AUTUMN 2015 THAT SINKING

FEELING Stefan Kawalec THE EURO AS A THREAT TO EUROPEAN INTEGRATION Brigitte Granville THE IMF AND THE EUROZONE: FIREMAN OR ARSONIST RECOVERY

Jean-Jacques Rosa Alberto Bagnai GIVING GREECE “AUSTERIANS” VS. A CHANCE “APPEALIANS” Joachim Starbatty Hans-Olaf Henkel HAS GERMANY THE EURO-RESCUE BENEFITED FROM POLICY AND THE EURO? BREXIT THE EURO HAS PROFOUNDLY CHANGED Tomasz Poreba is a Member of the European Parliament and President of New Direction – The Foundation for European Reform. EUROPE he introduction of the euro was supposed to strengthen the process of European integration. Unfortunately, although the euro has become one of the most visible symbols of the EU, the T number of harmful consequences is growing. The euro has distorted the way in which the economies of Spain, Portugal, Italy and Greece function. Moreover, the countries of southern Europe, as members of a currency union cannot use currency devaluation, the most powerful instrument for coping with a serious economic depression. Economic history teaches us that having your own currency is essential for a country facing a severe economic crisis, but appropriate reforms must follow devaluation to make a recovery sustainable.

There can be little doubt that the euro has profoundly changed Europe. A deeper reflection on the nature and consequences of the monetary union in Europe is unavoidable.

Today, more than ever before, we can see that the euro has still not improved the economic situation in the European Union. It was clearly a political rather than an economic project. The single currency, instead of accelerating Europe’s prosperity, has deepened divisions between EU member states. The introduction of the euro resulted in the disappearance of exchange rates risk within the eurozone and a sudden and massive inflow of capital to southern Europe.As a consequence, wages grew much faster than productivity and southern Europe lost its international competitiveness. The problem of competiveness is at the heart of the eurozone crisis.

The euro has affected not only eurozone countries, but also the rest of the European economy. Eastern Europe is also influenced by the economic consequences of the euro, as its largest trading partners suffer from economic growth below the potential caused by the euro and the euro- rescue policy. What is more, the euro is responsible for constant calls to transfer more powers to Brussels, and diminishing the role of the principle of subsidiarity in the European project.

With all views and analyses included in the New Direction magazine, I hope this publication will be a helpful tool in raising awareness of the economic and political ramifications of the single currency for the European Union. Tomasz Poreba GUEST EDITOR TABLE OF CONTENTS

6 10 14 20 Stefan Kawalec Brigitte Granville Jean-Jacques Rosa Zdzisław Krasnodębski The Euro as a threat to The IMF and the Eurozone: Giving Greece a Chance: European Monetary he eurozone crisis is European integration Fireman or Arsonist Grexit and the case for cooperation disunion among the greatest challenges facing the European Union. Many Teurozone countries, especially those in Southern Europe, are saddled with unemployment comparable in scale to that during worst days of the Great Depression of the 1930s. The very nature of the EU is being transformed: calls for a more centralized eurozone backed by a fiscal union feature centrally in the European political debate. The present euro-rescue 24 27 30 33 policy continues to prove itself an unmitigated failure. Alberto Bagnai Jacques Sapir Joachim Starbatty Jean-Pierre Vesperini “Austerians” vs “appealians”: The Euro and the current Has Germany benefitted The Euro’s Impact New Direction has invited The two sides of the austerity tale non-democratic shift from the Euro? on France leading economists and public intellectuals from a wide range of economic and political schools of thought—though all critical of the euro - to contribute essays assessing the eurozone crisis. It is time for an honest debate about the costs of the euro to take place in Europe, as its consequences impact non-euro countries, as well. New Direction is pleased to publish these essays, each of which combines clear, scholarly analysis with creative, 40 44 48 52 36 courageous thinking—precisely the qualities which the Peter M. Oppenheimer Hans-Olaf Henkel Roland Vaubel David Liebers Antoni Soy European political discussion Impact of the Euro: The Euro-rescue Banking Union: A Tale of Two Lefts The Illusion of the The View from Britain policy and Brexit A Breach of Faith and the Euro Spanish Recovery needs most.

New Direction – The Foundation for European Reform, a non-for-profit organisation (ASBL/VZW) registered in Belgium and partly funded Hans-Olaf Henkel www.europeanreform.org follow us @europeanreform by the European Parliament. Registered Office: Rue D’Arlon 40, Bruxelles, 1000, Belgium. Director General: Naweed Khan. The European Parliament and New Direction assume no responsibility for the opinions expressed in this publication. Sole liability lies with the author. THE EURO AS A THREAT TO EUROPEAN INTEGRATION Stefan Kawalec 1

urope can be proud of in Poland in the domestic currency was 105% in Germany, 108% in the its achievements in the remained unchanged, in terms U.S., and 124% in Poland. second half of the 20th of the currencies of the country’s century. After the terrible trading partners, they declined by Trade and current account deficits in Eexperience of two world wars, the 30%. This was probably the most the southern countries were mostly creation of the European Union important factor which enabled eliminated, but this was largely the and the common market were Poland to enjoy positive economic effect of depressed domestic demand. remarkable political and economic growth in 2009, when all other Wages declined much less than successes. However, these EU economies contracted. Today, necessary. At their present levels, achievements are currently being Poland continues to benefit from the current accounts can be balanced endangered by the adverse effects improved competitiveness obtained only if the southern economies do of the introduction of the euro. 2 as a result of the adjustment of the not utilize their potential, and rates exchange rate in 2008/2009. of unemployment remain at elevated levels. A higher utilization of the RESTRAINTS OF The Eurozone countries in countries’ economic potential would COMMON CURRENCY crisis cannot improve their automatically result in a reappearance ARE PAINFUL IN TIMES competitiveness through currency of a substantial current account deficit. OF CRISIS depreciation. Instead, they have Therefore, southern countries have been trying to implement a so the prospect of the continuation of When the euro crisis erupted in called ‘internal devaluation,’ the ‘internal devaluation’ policy in the 2010, one of the main problems which is in fact an ordinary coming years. of the affected Eurozone deflation policy. The main tool of southern countries was the loss this policy is fiscal tightening i.e. of international competitiveness. reducing government spending and A FRIGHTENING It was estimated that in order increasing taxes in order to weaken ANALOGY WITH THE regain competitiveness and repair domestic demand with the hope GREAT DEPRESSION their trade and current account that this will result in a decrease of balances, Greece, Portugal, Italy domestic prices and wages. There is a dreadful parallel and Spain needed to bring their between today’s ‘internal wages down by 20-30%. If these However, as economists have devaluation’ policy applied in countries had their own currencies, known for decades, wages are order to defend the euro, and the such substantial improvements in inflexible downwards. When deflation policy applied in order competitiveness could have been demand falls, companies reduce to defend the gold standard in the accomplished relatively quickly employment, and nominal interwar period. In Great Britain, a via currency deprecations, like the wage cuts are rare. The internal six-year policy of deflation (1925- one implemented in Poland, which devaluation policy resulted in a 1931) was unable to correct prices 1. The author is the CEO of Capital Strategy, a 05-14/save-europe-split-the-euro.html European Market”, German Economic Review, strategy consulting company in Poland, and a • B. Granville, H.-O. Henkel and S. Kawalec, 14 (1), February 2013, p. 31-49. is a member of the EU but not of decline in GDP and employment. and wages, that were overvalued former vice-minister of finance of Poland. ‘France Must Lead Breakup of Euro’, Bloomberg • S. Kawalec and E. Pytlarczyk, “Controlled the Eurozone. At the peak of the Compared to 2007, GDP in 2014 was by about 10%, i.e. three times less 2. This article draws from the following texts that View, May 16, 2013. http://www.bloomberg. Dismantlement of the Eurozone: A Proposal also discuss other aspects of the topic: com/news/2013-05-15/france-must-lead- for a New European Monetary System and world financial crisis in 2008/2009, 74% in Greece, 91% in Italy, 93% than the overvaluation that the breakup-of-euro.html a New Role for the European Central Bank”, • B. Granville, H.-O. Henkel and S. Kawalec, ‘Save • S. Kawalec and E. Pytlarczyk, “Controlled National Bank of Poland Working Paper No 155, the Polish zloty depreciated by in Portugal, and 95% in Spain. For Eurozone southern countries are Europe: Split the Euro’, Bloomberg View, May 15, Dismantlement of the Eurozone: A Strategy Warsaw 2013. http://www.nbp.pl/publikacje/ 2013. http://www.bloomberg.com/news/2013- to Save the European Union and the Single materialy_i_studia/155_en.pdf. about 30%. Thus, although wages comparison’s sake, this same ratio currently coping with.

