About EU gradualism and why markets speculate against the Euro
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Yesterday the website DebatingEurope.eu posted a very interesting debate with Slovak Finance Minister Ivan Mikloš, titled “Has the EU solved the crisis or is it worse?“. The Slovak Minister was called to offer his thoughts on a series of comments. He was even asked to answer my views that what Merkel, Sarkozy and the rest are calling a “fiscal union” has completely nothing to do with an actual fiscal union in which there would be a common treasury with jurisdiction over the exact same area the ECB has, with the power to raise revenue and issue bonds on its own accord; a surplus recycling mechanism (fiscal transfers) that would ameliorate the structural trade imbalances within the Eurozone; a unified banking sector and many other issues. My view was that if we are going to make a fiscal union we might as well do it right, since I uphold that just stricter rules, combined with excessive powers to unelected EU institutions such as the Commission and the European Court of Justice, will only make things worse (see my article About the pseudo-Fiscal Union and the actual Fiscal Control). The Slovak Minister responded in the following manner:
Theoretically, it might be true what Protesilaos proposes. Practically, it is politically impossible. The only thing that is politically possible today is what was proposed by Germany and France. Politically, stronger fiscal union and a transfer union – which means creating and building new institutions along with new common European taxes – this kind of transfer union is politically unsustainable. Even if this vision was the consensus amongst EU governments today, which I can tell you it is not, it will be unsustainable because it will be rejected by the people.
Of course, some of these things – for instance, Eurobonds – are maybe politically possible, but only after we have created strong rules which will minimise the risk of any moral hazard. This kind of fiscal union, which is represented by Eurobonds and other institutional changes, will not be possible unless we first create new rules to minimise risk. After we’ve done that, then we talk about Eurobonds and other measures.
The response of Mr. Mikloš gave me the chance to respond in the following manner, criticizing the “gradualism” that characterizes EU politics and I challenged the rationale about politically “possible” or “impossible”. Here is what I wrote back:
What Mr. Miklos says is absolutely correct. Politically speaking a genuine fiscal union is indeed impossible, at least within the current context. Hence European politics are characterized by an unprecedented “gradualism”, which seeks to reach specific ends by preparing the ground step by step. This is not necessarily wrong or undesirable, considering how diverse and multi-dimensional European politics are, from the supranational level, all the way down to national/local party politics. After all this is how the EU has always functioned ever since the Treaty of Rome (EEC at the time). All these decades the progress that has been made within this gradualist approach is significant, though there might be some discussion on secondary issues. This sort of achieving further integration has therefore proven to be a successful regime of reaching the ultimate goal of a political union in Europe, or at least an ever-closer union.</p>
Yet the conditions imposed by the crisis are fundamentally different than what used to be the case in previous epochs. In our days time is a luxury, while also market pressures are almost always faster than any democratic process (never forget democracy, EU already suffers from a democratic deficit – we want that to diminish not increase). Within this environment where the extraordinary becomes the standard political leaders need to think outside the rigid boundaries of their traditional practices. They need to act pro-actively not retroactively, as that is the only way to remain ahead of the markets. Alas for that to be true this gradualism I mentioned above cannot be the way forward, for it always leads to retroactive decisions, long after the disintegrating dynamics of the crisis have evolved into other realms and areas. Exactly because our leaders fall behind markets in decision-making, they always find their selves in a weaker position, laboring under immense pressure, often in desperately stressful conditions. This leads to mistakes and there have been many of them in the recent past. I could go down the line mentioning one by one all the contradictions and errors made by our political elite from summit after summit. However this is not our point here.
The gist is that in trying to maintain the same “politically” realistic approach, European elites end up being those who unwillingly materialize the desires of speculators. So far every single decision they have made has been in line with what the markets asked for. For me this is to a large extend why they are unable to provide any effective response to the crisis (there have always been flaws in the system of course, but let us not mention that now).
The tragedy, I may say, that we are facing is that in trying to be politically correct, paving the road for some closer union of the future, we have been unable to solve our current issues. I understand the need to look into the future. But in my understanding, if the euro falls apart (and there are many chances for that) then all plans for the “future” will be in vain, for states will return back to their national currencies, where they will be willing to control their monetary policy, implying that there is no chance they will give up their fiscal sovereignty – and Mr. Miklos who is an economist knows that well.
As for the last summit, I am afraid to say that it has produced a spectacular hole in the water, not only because on the economic level it did nothing to arrest the crisis, but mostly because it brought to the surface an “explosive” political debate about the role of each state in the EU; what this union is all about; where does sovereignty start and end; should we be part of it or not. Frankly this is no good news for anyone. The last thing we wanted now was to open the Pandora’s Box of competing national and supranational politics. Yet we did exactly that, adding a political layer on top of the existing economic crisis. In my view there is nothing to cheer about.
Of course do not forget that the Slovak Minister is above all a politician. I was not expecting from any politician to say that the manner in which European integration has been realized is wrong. Nor did I ever believe that the current crisis could have been solved by a mere European Summit. The failure of politicians to act pro-actively has made the euro, this utterly flawed currency, the best subject for speculation. EU politicians are so deluded by their political correctness that they cannot see the fall ahead of them. They fail to realize that what they built here in Europe is but a fleeting dream, from which they shall awaken to find every single country indebted for decades, condemned to stagnant growth; with its people being deprived of many of the things our civilization has to offer in this 21st century. We are already measuring the effects of the crisis in terms of lost generations. This is not something that happened because of the lack of “stricter” rules. It is because the “western” world followed a growth model based on cheap money, perpetual debt, bad government policies to sustain oligopolies and monopolies, little to no real growth, insignificant real savings. If we are to escape from this crisis we need to reconsider our world-views, not just some legislation that will allow for the punishment of those “profligate” states.