Thursday, 28 February 2013

Guest Post: What Next For Europe?

This is a response that Alex Sabell sent me to the last post. Since Alex genuinely knows this policy area very well, I thought it would be well worth sharing with you all. It has some worrying implications to say the least. Enjoy.

You speak of the current austerity conditions being imposed by the European elites and that they need to realise that this isn't going to wash with the electorate. The only problem is that I don't see the other solutions being any good either.
The likes of Greece, Spain etc... in general got quite a lot richer over the life of the Euro, and we can see now that this was mainly down to cheap credit being available under the assumption that Northern Europe (aka Germany) would pick up the tab if something went wrong. The Germans explicitly always said that they wouldn’t; so really nobody should have been lending on the assumption that Germany would actually stand behind the entire Euro venture.
The knock-on effect is that the banks of Europe do indeed need to take a hit on this (which they haven’t so far). But incidentally I think it would be a mistake to assume that pummelling ‘the banks’ and letting them take a hit, just affects rich people. ‘The banks’ essentially are all of our pension savings etc... or our ability to get a loan to start a business. They affect everyone. I don’t think the current Euro austerity ‘solution’ is just to benefit rich creditors.
Anyway I digress, my main point is that in hindsight its a bit mad that Greece, for instance, was able to borrow at the same interest rates as Germany. There were always some quite fundamental differences between the two countries, and I’m not just talking kebabs vs sausages. During this time wages and buying power went up a lot in most Mediterranean countries but stayed about the same in Germany, who were quietly becoming more efficient. (Germans exports were of course also benefiting from what was essentially, for Germans, an under-valued currency). Yet the stuff being produced in Mediterranean countries wasn't being made any more efficiently during this time of increasing wages. Those higher wages were effectively coming at the price of competitiveness. And cheap credit was papering over these widening cracks. Unit cost and various productivity/efficiency analyses seem to back this up. These countries were essentially living beyond their means – funded by credit.
So its not just the elites who would like to stay in the Euro now. Many people realise that going back to the old currencies would leave them quite a lot poorer. In effect it actually would mean going back to a relative level of income of the era before the Euro... Now, I realise that those politically connected, ‘the elites’, the financiers, the bankers, in these countries would have done best out of the Euro (and have all by now bought houses in London) and that those who suffer most are ‘the rest’, but the figures on wages and productivity do seem to suggest that most of the Mediterranean populations were considerably better off during the happy Euro years. People were paid more, they could buy more as their Euro currency was considered as good as anyone else’s, companies could borrow at more competitive rates and grow quicker than before etc... etc...
Sadly it was all a bit of an illusion.
The future for many Euro countries is a Euroland of either massive inter-country redistribution and losing control of your finances, in the style of a true political union, (which essentially means being told by Berlin and Frankfurt to be sensible or else) or falling out of the Euro, incurring a massive loss of wealth as your currency reverts to a more ‘natural’ level – a level of national wealth more like where you were before the Euro came along.

To me this implies that its not just a case of the elites imposing the wrong austerity solutions. They are rather stuck trying to manage a slightly unrealistic and ageing continent that’s got rather used to being comfortable and protected. The elites are effectively playing scrabble with a hand full of Zs, Xs and Js. And the rest of the letters are consonants. And they are nowhere near a triple word score.
I think its more a case of everyone in the Euro, the elites and ‘the rest’ alike, being trapped in a poorly designed (mainly when viewed in hindsight) currency union in which no future option looks particularly inviting. Somebody is going to have to pick up the tab for the Euro binge, probably the Germans, and they will forthwith ban all future parties. Or alternatively peripheral countries become poorer quite quickly, either through austerity or through falling out of the Euro. I can’t see a magic alternative policy that the elites can choose.
In effect, where I do agree with blaming the elites is that it was they who allowed their currency union to be designed by committee (apparently using sticky tape and party straws), but then European integration is a rather lovely idea – in principle – and I can see why lots of us went for it, elite or not.

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