Right Reason

The European Union Isn't a Polity

 

A flag intellectuals and bureaucrats alike can delude themselves into thinking people are loyal to it.

 

 

In “The Problem with the Euro Fix: What’s in It for the Dutch,” Josh Barro discusses the problems lying in the development of a European fiscal union, despite the beneficial effects it could have for monetary stability across the Continent: 

Large, economically diverse areas can successfully share a single currency if they have deep economic links that make it possible for troubled regions to ride out crises. That means shared bank regulation and deposit insurance, so banks don’t face regional panics; a labor market that lets people move from places without jobs to places with them; and a fiscal union, which allows the government to collect taxes wherever there is money and spend it wherever there are needs.

The United States shows that this approach can work: America’s 50 economically diverse states share a currency quite comfortably, in part because of our banking union (Washington State did not have to bail out Washington Mutual on its own when it failed), our fluid labor market (as oil prices rise and fall, workers move in and out of North Dakota) and our fiscal union (states in economic pain benefit from government programs financed by all states). Nevada does not need to devalue its currency to restore its competitiveness relative to California in a severe recession; instead, Nevadans can collect federally funded unemployment insurance and, if necessary, move to California. 

In the course of the article, Mr. Barro misses the point. He focuses on economics and on cool-minded cost-benefit analysis whereas the problem in Europe is a matter of political identity. The Euro Crisis is showing the weaknesses of the dream of a more centralized Europe not because of the fact that some nations will be worst off, but because of the fact that centralization has been pursued furtively at the scale of national governments and beyond without a corresponding shift in the national identities of Europeans. 

 

The United States of America has, for the most part, grown organically as a single nation since 1776. Unlike the European Union, it is a natural policy. Americans largely share the same religion, tongue, and nation mythology. When an American takes out a piece of money from his wallet, on the bill will be a figure that all Americans can recognize as part of his national heritage. The same can be said of the Britons and their pound. Nothing of the sort can be said of the Euro. In the United States, no one even has to ask the question: “What’s in it for Connecticut?” It’s simply a matter of understood duty that the federal government will pursue policies that will eventually favor some states over others. The growth of centralization has been supported by the growth a single national identity. 

The European dream is fundamentally a desire for a United States of Europe. The need for greater fiscal links between nations in order to sustain the Euro Zone isn’t a bug, it’s a feature. It’s a feature that has been hiding in plain sight for the past couple of decades until a crisis such as the one Europe is in right now makes centralization a mainstream talking point rather than an extremist conspiracy theory. The national identity, just like the European flag, isn’t been grown, it’s being constructed through the vehicle of the European Union.  

 

Nevertheless, that is not what the European Union has been sold as. It has been sold as both a necessary mechanism for stopping a Third World War and as an open market. In Germany, voters went separate ways with their beloved Deutsche Mark because Bundeskanzler Kohl took exploited the only things German fear more than inflation: European war. In Britain, joining the European Union was sold as entering a trade pact with Britannia’s largest trade partner. Unlike Germany, the United Kingdom didn’t go as far as to jettison its national 

The European project is unrealistic, but it is unrealistic less for the economic reasons pointed out by Mr. Barro as much as for political ones. He mentions the gradualistic centralization of the United States of America as a possible model for the United States of Europe, but that gradualistic centralization isn’t a mere model, it’s the way that polities evolve. 

Let Greece Go!

 

 

Greece owes  €317 billion, about 175 percent of its GDP. Those numbers are meaningless by themselves. For a vibrant economy, such as that of Germany or the United Kingdom, a similar debt wouldn’t be such a problem. But it’s neither Germany nor the United Kingdom that we’re all thinking about now. Instead, it’s Greece, a dysfunctional nation whose economy has been in recession since 2008. 

It’s looking increasingly likely that Greece will default on that debt this summer. Let’s not kid ourselves, whether Greece would default on its debt has been clear since the Euro Crisis began in late 2009. Since then, Greece has teetered on the brink of default with increasing amounts of cash being given to the Greek government to keep it going—and compliant. The question has been when not if. That time seems to be upon us. Despite technocrats’ efforts to steer Greece to calmer waters, with capital controls on Greek banks being the most recent attempt, Greece is far from them. Rather, the inescapable currents of change, hiding right beneath the surface, continues to drag the Greek ship of state further from coast.