7 countries/regions, but rather it is a way election in a member country may NEITHER THE EU NOR to permanently finance the deficits potentially shake the Eurozone. THE COMMON MARKET resulting from those problems. REQUIRE A SINGLE A fiscal union may limit the risk HOW TO SAVE THE CURRENCY FOR THEIR of irresponsible budget policy, EUROPEAN UNION AND OPERATION. BOTH but it will not prevent problems THE COMMON MARKET? INSTITUTIONS HAD with competitiveness from other EXISTED AND OPERATED sources. Any country in the Neither the EU nor the common SUCCESSFULLY Eurozone could at some point lose market require a single currency its competitiveness due to reasons for their operation. Both BEFORE THE EURO WAS which may be not easy to ex ante institutions had existed and INTRODUCED. diagnose and eradicate. A fresh operated successfully before the example is Finland, which until euro was introduced. If we do recently was regarded as one of the not want to witness how the euro Eurozone’s most robust northern destroys the European Union economies, and thanks to Nokia’s and the common market, we success was considered a symbol have to dismantle the Eurozone of a modern competitive economy. in a controlled manner, and we Today, it has a problem of structural need to agree on a new currency non-competitiveness. In 2014, coordination system in Europe. Finland’s GDP was only at 95% of This task is challenging, but 2007 levels. If Finland were not in feasible. Nevertheless, it requires the Eurozone, its currency would political will and leadership, which depreciate, thereby facilitating an is currently lacking. However, exit from economic stagnation. if the task of the Eurozone dismantlement is not undertaken and fulfilled by pro-European CONTINUING TO and pro-market leaders in the EU countries, it will be done by their Ultimately, in 1931, Great Britain, DEFEND THE EURO ’AT anti-European and anti-market plagued by a 20% unemployment ALL COSTS’ MAY TEAR successors. In the latter case, the rate, left the gold standard and EUROPE APART European Union and the common allowed its currency to depreciate. market will be destroyed as well. In Germany, Chancellor Heinrich Since the famous declaration by Brüning’s deflation policy helped European leaders seem to believe ECB President Mario Draghi in Dismantling the Eurozone will not pave the rise of Hitler. Today, that more progress in the fiscal 2012, that “ … the ECB is ready to solve all the problems of Europe, but economists admit that clinging union will equip the Eurozone do whatever it takes to preserve will it allow it to return to a path of to the gold standard was a key with effective preventive and the euro…”, the Eurozone is well growth. At the same time it will free factor in the deepening and correcting instruments, which will Puerto Rico protected from market sentiments. up energy and political capital which spreading of the Great Depression effectively substitute for the lack annually receive net However, the ECB is not able to is currently engaged in defending the internationally, which nearly led to of national currencies. But this federal transfers that exceed 10% fiscal transfers is a contradiction insulate the Eurozone from the euro. This will enable policymakers the demise of democracy all over is a fallacy. A fiscal union does of local GDP (average for period in itself. The inflow of funds to growing dissatisfaction of citizens to focus their attention on solving the world. not provide any instruments that 1990-2009). countries that are trying to regain of the member countries. Some could substitute for an exchange competitiveness through the Eurozone member countries are other problems and development challenges faced by Europe. rate adjustment in improving In Europe, Germany and Italy policy of internal devaluation only trapped in economic stagnation and ■ A FISCAL UNION WILL a country’s competitiveness. A tried to stimulate noncompetitive undermines this policy. While an suffer because they cannot improve NOT SUBSTITUTE FOR fiscal union could simply enable regions through fiscal transfers, internal devaluation policy intends their competitiveness through an THE LACK OF CURRENCY the collection of the resources without success. Despite spending to diminish domestic demand exchange rate adjustment. Others ADJUSTMENT AT THE necessary to finance the permanent huge amounts of taxpayer money in order to decrease domestic have to take part in consecutive bail- COUNTRY LEVEL deficits of some of the poorer or (amounting annually to 16% of prices and wages, incoming fiscal outs, and are forced to compromise less competitive regions. This regional GDP in southern Italy and transfers increase domestic demand on their values of prudent financial According to a popular view, is how fiscal unions operate in 25% of regional GDP in eastern and contribute to wage and price policies. This situation boosts the problems with the euro are federal countries such as the U.S. Germany), the Italian and German increases, and thus make it more animosities among European a result of the fact that the EMU and Canada, where some states or economies have gained little. difficult to regain competitiveness. nations and strengthens populist, architecture is not yet complete, as provinces are permanent recipients nationalist and anti-European Stefan Kawalec is the CEO of Capital the single currency has not been of net fiscal transfers. U.S. states In fact, an attempt to improve the So, once again, a fiscal union is not tendencies. The political landscape Strategy, a strategy consulting accompanied by a fiscal union or territories such as New Mexico, competitiveness of depressed areas a way to resolve the problems of in particular countries is getting less company in Poland, and a former vice-minister of finance of Poland. and a stronger political union. Mississippi, West Virginia and within a currency union through the non-competitiveness of some and less predictable. Any general

8 9 Brigitte Granville THE IMF AND THE EUROZONE FIREMAN ARSONISTOR hat has the International Monetary Fund (IMF) got itself into Wby accepting to rescue Eurozone (EZ) officials from their own incompetence? Not only did the founders of the single currency omit to include in their construct a crisis management mechanism to deal with liquidity problems (a true lender of last resort); in addition, the entire EZ population of experts, political authorities and civil servants were clueless in the face of the fiscal crunch that, in 2010, came to a head in one of the EZ’s smallest economies – Greece.

