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Should the Euro Survive: economics in an era of political extremism

 7th February 2014


This is a summary of my side of a debate held at the London School of Economics, Public Events series, 6th February 2014, details at


The question as to whether the Euro should survive is quite different from whether it will. I’ve not always been confident that it would during the last few years. I reckoned after the advent of Draghinomics that it could. And I’ve always believed that it should. Until now.

The title of this debate puts the ‘should’ question into the context of economics in an era of political extremism, but to me this goes further. The context is, surely, about economics as the cause of political extremism.

If we think that the political economy of the Euro Area is behind the growth of political extremism, and a more nationalist and divisive political agenda, perhaps we should also ask more seriously, taking into account economic and political costs, if the Euro, at least as it is currently constituted, deserves to survive?


Political extremism

There has been a lot of talk about political extremism since the Euro crisis began, but we should begin by asking at least whether this is all a bit over the top.

There have been countless demonstrations against austerity and significant outbreaks of social unrest. The results have included governments losing no confidence votes, calling early elections, being voted out, and abandoning previously announced policy measures. But there has only been one case where mass political protest forced the immediate resignation of a government, and that was in Portugal in March 2011 when Prime Minister Socrates was forced to quit.

That this should have happened only once is rather surprising, given the intensity of the debate and the pervasive effects of austerity. By and large, public protest and dissatisfaction, moreover, has focused mainly on governments, not Europe, per se.

In a Pew opinion survey, conducted in 2013, a significantly larger majority of respondents in Spain, Italy and Greece than in northern European countries, expressed concerns about the lack of growth, high unemployment, income inequality and the way the economic system favoured the wealthy. But there was little difference in the large majorities across the Eurozone that criticised their own governments’ handling of the crisis, compared to their criticisms of the EU. In Italy, only 36% of respondents has an unfavourable view of the EU. And throughout the crisis, a fairly consistent 60% of voters have insisted they preferred to stick with the Euro.

Why? Here are some possible reasons

First, according to an ECB report produced in April 2013, European households are reasonably well off. Median net wealth is about €190,000. The mean is a lot higher at €230,000, reflecting a high degree of wealth inequality where the richest 10% of households own 50% of net wealth.

Second, income inequality is relatively low, judged by Gini scores compared with, say the US, UK, and many emerging markets.

Third, social welfare systems, even if being pared, are comprehensive, and sophisticated

Fourth, ageing societies mean that although we have the spectre of shockingly high youth unemployment, the 15-24 year old cohort accounts for only 10% of the population – a third lower than in 25 years ago – and is still in decline.

And yet we should not be complacent.

The same Pew survey revealed large majorities in all countries who said that economic integration was damaging and had gone too far.

There is no question that the rise of populist political parties and movements is leading to policies that are becoming more nationalistic and more resistant to building political union in Europe. Indeed, perhaps we should think about this again after the European Parliament elections in May.

And it is quite clear that disaffection with national and European elites is growing.

In fact, I would argue that now the existential threat of a market-based disintegration of the Euro has receded, we might well expect a new phase in the Euro saga to evolve, in which politics dictate outcomes that were barely conceivable, or resisted while the economic and financial crisis was more acute.

This argument was made trenchantly by the Financial Times’ Martin Wolf in a column last month, where he argued that

  • our elites fundamentally misunderstood the consequences of policies before, during and after 2008, not least resulting in the belief that ‘the powerful have sacrificed taxpayers to interests of the guilty’
  • they have become increasingly plutocratic and divorced from the notion of citizenship, and from their citizens
  • and with particular relevance for Europe, he also noted that the economic crisis was now leading to a new constitutional, legitimacy and populism crisis with power accruing unaccountably to Germany, other creditor states and the troika; and
  • that European elites have taken the Euro project beyond the practical matters of mutual and shared integration to embrace the ‘fate of money’.


This last point is especially interesting and important. It lies at the core of the economics argument because the reference to how people view their money being managed or mismanaged resonates through history and, in Europe, it evokes a very poignant piece of writing by Joseph Schumpeter

Schumpeter wrote a manuscript in the 1920s, called Das Wesend des Geldes, which translates into English as the nature or the essence of money. I’d like to read you one brief quote:

“The often passionate, always great interest that is paid to the practical questions of the monetary system and the value of money can only be explained by the fact that the monetary system of a people reflects all that the people wants, does, endures, is, and that simultaneously the monetary system of a people exercises a significant influence upon its economic activity and its destiny in general”

This is powerful stuff, and goes to heart of the notion that the creation and control of money is intimately linked to ideas of nationhood and national sovereignty.