 

Really, the trend of Greek politics over the past half decade or so has been the story of captain after captain fighting against those currents. Greek’s economic and political nature cannot be recast from Brussels or even Athens. Recent concern about Greece failing as a state if it were to default misconstrues the predicament the nation finds itself in. Greece won’t suddenly fail as a state as a result of defaulting on its debts. Rather, Greece has been a failed state all along. Greece has had a long history of political corruption, economic inefficiency, and the systemic failure of its institutions. It was only able to gain admittance to the Euro Zone by cooking its books. Wall-street designed financial instruments could only cover up the mess that was Greece’s fiscal situation for so long. 

The nation has to reform, that much is true. Economic liberalization, and yes austerity, need to occur if Greece is going to prosper. Greece is stuck in an equilibrium of leisurely inefficiency that the Greek people are deluded to think can continue. It cannot, but the teethed reform that can actually change Greece structurally is a point that cannot be pursued as long as Greece holds onto its current debt. Paying back that debt is currently such a drain on the Greek economy that reform simply isn’t politically feasible. Moreover, the point of the troika’s bail-outs have never been to liberalize Greece, but to preserve Greece as a member of the European Union. 

 

Throughout the Euro Crisis, the important decision makers within the European Union have been interested in their own political projects. As self-interested politicians, their interest in Greece has largely been restricted to how Greece fits into a scheme of European unity and they have been more than willing to sacrifice Greece on the cross of European ambition. 

Last May, when giving a speech during the award of the Charlemagne prize for furthering European unity, Chancellor Angela Merkel warned that if the Euro fails, then “then Europe and the idea of European union would die.” Yet, Chancellor Merkel knows to let no crisis go wasted: "We have a common currency, but no common political and economic union. And this is exactly what we must change. To achieve this—therein lies the opportunity of the crisis."  Jean-Claude Juncker has yet to show a whiff of sympathy for Greece and has instead gone out of the way to state that he felt betrayed by Greece in the latest negotiations over Greece’s debt. To European leaders and Eurocrats alike, Greece is just a means towards their end of a centralized Europe, not an end in and of itself.

 

The crisis calls for an empathetic point of view that genuinely wants what is best at Greece. Policy makers should want to best for everybody involved in any political question. Looking at the crisis merely as a moment in the history of the European Unions inextricable march towards unity or as a threat to the world’s financial stability ignores many of the political dimensions that define the crisis.

For instance, merely looking at the financial consequences of Grexit overlooks how the strain of Greek debt has prevented any political progress in Greece. Syriza rose to power by speaking out against the demands put on Greece by the European Union and the troika. The party’s policies may be the last thing that Greece needs, but these are the policies that Greece will inevitably get as long as the troika meddles in their politics. The Greeks understand that the European Union care little for their plight. According to them, Greece needs to stay in the European Union, no matter the Greek costs. 

Greece has borrowed beyond its means, yes, but the banks have been there as enablers. They should have lent money with their eyes wide open. The banks that have lent to Greece made bets that haven’t paid off. The losses of those who haven’t already been bailed out will be certainly extreme, but so have the loses of the Greek people. The interests of the financial sector shouldn’t be made sacrosanct as the expense of the Greek people. Obsessed with the standard of economic efficiency, policy makers have been blind to the concerns of justice and equity involved when the banks get themselves into trouble. Nevertheless, policy choices today can put the developed world back on the right political track. In a world where finance has increasingly made the world fragile, a Greek default could help signal to the world that policy won’t play favorites for the financial sector, as it has done in crises past. 

If Greece is guilty of an irresponsible fiscal policy, the nation’s culpability must be balanced by the irresponsibility of those who lent money at close to near-German rates to a very non-German nation. Creditors and debtors alike are at fault. Greece alone cannot be isolated as the only guilty party who deserves to suffer the costs of the fact that they cannot pay back their loans. Just like almost all the other rich nations, those of Europe need to demonstrate to the financial sector that their interests are no more special than those of ordinary people’s. Letting Greece default on its debt without back-room negotiations to ensure that the banks get paid on their imprudent loans would be a small improvement on that margin.