10 severe blow to the legitimacy and that the country’s public debt is SBA – as now explicitly admitted by credibility of the IMF that may sustainable.” (Blustein, 2015: 2). the IMF itself – was not wholly, or prove irreparable. But that defence was contradicted even mainly, to do what was best for not only by the fact of the Greece. The various liberties taken were restructuring of Greek public debt discussed in an article “The agreed two years later but also, The integrity of the IMF has been Economic consequences of Greece” 3 and most damagingly, by a further damaged by its failure to offer that I published with a group of official paper published by the IMF in public what would have been colleagues last year, the key points “Ex Post Evaluation of exceptional the most honest advice to Greece having to do with the Fund’s choice access under the 2010 stand-by – namely, to leave the Euro as of counterparties and the scale of arrangement” (May 2013), 6 a necessary (but not sufficient) access to Fund resources. in which the Fund Staff admitted condition for a return to growth, and that they knew that the Greek to secure debt relief from its private The ambiguity of the Eurozone’s debt was not sustainable yet had creditors while the official sector (that institutional arrangements, notably gone ahead with the programme is, EZ governments and the IMF itself) the European system of central “because of the fear that spillovers would offer new loans to support banks, makes it doubtful that from Greece would threaten the Greece’s domestic adjustment. If any Eurozone country’s national euro area and the global economy.” Greece refused to leave the Euro, then institutions can be counterparties the IMF should insist on still more with the legal accountability So the IMF compromised its radical debt forgiveness from the required by the IMF Articles of own standards for lending and other EZ governments. Association (Article V, Section 1). conditionality to avert the coyly expressed “threat to the Euro Five years too late, the IMF appears As for the size of IMF lending to area” – which meant, in reality, in the aftermath of the latest Greece, the Fund’s initial decision the prospect that a write-down of Greek convulsion to have inched to allow Greece to draw down an Greek debt would have necessitated towards such a position, albeit in a somewhat un-transparent way. The impression left by this sorry tale THE EURO IS PART OF THE ENTRENCHED, is, nonetheless, that the IMF under TO SOME EXTENT EVEN SUBCONSCIOUS, its French Managing Directors BELIEFS AND VALUES OF THE FRENCH has prioritized supporting the strategic political goals of France ELITE: AS A RESULT, ANY THREAT TO THE and other EZ governments which, SINGLE CURRENCY IS REGARDED AS in turn, have enjoyed the decisive DANGEROUS EXTREMISM. support of the US. This can only Although several European officials to Greece, and similar programmes at that time looked like the most contribute to the feeling shared by and commentators at the time were subsequently applied in plausible winner of the approaching most non-G7 IMF members that were against IMF involvement Portugal, Ireland and Cyprus. 1 presidential election in France – the extraordinary 600 per cent of quota the recapitalization of French and the IMF has become an instrument in a European crisis as somehow very country which had initiated over the length of the planned German banks, almost certainly for supporting the geopolitical humiliating, the prevailing view The Euro house was on fire as the entire euro project. The euro programme was immediately with national taxpayers’ funds for agenda of the G7. It is no wonder especially in Germany ended up Greece flirted with sovereign is part of the entrenched, to some blown out of the water by the the most part. In so doing, the IMF that emerging market countries favouring the inclusion of the default. This jeopardized the extent even subconscious, beliefs reality that the initial programme was complicit in imposing economic have started to design their own IMF as a “junior” partner in what solvency of several major EZ banks, and values of the French elite: as (the SBA agreed in 2010) envisaged sacrifices on Greece over and above multilateral financial institutions. ■ became known as the Troika with the highest exposures being a result, any threat to the single access peaking at a stupendous what would have been inevitable (the European Commission, the held by French banks. The very currency is regarded as dangerous 3,212 per cent (IMF, 2013: 29). 4 in any case, as well as unjustly European Central Bank (ECB) and survival of the single currency extremism. Moreover, the IMF disadvantaging other Eurozone the IMF). On 25 March 2010, a appeared to be at stake. The head needed to prove its relevance after Perhaps most serious of all was the countries whose banks did not have joint programme was agreed to of the IMF was none other than the period of the global credit IMF’s going along with the fiction in disproportionately large exposures provide conditional bilateral loans Dominique Strauss-Kahn (DSK), who boom (2003-07) when it had no new 2010 that Greece was solvent. The to Greece but now had to contribute customers (Blustein, 2015). 2 DSK Fund’s defence of that position in a proportionally to the official bail therefore saw an opportunity to Staff Position Note entitled “Default out of Greek debt. As remarked by 1. http://www.europarl.europa.eu/sides/getDoc. By Arrangement.” IMF Country Report 7 do?pubRef=-//EP//TEXT+TA+P7-TA-2014- (13/156). save both the euro and the IMF. in Today’s Advanced Economies: Ashoka Mody (2015), a former IMF 0239+0+DOC+XML+V0//EN 5. Cottarelli, C., L. Forni, J. Gottschalk and P. Mauro 2. Blustein, P. (2015). “Over their heads; the IMF and (2010). “Default in Today’s Advanced Economies: Unnecessary, Undesirable, and official, if the rationale for the 2010 the prelude to the euro-zone crisis.” CIGI papers Unnecessary, Undesirable, and Unlikely.” I M The IMF’s involvement with Unlikely” 5 was necessary given programme was fear of contagion, 60. F Staff Position Note, Fiscal Affairs Department Brigitte Granville is Professor 3. “The economic consequences of Greece”, SPN/10/12. that in 2003, the IMF board had surely it was a matter for the February 2015, Alberto Bagnai, Brigitte Granville, 6. IMF (2013). “Greece: Ex Post Evaluation of Greece meant turning a blind eye of International Economics and Peter Oppenheimer and Antoni Soy http:// Exceptional Access under the 2010 Stand-By to several of the basic principles introduced the rule that “a country international community to share Economic Policy at the School of www.project-syndicate.org/commentary/ Arrangement.” IMF Country Report(13/156). Business and Management, Queen greece-eurozone-breakup-by-alberto-bagnai- 7. Mody, A. (2015). Professor Blanchard Writes a and rules governing the Fund’s receiving a large loan would the burden not for Greece alone et-al-2015-02 Greek Tragedy. Bruegel. Brussels, 13 July. http:// Mary, University of London, and the 4. IMF (2013). “Greece: Ex Post Evaluation of bruegel.org/2015/07/professor-blanchard- operations. The result has been a have to meet a high probability since the motivation for the Greek author of Remembering Inflation. Exceptional Access under the 2010 Stand- writes-a-greek-tragedy

12 13 Jean-Jacques Rosa GREXIT AND GIVING GREECE A CHANCE: THE CASE FOR COOPERATION

14 15 Grexit will happen, THE SOONER THE BETTER, (as a consequence of the falling and German banks, in order to sooner or later. The price level). Given the magnitude of absorb the social and political sooner the better, PROVIDED THE CREDITORS OF previously accumulated excesses of consequences of the deflationary provided the creditors GREECE ACCEPT TO REALLY Greek products prices over those of shocks caused by the exchange rate ofA Greece accept to really help an HELP AN OBVIOUSLY BANKRUPT competitors within the Eurozone, it imbalance. obviously bankrupt government GOVERNMENT WITH A MAJOR would take ten years of deflation at with a major upfront debt relief, UPFRONT DEBT RELIEF, WHILE that rate, or more, to restore Greek Indeed, since the Greek economy while guaranteeing its continued competitiveness. Long enough to used traditionally to be more access to international finance GUARANTEEING ITS CONTINUED raze the economy to the ground. inflationary than the other members during a critical transitional ACCESS TO INTERNATIONAL of the Eurozone, the suppression of period. FINANCE DURING A CRITICAL The destructive consequences any possibility of devaluation that TRANSITIONAL PERIOD. of additional borrowing-cum- the entry in the zone implied rapidly The “bailout” that the cartel of budget-austerity lock up the Greek eroded the competitiveness of Greek Greece’s creditors (the « troika » economy in a vicious circle. But products in foreign (Eurozone) of the European Commission, ECB they also trap the creditors, as far markets, as well as in the domestic and IMF) claims to be offering to as they logically lead Greece to market. And this depressing effect that country amounts in reality an increasing debt/GDP ratio and increased as the national inflation to a cynical sinking of the Greek pursued deflation, thus to another rates divergence grew over time. It economy, a Greek disaster. The crisis in the coming months that brought a progressive deterioration reason is simple: Extending loans will require a new bailout. of national growth while the to an insolvent debtor is a recipe government was left with the sole for permanent depression. budget policy to compensate for DEEP EXCHANGE RATE the falling incomes of firms and DISEQUILIBRIUM households. A PONZI SCHEME The current focus on the “debt Additional loans extended by the crisis” however diverts attention CLASSICAL IMF cartel, amounting in the present from the main fact: it is a collateral SOLUTION PLUS episode to € 86 billions over the damage stemming from exchange MARSHALL PLAN next three years, are intended to rate disequilibrium. Greece help Athens repay interests on cannot escape from the debt/ This was all the more tempting its previous debts, but they also deflation vicious circle because since, given the relatively high add a new layer of debt to the old its fundamental problem is not Greek inflation, the moderate ones and will require additional addressed nor resolved. It was nominal ECB interest rates were payment of interests in the future. not, initially, a problem of excess transformed into negative real Increasing current debts in order indebtedness, although it is rates for Greek borrowers. As a to repay interest on previous ones currently an excessive debt level borrower, the government was is a well-known financial device: that makes the country insolvent. then rewarded by a positive return it is called a Ponzi scheme and The deep source of the economy’s to float larger amounts of debt. leads invariably to bankruptcy predicament is to be found in the because larger budget surpluses destructive, disequilibrium current By the “virtue” of the euro entry, will be required to service the and prospective real exchange the vicious circle of production new “bailout” loans that in turn rate (competitiveness) within was thus complemented by a imply further cuts in government the Eurozone that the country vicious circle of financial policy. spending and increased taxation. cannot compensate anymore Without an exit from the euro Those deflationary measures by a change of the nominal and its vicious circle of non- will shrink tax revenues, making parity of its own currency. The competitiveness no solution to the the search for increased budget overvaluation resulting from the current depression is possible. surplus even more elusive. At the substitution of the euro – a DM same time the contraction of output clone – to the Drachma ruined its This is not a radically new will produce still more deflation export competitiveness as well situation, unknown of. The IMF than the current one (about minus as its import competitiveness has been confronted, in the past, to 2% a year), thus aggravating the in the confrontation with similar cases in several countries. real burden of the old debt (the artificially cheapened imported The classical, standard, solution is value of which stays constant in products. It has even induced well known: a simultaneous use of nominal terms) relative to a GDP successive governments to borrow the three instruments of massive that shrinks both in real terms unsustainable amounts of debt, debt relief, substantial devaluation (recession) and in nominal terms with the active complicity of French of the currency, and financial

16 17 THIS IS NOT A RADICALLY NEW SITUATION, UNKNOWN OF. THE IMF HAS BEEN CONFRONTED, IN THE PAST, TO SIMILAR CASES IN SEVERAL COUNTRIES.

