Wednesday, July 24, 2013

Euro divisions: waiting for the perfect storm?

Sonia Alonso looks at the prospect of a "perfect storm" for the euro crisis in La fractura democrática en la UE: ¿encaminados hacia la tormenta perfecta? El Diario 21.07.2013, appearing in English as The growing economic and ideological breach between Northern and Southern EU countries is pushing Europe towards a perfect storm EUROPPO Blog 07/22/2013.

French jobless hits fresh record - economy Euronews 07/24/2013

She provides charts illustrating the political polarization between the EU "south" and the wealthier northern nations. She is looking at the EU as a whole, not just the eurozone countries:

In Northern EU countries, political trust has remained above its 2002 levels since Lehman brothers filed for bankruptcy in September 2008 (with similar values for the countries inside and outside the euro). Both trust in government and in political parties peaked between September 2008 and February 2009, when European governments and governmental parties were united in implementing anti-cyclical reforms, and when European politicians were talking about the need to re-invent capitalism and to increase the levels of regulation of financial markets, while simultaneously blaming the US and its "free-market-above-all attitude" for what had happened. After this peak in trust, levels went down in 2010 and 2011, the years of the Southern European bailouts, but grew again in 2012, particularly trust in political parties, which jumped from 25 per cent in November 2011 to nearly 35 per cent in June 2012, at a time when austerity policies were well entrenched among EU institutions and Northern European chancelleries. Satisfaction with democracy in Northern EU countries has evolved in a similar way. It is less "bumpy" than political trust, for it is less dependent on contextual factors, but the upward tendency is clear even if modest ...

In Southern Europe, by contrast, trust in governments and parties has consistently declined since February 2009: a drop of 27 points for governments and 15 points for parties in just four years. In June 2012 only one in ten Southern European respondents trusted its government and its political parties. If we look at the last ten years, the gap in political trust between the North and the South of the EU has grown from 9 per cent to 32 per cent for governments, and from 6 per cent to 25 per cent for political parties. Satisfaction with democracy has also dropped quite dramatically. The gap in the last ten years has grown from 21 per cent (already a quite remarkable gap) to 46 per cent. This is what I call the "democratic breach".
The main purpose of the common currency in the official public consensus supporting it was to promote the progress of political union. Now, the problems of the common currency are having the opposite effect. Alonso writes:

This is a classic example of overlapping territorial and economic cleavages. Creditors are in the North, debtors in the South, and the interests of creditors and debtors are totally at odds with each other. A process of internal colonialism seems to be emerging inside the EU. This process is compounded by the "ideological divorce" between North and South mentioned at the beginning. Historically, such overlaps between territory, economy and ideology have seldom been conducive to moderation in the settlement of political and economic conflicts. On the contrary, they reinforce each other in polarised directions. We seem to be heading towards a perfect storm.
Alonso borrows the "ideological divorce" phrase from Lluís Orriols, El divorcio ideológico de Europa El Diario 21.07.2013. Orriols looks at the policies emphasized by the political parties in the EU (not just in the eurozone). It's an inherently subjective approach involving considerable judgment by the analyst, but it provides a useful data point. Orriols work confirms continued general support for the EU, but with more weakening in the countries under the austerity hammer; he includes Greece, Ireland, Italy, Portugal and Spain, also known by the not-exactly-cheerful anagram PIIGS, as the troubled countries, though Cyprus should also be in the list.

He shows support for "free market" and austerity policies declining in the crisis countries and increasing in the rest. It's hard to tell what that means. But it's probably a good guess that the crisis countries want to see the markets restrained more urgently than those in the richer countries, which have promoted a judgmental attitude toward the crisis countries. It's easier to support austerity that is falling on a different country than one's own.

He also finds that the trend in the crisis countries is more toward parties of the left, while the conservative/right parties are gaining support in the less-affected EU countries.