 

The creation of a euro was an ill-conceived policy, informed more by the fantasies of politicians and eurocrats alike than the fundamentals of their societies. Reality needs to reassert itself. European leaders need to admit that Greece cannot prosper as part of the Euro Zone. The slogan of the hour needs to be: Let Greece go! 

Greece will still be in an unenviable predicament, but it will be in a position to decide on their own policies. If political reform fails, the Greeks would deserve to suffer a catastrophe of their own making. Today, they deserve relief and an opportunity to pursue reform on their own initiative. 

An Impending Divorce?

Grexit may be upon us. At first Greece's exit would be a calamitous event that could take down the entire European Union, then it was something that was just a little bit too costly considering the possibilities of renegotiating their debt and now the costs of Greece leaving are still terrible, but just a little bit less terrible than Greece staying. Even Lawrence Summers has come to accept that, after much ado, Greece and the Eurozone may be finally getting to their divorce:

When, as now appears likely, Greece financially separates from Europe, it will at one level be no one’s fault. The Greek leaders will rightly explain that having imposed more austerity on themselves than any industrial country has suffered since the Depression, they could not do more without light at the end of tunnel in the form of a clear commitment to debt relief. European leaders will rightly explain that they adjusted their positions repeatedly to accommodate the Greeks. They will stress that their publics would not permit Greece to play by different rules than the rest of Europe. And the International Monetary Fund will rightly explain that it would have blessed any plan agreed to by Greece and Europe that added up.

...

Make no mistake about the consequences of a breakdown. With an end to European support and consequent bank closures and credit problems, austerity will get far worse in Greece than it is today, and Greece will likely become a failed state, to the great detriment of all its people and their leadership. Once Greece fails as a state, Europe will collect far less debt repayment than it would with an orderly restructuring. And a massive northern out-migration of Greeks will strain national budgets throughout Europe, not to mention the challenges that will come as Russia achieves a presence in Greece. The IMF is looking at by far the largest nonpayment by a borrower in its history. True, there are good reasons to think enough foam has been placed on the runway to prevent financial contagion. Yet, this was asserted with respect to Long-Term Capital Management, subprime mortgages and the fall of Lehman Brothers.

But he makes a critical error in his overall judgment of the situation, betrayed by the title of his article: "The consequences of Greece's impending breakdown."

To keep things pithy: Greece isn't going to become a failed state. It already is a failed state and has been so for decades. For its own good, Greece is a failed state with no business in being in the same currency area as Germany. The divorce isn't the disaster. Mr. Summers may write of Greece's impending breakdown, but the truth is Greece is already broken. There is simple no way, let alone politically possible way, for Greece to pay back its debts.

The disaster isn't Greece leaving the Euro Zone. The disaster was Greece joining the Eurozone in the first place. Unfortunately, the longer it takes for politicians to admit that, the more unnecessary suffering before the ties are finally cut.

Greece: Putting the 'Political' in 'Political Economy'

 

History suggests that monetary arrangements last only as long as the political economy that supports them.

- The Economist, “The global monetary system: Not floating, but flailing”

 

 

Greece in the headlines is rarely good news, at least for those who care about the stability of the European Union. Yet it is back there. This time, the news is that Greece will soon be holding national elections. The far-left party, Syriza, holds a small, but steady lead in the opinion polls. Although he is now reigning in his rhetoric, Alexis Tsipiras has driven a single message home throughout the campaign: That he will bring to an end the four years of austerity. Although he may have recanted his strong opposition to the Euro, Mr. Tsipiras still represents a threat to the terms the Greek government gave its creditors in exchange for two successive bailouts not so many years ago. 