help during the readjustment of foreign debt in euros, which of austerity in other southern the confidence in the euro must be in the exchange rate is impossible. the costs of non-exit will keep period since the government’s proves already unbearable today. countries currently trapped in eroding in the near future. But also for the taxpayers of growing. The balance of costs and access to international capital A devaluation of 30% vis-à-vis the austerity-cum-depression. creditor countries because benefits will increasingly favor exit. markets is jeopardized by default euro for instance would instantly It follows that in spite of the the Maastricht treaty forbids It follows that of all the options at and devaluation. That’s what the increase by 30% the amount And given the close association opposition to a Grexit both in monetization of a governmental the table an assisted Grexit now, Greek economy requires to return in drachmas that the Greek between big banks and big Greece and in the rest of the debts, so that bailout “aid” has to be augmented by a Marshall Plan to to competitiveness and solvency: government would have to raise to governments, a shrinking Eurozone, the shrinking of the financed by national taxes, difficult help Greece modernize, would be massive debt relief plus exit from pay interest on that debt, and there Eurozone resulting from one or Euro area will prove impossible to to increase for governments that the best one . the euro. would be no possibility whatsoever several exits would constitute avoid. The choice for its leaders is are already struggling to reduce to borrow in international capital a serious drawback for private thus not one of “shrinking versus their own budget deficits. And Shortsighted politicians that keep markets, making a unilateral debt and public interest groups that not shrinking” of the euro, but of these contributions will be lost neglecting this best option do let THE GROWING COST default unavoidable. Bankruptcies political leaders do not want to a managed shrinking intended to when the final bankruptcy will the equivalent of “big bills lying on OF NON-EXIT would follow as well as a deepening displease. avoid major disruption of southern occur. the sidewalk”. We should pick them of the current depression. And economies and to limit the costs up and reap the benefits. ■ Even though Greece is a small the default on debts would lead In spite of periodic announcements to the northern Eurozone citizens, The conclusion is that the costs of country within the European Union to costly litigation with European of an imminent return to prosperity versus saving the current euro a Grexit to Eurozone institutions, and the Eurozone, whose national creditors undermining any in the south, austerity policies have membership “whatever it takes”, in terms of contagion effects on product amounts to no more than return to confidence in the Greek clearly failed to restore growth implying larger losses to both other southern countries (including 2% of the Union GDP, a unilateral economy. there. The only perspective for Greeks and other Eurozone citizens. France) and reduced credibility of exit from the euro could prove the southern part of the Eurozone the euro in international financial costly for Greece but also for the That perspective could explain why is one of a continuing stagnation. markets, cannot be avoided and Eurozone. the public opinion in Greece still The Greek case is even worse BIG BILLS LEFT LYING won’t be avoided, while the losses favors staying in the euro in spite since the Ponzi scheme of bailouts ON THE SIDEWALK to Eurozone taxpayers will increase Were Greece forced to a of the fact that the euro itself is must lead to recurrent crises, and with the passage of time and confrontational Grexit, without the main cause of the problem and ultimately to bankruptcy and euro The earliest exit is the best solution, further delay in exiting. The losses Jean-Jacques Rosa, a former economic editor for the French agreement or help from other precludes any return to growth. exit. It follows that a contagion first and foremost for the Greek to Greek citizens will also increase daily Le Figaro, and past member of Eurozone members, the necessary On the other hand, Eurozone effect is unavoidable in southern citizens themselves of course, due to continuing economic France’s Prime Minister “Council of Economic Analysis”, is a professor of devaluation of a new Drachma politicians fear that a Grexit would Europe. International investors because a return to growth under contraction. Thus the costs of exit economics and finance (emeritus) at would maximize the burden lead to contagion and refusal are progressively learning that and conditions of a deep disequilibrium will materialize in all cases, while Sciences Po Paris.

18 19 EUROPEAN MONETARY DISUNION Zdzisław Krasnodębski

oday the opinion that side there were reckless, romantic of democracy. Indeed, if at that time monetary union was politicians and on the other sober, public debate had really been carried a failure is widely rational economists who were out and the tools of direct democracy shared by a majority familiar with “the inevitable laws had been used, the euro would never Tof economists. How could this of economics” and knew from the have been implemented, because the error - now so seemingly evident beginning that the euro could not be majority of EU citizens, especially in - have happened? Frits Bolkestein, a success. Germany, were against it. former EU Commissioner for the Internal Market, argued at a Warsaw Monetary union was the work The euro turned out to be a conference in May this year that of elites - political, economic and trap. Instead of unifying Europe the “euro” was a “romantic act”, academic, including economists - economically, and as a consequence the work of politicians, not of who believed that the more “unity”, politically, it dramatically increased economists. the better also for economic the economic gap between the development, that “more Europe” is European centre and the periphery, However, when the project of always better than “less Europe”, that undermining the entire “European monetary union was created, the integration can move only forward project”. The argument that Greece vast majority of economists did towards ever closer union, and that is a special case does not stand the not see any threats in it, and a few there is “no alternative”. And where test of facts - Spain, Portugal, and critical voices, mostly from the US, there is no alternative, there is also Italy are still fighting with enormous were effectively suppressed. no politics - we know this not only debts and high unemployment, while from Hannah Arendt. economic growth in these countries European financial circles supported is still too low. 1 the project of the common European Therefore one can say that it was not currency with enthusiasm, hoping politics, but - on the contrary – its Currently, the crisis also threatens for reduced transaction costs, new absence, which led to the creation countries that have not committed profits and a new dynamic for the of the euro. The consequence of the sins of excessive debt like the Greeks economy. It is not so, that on the one absence of politics was a weakness - for example, Finland and the

20 21 Netherlands. It is therefore wrong integrating it, it has caused inner Tusk’s announcement that in 2012 “liberal hegemon.” 5 Until now one Yet the problem is not only if faction, have gambled away in one to maintain that other countries tensions and economic rifts, which Poland would enter the eurozone has to agree with Hans Kundnani Germany is able to play the new night all the political capital that a - in contrast to Greece - in spite of disintegrates Europe. turned out to be empty words. that “Germany has not created role and in what way. The problem better Germany had accumulated belonging to the euro zone were While in the near, European stability …but instability. 6 is, if the role of the “Zuchtmeister“ in half a century – and by “better” able to reform and overcome the Most visible are the political periphery within the Union, can really be reconciled with the I mean a Germany characterised difficulties. Antonio Soy convincingly consequences: Greece has become economic problems contribute In that new role Germany should idea of Europe? For many European by greater political sensitivity demonstrated that with the example a protectorate, managed by to political tensions, in the more be no longer only a “Zahlmeister”, nations, Poland included, it is not and a “post-national mentality”. of Spain. financial institutions and the distant periphery out of the Union cashier of Europe, but a acceptable. It is also rejected by both The conservatives in Europe Commission. The new status of – its neighbourhood in the East “Zuchtmeister”, its disciplinarian. the European right and European would not expect a “post-national The chances that another recovery Greece contradicts the declared and South – domestic wars and It has not only to pay, but also left. For example Habermas argues mentality” from Germany, but program will improve the situation, democratic principles of the conflicts, the emerging Islamic to discipline the other. 7 As in the above-mentioned interview respect for interests, sensitivities are minimal. Even the two main European Union. As Jürgen State and an expansive Russia pose “superpower in the middle” it must that when finance minister Schäuble and sovereignty of other European protagonists of recent events - Greek Habermas argued in The Guardian: a military threat to the Union. patiently but sternly integrate threatened with the prospect of nations. prime minister Alexis Tsipras and „the de facto relegation of a Europe, taking care of the centre. 8 a Greek exit from the euro, he German Finance Minister Wolfgang Member State to the status of a In the new political geography The leader taking hard, but revealed himself as Europe’s chief Taking all this into account one can Schäuble, like most economists, protectorate openly contradicts Germany has risen to power necessary decisions, must reckon disciplinarian. expect that in the future the political remain sceptical. 2 The previous the democratic principles of the and has become the centre of with the fact that it will be the disputes in Europe will become “reforms” have seen a 25% reduction European Union” (The Guardian, Europe. 4 The monetary union has subject of dislike, or even hatred. In The German government thereby fiercer. Political polarization will in Greek GDP since 2008, an 16 July 2015). strengthened a united Germany. fact, one can observe growing anti- made for the first time a manifest become stronger. Some member unemployment rate of 25%, and France became a junior partner in German sentiment in Europe. It is claim for German hegemony in states will seek to strengthen their among young people more than The fate of Greece is, however, the “directorate”, and is becoming not an easy psychological situation Europe – this, at any rate, is how sovereignty and will form different 50%. There is no indication that this only one of the symptoms, even if a more and more frustrated. for Germans themselves, who are things are perceived in the rest blocks within the Union. This could fundamentally change in the dramatic one, of a profound change not accustomed to such a role. 9 of Europe, and this perception tendency will be accompanied by a future. The International Monetary of political configuration in Europe. One can, however doubt, if The inconsequent, chaotic policy defines the reality that counts. I centrifugal pressure from the centre Fund openly stated the need to One can speak of a new political Germany is able effectively, and as concerning refugees shows that this fear that the German government, to respond to the crisis with greater redeem some of the Greek debt. geography. 3 In this new political a consequence to play the role of psychological burden is too big. including its social democratic centralization, by building a political geography the difference between and economic union according to the During the last performance of the centre and periphery became opinion that only further integration, “Greek tragedy” another taboo has more politically visible, because DURING THE LAST and the introduction of a common fallen. German Finance Minister the dream of caching up thanks to fiscal and economic policy can solve Wolfgang Schäuble proposed a European integration turned out PERFORMANCE the problems. temporary Grexit. So far, no one to be illusory. This time the most OF THE “GREEK officially and at such a high-level troubled periphery is not the post- TRAGEDY” Zdzisław Krasnodębski is a dared to propose an exit scenario. communist countries of Central ANOTHER TABOO sociologist, social philosopher, It is interesting that prior to this and Eastern Europe - with the HAS FALLEN. and publicist. He is a professor at dramatic U-turn, those who had exception of rebellious Hungary the University of Bremen and an argued for a Grexit as the only - but the countries of southern associate professor at the Akademia path to a real Greek recovery in Europe. Ignatianum in Cracow. In 2014 the German political debate were he was elected as a Member of the presented as populists. The aim of In that transformed constellation European Parliament. ■ Schäuble´s proposal was above all Poland has gained in reputation to exert political pressure on Greece and become an object of excessive and was one of the examples of the praise - a rare success story. It is new power dynamics in Europe. no coincidence Donald Tusk was awarded the position of President Monetary union has strong political of the European Council. This implications. The Euro has changed success story would be impossible, the European Union but not in the if Poland had given up its national way that was expected. Instead of currency. Fortunately Donald

