From independence, freedom and truth

Economy

What if the peseta comes back?

Fernando del Pino Calvo Sotelo

January 23, 2012

The situation in Europe is worrying and we need to be realistic about it. It is not a matter of arguing about what it should be or what we would like it to be, but of understanding what it really is.

To put matters into perspective we need to remember that the construction of Europe and of the euro in particular were mainly the invention of politicians, not bureaucrats nor economists. France has always been the driving force behind the various stages of European integration, acting as ringleader and relying to a large extent on German economic might. De Gaulle reportedly said, “France must be the rider: Germany the horse.” It was one of the ways in which France tried to stem the tide of events from sweeping the country’s grandeur into the backwaters of history where lost empires languish unsung. The euro was a purely political project aimed at making France the champion of the pan-European cause.

That said, it is equally true that a customs-free trading union that permits the free circulation of people, merchandise and money was and is an extraordinarily positive event and an inspiring model of international cooperation. It signified freedom and brought genuine prosperity. However, given recent developments, the possibility of the single currency turning out to be an over-ambitious political gamble cannot be ignored.

Official propaganda represented the euro as an unqualified success for all the countries that abandoned their currencies and, with them, sovereign control over their monetary policies. We know that the list of politicians’ failed promises is not a short one. It wasn’t then and it isn’t now. Have European politicians fulfilled their pledges with respect to the euro? They promised greater growth. In the decade of the euro, however, European economic growth has in fact been half what it was in the immediately preceding ten years and only a third of the figure obtained in the 1980s. I don’t suggest cause and effect; I merely state the facts. The politicians also promised economic convergence, but the gaps in terms of inflation and productivity have persisted since 1999. They also said that the euro would improve relations between the countries of Europe following centuries of confrontation. Yet it is precisely now that the euro threatens to become the greatest source of tension between European countries since the end of the Cold War.

Also, leaving aside for a moment the problems of the euro, politically Europe is beginning to tread on some very slippery ground. The much heralded “Construction of Europe” is assuming a most undemocratic profile. When Giscard (a Frenchman, needless to say) presented his personal European Constitution, only ten members of the EU even considered holding referendums to obtain their citizens’ approval. Of the three medium-sized countries that first held a vote (excluding Luxemburg on grounds of size) two voted it down, precisely the two with the highest turnout, France and the Netherlands. Undeterred, using a text that was almost identical, Europe’s rulers changed both the name of the document and the means whereby it could be approved and, surprise, surprise, only one solitary country was required to hold a referendum, Ireland. But again the Noes have it. This time Brussels gets the jitters and refuses to accept the result. Amid some ugly threats and taking full advantage of Ireland’s financial difficulties, the country is forced to repeat the vote until it reaches the right decision. Given that chain of events, it is fair to ask the question, what did the very first article of that stupendous document, “This Constitution, reflecting the will of the citizens …” actually mean?

Secondly, European governments are getting used to riding roughshod over the rule of law. The vaunted Maastricht rules limiting public deficits and borrowings were ignored by both France and Germany within four years of the euro being adopted. Today almost all the euro countries flout them. The Treaty of Lisbon specifically forbids member countries to answer for the debts of other countries. That notwithstanding, the debts of the peripheral countries are being underwritten again and again and there is now talk of eurobonds. Lastly, the purchase of sovereign bonds by the European Central Bank, focused in the main on those countries with the lowest ratings, and the Bank’s “limitless” provision of liquidity verge, to put it mildly, on the very limits of its remit.

If what they seek by these acts is credibility, European leaders should be a shade more serious. At present they meet once a month to solve what they said they solved the month before. And at the end of every meeting they look the audience straight in the eye and say: So, which do you believe? Me or your own eyes? As Shakespeare wrote, “words pay no debts”. Our elected leaders cannot go on forever ramming reality into their own political pipe dreams. Something, somewhere, at some time will give.

Ratings agencies have their weaknesses and generally are a lagging indicator. But to call them Yanks and demand a European rating agency is not only infantile; it’s a joke. It’s blaming the mirror for your flab. It was only yesterday that the same ratings agencies were accused by the same politicians of being too bullish on their credit ratings on the private sector. Now they’re accused of being too bearish. When? Right! When the ratings affect the public sector, the politicians’ particular patch. Two years ago the Chinese, hard to equate with Americans, set up their own ratings agency, Dagong Global. On average this has given lower credit ratings on the sovereign debt of eurozone countries than S&P up until last week, when the gap began to narrow. But keep your eye on the ball. If I understand them correctly, Dagong is still less enthusiastic about Dutch, French and German debt than those dreadful Americans.  So, make no mistake: the markets are not the problem. The markets are in most cases the last line of defence of the citizens, rendered daily more impotent and defenceless by the wastefulness and wishful thinking of our politicians. When it comes to the crunch markets constitute the control mechanism that is least vulnerable to political manipulation.

Contagion is the latest buzzword. As we know, the golden rule in politics is: what’s good is good thanks to me, what’s bad is bad thanks to that guy over there. Contagion is where an infected party infects a sane party. The sane party is blameless; he just happened to be passing by. The snag here is that we Europeans weren’t infected. And we weren’t infected for the very simple reason that the infected party was us.

The euro is an inherently fragile currency. It was set up with major deficiencies that went unnoticed in the boom years. The monetary union of countries as heterogeneous as ours cannot hope to function without economic and fiscal union. Economic and fiscal union cannot happen without a strong desire to achieve political union, whereby the more prosperous countries agree to transfer wealth to the less prosperous countries. I do not see that happening in Europe. Commercial union is here, certainly. Political union is not here and is not expected.

Herr Schäuble said the other day in an interview for Der Spiegel that Germany was not prepared to bail out other countries “at any price”. The reporter then asked him: “So, what happens next?” Note the German finance minister’s response: “There’s no need to speculate on that. In any event, we would be a strange government if we didn’t prepare for such eventualities, however improbable.” I suggest our government do just that.

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