Once you see the Euro economic agenda this way, rather than through the narrow, if important lens of competitiveness, labour costs, public debt, and so on, the economic question is not only about somewhat parochial but substantive issues of adjustment in the debtor countries bordering the Mediterranean but crucially about whether a Europe, with a newly powerful Germany at its heart can reconcile the different interests and desires of its disparate peoples under the Euro?

The Euro was, after all, designed to break the link between national sovereignty and national money, and to transfer the powers and privileges conferred by having one’s own money to a united European entity or entities.

As things stand today, I would contend that this evolutionary process has stalled, and not without acrimony between northern creditor and southern debtor nations, between left and right, and between haves and have nots.

If the status quo doesn’t change, growth remains anaemic, unemployment high, economic expectations low, and banking systems flawed, it is still possible in the next several years that in some countries, people may yet debate whether the harsh realities of exit or dismantling the Euro might be worth the candle after all, relative to the politics of passive submission to long-term depression-like conditions.

So what is to be done?

Conceptually, European leaders have to stop thinking that the Euro crisis was and is a fiscal or debt crisis and therefore, that it is all about the debtors.

Instead they have to recognise, through their actions and policies, that the crisis was first and foremost a balance of payments crisis that lead to a sudden stop, and therefore, a sovereign and banking crisis. So, instead of this being fiscal crisis, it is a financial crisis, and instead of its being about debtors, it is also about creditors and about symmetric adjustment.

Symmetric adjustment would mean major changes in policy that have so far been resisted, diluted, or weakly implemented. Here are six to be getting on with:

  1. Debt write-offs and restructurings to put nation states back on to a sustainable fiscal path, together with the introduction of common Euro bonds and an enlargement of the ESM
  2. Serious attention to the avoidance of the danger of deflation, which would make debt burdens even heavier
  3. The introduction of QE by the ECB, and unlike the OMT programme, resources that are open ended and unconditional
  4. Clear recognition in this year’s Asset Quality Review of the need for and size of bank recapitalisation, together with a credible plan as to how this will be financed, since it is most unlikely that the monies can or will be raised privately
  5. More balanced macroeconomic adjustment via higher inflation in core countries to balance lower inflation in the periphery, and higher investment in the core to balance higher savings in the periphery
  6. A genuine banking union with joint liability and fiscal backstops to finance a single bank resolution regime and common deposit insurance – but this is light years from the banking union recently agreed

As you know, these issues shape the wedge that has formed between creditor and debtor states. We can well understand the concerns that German and other northern European citizens have about being bounced into a transfer union – but also the sensitivities of their southern neighbours that they shouldn’t be expected to shoulder all the burden of adjustment to a crisis in which it took two to tango

It really is a case of creditors and debtors having to align their interests to integrate or bust.

For Europe, it is all very reminiscent of the globalisation trilemma posed by Dani Rodrik in 2007

Rodrik claimed that it is not possible to combine national sovereignty, democratic politics and deeper economic integration unless you have accepted and trusted institutions at the heart of governance. Otherwise, all you can manage is two of three.

Without those institutions, the absence of which was laid bare by the Euro crisis, Europe is having to choose which two, and deeper economic integration seems increasingly to be the weakest link.

So, should the Euro survive?

No one imagines this question has relevance on a time frame that matters to financial markets. Cue a bizarre sort of euphoria that has seen capital flow back to the periphery, and made investors a lot of money. But the fundamental transformation of European economic governance, and of the economic outlook are still going begging.

I concede that muddling through can go on for some considerable time, but the answer to ‘should’ should be ‘No’ if symmetric adjustment as I’ve described is not possible, and if the price of integration is the withering of peoples’ democratic rights and sense of sovereignty. At the very least, countries that could and chose to live inside a Teutonic monetary union should do so, others should be allowed to leave, not least for fear of the political consequences for themselves, and by implication for the rest of Europe, and who knows how far beyond?