1. Cf. Christian Siedenbiedel, Südeuropas 6. Hans Kundnani, The Paradox of German Power, Scheinblüte, Frankfurter Sonntagszeitung, 26 London 2015, p. 109 Juli, 2015 7. Jacques Schuster, Europas Zahlmeister muss 2. Joseph E. Stiglitz, Greece, the Sacrificial Lamb, auch Zuchtmeister sein, Die Welt 15. 07, 2015) The New York Times 25 July 2015. 8. Herfried Münkler: Macht in der Mitt. Moreover Zdzisław Krasnodębski is a 3. Nicholas Walton, Jan Zielonka (eds), The New interview with Münkler in Deutschlandfunk: sociologist, social philosopher, Political Geography of Europe, European Council Deutschlands neue Rolle in Europa:Zahlmeister and publicist. He is a professor at on Foreign Relations. London 2013 und Zuchtmeister. Der Politologe Herfried 4. Herfried Münkler: Macht in der Mitte. Die neuen Münkler im Gespräch mit Liane von Billerbeck, the University of Bremen and an Aufgaben Deutschlands in Europa, Edition Körber http://www.deutschlandradiokultur.de/ associate professor at the Akademia Stiftung, Hamburg 2015 deutschlands-neue-rolle-in-europa-zahlmeister- Ignatianum in Cracow. In 2014 he 5. Cf. G. John Ikenberry, Liberal Leviathan: The und.1008.de.html?dram:article_id=313238) Origins, Crisis, and Transformation of the 9. Costanze Stelzenmüller, The Greek Bailout Has was elected as a Member of the American World Order. Princeton: Princeton Shaken Germany to the Core, Newsweek 28.7. European Parliament. University Press, 2011 2015,

22 23 ccording to the Merriam- crisis (what a bitter irony – or question (how to consolidate public Webster dictionary, a clever manipulation! We call finance?) was wrong, because austerity is “the quality “sovereign” the debt of states government debt was not an issue. or state of being which are increasingly deprived But the answer was right, because austere”;A austere, in turn, means of economic sovereignty by the by “destroying domestic demand” “stern and cold in appearance, selective application of European (in Mario Monti’s words), austerity ascetic”. The very first question rules). The crisis was not caused by settled the intra-Eurozone external we should ask ourselves when government profligacy, but rather imbalances, which were the real discussing austerity is why on by the fact that the euro, being too issue. The fall in income in Southern Earth we are describing a policy weak for Northern countries and countries reduced their imports; tool (basically, expenditure cuts) too strong for Southern countries, moreover, the fall in labour income by using a word which carries had favored the build-up of huge (which from the point of view of with itself a positive value external imbalances: Northern the firm is labour cost), favored by judgment. Austerity, in principle, countries’ exports were favored by skyrocketing unemployment, was is a virtue, or at least one of its a relatively weak currency, as were expected to propel their exports. antonyms, luxuriousness, is usually Southern countries’ imports by a considered to be a vice. relatively strong one. Moreover, Just to make an example, the the euro had favored the reckless external balance of Italy expressed The choice of words matters. financing of those imbalances. as a percentage of GDP improved Every time a word carrying a Indeed, this is what the euro by more than 5 points from 2010 positive connotation is used in a was all about: favoring financial to 2014. But this came at a cost: debate where rationality should integration, i.e., the ability of a public debt as a percentage of prevail, manipulation is at work and disaster is looming large. The European “dream”, and THE VERY FIRST QUESTION WE SHOULD ASK “austerity”, are two good cases in point (the latter being largely a OURSELVES WHEN DISCUSSING AUSTERITY IS consequence of the former). The WHY ON EARTH WE ARE DESCRIBING A morality tale suggested by the word POLICY TOOL (BASICALLY, EXPENDITURE “austerity” is simple: the crisis we CUTS) BY USING A WORD WHICH CARRIES have been living in for the past WITH ITSELF A POSITIVE VALUE JUDGMENT. seven years has been caused by the profligacy of the wicked state. AUSTERITY, IN PRINCIPLE, IS A VIRTUE, The bitter medicine of austerity, OR AT LEAST ONE OF ITS ANTONYMS, to be administered by virtuous LUXURIOUSNESS, IS USUALLY CONSIDERED technocrats, is the only remedy to TO BE A VICE. past excesses. Needless to say, this tale has looked plausible to what Keynes has called “the ordinary country’s agent to get indebted with GDP increased by 17 points, uninstructed person”. Everybody another country’s agent. and the cumulated GDP loss is asked to pay taxes, and most reached -2.6%. Why was austerity respond by considering the state an At the height of the Eurozone deteriorating, rather than enemy. A tale where your enemy is crisis (back in 2011), nobody heard consolidating, public finances? the villain is indeed tempting. Yet, us. Then, on May 23rd 2013 the Well, because unsurprisingly “AUSTERIANS” it does not need to be true. vice-president of the ECB, Vitor enough the deliberate “destruction Constâncio, confirmed in a speech of demand” carried with itself a Since the beginning of the crisis a held at the Bank of Greece public huge demand crisis, and hence VS. few economists pointed out that debt was not the cause of the deflation. While the real burden “APPEALIANS” the austerity tale did not square crisis. Two more years later, on of public debt was increasing, with the facts: most crisis countries September 7th 2015, Francesco tax earnings were falling, and THE TWO SIDES OF THE AUSTERITY TALE have had stable or declining public Giavazzi, the high-priest of the the debt-to-GDP ratio exploded. debts. In each and every case what “austerians”, arrived at the same Suddenly, the wrong question had risen was private external conclusion on Voxeu.org. Does this became the right one! Public Alberto Bagnai debt, i.e., the debt of domestic mean that austerity was the wrong debt is becoming an issue almost firms and households with foreign policy response? No matter how everywhere in the Eurozone. But creditors. Hence, we have not been paradoxical this may seem, austerity on top of all this, the strategy of witnessing a “sovereign” debt proved to be the (temporarily) right responding to external shocks crisis, but a balance-of-payments answer to the wrong question. The by destroying domestic demand

