by George A. Pieler and Jens F. Laurson
There is an oversupply of doomsday op-eds dealing with all matters Europe, EU, and the Euro—terms often used interchangeably, if wrongly. From the Greek collapse, to the end of the euro, to complete EU demise, every possible scenario is detailed. To keep up, the Financial Times has even launched a devoted blog titled “Eurozone Crisis Rolling Coverage.” No matter the source, from print to online media, every angle seems to have the same underlying prediction: the euro, the European Union as a political entity, and the ideal of European unity, are bound to fail.
But this need not be the case. There is no simple solution that will save Europe, but there are lots of short-term plans to ameliorate the worst fears, at least.
Ultimately though the market must be allowed to work its magic, including if necessary returning Greece to the drachma.
Both Europe and the US have lived with extreme tension between economic and political institutions since at least 2008. A key difference is that, unlike the US, the eurozone lacks the mature mediating and governing institutions to effectively deal with a prolonged economic crisis. The economic culture of central and northern Europe (especially Germany) values fiscal balance more highly than, well, shorter work-hours and early retirements. Crudely put, the south doesn’t work quite as hard to pay its bills, and worse, let productivity slip. Thus, either some one else has to, or the inflation-default choice must be made.
Nor is the European Central Bank (ECB) designed to deal with the sovereign debt of EU member states. But contrary to the doomsday scenarios in the press, this does not mean that the ‘European project’ is inexorably teetering toward failure. Europe can still be saved—the key is to clean up the current mess with proper regard for long-term consequences.
The incipient European Stabilization Mechanism (ESM), largely a Franco-German initiative designed to tie EU member states’ fiscal decisions more closely to monetary ones, already steps outside the political boundaries of the EU as understood hitherto by triggering fiscal sanctions against member states that run endemic deficits. Meanwhile the European Financial Stabilization Fund—newly beefed-up thanks to Germany—brings the ECB into the Euro-bailout business, presumably on a limited basis.
But there are clamors to make permanent both these devices, supposedly in the interest of greater stability. In addition, the IMF is considering purchasing the bonds of the distressed economies, treating European economies as the equivalent to ones in the developing world.
The one thing Europe must not do is endow Brussels with economic powers that trump the governments of EU-member states—not unless governments are prepared to face voters with a fresh constitution for Europe. Avoiding a voting-booth debacle by incrementally empowering a vast array of decision-making entities would risk a constitutional crisis. After all, the narrowly accepted constitution that grew out of the Maastricht accord was sold to already skeptical Europeans, in part, on the ground that it wouldn’t endanger the states’ authority on fiscal policies.
Europe must instead deal with the current economic distress through the present institutional framework. And it must, at last, learn to respect and trust market forces. Various mechanisms for purchasing the questionable debt of EU members, including Eurobonds, are being floated, but no such financing mechanism will succeed if it only serves to spread the risk further. EU policymakers must allow the markets to freely evaluate the underlying conditions of the debtor economies.
That means member-nation debt should be valued by decisions of private investors, not valued by ECB purchases (or pooled EU purchases) of debt instruments at an inflated price. Not only do above-price purchases by the ECB subsidize fiscal failure, it is also a self-referential debt-spiral that only causes more mistrust in the market place. The ECB should not buy up the debts of EU member states, and the ESM should be given a hard end-date beyond which it will cease to pay a premium for failure.
‘Emergency measures’ must be strictly limited in time, scope, and power. Markets (and headlines) might love bailouts, because they allow traders to extrapolate from today, not speculate on the unknown. But bailout sentiment is just a knee-jerk, something-is-better-than-nothing, reflex. It cannot be the guide to responsible governance, which, in Europe as elsewhere, demands a broader vision.
The EU and Eurozone are flexible enough to avoid collapse without a massive centralization of political power. If Greece switches to a devalued drachma (the plans are drafted and ready to go, no doubt) the euro, along with the EU, will survive. Letting the market decide what the drachma is worth, and what investors are willing to pay for Greek debt isn’t an apocalyptic scenario. The most natural adjustment mechanism in the world—economic freedom—trumps endlessly moving debt around in the hope no one will notice it’s still there. Ponzi schemes, it should be remembered, always end with the last-to-the-party holding the bag.
Economic integration through open trade and free movement of labor has been the key to Europe’s success, not the centralization of economic decision-making. Preserving economic freedom should be the overarching concern of policymakers, not ratcheting up the size of the Brussels bureaucracy.
[Photo courtesy of Flickr user Leandro Ciuffo]