Eurosceptics crowing about how they have been vindicated by the Eurozone crisis are beginning to drive me nuts. I don’t think they have been vindicated, but that’s for another column. What matters now is this:
1. Like it or not, a calm negotiated dissolution of the euro is not possible
It is true that currency unions have in the past been dismantled without catastrophic economic disruption. In recent years, Britain’s currency union with Ireland ended in 1979 when Ireland joined the European exchange rate mechanism; and Slovakia and the Czech Republic introduced separate currencies in 1993 after Czechoslovakia’s “velvet divorce”.
It is imaginable that at some time in the future the Eurozone could be broken up by mutual consent of its participants without precipitating disaster (whether that is a desirable outcome is another matter). This is, however, utterly implausible in the near future. The bond markets are in a state of panic and smell blood, and not even the smallest reduction in Eurozone membership – a Greek exit – could take place without triggering further panic that forced Italy, Portugal and Spain out too. The only plausible scenario for ending the euro as we know it in the foreseeable future is a chaotic collapse.
2. The collapse of the euro would be a disaster for Britain
Such a collapse would be ruinous for every country that was forced out. In the run-up to exit, they would experience catastrophic capital flight. Their banks would implode and credit would disappear. As businesses failed, unemployment would rocket – and people left in work would find their living standards and purchasing power slashed as a result of the devaluation that euro exit would inevitably bring.
The impact would be felt throughout the world. Germany and other countries still in the Eurozone would go into deep recession as their banks took the hit of defaults on loans to the leaver countries and as their exports to those countries slumped. Britain would take an economic hammering. The Eurozone is Britain’s biggest export market, responsible for nearly half of British export revenues, and British banks are massively exposed to Eurozone debt. The disintegration of the Eurozone, and the consequent wider economic downturn, would be a calamity for Britain.
3. The euro must be saved
It follows that it is in everyone’s interests, including Britain’s, for the euro to be rescued. The key question is how. This, of course, is what the European political class has been arguing about for months – without providing a credible answer, which in turn has exacerbated the crisis as the markets have factored in the possibility of meltdown.
The immediate priority is to end the bond market panic to allow the Eurozone debtors to borrow more at reasonable rates of interest. The problem is that this requires the Eurozone as a whole to underwrite their borrowing – which means Germany, as Europe’s biggest creditor nation, taking on responsibility for the debts of southern Europe, either directly or indirectly. Up to now, however, the Germans have refused to do so. The German economic policy establishment, horrified by the prospect of inflation above all else, considers that the priority is for the indebted countries to reduce their debts and has ruled out the European Central Bank acting as lender of last resort. German voters balk at their taxes bailing out what they see as profligate and lazy southern Europeans.
The most likely way out of this impasse is that a deal will be struck whereby the Germans relent on bankrolling the Eurozone, but only on condition that the debtor countries immediately implement draconian austerity budgets and accept tough, intrusive Eurozone-wide budget rules.
That would calm the bond markets, but at great cost:
- Austerity would almost certainly strangle what little growth there is in southern Europe, with knock-on effects for everyone else.
- Such a regime would place the burden of paying for the sovereign debt crisis – which, lest we forget, is the result of the global banking crisis of 2008 and the ensuing recession, not decades of state profligacy – almost entirely on the shoulders of the working class.
So what should democratic socialists do? First, argue for a recasting of the role of the European Central Bank to include pursuit of growth as well as stability. Second, press for a fairer sharing of the pain of austerity by ensuring that the rich pay more, starting with a Tobin tax. And third, demand a massive increase in the powers of the European Parliament, the only Europe-wide democratic institution, to maximise accountability of the new economic policy regime.
- Handing over responsibility for overall economic policy to the Eurozone would mean that the key decisions on taxation and spending would no longer be taken by democratically elected governments – a dramatic erosion of national sovereignty.
It’s hardly a panacea, but it’s a lot better than crowing.
- This paper from the Breugel think-tank is worth a look.