24 25 annihilates the main advantage was the villain. But now valiant Summing up this discussion: with of forming an economic union, politics will fight austerity, and the “austerians”, and their late which is precisely the opportunity good will prevail. I call these conversions, the economic science to sustain the member countries’ colleagues “the appealians”, has lost its credibility. With the growth through the demand because of their nagging habit of “appealians” it is losing its dignity. expressed by a big single market writing long appeals. For whatever Every undergraduate textbook (as another “austerian”, Alesina, reason those colleagues seem not will explain unless you restore THE had wisely pointed out in 1997). to understand that a unilateral some degree of exchange rate expansionary policy in Southern flexibility, an excess of imports Is there an alternative strategy countries would destroy both their must be addressed by curtailing available? Of course there is: every balance of payments and (after the incomes (thereby leading the textbook will tell you that it is austerity) their public finances. whole system to collapse). The nominal exchange rate flexibility. They also refuse to understand refusal to reckon with this simple And yes, you got it: in the Eurozone that a coordinated expansionary fact of life is likely to reopen in this implies the end of the euro. policy at the Eurozone level is Europe the bleak times of religious This is something the believers of politically unfeasible. Of course one wars: the only difference being euro religion cannot admit. Their may advocate it, and write a nice that this time the whole story EURO reaction is to propose another appeal for it, but Greece is a telling began when European politicians morality tale: the wicked austerity example of what will happen decided that “Brussels was well imposed by despicable technocrats afterwards. worth a single currency”. ■ AND THE CURRENT IS THERE AN NON-DEMOCRATIC ALTERNATIVE STRATEGY AVAILABLE? OF Jacques Sapir COURSE THERE IS: EVERY TEXTBOOK WILL SHIFT TELL YOU THAT IT IS NOMINAL EXCHANGE e have witnessed a dramatic shift RATE FLEXIBILITY. toward a non- democratic form of Wgovernance this summer in Europe. Many observers carefully noted that. But, this shift has actually been under way for many years. The current Greek crisis revealed but not created it.

In retrospect one can say that the decisive turning point has been, in Europe, the implementation of the Euro (or, in other words, the Economic and Monetary Union). This is not just a governance problem.

Actually institutions have been deeply modified in that non- Alberto Bagnai teaches economic democratic direction. The change policy at the Department of is a major one and affecting all Economics of the Gabriele d’Annunzio University in Pescara institutions, from economic ones to (Italy). His book on the Eurozone political ones. crisis, “Il tramonto dell’euro”, sold 20000 copies in Italy, and his blog Goofynomics was awarded the best economic information website prize by the Festa della Rete 2015.

26 27 A MAJOR of popular sovereignty and of honesty, were holding up a « pro- J-L. Mélenchon and especially of THE EURO HAS INSTITUTIONAL CHANGE democracy operates for the profit of Euro » as well as an anti-austerity Eric Coquerel. 4 This is also what an one single country, Germany. It has discourse. These two discourses article published in The Guardian on BECOME AN OBSTACLE The economic institutions of the deep political consequences both are incompatible, as we can see July 14th, that is, one day after the TO DEMOCRACY (AS countries which adopted the Euro on the representation of the people, today. Either one accepts austerity, capitulation of Tsipras, called for an WE HAVE SEEN IN have been progressively modified. and on the political mechanisms with the possibility to negotiate « exit of the left » or a « lexit ». 5 GREECE) AS WELL What we are calling today within the various countries, as some titbits of it, like the weight It was also the meaning of the AS TO POLICIES “austerity” is merely the result of well as between them. This is one of the chains and the duration of article by Oskar Lafontaine, former FAVOURING LABOUR this institutional change. Austerity of the main factors promoting slavery, or then one can keep the leader of the SPD and a founding is the legitimate daughter of the anti-democratic behaviour in the Euro, or else one refuses austerity member of Die Linke, who, in AND OPPOSED TO Euro; since 2010 it has become European countries. but this then implies an exit from 2013, called for the dissolution of FINANCE. HOWEVER, its darling favourite. After having the Euro. 1 the Euro. 6 This is, implicitly, the THESE QUESTIONS BY attempted to finagle around it meaning of the appeal of Stefano NO MEANS EXHAUST between 1999 to 2007, countries like THE MESSAGE OF THE Fassina, who was one of the TH France, Spain or Italy, Portugal and JULY 13 CAPITULATION THE EURO AND leaders of the Democratic Party in THE SUBJECT. Greece have been forced, according DEMOCRACY Italy (and former vice-minister of to rhythms and under conditions, The message, which the europeist economy in the Letta government), which were specific in each case, circles in Brussels and elsewhere The Euro has become an obstacle an appeal, which was, picked up to squeeze into the straightjacket will be trying to foist upon the to democracy (as we have seen on the blog of Yanis Varoufakis. 7 of austerity. The domination of media is clearly that it could be in Greece) as well as to policies Fassina actually called for a large the austerian thematic over the no alternative to austerity and favouring labour and opposed union of all democratic forces, political life of these countries is non-democratic domination by to finance. However, these be they from the left or from the concomitant with the Euro. people from the Eurogroup. And, questions by no means exhaust the right, against the Euro. The true with no loss of irony, it will be subject. The Euro has, in reality question which one must ask Economic and Monetary Union the politicians pretending to be accentuated and generalized the therefore is of knowing whether has also induced, and one can from the “left” who will make the process of financialization of the one must make the dismantling of suppose that this was indeed the greatest use of it, from François economies, which we have known the Euro a priority. And, on this true aim of those who put in place Hollande to Pierre Laurent (head for close to 15 years. 2 It is because point, Fassina as well as Oskar the Euro, important changes in of the French Communist Party), of the Euro that the great European Lafontaine and many others are the forms and methods of political over Pierre Moscovici. But this in banks have gone looking for answering affirmatively. governance. The shifting towards no way corresponds to the truth. subprimes in the United States with a world of systematic denial of The existence of the « plan B » the consequences we know since And it is both symbolic and democracy is the result of this. drafted by former Greece minister the crisis of 2008. So that, not only important that a man such a Romano We must be aware of the fact that of finance, Mr Varoufakis being has the Eurozone dragged part of Prodi, who was President of the the single currency is not only an one proof that another kind of Europe into very weak growth, 3 European Commission and Prime instrument of financialization. policy was possible. However, we but also neither did it protect Minister of Italy, is talking on this It has progressively become must understand that this other it, contrarily to what politicians subject as of a « German Blitz ». 8 autonomous itself, and it has policy implies, at one time or are very imprudently claiming, The Greek crisis has shaken become a way of government with another, a break-up with the Euro from the financial crisis of 2007- the wobbly foundations of the ever-greater consequences, day by and – may be - with the European 2009. Thus, the result is clear. If European construct to its core. ■ day, on the political functioning of Union. What the Greek crisis, policies nefarious to economies the countries. National Parliaments which from all evidence is far can be implemented outside of the have been progressively deprived from over, is teaching us, is that Euro, the latter implies nefarious of their sovereign prerogatives, there is no other policy possible policies. In fact, no other economic particularly – but not only – by within the framework of the Euro. policy is possible as long as one is the TSCG which was ratified in This evidence has come to hit hard inside the Euro. This is indeed one September 2012. This dispossession those who, to the left, and in all of the lessons of the Greek crisis. So the dismantling of the Eurozone appears indeed to be a priority 1. See Daniel Munevar, one of Varoufakis July 14th, 2015, http://www.theguardian.com/ task. Because of the Greek crisis we collaborator, (http://www.socialeurope. commentisfree/2015/jul/14/left-reject-eu- eu/2015/07/why-ive-changed-my-mind- greece-eurosceptic have had an important clarification about-grexit/ ). 6. Text published in Neues Deutschland: http:// 2. Sapir J., Faut-il Sortir de l’Euro ?, Paris, Le Seuil, www.neues-deutschland.de/artikel/820333. of the debate, be it in Greece or in 2012 wir-brauchen-wieder-ein-europaeisches- 3. Bibow, J., “Global Imbalances, Bretton Woods waehrungssystem.html and on d’Oskar Europe and in France in particular. Jacques Sapir is professor of II, and Euroland’s Role in All This.” in J. Bibow Lafontaine’ blog : http://www.oskar-lafontaine. One must note, on the question of economics at EHESS-Paris and a et A. Terzi (edits.), Euroland and the World de/links-wirkt/details/f/1/t/wir-brauchen- well-known specialist on the Russian Economy—Global Player or Global Drag? wieder-ein-europaeisches-waehrungssystem/ the Euro, an important evolution Londres, Palgrave, 2007 7. Fassina S., « For an alliance of national economy. He has been a constant 4. Voir Coquerel E., « Pour un sommet liberation fronts », note published on Yanis within the forces of the left, contributor to the debate about internationaliste du plan B » note published Varoufakis’ blog by Stefano Fassina, MP, the Euro for the last five years. His August 18th, 2015, July 27th, 2015, http://yanisvaroufakis. including in France, looking at http://www.eric-coquerel.fr eu/2015/07/27/for-an-alliance-of-national- book “faut-il Sortir de l’Euro” was 5. Owen Jones, “The left must put Britain’s EU liberation-fronts-by-stefano-fassina-mp evolution of the “Left Party” of published in 2012. withdrawal on the agenda”, The Guardian, 8. In Il Messagero, August 8th, 2015,