 

Man is a political animal—Zôion politikòn. It is therefore fitting that one of the most important parts of his society be driven by political concerns, by concerns of identity and fairness, as much as the economic concerns of supply and demand. At the heart of the Euro is a political concern: That Europe needs to be brought under a single political organization, however loose. Whether it is President François Mitterand or Chancellor Angela Merkel, the major decision makers over the course of the Euro’s existence have lived in a world where the horrors of the two world wars were everywhere, whether in the façades of Berlin or the memories of former refuges. 

Yet for as much as I can sympathize with the purpose of the Euro project, it is still a concern born from the tragedy of another era. With or without the European Union, there wouldn’t have been another major European war in the past decades. Neither the United States or the former Soviet Union would have allowed for that to happen. Today, genuine fear of strife between European powers is insensible to the point of being a phobia. If the Greeks decide to leave the Euro, I hope they won’t be held hostage to placate that phobia. 

 

As much as may speak, as The Economist does, of structural reforms in the wake of the Euro Crisis, realistically, nations will continue to do as they always have unless there is a stick telling them to do otherwise. One only need look at France’s own peccadilloes to recognize that the rules of the European Union don’t hold all that much weight under current circumstances. Those circumstances may change, but that would require political centralization, which can in turn only really work if Europe is in any way a policy. Yet it isn’t a polity. The Germans and the French, let alone the Germans and the Greeks, are not going to agree about fundamental matters of policy. Nor are they going to treat the authority of the other over them as legitimate. 

 

Endogenous structural reform is squaring the circle. Exogenous structural reform is, well, empire. And who really wants that?

 

The European Union and The Consent of the Governed

 

 

 

Is the European Union a nation in and of itself? Guy Verhofstadt seems to believe so.

As an American familiar with American federal institutions, I can certainly say that what Mr. Verhofstadt and his ilk desire is a United States of Europe. Any talk otherwise betrays their unfamiliarity with what a federal union demands: That people ultimately identify with the top of the political pyramid.

 There can never be a United States of Europe because, unlike the United States, there is no single European identity. I doubt that a majority of Europeans will identify the European Union as their ultimate political group. An American in California can consider themselves to be the member of the same policy as an American in New York; they both speak the same language, they both roughly have the same political ideals, and they both identify with the same political symbols. The same cannot be said about a European in Athens and a European in London.

There was certainly a gradual evolution in American identity over the course of the 19^th century. One can easily cite Robert E. Lee's decision to fight for Virginia rather than for the federal Union as evidence for that, but it was nevertheless a difficult decision for him to make. Would it be similarly difficult for a German, Frenchman or Englishman to make a similar decision? I doubt it.

Democracy is a means of finding some shared opinion constituting the consent of the governed within the clamor and energy within a nation. It seeks to find some solution to the problems of governance which will be satisfactory to most. Whether those policies are found is often more a question of shared identity and shared symbols than actual persuasion. There need to be focal institutions and ideals which can unite people around political institutions, and where they don’t exist nor will the fiction of a consent of the governed. 

Democracy cannot work everywhere, and there needs to be some shared sense of identity for people to be willing to continually exist within a democratic nation with their geographic neighbors. Such identity exists in the United States, but it simply doesn’t across the European Union.  

The Euro Crisis and the Assault on Nation-State Democracy

Who is loyal to this flag? Mostly bureaucrats.

 

The ongoing crisis in the European Union allows us to be witnesses to perhaps one of the most important assaults on freedom in this generation. It is not a conscious assault of freedom, for the most part, but rather a process by which politicians are willing to sacrifice the freedom of those that they are supposed to represent and those of nearby nations in order to fight against the inevitable. The Eurozone is doomed or it will have an extravagantly high cost, focused in the Mediterranean nations, to save. The entire project of putting heterogeneous nations with little economic similarity under a common currency was a bad idea to start off with and its implementation was just as faulty.

