There has been a lot of talk in recent days about the imminent collapse of the Euro. Some have given the currency only a few more weeks or even days. The Polish foreign minister gravely wrote in the Financial Times that “the biggest threat to the security of Poland would be the collapse of the Euro”.
It would be wrong to entirely discount the possibility of a Eurozone currency collapse. There was a life before the introduction of the Euro in 1999 after all. And we have argued in the past that a return to a national currency for crisis-stricken economies could signal a return to greater democratic control of economic policy.
But collapse isn’t very likely at all and recent events have made it even less probable. Peripheral Eurozone countries, from Greece through to Ireland, have had ample opportunity to rescind their Eurozone membership and return to their own national currencies. In Greece, the degree of austerity-induced deprivation is such that one would have expected the formation of a strong anti-Euro coalition. Yet when the idea of putting Eurozone membership to a vote was floated by the then Prime Minister, Papandreou, he was peremptorily dismissed by his own party, much of his own population and by an angry mob of EU officials and national representatives of Eurozone member states. There is no clearly articulated alternative to the Euro either on the streets of Athens or Rome or in their national legislatures. Some commentators have suggested we are in a 1930s moment: international economic arrangements lie in the balance as the threat of social dislocation looms. This is bad history. What made the 1930s precarious and unstable was the proliferation of clearly articulated alternatives to the international economic order revived after the First World War. Nazism and Stalinism presented themselves as viable national alternatives to the status quo. There is no such pressure of alternatives on the Eurozone today.
The question is not whether the Euro will disappear. It is how will the crisis transform the Eurozone? This is where the real struggle lies.
Yesterday, Eurogroup finance ministers met in Brussels and agreed on an expansion of the European Financial Stability Fund (EFSF). No definite numbers were put on this expansion but the hope is that new investors – both public and private – can be induced into contributing to the Fund. Ministers also discussed the role of the IMF and how its role could be increased.
As already argued on The Current Moment, this approach of throwing money at the problem represents a massive transfer of wealth from taxpayers to private investors. Arthur Goldhammer rightly noted in yesterday’s Current Moment interview that bail-outs don’t just mean giving more money to rich bankers in pin-striped suits. A lot of ordinary people have savings tied up in banks and their interests would be protected by bail-outs. The problem, however, is that these bail-outs also are accompanied by austerity measures intended to bring government borrowing back down as quickly as possible. Having your savings protected via a bail-out is one thing; losing your job or having your pension dramatically cut-down is another. The bail-outs are serving as tools with which to shrink national social contracts.
The Eurozone crisis is so serious because support for financial institutions is being coupled with such severe austerity measures. This has dampened growth to the point that debts become larger and larger. And as markets begin to doubt the viability of debt-laden Eurozone economies, borrowing for these countries becomes more and more expensive. These are the self-fulfilling dynamics that are putting such pressure on the Euro.
The struggle at the moment is between those who believe structural adjustment of peripheral Eurozone economies is the best guarantor of the Euro’s long-term survival and those who would like the European Central Bank to print money so that the Eurozone can inflate its way out of the present crisis. More likely than the disappearance of the Euro is some retreat from austerity and an acceptance of the need for greater fiscal stimulus and/or a less restrictive monetary policy.
What was going on behind the scenes yesterday was a discussion about how to find some agreement between France and Germany on this point. Germany has pushed for closer fiscal integration, meaning a much tighter disciplining from Brussels of national budget lines. France wants the ECB to step in as lender of the last resort even if this means breaking with its pure price stability mandate. Where France balks is at the idea of giving the European Commission powers over national budgets. France would prefer that this power be retained by national governments themselves. This, of course, raises fears in the Hague, in Dublin, in Helsinki and elsewhere, about big countries lording it over small ones. As ever, small states prefer the protection of the European Commission.
The real struggle at the moment is over the exact configuration of this “Stability Union”. Without any viable alternative to the Euro being proposed, it is likely to remain. What is disappearing is any democratic control of macro-economic policy. If the French get their way with an expanded role for the ECB, and if Germany manages to push through its plan for fiscal integration without any treaty changes, then the legacy of the crisis will be a revised European Union that leaves even less space for democracy than before.