Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Thursday, 19 April 2012

Political Will Won't Save Eurozone


Martin Wolf in the FT warns us not to underestimate the political will of the European elite. I don’t know if someone gave a similar warning on the will of the Bourbons but this argument is a red herring. This is equivalent of a ‘Hail Mary’ argument since it is almost impossible to construct an economic defence of the stated policy of no default, no exit, no monetisation, no fiscal union and austerity led growth through massive internal adjustment. As Greek default, sorry voluntary PSI, showed these objectives are impossible to achieve together. One or more conditions will have to be relaxed. And the longer the delusion of political will triumphing economic reality continues, the worse the situation will become and the bigger the eventual catastrophe.

The two main political arguments touted in the FT article are the fear of break-up and the sunk costs associated with the commitment to the ideal of Europe. The first is a weak force. Fear is transitory and self-interest triumphs over it eventually. At the moment, fear of exit and being alone in the wilderness is propelling minimal reforms and short-term austerity measures from peripheral nations. But fear does not mean that there is widespread acquiescence for austerity and reform. There is support for the Euro and European integration because people recognise that it benefits them. However, they want someone else to pay for it. Again Greece makes it very clear that although the people desire the Euro they are not willing to jump into the German sacrificial altar for it. This conflict will be resolved one way or another as unstoppable economic force washes away the immovable elite.

The defence of sunk costs is a stronger force. Throughout history the establishment, allied with reactionaries and vested interests, has stoutly defended the status quo. But history is also littered with the corpses of elites too slow to change and recognise the danger facing them. The entire handling of crisis so far shows that the European elite is making the same mistake. They have been consistently behind the curve and reacted to events through ill thought short-term policy fixes. Tremendous political will does not guarantee continuation of the union by itself. The elites have to express their will through intelligent policy to be able to mount a credible defence against the economic forces arrayed against them. Until now they have only proved JK Galbraith’s statement that between grave ultimate disaster and the conserving reforms that might avoid it, the former is frequently much preferred.

There is still time to save the Eurozone. It requires an end to self-delusion by pulling the plug on insolvent sovereigns and banks. The pain will have to be alleviated through monetisation and fiscal transfer enroute to a full fiscal union. Austerity will have to be abandoned. This is not a compromise between Germanic ideas and messy European reality but a surrender of Germanic ideas to messy European reality. 

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