Päivi Leino-Sandberg and Janne Salminen in Should the Economic and Monetary Union Be Democratic After All? Some Reflections on the Current Crisis 12/17/2012 14 German Law Journal 14/2013 give some more detailed background on how this division has developed:

In 1997 the EU Member States complemented the formal EMU structures by concluding the Stability and Growth Pact, an agreement aiming at maintaining the stability of the EMU and consisting of fiscal monitoring by the Commission and the Council, and the Issuing of a yearly recommendation for policy actions to ensure a full compliance with the Pact also in the medium-term. The idea was to make sure that Member States adopting the euro not only met the Maastricht convergence criteria when joining the euro, but continued to comply with the fiscal requirements. An Excessive Deficit Procedure could be launched against a Member State breaching against the maximum limit for government deficit and debt, and if unsuccessful, the Member State could ultimately be placed under economic sanctions.
The deficit and debt limits set under the Maastricht and the Stability and Growth Pact were artificial, economically mostly senseless and poorly enforced. They were largely a reflection of the German One Percent's obsession with "hard money" and the related fear of inflation.

But the weaknesses of the euro currency zone didn't become the occasion for a real currency crisis until the North Atlantic Depression hit Europe in 2008 and the Greek debt problems became public in 2009:

Almost twenty years after the entry into force of the Treaty of Maastricht, it is evident that many of the EMU [European Monetary Unit, i.e., the euro] solutions have proved unsustainable. While the Monetary Union initially provided a number of fat years in the form of stability and a strong currency, the Economic Union did not encourage to a satisfactory level of convergence that would have been needed for the prosperous years to continue. There are many reasons for this outcome: Member States and their financiers operated for a long time in an unexpected way, and more recently the markets have reacted likewise. Some blame the crisis on an 'asymmetric symbiosis between states and banks' [quote cited to Mattias Kumm]. The situation of Greece has been considered partially self-inflicted as regards fraud and corruption, but was made much worse by the global financial crisis. The other Member States were slow in coming to the rescue, and soon after they did, the Greek government debt turned out to be of a size practically untenable for the country [in the neoliberal consensus view], followed by concerns relating to some of the larger Member States. The fundamental problem has been this: the EU has had no appropriate tools that would solve the current crisis, and there is disagreement on what measures would be needed, and whether these should be adopted. Therefore, the crisis itself is caused by the justified suspicion that the EU is not capable of solving the crisis that it is trying to tackle.

To avoid this outcome, a number of quick fixes have been made to save certain Member States and, ultimately, Europe's common currency, from sinking. In handling the sovereign debt crisis various instruments have been used, by the Union and the Member States along the Union in an intergovernmental setting. This has resulted in a web of various mechanisms and parallel processes. There are measures aiming at assisting individual Member States and, subsequently, at stabilizing the whole euro area, on the one hand, and measures aiming at improved economic governance, on the other.
However, these measures were taken in practice largely on the insistence of Germany under Chancellor Angela Merkel, based on her stone-conservative economic doctrine of "ordoliberalism." And they were taken with much regard for democratic niceties, especially in the countries put under the austerity hammer. Merkel effectively deposed the elected heads of government in both Greece and Italy during the course of imposing the austerity requirements, though both are now operating under normally elected parliamentary prime ministers.

Those measures included the inevitable initialed agencies and agreements, notably the EFSF (European Financial Stability Facility) and the ESM (European Stability Mechanism). It also includes the Fiscal Compact of 2012 (Treaty on Stability, Coordination and Governance in the EMU), which I call the Fiscal Suicide Pact because it effectively bans stimulative Keynesian counter-cyclical fiscal policies during recessions and depressions. Which is nuts. They note, "The problem is that, while few of these measures have helped to cure the problems of credibility in any more permanent manner, they have also done little to contribute to the legitimacy of the existing arrangements."

I love that euphemism, "asymmetric symbiosis between states and banks" as a way of saying the banks had the governments under their thumbs.

The paper's synopsis sums it up this way:

As a consequence, a number of 'quick fixes' with little democratic elegance and largely dictated by the markets have been adopted in swift succession to save certain Member States, and ultimately the Euro, from sinking. This has resulted both in a web of mechanisms and parallel processes, but also in serious constitutional challenges that remain largely unaddressed. The European Council’s contribution has been limited to general references to the reforms brought by the Treaty of Lisbon, which have proved to be of a limited use in tackling the current crisis. At the same time, it seems to forget that the said Treaty allocates democratic responsibilities to the European Council, as well, which it fundamentally fails to respond to.
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