowledged in its clandestine evolution and intent on the road to full political and fiscal union. Had there existed legitimate popular support for such comprehensive union – ignoring the concrete “no” votes already recorded, where they were even offered – the Euro project’s history would look remarkably different. As its support collapses further, the extraordinary measures taken to keep it afloat are reinforcing long-standing concerns from the populace over Brussels’ remote, undemocratic and domineering character.

In building the single currency the intent and motivations are highly debatable. Post-45, there clearly existed enormous political energy to fundamentally alter the nation states of Europe for benign purposes. On this view the project cannot be denied its success. But there is also the market interpretation: the EU and, particularly, the Eurozone are ultimately the creation of a fluid, borderless marketplace. As Chris Grey observes,

" … in supporting the EU the Left became entirely blind to the way that European integration had virtually no democratic institutions or mandate, and ironically supported an  EU which actually promoted and extended a free-market ideology they do not believe in.”

Greg Palast goes one step further. In a provocative piece, he argues that the Euro’s creation was intended to run into just the sort of problems we see today: discordant national economies tugging in opposite directions on the Euro framework. Robert Mundell, who helped pioneer ‘supply side’ economics as well as laying the theoretical groundwork for the Euro, was, according to Palast, principally concerned with removing state control over commercial enterprise.

 "It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business."

Witnessing the astonishing attacks on labour rights, bargaining powers and the ownership of public assets, so called “internal devaluation”, the idea hardly stretches credulity. Once Keynesian demand management ideas had been effectively killed off in the late seventies, monetary policy emerges as the central tool. If that, too, was taken away – what options are left on the table when the inevitable storm arrives? The European project, despite being treated as a sandal-wearing commune of the Left, has always been riddled with a strident neoliberal agenda. If the market lobby have their way, the crisis will transform Europe not into a poor man’s United States of America, but the United Market of Europe; technocrats in parliaments, unions in the dock and graduates fighting over the burger flippers.

On David Malone’s argument that the central force holding the Euro together is debt, in one sense this should not be controversial; considering the sheer scale of debt denominated in Euros its collapse will be fiercely resisted by creditors. But it seems clear – and here I agree with Victoria Curzon and Malone himself – that a substantial debt write off must be accomplished: “The best way forward is to let [the bubble] burst,  wipe the slate clean as quickly as possible and start again.” A public audit of national debts would be welcome: what exactly is owed and to whom. To avoid the accusation that this will be a covert move towards debt write-offs, it should simply be stated overtly. If 2012 called for any jubilee, it was of the biblical variety – debt forgiveness – rather than a washed out Royal pageant.  

How can the Euro be saved: if the hope is for Germany to stand behind the debt, the first questions must be ‘can Germany afford it?’ and ‘would Germany agree to it?’. On the first, probably not. On the second, perhaps. But probably not, at least not on terms acceptable to the wider Europe. Without firm auditing the scale of the problem remains unknown and every bail out and package simply bloats an already unsteady beast. As John Mauldin argues:

 There is a limit to how much debt the market will be willing to tolerate. What that limit is, no one actually knows until it is reached, and then it is too late. The limit has evidently been reached now in Spain. It will soon be "now" in Italy and even France, minus serious reforms. German credit default swaps are rising every week.

At some point, the game is up. Fiscal union, banking union, political union, even if these are achieved significant debt restructuring and write-offs will be needed. That political union also carries a cost. Despite the persuasive arguments of Aristos Doxiadis, political union still appears a bridge too far for an EU already crippled by waning legitimacy and we may need a collective step back before we can move forward. Audit, restructure and reduce the debts, clear the slate, and the Euro may, for now, be saved (if diminished). In calmer waters, the task of re-imagining the EU must begin as a participatory, democratized federation in a complementary relation to national customs, institutions and sovereignty – and a single currency, in its current form, may not be part of that.

For the Euro, again fundamental changes would be needed to address the internal tensions and imbalances pushing against the current framework. Soros’ is right, in part, in his analysis of the German position – it is not just the debts their central bank hold in Euros, but the effective European subsidy Germany receives on its exports that keep them fighting for the Euro’s survival. But there is no free lunch and it’s the weaker countries footing that bill on their balance of payments. The safety route Soros outlines, a minimum German intervention to protect the currency and debts, is not only an exceptionally tall order but it leaves too many imbalances unaddressed. Combined with escalating social tensions across the weaker zones, and the plan just does not appear credible; when austerity bites the public will ultimately bite back. Save the debts, force the union, and eventually the Euro falls –  and possibly the union with it. Europe desperately needs a change of direction.

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