A précis of previous posts on this theme
In August last year we published a two-part review of Collapse: Europe after the European Union by Ian Kearns. Although an EU enthusiast Kearns fears for its future unless serious reforms are undertaken. We don’t share his enthusiasm and question some of his assumptions but we agree with much of his analysis, if not his conclusion – that it needs more unification. Here we summarise the points relating to our economic theme but there is much more in his book and our reviews.
In tackling the world financial crisis the ECB prioritised institutions (especially banks) over citizens. The latter had to bear the costs. Everyone was promised there would not be bailouts; there have been but the loans may never be repaid unless under the most oppressive and often counter-productive terms. The Union institutions forced Greece, Ireland, Portugal, Spain and Italy to take remedies that made matters harder for them. Iceland defaulted on foreign debt and protected its own citizens giving it a path to recovery; Denmark was also able to protect smaller creditors from bank failure.
The drastic ‘cures’ imposed on Greece, Italy and Spain plunged them into deep and prolonged recessions with very high unemployment and reductions in social security. It seems astonishing that the UK Labour Party remains enthusiastic about the EU. Eventually Draghi lowered interest rates and created a flood of new money but the underlying problems have not been remedied.
The result of mismanagement has been the rise of left- and right-wing ‘populism’ but the states may no longer have the power to deliver on their promises. As Kearns says, “… the will to face a crisis collectively does not exist.” France favours Keynesianism while Germany favours strict controls, and those outside the zone are suspicious that their interests will be overlooked.
Collapse: Europe After the European Union – 1 (04/08/2018)
The EU faces economic risks that threaten its future. Kearns lists these as: Trump’s policies, a Chinese recession, an oil crisis, a no-deal Brexit, further mistakes by the ECB and a banking crisis within the eurozone. All are real possibilities that the eurozone isn’t ready to handle. Solidarity between countries that needed help and those needed to provide it is unlikely. Only by deploying Germany’s surpluses, could the position be held but no moderate German government would survive that. The eurozone’s financial plumbing would seize up, supply chains would suffer as debtor countries would not have the means to buy from surplus countries. Unemployment would surge, the Single Market would cease.
And finally, separatism in Catalonia and Northern Italy has strong support but how would the much poorer areas survive?
Collapse: Europe After the European Union – 2 (05/08/2018)
In January this year we devoted four posts to analysis and critique of the euro, the monetary union that the EU expected would supercharge progress towards a supra-national state. We provide a brief comment before a link to each of these posts.
The EU celebrated the 20th anniversary of the euro as the new year opened. We offered our own ‘celebration’ with a short quiz, asking in the final question whether the euro would see its 21st birthday.
The EU supposed its new currency would promote economic convergence between the eurozone member states: it has seen increasing divergence. Nor has it promoted overall growth; the UK stood outside and has done better than the average eurozone member despite the forecasts of the usual prophets of gloom.
The survival of the euro, and thereby of the Union itself, has now taken precedence over all else. In single-nations rich areas subsidise poorer ones without much complaint; this is illegal in the eurozone but it must happen or trade would stop – so it does happen, under cover, which will cause a lot of anger when revealed. The warning signs of failure were clear from the EU’s own preliminary experiments such as the monetary snake and ERM, which frightened Britain from joining.
The State of the Euro (07/01/2019)
Our next post looked into the history of monetary unions, most of which have failed, and the possible consequences if the euro also dies. We looked at the risks that nations take when they transfer control of their monetary policy and decisions to another authority, identifying Greece and Italy as two countries particularly in danger within the eurozone.
We also pointed out the disconnection that results from the EU declaring that sovereign bonds are risk-free, implying there is no possibility of any country being unable to repay its loans. Yet financial markets give higher returns on Italian bonds than German ones because the latter are safer (it actually costs money to hold them).
So Germany effectively holds IOUs from other member states, as a result of its successful manufacturing exports. It must be doubted whether it will ever be able to reclaim the debts from nations that are struggling economically.
Ultimately monetary unions fail because of politics. A ‘normal’ central bank can delay a crisis for a very long time with low interest rates and bond purchases but the ECB has run out of road unless other nations agree to help Italy, indefinitely.
We also highlighted some further reading that goes into more details than is possibly in a blog.
The Future of the Euro – 1 (10/01/2019)
The second post in which we looked to the future of the EU and its EMU noted the outcomes of several earlier experiments with monetary union, notably the Rouble Zone, which collapsed at the same time as the Soviet Union and shortly before the Maastricht Treaty mandated the creation of the euro, despite the warning sign.
We quoted the reservations of the founding Chief Economist of the European Central Bank, Otmar Issing, who felt he had been obliged to go along with EMU for political reasons. This is his key observation: “Today, the no bail-out clause is violated every day, de facto. … It is difficult to forecast how long this will continue for, but it cannot go on endlessly. Governments will pile up more debt – and then one day, the house of cards will collapse.”
The logic of monetary union for the EU is to accelerate Ever Closer Union. Its practicality and the economic security of citizens is secondary to this overriding goal.
The Future of the Euro – 2 (12/01/2019)
In the final post in this series (though surely not on this topic) we looked at the implications of the vulnerability of the eurozone (EZ). We cited Nobel Prize winning economist Paul Krugman, who argued that no country can have a fixed exchange rate, free flow of capital and its own monetary policy. This economic ‘trilemma’ is vividly demonstrated by the EZ which demands the first two and so denies the possibility for a troubled country, like Italy, to manage capital flight.
We argue that there is no political will to enter a full financial union to fix the problems because it implies debt sharing between nations. The likely outcome for the EZ therefore is a break-up, whether it will be managed or chaotic is less clear. We highlight some of the consequences.
The Death of the Euro (26/01/2019)