The Euro: no more agonising stages

by Jonathan Todd

“If your action must be drastic, do it in one fell swoop, not in agonising stages”.

This was Isaiah Berlin’s interpretation of one of Machiavelli’s maxims. The Euro crisis unfolds in stages; each more agonising than the last.

A couple of weeks ago rapid and drastic action may have created a firewall between Greece and the rest of the Eurozone. Shock and awe of 2008 proportions did not come. The markets remain ahead of the politicians.

Henry Kissinger still wouldn’t know who to call if he wanted to call Europe. If he did get through he’d say: “Why don’t you fix your biggest economic crisis since the 1930s”?

Now, as then, political leaders seem haplessly buffeted by events. But, even now, after the falls of Papandreou and Berlusconi, dangerously high interest rates on Italian debt (driven by suspicion of Euro collapse as well as the capacity of Italy to service its debt) and the threat of government defaults that would have an impact on the global financial sector to make the demise of Lehman Brothers look like a picnic, choices could be made that would save the Euro.

Only clear confrontation with these choices will suffice. The can has been kicked down the road for so long that there is no road left. All that remains is the unstitching of the Euro or urgent confrontation with these choices:

First, the Euro must be openly acknowledged as a political project that requires greater pooling of sovereignty and shared responsibility by its member states.

Second, a key shared responsibility is the creation of growth rates in the periphery sufficient to make their debts sustainable.

Extreme austerity is a recipe for little other than enforced destitution, violent resistance and the fostering of various flavours of fear and loathing. Citizens in the core Euro states resent the bailouts needed by the “feckless” periphery (hence, the rise of the True Finns) and citizens in the periphery are appalled at the internal devaluation (brutal public spending and wage cuts) that the (for now) non-option of external devaluation forces upon them.

If the new Europe is to emerge – and with every day that it doesn’t some form of Euro disintegration becomes more likely – it must be one of greater solidarity between the core and the periphery. This solidarity cannot allow necessary change to be evaded in Italy (for example, tackling corruption) and Greece (say, reducing military spending).

Some of the changes that are needed to deliver sustainable growth and debt rates in Italy and Greece must come from Rome and Athens. But others must come from Berlin, as the periphery will be unable to achieve these rates without a substantial and decisive move to a fiscal union and the ECB becoming a lender of last resort with a willingness to be as active as the bank of England.

Angela Merkel should, if she really meant what she says about preserving the Euro, have already provided this assistance. She would have done so loudly and proudly, confidently articulating that Germany’s interests are best served by taking the steps required to keep the Euro together. And this would answer pretty much every question about the Euro. So Kissinger, nor anyone else, would need to call. Instead, she has willed the end of keeping the Euro together without willing the means, which ever more compels the conclusion that she doesn’t actually believe in the end (which is part of what drives Italian debt interest upwards).

The UK’s interests consist in the following:

We must insist that Merkel urgently wills the means or desists with claiming the ends. She surely could will these means, but if she won’t (out of, not unjustified, fear of the fiscal cost to Germany and the political cost to her of institutionalising a “transfer union”) then the UK ought to work constructively to secure the most orderly break-up of the Euro possible. As disorderly break-up, a significant risk of on current trends, risks global depression and the nationalisation of every bank in Europe, a wretched inheritance for future generations.

The benefits of the EU must be independent of the benefits of the Euro or the UK would not have enjoyed any benefits from the EU. The UK should seek to retain and maximise the benefits of EU membership in the event of Euro break-up (or further Eurozone integration if Merkel does step up to the plate).

Increasingly, however, it seems apparent both that a new settlement in Europe must soon come to pass (further deepening or coming apart of the Eurozone) and that demands for a referendum on UK membership of the EU will be assented to (probably at the time of the treaty change which this new settlement will inevitably require).

Assuming that the Euro stays together in some form, if not necessarily in its present form, this referendum will be fought between united Labour and Liberal Democrat parties, arguing for the UK to stay in the EU but out of the Euro, and a divided Tory party, some of whom would want to stay in the EU on these terms and some would not.

There is early evidence that Labour and the Lib Dems would win this argument and that Tory division on Europe undermines their popularity. These are the meagre silver linings on the very grey cloud that the Euro now constitutes.

