Tuesday, November 25, 2014

Poking the Eurozone Bear

LONDON – The conventional wisdom is that, when confronted by a bear, you should lie motionless until it loses interest (or assumes that you are dead) and leaves you alone. But there are different species of bear, with some more likely to be deterred by bold, purposeful action. The question is how to determine the right approach when terror incarnate is staring you in the face.

This scenario is helpful for thinking about the eurozone as it attempts to survive its next round of trials – beginning with the European Parliament election in May. Can it continue simply to “lie still,” hoping that no new shocks arise that diminish its economic health, if not threaten its survival?

Some take the sanguine view that the current “lie still” approach is adequate to ensure that the eurozone economy does more than avoid decline. From their perspective, Germany’s decision over the last three years to permit actual and prospective transfers just large enough to prevent financial meltdown will somehow be enough to enable the eurozone finally to begin to recover from a half-decade of recession and stagnation.

But the fact is that these transfers – that is, European Stability Mechanism-financed bailout programs and the European Central Bank’s prospective “outright monetary transactions” (OMT) bond-buying scheme – can do little more than fend off collapse. They cannot boost economic output, because they are conditional upon recipient countries’ continued pursuit of internal devaluation (lowering domestic wages and prices).

Reinvigorating the eurozone economy requires a more radical effort to resolve the interlinked sovereign-debt and banking crises. Specifically, it demands sovereign-debt mutualization through Eurobonds, and thus the elimination of eurozone countries’ fiscal sovereignty, and a full-fledged banking union with recapitalization authority and shared deposit insurance – a far cry from the arrangement that has been agreed.

If Europe’s leaders continue to choose mild palliatives over bold tactics, the best-case scenario is a lackluster recovery, with GDP growing at a 1-2% annual rate. Unfortunately, this best case probably is not enough to prevent future sovereign-debt defaults in countries like Italy, Spain, and eventually even France. In other words, at some point, lying still will no longer be an option.

In fact, eurozone leaders might be spurred into action even sooner. While the prospect of OMT seems to be keeping financial shocks at bay, at least for now, a political shock seems increasingly likely, with voters reacting against the internal-devaluation policies that are fueling high unemployment and undermining living standards. The upcoming European Parliament election could be just such a shock.

As it stands, Europe’s political class is committed to internal devaluation in all of the troubled eurozone economies. The alternative approach – dismantling the eurozone to allow for external devaluations – has thus become the playground of hitherto marginal political parties, which are now surging ahead in opinion polls.

In France, the groups concerned – the National Front and the Union of the Left – represent political extremes. In Italy, a more ideologically neutral anti-establishment force may arise, with a much sharper anti-euro focus than Beppe Grillo’s populist Five Star Movement, which emerged last year to become the country’s third-largest political force. As these parties gain traction, the euro’s chances of survival diminish.

The predicament of Europe’s political establishment stems from a combination of irrational fear and vain ambition. This is particularly apparent in France, where the monetary union has often been viewed as a tool for harnessing Germany’s economic strength to project power worldwide. Given that dismantling the eurozone would mean the end of the French establishment’s European project and would weaken Europe’s ability to advance its interests vis-à-vis global powers like the United States and China, “monetary anti-union” is unthinkable.

France’s global ambition is apparent whenever its mainstream politicians discuss the euro. For example, in 2011, Edmond Alphandéry, a former economy minister, declared that a eurozone exit by a member country was as likely as a dollar exit by Texas or California. Here, on full display, was the wishful thinking that brought the euro into existence in the first place: its French architects dreamed of a Europe that could equal the US. That was always an illusory ambition, but it continues to cloud European leaders’ judgment.

The single currency’s advocates are right about one thing: political motives have always underpinned the establishment of monetary unions, from Latin America’s in the period from 1865 to 1927 to that between Ireland and Britain from 1922 to 1979. But they are missing a crucial point: politics is also the reason for these unions’ dissolution. When the economic costs and divergences become too much of a threat, the political will to do what it takes to ensure the common currency’s survival collapses.

Voter reaction against the euro may well force the eurozone to stop lying still and take real action. The question is whether that would mean that some or all eurozone countries must go their separate ways.

Read more from "Europe's Ever-Closer Disunion"

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    1. CommentedZsolt Hermann

      There is also a saying, "if you do not know where you are, which way to go, it is better to sit and do nothing".
      I think this attitude might be closer to what the decision makers in Europe are doing, but this attitude can only be temporary.
      Not knowing the laws does not acquit one from committing a crime.
      Despite everybody agreeing to the fact that we evolved into a globally interconnected and interdependent human system, and especially in Europe where a preliminary infrastructure is already built for this purpose, not progressing towards full integration is a crime those delaying it will regret bitterly.
      A house has to built from the foundations, and trying to balance a roof over non-existing foundations and walls cannot be sustained.
      A common currency, even harmonized financial institutions cannot succeed, even with frantic manipulations and pouring endless billions into bottomless pits, when underneath the nations are working in highly different ways, are on different levels, and most of all continue to compete with each other.
      And it is possible that even with the next elections a deep erosion starts as the extremist parties gaining ground, resentment against the Euro experiment grows all over the globe.
      In a global, integral system only mutually complementing cooperation, integration from bottom up can succeed and build a sustainable structure.
      Of course it cannot be achieved forcefully, or by misleading people as all though history we tried to implement new systems.
      Any new change has to be introduced trough positive motivation, free choice, where people understand that it is in their best interest to join in, and take part in the change.
      And the only way of achieving this is through education, transparent, unbiased and scientific information change.
      And we already have more than enough data, we simply have to work out how to deliver it in the best way.

        CommentedEdward Ponderer

        God, give me grace to accept with serenity
        the unstoppable evolution of Humanity into one global society that cannot be changed,
        Courage to rise above my individual and national ego--for my own and my nation's sake--to do everything in my power to assist in the successful and happy integration of people and nations into that global unity,
        and the Wisdom to move away from my childish short-nearsightedness, greed, fear, and habitual following of outdated models and methods just because they are my training, habit, and sense of power & prestige--for they are the way of the lemming, and I don't want myself, my nation, or my human race to be lemmings.

    2. Commentedhari naidu

      I've a feeling you're poking a finger into your own eyes because of your confused perspective from London. And may be demise of Cameron and Conservatives in next general election.

      If you recall when Maastricht Treaty was being formalized, Lady Thatcher and Whitehall Treasury advocates were also poking their fingers into Euro, as a single currency. They preferred the global hegemony of USD...as a leverage.

      Euro is now a global reserve currency with roughly 25% share... and still rising... in spite of the Euro crisis. Why? Because EM prefer bilateral trade dealing in Euro, for example, mainland China. Of course, supplanting the dominance of dollar trade will take time, but it shall eventuate - just like the demise of Sterling!

      I shall forecast for you that the majority in next EP elections will be represented by centre-left parties. The right-wing fringe parties - UKIP! - on which you are calculating to poke
      fingers into Euro policy will not change the balance of power in EP. Single issue parties will not survive in EP with emerging new Banking Union and a more transparent Single Market.

      Moreover, expect Euro inflation to pick-up during the next EP election process - end of deflation threat.