28 29 Joachim Starbatty HAS GERMANY BENEFITTED FROM THE EURO?

hen the Bundestag unemployment. In their view, it common currency on Germany, labour markets become more A first negative consequence of not offset comparatively small voted on a third was in the country’s best interest an economist’s perspective flexible (as happened in Germany the Euro for Germany relates wage increases in Germany by rescue package to avoid a Grexit at all costs. But must go to the roots. Politicians with the so-called Hartz-Reform directly to exports. German devaluating their currencies for Greece on it is remarkable, that 86 members deliberately ignore the negative at the beginning of the 2000s), politicians are short-sighted: the anymore. Consequently, they lost WAugust 19th, the entire political of the CDU/CSU group did not consequences of the Euro. unemployment shrinks. If firms common currency has helped their competitiveness. The often spectrum represented in follow chancellor Angela Merkel Positive developments like the in China build factories, demand the export sector. In fact it has proclaimed German advantage Germany’s legislative institution and voted against the package. decrease in unemployment for German machinery rises. worked as a subsidy to firms is just the Keynesian “beggar- agreed: Germany has benefitted Apparently, her power base is during last decade and the success Whereas positive developments selling their products outside the thy-neighbour-policy”, which immensely from the common undermined. of German exporters had other are incorrectly attributed to the Eurozone because the Euro is imposes a huge cost on the currency. The deputies referred driving forces such as structural single currency, negative aspects undervalued for Germany. After European periphery and has led to a competitive German economy, When it comes to evaluating reforms and a stellar economic were not even considered in the the introduction of the Euro, less to a large increase in TARGET- a strong exporting sector and low the economic impact of the growth in emerging markets. If Bundestag. prudent member states could balances. But this “advantage”

30 31 the German economy. In contrast, periphery governments and the ECB, is not able to focus on social safety nets. German needs because it has to take into account the situation Ever since the end of the Second of other Eurozone members, World War, Germans have some of which require loose aspired to be good Europeans monetary policy to overcome and deepen the European persistent economic crisis. integration. Especially after Ultra-loose monetary policy reunification in 1990, Germans Jean-Pierre Vesperini may help to cushion recessions were eager to overcome Europe’s but it bears significant risks: if past and build a peaceful and applied too long, central banks prosperous European Union THE EURO’S IMPACT ON produce asset price bubbles. Even which included the former though, there is no clear evidence socialist countries of Central and of such bubbles in Germany Eastern Europe. Germans were yet, exponential house price well-liked in Europe, especially developments in major cities like in Greece, where Germany was Munich and Frankfurt suggest voted the most popular country has a downside, too: subsidies speculative activity has picked up numerous times. That has changed FRANCE encourage complacency. If dramatically recently. dramatically, since austerity German exporters get used to policy in Southern Europe has The euro has been a full order books because of A third negative consequence of caused severe economic pain and disaster for all countries a subsidized exchange rate, the single currency for Germany is widely seen to be enforced by that have adopted it, incentives decrease to cut costs is the disastrous economic Germany. Many Germans feel that with the exception of and increase productivity. In the situation in Southern Europe, resentment against their perceived Germany and countries long run, German firms run the strongly linked to risk of becoming dependent on a German economy, cheap subsidised currency. THE COMMON CURRENCY HAS HELPED such as Austria and, If exporters gain from a cheap THE EXPORT SECTOR. IN FACT IT HAS to a lesser extent, the currency, importers lose. Netherlands. Germans have seen their relative WORKED AS A SUBSIDY TO FIRMS purchasing power decrease, SELLING THEIR PRODUCTS OUTSIDE The euro has been since the social dividend (Karl THE EUROZONE BECAUSE THE EURO IS especially catastrophic Schiller) of regular currency UNDERVALUED FOR GERMANY. appreciation has not materialized for France, because it any more. The purchasing power dramatically reduced of every German could be 30% the competitiveness of higher. Therefore we have also which has negative effects on dominance in Europe is on the the French economy negative wealth development. the German economy and on the rise. Instead of uniting European through two processes. Due to the weak exchange country’s standing within Europe. citizens, the common currency has rate, holidays in Non-Eurozone Strong European neighbours are driven them apart and Germans countries like Denmark, Sweden, a blessing for Germany because dislike this development - they are the UK and Switzerland have they buy German products and losing an intangible asset. ■ become prohibitively expensive visit the country, recession for middle income German plagued crisis countries drag families. According to a recent down its economy. As an external study from the economic think devaluation offers the best hope tank DIW (Deutsches Institut für of swift recovery in Southern Wirtschaftsforschung), average Europe, it is from an economic German wealth has declined by perspective to be welcomed 15 percent in the last decade. by Germans. The supposed Until the introduction of the Euro, irreversibility of the Euro rules the German Bundesbank ensured out the fastest way to recovery with its monetary policy that and inevitably leads to a banking Joachim Starbatty is professor emeritus at the University of investments paid a decent yield. and transfer union. Hard-saving Tübingen. He is a Member of the It was able to do so because it Germans will consequently be European Parliament and serves as the chairman of the European adapted benchmark interest rates liable with their deposits and Conservatives and Reformists Policy suitable for the current state of pensions for less disciplined Group on the Eurozone.

32 33 irst, France has lost its far away from the French one. market shares plummeted 20.8% monetary sovereignty. The Indeed, during this entire period, since the creation of the euro euro fixed the exchange the exchange rate of the euro from 4.8% to 3.8% of world rate between the franc was on average € 1 = $ 1.332, trade, while those of Germany Fand the mark, all the while wage so nearly equal to the optimal remained roughly stable only policies in France and Germany exchange rate for Germany, dropping by 2.7%, from 7.5% to remained completely divergent. and more than 20% above that 7.3% of world trade. France has pursued lax policies for France. German politicians (especially with the adoption of who negotiated the creation of The euro has reduced the 35 hours week) while those in the euro have hence proved far growth of exports of France and Germany have been strict. more skilful than their French as a consequence has greatly So, since the creation of the euro counterparts (Mitterrand, reduced production, particularly in 1999, unit labour costs have Delors) since they won the industrial production. By grown twice as fast in France headquarters for the ECB in reducing growth, the euro has as they have in Germany (+ Frankfurt, which is headed by prevented attempts at reducing 31.5% against 14.8%). This loss a Frenchman, but led a policy unemployment which was the of competitiveness in France favourable to the interests same in 2014 as it was in 1998 relative to Germany, which of Germany and inimical to (10.3% of the workforce) while could no longer be offset by French economic interests. The during the same period Germany changes in the exchange rate consequences of the exchange managed to reduce its by half between the franc and the rate policy of the ECB during (9.4% to 5%). mark, was particularly serious the presidency of Jean-Claude because of direct competition Trichet were extremely serious. The reduction in output growth between German and French Indeed, the overvalued exchange also slowed the growth of tax companies. The resultant loss of competitiveness is particularly evident in observing the THE EURO HAS REDUCED THE GROWTH evolution of the trade balance between France and Germany. OF EXPORTS OF FRANCE AND AS A Whereas that balance was almost CONSEQUENCE HAS GREATLY REDUCED equilibrated in 1998, just before PRODUCTION, PARTICULARLY the introduction of the euro INDUSTRIAL PRODUCTION. (import-export ratio or coverage of import by export of 97.3%), it is now heavily in deficit with a rate policy has led French revenues, which explains why ratio of 73%. companies, either to lose market public debt has grown much exchange rate policy) has competitive gap that emerged share if they maintained their faster in France than in Germany. proved destructive for the between Germany and France in Second, the optimal exchange margins or to sacrifice their While the debts of both countries French production base. In the period from 1999-2011. rates for the French and German margins to avoid losing too much were about the same level in particular, employment in the economies are different. This is market share. But in sacrificing 1998 (about 60% of GDP), French industrial sector, which had Both the adverse effects of the because labour costs are higher their margins, they were forced public debt was equal to 95% of remained stable between 1999 divergence in costs between in France than in Germany, and to reduce investments, which GDP in 2014, while in Germany it and 2002, began to decline from France and Germany and those , because of elasticity: the price resulted in a weakening of their was just 74.7%. 2003, namely when the policy of of the overvaluation of the euro, of French exports is higher than competitiveness, which in turn the strong euro was inaugurated even as they have attenuated, will those of German exports due erodes their market shares. Replacing Trichet with Mario by Mr Trichet. Industrial continue to impede the growth of to differences in composition. Draghi has been accompanied employment in France would the French economy. Jean-Pierre Vesperini is a professor at l’Institut Catholique de Under these conditions, the These two factors, first, the by a radical change in the not cease to decline annually Paris (Paris’s Catholic Institute). He optimal exchange rate of the fixed exchange rate between exchange rate policy of the from 2003 to 2014. Over that The euro has handicapped the was a member of the French Prime ECB. Henceforth, the exchange Minister’s Council of Economic French economy is around € 1 France and Germany combined period, industrial employment growth of the French economy in Analysisis. = $ 1.10, while for the German with divergent wage policies rate of the euro, without yet fell by 24% in France, while it other ways, too. By constraining economy it is about 1 € = $ and, second, the long period being particularly favourable to barely changed in Germany. France from exercising budgetary Having lost its monetary and 1.35. But throughout the period of overvaluation of the euro French exports, is more suitable sovereignty and submitting itself fiscal sovereignty, France no in which Mr. Trichet was the for the French economy has for its economy. However, Admittedly, since 2011, unit to supervision by the European longer has the ability to define a president, from 2003 to 2011, the been devastating. Dramatically 10 years of overvaluation labour costs rose slightly Commission, the euro prevented policy appropriate to its situation. European Central Bank followed reducing the competitiveness (eight years under the Trichet faster in Germany than in France from adopting a fiscal So long as France does not regain an exchange rate policy close to of the French economy, the presidency, plus the two years France. However, this recent policy enabling it to combat monetary and fiscal sovereignty, the optimum exchange rate of euro drove down the market it took Draghi to succeed in development, which may not the crisis of 2008, as the US and it will not return to strong Germany, and at the same time share of France. In France the reversing the orientation of endure, does not offset the huge Britain were able to do. growth. ■