Jonathan Todd is Labour Uncut’s economic columnist.


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5 Responses to “The Euro: no more agonising stages”

  1. Nick says:

    First, the Euro must be openly acknowledged as a political project that requires greater pooling of sovereignty and shared responsibility by its member states.

    Ah yes. The hard working Germans must fund the profligate olive growers so they can sun them selves, retire early, loot government funds, …

    So they must print lots of wonga and splash the cash. In other words, rip of the prudent who saved. Not to worry as a politician, after all you made sure you had an inflation linked pension so you’re immune from your own errors. It’s the little people who pay.

    Merkel is toast. Come the next election, she is out. It’s going to be hard deposing a German leader, unlike Italy or Greece.

    So onwards and upwards, more and more debt. Just like the donkeys in the first world war, throwing more people over the top to be slaughtered is going to win the war and make the Euro a success.

    It’s not.

    Same with the UK. With debts of 7,000 bn when you include the pensions, the UK government is just as much up the proverbial creek as Greece.

  2. Madasafish says:

    “We must insist that Merkel urgently wills the means or desists with claiming the ends. She surely could will these means, but if she won’t (out of, not unjustified, fear of the fiscal cost to Germany and the political cost to her of institutionalising a “transfer union”) then the UK ought to work constructively to secure the most orderly break-up of the Euro possible.”

    Whilst I can understand the thinking behind the statement, it’s political pie in the sky..
    Ain’t going to happen. We have zero influence on the issue..

  3. …..’greater pooling of sovereignty and shared responsibility by its member states.’

    Even if the likes of Greece and Italy were to go along with this (and by the look of it they’re allowing themselves to be pushed into it – so far) UKIP and Tory sceptics would have a field day here.

    …..’the creation of growth rates in the periphery sufficient to make their debts sustainable.’

    If that means Germany coming up with the cash for this, Angela Merkel’s chances of staying in power come the next election there would be pretty much zero.

    ….. ‘solidarity cannot allow necessary change to be evaded in Italy’…..’and Greece.’

    Who would disallow this evasion and how would the Italian and Greek people be expected to react? It doesn’t take much to figure out how the British would react.

    As for ‘Angela Merkel should …have already provided this assistance.’

    By the sound of the above the price would be too high for the others to accept. If however that is what it would take to save the Euro then the only conclusion is that it is soon to be kaput and the concept of a European Union with it.

  4. Anthony Sperryn says:

    In ordinary banking, as customarily practised over the years, the wise banker did not like his customer going bust and took action to prevent it happening. This action included concessionary interest rates, or even zero interest for a period, and, indeed, restraint on lending in the first place.

    The Euro market pre-supposed countries operating their economies on agreed lines and, consequently, interest rates would lie within a narrow bracket.

    What has happened is that international capital, which has little of the character of the wise banker (thank you, Goldman Sachs et al.) and operates with minimal covenants in favour of the borrower, has come to dominate the markets. The Euro market appears now to be largely speculative. Price (i.e. interest rates) is almost the only determining factor as to whether a loan is made.

    I would have thought that the 17 governments could all stand together and declare:-
    1. None of their countries will borrow at more than, say, 2 per cent over the German rate of borrowing.
    2. None of the countries will repay any loans unless repayment is available (from other than ECB) at the rate indicated in 1.
    3. If a lender cannot be repaid from other sources, then the loan in question will be compulsorily rolled over at the rate in 1., regardless of what the rate might otherwise be.

    I should have thought that the 17 national legislatures should all be capable of passing the necessary legislation with little delay and to backdate its effect to a date that the 17 countries agree.

    This may be a default, but so what. We have a crisis on our hands and the well-being of the 17 countries and their inhabitants is more important than the sanctity of previous banking contracts. The time has come for firm collective action. We can learn from how some Asian countries dealt with a previous financial crisis.

  5. @ Anthony Sperryn

    If the Eurozone members were crazy enough to even consider what you suggest and it then somehow got out; that alone would not only be the end of the Euro but of their economies too. The upshot would be a return to the great depression with nobs on.

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