On the eve of the EU Summit, Mark
Sheetz offers the following commentary, which differs in some respects from
mine.
In several recent blogs on the
euro crisis, Stephen Walt has expressed exasperation with European leaders and
pessimism on the fate of the eurozone. His reaction is understandable and
consistent with virtually all journalists and economists who study the issue. They
are frustrated at the slow pace of European decision-making and the fact that a
solution seems obvious. In recent days, demand for action has become nearly
hysterical, with analysts, columnists, and editorial writers for the New York Times suggesting that time for
a solution is "running
short," that "the
endgame is fast approaching," that the eurozone is facing a "meltdown,"
and that a collapse is "perhaps
inevitable."
So, what is the solution? Conventional economic wisdom insists that either
Germany acquiesce to some sort of bailout or the eurozone is finished. Germany
must consent either (a) to the issuance of joint and severally liable Eurobonds
or (b) to a policy of monetary easing by the European Central Bank (ECB). The
problem is being treated as a technocratic economic matter. Hence,
technocrats have come to power in Greece and Italy. But the matter is
essentially political and the crisis turns on central problems of international
relations theory, like anarchy, sovereignty, and power.
Economists believe that the basic problem of the eurozone is economic: that
national economic imbalances can no longer be restored through the traditional
method of currency devaluation. But the problems of the eurozone are
fundamentally political: (a) it expanded too fast, wider won out over deeper,
(b) there is no commitment to common budgetary policies, and (c) there is no
mechanism to enforce agreements.
The debate is congealing around two poles, a pessimistic pole predicting the
breaking apart of the eurozone versus an optimistic pole of closer integration.
The solution includes both. On the one hand, wide economic disparity among
members of the eurozone will force weaker members to leave. Greece, as well as
those countries that use the euro but cannot afford it (PIGS), will be cast off
from the eurozone by a mounting centrifugal force.
On the other hand, the remaining members will converge on tighter economic policy
along the German model. As a corollary to more restricted membership, those
countries remaining in the eurozone will harmonize their policies regarding
deficits and government pensions and achieve some sort of convergence in the
major items affecting budget deficits. This will have the effect of bringing
Europe closer together, or at least those countries that can achieve
convergence. It may also create a more politically coherent Europe, with those
remaining in the eurozone leading the European Union economically and
politically. Such a situation might even give a common foreign policy the
chance to develop and cohere around a small group of stronger European
countries.
Some believe that a Greek expulsion from the eurozone will be catastrophic.
They assume that a Greek default within the eurozone is manageable, while a
Greek exit would make contagion worse. My own feeling is that contagion -- and
the accompanying collapse of the European project -- would be the result of
Greece staying in the euro, not the result of Greece getting out. The
recent evidence of market contagion to Italy and Spain appears to support this
claim. A referendum in Greece would have cleared the air. It would have
restored a stark reality that European leaders would not be able to evade. If
Greeks had voted "no" on the referendum, Greece would have had little
choice but to return to the drachma. That would have been a lesson to others. They
would have recognized that they have only two choices: (a) converge fiscal and
monetary policies or (b) press the "eject" button. The problem now is
that European leaders may still think they can muddle through by patching up a
country here and there. That will destroy the clarity exposed by a Greek
default.
The divide, as usual, is between France and Germany over monetary policy. The
French, along with their southern European allies in Greece, Italy, Spain, and
Portugal, favor easy money, while the Germans, along with northern Europeans in
the Netherlands, Austria, and Finland, insist on a tight money policy. Any hint
of German capitulation to French demands of easier money will be the end of the
euro. The first sign of wavering, the first inkling that a compromise is afoot,
will signal to the markets that the floodgates for a river of euros are open,
that fiscal and monetary discipline are history, that inflation will be
rampant, and that the euro will be worthless.
Germans will not pay for the profligacy of their neighbors. Otherwise, where
would it stop? Any concession towards easy money will only reinforce the
"moral hazard" of further risk-accepting behavior. It is a story as
old as Aesop: the ant and the grasshopper. Germany entered into the euro under
assurances that all members would conduct their economic affairs responsibly. If
this is no longer the case, then Germany will reserve the right to withdraw. A
former British chancellor of the exchequer agrees,
insisting that Germany would sooner withdraw from the euro than see its
integrity compromised. Another (not insignificant) factor is the survival of
Angela Merkel as chancellor. Any suggestion of Merkel wavering at the prospect
of easy money is tantamount to political suicide. So all the speculation that
the ECB or the EFSF will "stabilize" (rescue) the euro is so much
folderol.
The power calculus, then, favors Germany. France will be dragged along
kicking and screaming, but two points suggest eventual French capitulation. One
is that Germany will otherwise threaten to secede from the euro, which would
put France in a nasty competitive economic position. And the second is that,
without the unity embodied in a common currency, French hopes of ever again
exerting influence on the world scene will have evaporated. Europeans
understand that they cannot meet global challenges as individual nations
because they are no longer great powers. As President Sarkozy
conceded, "If Europe does not change quickly enough, global history
will be written without Europe."
The original path to the common currency was through a convergence of economic
policies. Nations would have budget deficits of no more than 3 percent of GDP,
and total debt of no more than 60 percent of GDP. If euro members had stuck to
these criteria, they would be in dandy shape now. So a return to that
mechanism, with additional penalties for non-compliance, might work. The
problem is to create binding agreements.
On the question of enforcement, one possibility mentioned is an automatic
increase in taxes to offset a budget deficit beyond acceptable limits. Other
devices to ensure compliance with EU oversight of national budgets are available
for the same purpose. These sanctions would be imposed by a central authority
that can override national budget decisions. The European Court of Justice and
the European Commission have been suggested as ultimate arbiters, but such
supranational enforcement has its limits in a union of sovereign states.
Sovereign governments may oppose such measures for domestic political
reasons. As long as sovereignty remains, national governments may negate
previous agreements. Even within national governments, as in the U.S. Congress,
existing legislatures may negate the agreements of previous legislatures. Therefore,
a more severe penalty is required.
The ultimate penalty for non-compliance is, of course, expulsion. The eurozone
could expel any country that fails -- after a suitable time period -- to adhere
to budgetary guidelines set forth in a new agreement. The ultima ratio of
economic union is expulsion, just as the ultima ratio of politics is war. It
lurks behind every decision as the final alternative.
So the demise of the euro, as a proxy for the EU itself, is not on. Neither
is a consolidation on the German federal model. A big push for more Europe is
not in the cards now. The loss of that much national sovereignty is
unrealistic, given the immature development of a European identity. That is why
convergence of fiscal and economic policies is the most likely outcome, not
complete structural reform.
But convergence will not save the euro if member states refuse to comply
with agreed guidelines. Both France and Germany violated the guidelines in
2003, breaking through the barriers of 3 percent budget deficits and 60 percent
debt for more than a year. If the founding members of the eurozone fail to
comply or to remedy violations within prescribed time periods, then the euro
will well and truly collapse. In a union of sovereign powers, political will is
the ultimate arbiter.
Mark
S. Sheetz is an Associate in the International Security Program at the John F.
Kennedy School of Government of Harvard University. He is currently writing a
book on France, Germany, and the
Transformation of Europe.
COMMENTS (6)
Read More
