When will Europe begin to recover from its epic depression?
The euro, in its current form, is an unsustainable project.
Nowadays, that is a relatively uncontroversial idea. Beyond the many cultural and structural difficulties of building a currency union in Europe that my colleague Frances Coppola describes, the existence of monetary union without fiscal union is like building a house with no roof.
That's because the euro creates a new problem that does not exist for governments with their own currency. It creates the risk of sovereigns running out of money, as within the euro system they are subject to an external monetary authority.
Those who realized this made some prescient observations. As Stephanie Kelton (then Bell) noted way back in 2002: "Countries that wish to compete for benchmark status, or to improve the terms on which they borrow, will have an incentive to reduce fiscal deficits or strive for budget surpluses. In countries where this becomes the overriding policy objective, we should not be surprised to find relatively little attention paid to the stabilization of output and employment. In contrast, countries that attempt to eschew the principles of “sound” finance may find that they are unable to run large, counter-cyclical deficits, as lenders refuse to provide sufficient credit on desirable terms. Until something is done to enable member states to avert these financial constraints (e.g. political union and the establishment of a federal (EU) budget or the establishment of a new lending institution, designed to aid member states in pursuing a broad set of policy objectives), the prospects for stabilization in the Eurozone appear grim."
Of course, while the sun was shining all was well. Government borrowing costs across the eurozone converged, and growth was relatively decent. Yet it was inevitable that at some point the skies would open up, rain would flood down, and the new structure would be tested.
Indeed, even the architects of the euro understood this to some degree. Romano Prodi — the then president of the European Commission — conceded in 2001 that the euro system was not fit for purpose when he wrote: "I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created."
Of course, I would argue that building a house with no roof and then constructing the roof at the time of crisis is stupid and self-endangering. But the reality has been far more stupid and dangerous — hence the continued crises — because rather than constructing the necessary roof of a fiscal union, the various policies that have been rolled out during the sovereign debt crises to back the troubled governments and to ease the crisis have consisted of a few ad hoc attempts at stringing up a metaphorical tarpaulin and calling it a roof.
And while stringing up a few layers of temporary tarpaulin has temporarily helped the troubled sovereigns of the eurozone to lower their yields, even Angela Merkel — the poster-girl for hard-faced teutonic fiscal rigour — admits that in the long run a fiscal union is the only way in which the euro system can be fixed.
So the eurozone is still rolling from crisis to crisis, from botched temporary fix to botched temporary fix, and the outcome of this has been an epic depression and massive unemployment.
So what's keeping the problem from being fixed? In my view, cultural and political barriers. As Frances Coppola argues: "The history of Europe is long and blood-spattered. It is nothing like the United States, which is a young country with a common language, clear boundaries and a single political structure. Yes, the USA fought a civil war to achieve its current degree of political unity, and there are no doubt still stresses and strains. But Europe – if you must regard it as one entity, which is problematic in itself – has fought HUNDREDS of civil wars. We do not have a single language, we still cannot agree where our boundaries should fall and national interests always trump "European" politics. You can’t overturn tribal and cultural identities that go back thousands of years at the stroke of a few politicians’ pens."
So while the U.S. federal government redistributes money across state boundaries, from richer states to poorer state, the German public balks at the idea of direct fiscal transfers to prop up the finances of the periphery, and so the E.U. forces self-defeating austerity measures on peripheral governments, compounding the crisis and worsening the unemployment.
Yet even in this time of self-regurgitating crisis, the concept of European integration remains beloved of the technocratic European elites, as well as most significantly the European public at large (with Britain the major exception).
Undoubtedly there are clear threats to the status quo. The major one is large numbers of unemployed, hungry people. As mass unemployment has been allowed to take hold, the radical nationalist right is ascendant, most prominently in Greece and in France, but also across the eurozone in general. And the radical left — some elements of which also seek a breakup of the euro — is also prospering in these harsh times.
But for all the blundered policy and mess, I don't think the failure of the euro is imminent. Indeed, next year may mark something of an upward turning point for the continent in its long struggle with economic depression. The big story — as it is in much of the rest of the world — is energy markets. In my view, falling energy prices are a boon for the European economy, as Europe is a major importer of energy. Cheaper energy — which trickles down throughout the economy via transport prices, heating prices, etc — will take the heat off squeezed household, business and government budgets which have been eaten into by high energy prices ever since the financial crisis. That should put some wind into the tattered sails of the European economy and create new desperately-needed jobs.
And while I recognize that that may just mean a temporary respite from the long road toward the inevitable breakup of the euro, I also recognize the possibility that the European political elites — who clearly do understand the need for a fiscal union, even if they think it is politically unviable — may use this chance to begin to fix the broken system.
Sometimes, incompetent policymakers just get lucky. The possibility that next year could mark a bottoming out for the eurozone is real, and growing with the falling oil prices.
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