 

The institutions of nation-state democracy may be an object of great trust to modern day Libertarians, and this is not entirely without justification. After all the institutions of nation-state democracy have done little to nothing in either guaranteeing liberty or to preserving it against erosion. The parliamentary reforms in the United Kingdom, for instance, opened the gates for Fabian socialism and the hey-day of the Liberal party was short, one could even go as far as to say the Liberal Party died with Gladstone. In the United States, the Progressive belief in the absoluteness of democracy brought with it not only Federal encroachment on the lives of each citizen, but also a regulatory ecosystem in which an alphabet soup of bureaucracies regulate largely without the oversight of Congress. Nation-state democracy brought along with it a superstitious regard for democracy as a means of creating society anew and it contributed to the decline of the rule of law as it became popular to deny any authority about the representative body. Those that thought democracy would protect liberty were mistaken and the experience of the last two centuries better corroborate the opinions of the franchise's bears than it's bulls.

It could be said that we live in a world of the second best. It could very correctly be pointed out that, especially in Europe, the alternative to nation-state democracy is a Federal European state. Either the sovereignty of nations like Greece and Spain to tax and spend, certainly a sine qua non of nation-state democracy, as their governments decide is upheld, or the European parliament usurps that power by deciding how those nations may tax and spend. That is certainly true, but something braver and more pertient can be said: that despite its many problems, nation-state democracy has been the best set of political institutions for the maintenance of human prosperity the human race has ever discovered.

 

Yet, if the Eurozone is going to be salvaged, then nation-state democracy must be cast aside and the powers given to a body that claims sovereignty above the representative bodies within the nation-state. The reason for this is that the Euro Crisis cannot come to a close without an influx of capital into the Mediterranean economies, and this cannot happen without German and other Northern European investors buying assets in those countries. For that in turn to happen, these investors need to expect their investments to bear fruit in the future and they will only have this expectation if the local governments have their fiscal and monetary hands tied by an outside sovereign who ensures that local governments limit their spending and are irrevocable joined to the Euro. Only closer political union will bring the Northern, Germanic capital that the Mediterranean, under their present conditions, so desperately need and it will only travel downward when there is closer political union.

Closer political union, though, would mean the sacrifice of the Mediterranean nations' self-determination to a legislative body in Strasbourg and Brussels that is no longer accountable to the peoples of those nations. Where the Connecticut Compromise was able to balance the power of the smaller and larger states of the United States, the abrogation of nation-state democracy in Europe would mean that the Mediterranean states would be more or less giving up their power and agreeing to terms set by the Northern states. There is no give-and-take, there is simply the agreement of some states to the conditions set by others. Let's not forget that the EU is the organization that when the Irish rejected the Lisbon Treaty in a referendum, simply figured they had it wrong and forced another referendum. In addition, if the political union were to ever happen, the entire process of recovery for the Mediterranean would be for what should be considered foreign investors going into nations and buying them. Not only will nation-states like Greece and Spain be under the political terms set by Germany, but they will also by the end process be owned by German capitalists.

 

The good news is then that this union will never succeed. Europe is not a polity. It is united neither by tongue nor law nor religion nor common experience. The language of Spain is Spanish, that of Poland is Polish and that of Austria is German. There is the Napoleonic Code in France and the Basic Law in Germany. Greece comes from a Orthodox religious tradition while Dutch religious tradition is highly influenced by the events that followed the Protestant Reformation. The only thing close to an experience shared by the entire continent was the Second World War, but that was won by soldiers who are foreign to the nations now in the EU. The entire project of the EU is primarily bureaucratic in nature and it has been explicitly created by treaties rather than the loyalties of people.

There is simply no social fabric to hold a Federal European state together and any attempt to make one will fail. The road to that Federal state would be an arduous one, especially for Mediterranean nations, and there is simply nothing that will hold it together through that arbor. Nations like Greece and Spain will find it much easier to simply leave the Euro, though they may never do so explicitly, than to accept the terms of an artificial European state. Though they may travel down that road for the time being, when the real sacrifices have to be made and when hope of recovery is all but extinguished, the national governments of many nation-states will simply not be able to withstand the protest against the usurpation of their nation-state democracy.        

Wicksellian Rot in Greece: When Will Relief Come?

From NPR:

"There's no credit. How can you do business without credit?" he asks.

 

Greek banks have little money to lend out, while foreign lenders, which once flooded Greek businesses with loan offers, no longer want to do business in the country. The possibility that Greece might leave the eurozone, however slim, makes lending money there too risky.

