Fragile Europe of the Single Currency

There is now a general crisis in Europe without a visible or credible way out.  It is clearly evidenced by the continuous flare-up of hotspots of tension: from Greece to the Iberian Peninsula and back, and then onto increasingly less veiled allusions to Italy and a dramatic about-face of Paris.

Until just over a month ago, Sarkozy was convinced that he could delay, till 2012-13, the reduction of the French deficit to the levels required by the Maastricht and Dublin parameters.  Now he speaks of a rapid return to the Maastricht-Dublin levels in the short term.  A specter of a new collapse haunts France facing Germany, the specter generated by the fear that the “markets,” i.e. banks, might speculate on budget cuts that Berlin and Bonn, the Bundesbank and the ECB, would order the euro zone countries to enact.

Paris fears that the increasing public deficit will make the risk premium on French Treasury securities higher than that on German ones.  In addition to the usual financial instability, such an event would undermine the position of the French ruling class in Europe, which has been crucial for its control — increasingly ironclad from Jospin to date — over France.  The prospect, already on the horizon, therefore is to cut the budget, which will not eliminate the deficit, even if it’s cut at the risk of aggravating the social crisis, but which will certainly reduce public services and jobs.

The French and German reactions to the Greek and Iberian situation once again highlight not only the role of financial “markets” (which, far from having been pacified, speculate on the Maastricht-Dublin criteria imposed by Germany) but also the absolute unsustainability of such pacts and of the European Monetary System.

The Greek story gave rise to an important debate in the Financial Times on the institutional aspect of this monetary system, a debate which, I think, has not been echoed in Italy.  The debate was started on the 16th of February by none other than Otmar Issing, former Member of the Executive Board of the European Central Bank, who, as an economist, was the chief architect of the operational rules of the European Monetary Union (EMU) which gave birth to the euro.

Issing writes that a rescue of Greece is impossible due to legal and regulatory reasons, as it would destroy the axis that holds together the monetary union.  The said axis is the rule that the euro zone member states are themselves legally responsible for dealing with their respective fiscal problems “of their own countries.”  For Issing, to help Greece would entail an unprecedented moral hazard of credibility for political reasons.

Let’s read it together: “By its construction, Emu is a ‘no transfers’ community of sovereign states. Transferring taxpayers’ money from countries that obeyed the rules to those that violated them would create hostility towards Brussels and between euro area countries.”  In the introduction to his piece, Issing recognizes the inconsistency of the European Monetary Union: “In the 1990s, many economists — I was among them — warned that starting monetary union without having established a political union was putting the cart before the horse.  Now the question is whether monetary union can survive without such a political union.”

Issing is correct, except that, after underlining the institutional illogic underpinning the euro, he goes on to assert that the system can be maintained if you obey the rules, thus refusing to help Greece.  The weakness of his conclusion has been seized upon by Padoa-Schioppa, who, with an air of innocence, proposes in the 19 February issue of the Financial Times that Europe therefore proceed to political unification, knowing full well that that is an anathema for France as well as for Germany.

It fell to the financier George Soros to cut to the chase instead.  In an article published on the 22nd of February, he observes that the mode of European integration is patently flawed: no monetary system can function without the combined action of the Central Bank and the Treasury.  And that is precisely what Europe lacks, frozen as it is in its current form.  The flaw in the European system, says Soros, was demonstrated during the outbreak of the crisis in 2008, when each country had to rescue its own banks by altering the relative fiscal position in a highly unequal and asymmetrical context.

The financier highlights two important elements.  The first is the case of Greece, where the drastic cuts are to produce a fall in demand and thus in income, consequently reducing the tax revenue, without however solving the problem.  The second concerns Europe.  Article 125 of the Treaty of Lisbon provides for coordinated aids, but there is no legislation governing them.  Given Germany’s opposition to “dipping into its own pocket” to help other European countries, Article 125 is destined to remain a dead letter.

The situation is aggravated by the activity of the markets for credit default swaps (CDS), risk insurance certificates, and hence speculation on the debt.  The CDS speculate on failure, that is, default.  The longer Greece is left alone, the more the speculators win — until the explosion happens.

Neo-mercantilism, the subterranean reason for the inconsistency of the euro, is glaringly omitted in the aforementioned analyses.  Germany is the heart of that neo-mercantilism.  However, ragged micro-enterprises of Emilia and of northeast Italy, as well as French state-owned enterprises, also aspire to the same model.  Both aspirations are bankrupt: France rarely realizes external surplus; and Italy doesn’t even constitute a system, based as it is on dependence on exports to Germany and/or consumerist bubbles that inflate and deflate here and there in the world.  The euro, divorced from fiscal policy, does not contribute to stability; rather it only serves to safeguard oligopolistic competition within Europe through wage deflation.  The crisis is reshaping the neo-mercantilist relations, on which major interests concentrate.

The original article “Fragile Europa della sola moneta” was published by Il Manifesto on 28 February 2010.  Translation by Yoshie Furuhashi (@yoshiefuruhashi | yoshie.furuhashi [at]

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