‘It’s probably worth asking if the objective, saving the Euro, is really worth it.
First, what if the price of saving the Euro is the end of the wider European project? The European union is based upon trust, building confidence, sharing the wealth, and mutual support. The new institutions designed to save the Euro — even stricter fiscal rules and a financial “cordon sanitaire” around Greece — are based upon seeing every possible interaction with another state as a moral hazard problem where trust should be eliminated. Designing institutions in this way undermines the capacity to generate trust. Trust is not an optional extra. It is a necessity. Try running a banking system without it and see what happens.
Second, back in the 1990s critics of the Euro pointed to the costs of the convergence needed to make it all happen. There was a decade of anemic growth and high unemployment as multiple states simultaneously tried to get their budget deficits and debts down while maintaining very low inflation rates. The response to those critics at the time was “never mind the short term costs, wait for the long term benefits.” Those benefits seemed to arrive in the 2000s, before the financial crisis hit, when inflation rates and bond yields in Europe fell together while growth picked up. But those benefits now seem to be as much a result of the mispricing of risk in the bond market, free money to the periphery and asset price bubbles, as they are of fiscal consolidation. Indeed, today the “never mind the short term costs” argument has found a new form in “We can’t break it up because the costs will be catastrophic; we must suffer a decade of depression instead as the lesser of two evils,” which makes saving the Euro all cost and no benefit.
The Euro was supposed to obviate the twin problems of serial devaluations and currency volatility. But on the balance sheet of misery, how much devaluation and volatility are worth the impoverishment-by-policy of millions of Europeans and the loss of a generation of growth? If this is the price to be paid for saving the Euro, surely that needs to be recognized ahead of time?
Without asking the right questions, and being honest about what questions to ask, you cannot resolve this crisis. Time is running out to ask the right questions. The elections in France and Greece offer European leaders an opportunity to ask them. If they do not, then austerity-strapped European publics will find their own questions, and the designers of the Euro will not like the answers they provide.’
‘With the exception of the Baltic states, small enough to export a large chunk of their tiny labour markets to compensate, every major European country that has practised austerity now has more debt than when it started. States cannot all cut their way to growth inside a common currency without promoting a general contraction that makes the debt problem worse, not better.
Tragically, mere policy failure is seldom enough to shift a good ideology. As Karl Polanyi noted in 1944 regarding Europe’s last attempt to run a gold standard in a democracy: “Its spectacular failure … did not destroy its authority in all. Indeed, its partial eclipse may have even strengthened its hold since it enabled its defenders to argue that the incomplete application of its principles was the reason for every and any difficulty laid to its charge.” As Mr Rachman compellingly demonstrates, Polanyi’s insight remains sadly germane today.’