It's a huge challenge for companies like Kir-Yianni, which have to import virtually all of the materials and equipment they use in their production. Kir-Yianni buys bottles from Italy, paper from Turkey, barrels from France and cork from Portugal.

 

What the NPR broadcast is describing, though it does not go into the economic details, is a phenomenon called Wicksellian Rot. Entrepreneurs in Greece are suffering from not having the money at hand to make their exchanges. This does not necessitate that what they are doing is economically unprofitable, indeed in the case of many it seems that they are plenty profitable, but that they suffer a want of physical money to complete their exchanges with other people. They know that they can make mutually beneficial trades with other people and they have done so in the past, but this exchange cannot be completed because of a lack of money. Thus parts of the Greek economy, which could otherwise be prosperous, are in a state of economic malaise due to a simple lack of cash.

 

The Euro is leaving Greece. As can be gathered from the broadcast, and which is corroborated by other reports, there is not enough Euros in Greece to fulfill the demand for money and so patterns of trade are grinding to a halt. This in turn is exacerbating the Greek economy as those few productive sectors in the economy are brought down as the Wicksellian rot brings down the economy. The natural process of this crisis is that capital will flee Greece into other parts of the world, and especially of the Euro-zone, until the overall price-level in Greece. This can be crudely shown with a basic supply-and-demand diagram, with the price-level on the ordinate and the quantity of money on the abscissa:

 

The right-ward sloping blue curve is the demand for money. It slopes that way because as the price level increases, each unit of cash will chase less goods hence to maintain their power to buy goods, in econ-speak their purchasing-power, people will demand more money. The purple line is the supply of money. It is vertical there because we shall assume here that the supply of money is endogenous, the product of the decisions of central-bankers and savers for reason outside of the model. Here, the initial price-level shown by the red dashed line no longer brings the demand and supply of money into equilibrium. Instead, the demand for money at that price-level exceeds the supply resulting in a large shortage of money whose effects we now see in Greece. The two can be brought back into equilibrium if the general price level in Greece decline by a process of systemic deflation; however, this is a process that has proved to be devastating for prosperity as shown by the British deflation of the 1920s after the Bank of England returned to the gold standard's pre-war parity even after half a decade of inflationary politices.

 

This can be avoided and there is a way to bring back monetary equilibrium without the price-level adjusting. This is possible if the Greek government were to expand the money supply as to bring it into equilibrium at the current price-level. This can be graphically represented as so:

Even though this would disturb the economy in its own ways, expanding the money supply would enable Greek entrepreneurs who have viable businesses to get the cash they need. In addition, since the Greek unit of money would have to decrease in value with respect to foreign monies, Greek goods would be less expensive than goods from other nations leading to a comparative advantage for Greek exports.

 

None of this is to happen soon, though. The Greek government has no control over their money and the nation is stuck in a union to the benefit of fiscally sound countries. Due to the loyalty of the EU to the idea of a united Europe and because the Euro is seen as an essential tenet of a united Europe, the Greek economy is simply left to go about the long process of deflation (while at the same time having to abide by austerity measures enforced by the EU). If Greece were to simply leave the Euro and adopt the Drachma, then Wicksellian rot could be avoided by expanding the money supply and the Greeks could use devaluation as a tool for getting out of the crisis.

In the short term, this is not to be for Eurocrats can continue to delude themselves that Greece can somehow remain in the Eurozone without loosing a decade of economic growth. In the long term, though, the Euro will leave Greece and the conditions of Wicksellian rot will worsen until finally the Greek government expands the money supply. What they use to initially expand the money supply may not be called Drachmas at first. They may very well be promises to pay Euros to the holders of the notes. However, they will be Drachmas in all but name and it is very likely that Greece will only formally sever its ties to the Euro after the informal ties had already cut themselves. This is all speculation, but what we can be certain of is that as long as Greece is in the Euro, there is no hope for the Greek economy. Until political hopes give way to economic reality, Wicksellian rot will worsen in Greece.