The Macron vs Germany standoff on fiscal policy should be a wake up call for Eurocrats.
Eurocrats are sitting on the horse face backwards – this is not the time to play hardball, but to realize if they do not profoundly reform how the EU works it will not survive. Yes, discipline is important but not imperative, not an ultimate value or principle which overrides everything else.
There are two choices: they either give more fiscal space for the Southern European countries (including France) in managing their own finances (at the same time asking for internal reforms in return) or face the inevitable: the political rug underpinning the structure they are getting their salaries from will be pulled out violently.
The fact that Le Pen did not win does not mean she lost or the problems causing her ascendancy have disappeared. On the contrary, if you fail to resolve these problems first, accommodating a huge proportion of European people who are the losers of globalization, the building will come crashing down. Five years is a short time.
The math is simple: either you keep the eurozone with introducing a system of internal transfers, a flexible fiscal union (common shouldering of debt and bank union as a minimum first step) and a complete political reform (who is electing the Commission?) – or the growing tensions will take down the edifice. The problem is that it is enough for one big country to quit the eurozone to end the European project in its current form. Greece is too small for that, but Italy and France are big enough. You need one electoral revolt in one of the key countries to end the euro in its current form (it might continue to exist as a quasi-Deutschmark afterwards, who knows, maybe kept by the Nordic countries, mostly German-speaking).
The problem of the eurozone seems to be economic (monetary union without fiscal union) but deeply political in its nature. If there is political power and willingness, any problem can be solved. In Europe there is too much power where it shouldn’t be (pushing through micromanagement to the local level) and too little where it is needed (Kissinger could still not call anyone). We need political clout and guts to deal with problems. In the European standoff, it has to be a compromise, as there are multiple power-centers.
In the end, all suggestions to ease the pain of the South boil down to one thing: Germany needs to pay up. Why? To maintain their access to their main export markets without currency risk and entrance hurdles, so they can keep their economy growing. They can argue as long as they want about their production efficiency and its high quality, but if the EU collapses and these countries go to crisis, who will buy the BMWs?
Without customers the export-based German economy would find itself in deep trouble. On the other hand – if we still stick to maintaining the eurozone – the Southerners will have to profoundly change how they operate: pull back the state from many areas of the economy, decrease spending and adopt rules that help “increasing the efficiency” (which in economist jargon often means to be able to fire and hire without much hassle, but also less bureaucracy and less state intervention where not needed).
Even though it looks good on paper, the latter is more difficult. As we saw, the Maastricht criteria are sort of superior principles that stand above all in the eyes of the Commission (not to mention that big countries, like Germany, have violated them many times). Any principle is by nature a cultural choice: what do I prefer, eat the marshmallow now or tomorrow? How do I prefer to work: making a schedule one month in advance or flexibly going with the flow, without taking many commitments?
In order to be successful in the current framework, Southern European countries would need to change in their very nature, to become (more) Nordic from Mediterranean. I don’t think this is possible. You can make changes here and there, but from top to bottom altering how people in an entire region approach life’s problems is not possible. You can force them, either by military invasion or the Troika (example of Greece), but all you would obtain is silent resistance and eventual failure. The GDP of Greece decreased by roughly a third: not sure if simply carpet bombing parts of the country could achieve the same result.
The only solution to keep the existing framework: Germany and other net payer countries accepting constant subsidies to countries of the South, in exchange for maintaining their current account surpluses and to some mild reforms which can still be sold politically in the South – massage therapy instead of electroshock and brain surgery.
Funnily, as many have written about it before,
for France or Italy the euro is a foreign currency – they simply introduced money issued by “another country”,
which has completely different economic situation and way of doing things from theirs. And it happens to be traditional German discipline right from Frankfurt – efficient in Schwabia, but not so much tailored for the needs of Marseilles, Palermo or Thessaloniki. It took only ten years for this artificial creature to get sick, now it is kept alive but its core existential problem is not resolved – if it can be resolved at all.
Given the fact that the Commission can only impose regulations and decisions on elected governments, as long as people in these countries have a vote, they will express their discontent. Bottom-up vs. top-bottom.
In the end, they will elect someone who will say: Why should we respect alien rules? Why paying back the debt at all?
It is irrelevant, whether such questions are “rational” for PhDs in economics. if millions of voters ask them, who will then elect politicians accordingly, bringing down the system. And if these politicians do not keep their word people will take on the streets and storm the Bastille. Simple as that.
We went a bit far, but my main thought is that it does not make any sense to ask France to make reforms right now just after Macron was elected before easing on the principles and at least in theory agreeing on opening up the Nordic purses (mostly the German one). However, that is a heavily political question with the German elections around the corner. In the end, the story boils down to one thing: if the people of Europe have want the same thing. If not, then it hardly makes sense to have all these different countries held together by the same terms in the current structure. Maybe we need many Switzerlands, Venetian Republics and Singapores sewn together by a couple of common interests, a modernized Holy Roman Empire revived in the era of innovation and strong need for locals to manage their own affairs as independently as possible.
This is a guest post. “Patrick Bateman” is an analyst who lives in Switzerland.
Follow us on Facebook , Twitter @_MwBp , or subscribe to newsletter