34 35 Antoni Soy THE ILLUSION OF THE SPANISH RECOVERY

ince 2008 the Spanish In 2005-07 the economy presented The causes of the crisis have been has not been in recession. important part has been achieved lowest of the major countries of the economy has suffered a a public sector surplus. With the neither the public sector deficit The unemployed and the thanks to a very severe “reform” euro zone and they have shown the major crisis, with a sharp crisis the public deficit grew rapidly nor the failure of “structural unemployment rate have started of the labour market, with cuts in most moderate growth. drop in its GDP and per at 11% of GDP in 2009. The deficit reforms“. Both, rising private debt to fall. However, unemployment wages, a reduction in unit labour Scapita GDP and a big increase in its remained high, finishing 2014 at levels and the lack of prudence stands at more than 5 million costs, a reduction in firing costs, The internal devaluation in Spain unemployment rate. It is its deepest 5.6% of GDP. As a result, Spain’s and efficiency of the creditors that people and the unemployment a decrease in unemployment has been very intense. The burden crisis since the 1936-39 civil war public debt has increased rapidly caused this situation, are at the rate at more than 22%. benefits, and a greater flexibility of the adjustments to improve with a fall in per capita GDP of and it stood at more than 98% of root of the crisis. for companies in all collective the imbalances in the euro zone more than 7% in seven years. It can GDP. Private debt has increased Undoubtedly, some external shocks bargaining procedures. During the between creditor and debtor states be compared to the impact of the significantly and rapidly since 1999 Since the third quarter of have helped what seems to be crisis period, wages and nominal has been highly asymmetric, with Great Depression of the 1930s. reaching 231% of GDP in 2010. 2013 the Spanish economy an economic recovery. But, an unit labour costs have been the the peripheral countries being

36 37 the ones to suffer them almost debt crisis and a profound crisis together with some reduction in exclusively. With the EMU and the of the banking system. The danger private sector borrowing abroad. But, in the Spanish economy euro the adjustment process has of a bankruptcy and the need of Consequently, the current account there is a lack of real convergence been as asymmetric as in the other a bailout as the Greek economy balance gradually recovered with the average of the euro zone fixed exchange rate regimes. came to be very close, with a very and in 2013 it became a surplus. related to: important difference: the Spanish However, the first signs of a Theoretically, the austerity policies economy is much larger than possible recovery have caused has been characterised also by the Greece, and the consequences imports to rise and in 2014 the cuts in public spending, with the on the whole euro zone would current account balance was back The great unemployment consequent reduction in public have been much more severe. So, in deficit. and the structural deficit. Many public services have the troika has allowed Spain to problems in the labour market. had to accept major cuts; however, maintain a relatively expansionary Based on these figures, the Spanish public deficit has withstood fiscal policy. government, the EU and the IMF, these attempts at reduction and have spoken of the success of the The backwardness in the relative the public debt to GDP ratio has The current account deficit policies they have promoted and provision of technological capital increased constantly. So, besides became larger and larger in the implemented: competitiveness and in the R&D expenditures. the labour market reform, an period of economic growth, due to can be restored within the euro important element for the recent high import growth and increasing zone, and it can start to grow so-called recovery is the sizeable private sector indebtedness which again, based on increased exports, The problems that represent the existence of public deficit of the Spanish were financed primarily with implementing policies of “internal the euro and concretely the loss of importance economy in recent years. funds from abroad, with a historic devaluation”. The Spanish of industry and manufacturing in a context of lower growth and loss of competitiveness. current account deficit of almost economy is being held up as an The It experienced a dramatic moment -10% of its GDP in 2007. With the example of what other economies, backwardness in the relative of crisis in 2011-12 with a big rise “internal devaluation” Spain began particularly Italy and France, provision of in unemployment, a sovereign to cut its imports significantly should do. human capital.

The unemployment rate is the on job training; third, a significant 2007). Moreover, there is a loss of THE INTERNAL second highest in the EU and the delay in the technology and weight of both the industrial and DEVALUATION IN euro zone (more than twice) after innovation system. the manufacturing production SPAIN HAS BEEN Greece. Youth unemployment especially after the outbreak of VERY INTENSE. represents another important One of the main problems of the crisis. Finally, the evolution of issue (over 50%). There is a the Spanish economy is its competitiveness (measured by the temporary employment rate much technological slowdown, with Real Effective Exchange Rate) has higher than in the other countries respect to the EU, the euro area been negative in relation to the of the euro area. In fact, the and the OECD. The technological euro zone since 1999. recent increase in employment capital, the R&D expenditure in is mainly in temporary jobs relation to GDP and the number Eventually, to sum up, in this and with precarious conditions. of researchers in % of the labour context the recovery of the Spanish Between 1994 and 2013 in Spain force are below the average of economy does not seem to have a the employment increased these areas and decreased clearly very solid base. The permanence by more than 40% but the from the crisis. of the structural problems of unemployment did it by more the economy (high structural than 75%. Another important backwardness unemployment; mismatch in the is that human capital in relation to labour market; backwardness in This structural unemployment, the working age population is 5% the technological capital and the so high and persistent, seems below the euro area average and its human capital adversely affecting related to: the type of specialization relative improvement is stagnant productivity; the problems of too much focused on sectors since 2005. Public expenditure on growth and competitiveness posed relatively unproductive and education relative to the working by the existence of the euro) as well not technologically advanced; age population is a 22% below the as that there has been no change an education system unable to euro area average and prone to in the predominant type of sectors respond adequately to the needs decrease since 2009. in the economy, it does not permit of businesses, with an excess of much optimism regarding the Antoni Soy, Professor of the people who only have primary During the period of expansion, possibility of achieving a strong University of Barcelona, Former education (with a major school there were growth rates higher and powerful economic growth Deputy Minister of Industry and Business in the Government of failure) and a lack of people with before (1986-1999) than after the without the problems and the Catalonia secondary education, specifically implementation of the euro (2000- limitations of the past. ■

38 39 he euro in its present form The total volume of such debts has and institutional diversity, and is a negative-sum game. been swollen by periodic surges in partly from the nature of modern Not merely for members market interest rates facing debtor labour markets. National diversity of the eurozone, but for countries in response to their loan alone was in the 19th century Tthe global economy as a whole. demands. It should be added consistent with an exchange-rate It makes the world community that the IMF has, constitutionally union extending not merely across, worse off – in other words, with speaking, no business lending to but far beyond Europe. This was outputs and incomes lower – than sub-units of a single-currency area the classical gold standard. it otherwise would be. such as the eurozone, without a guarantee of repayment from the With industrial technologies This happens because the euro monetary authorities of the zone as comparatively primitive, and within its sphere of operation a whole. The Fund’s disregard for in the absence of strong trade signifies renunciation of a key this principle reflects its eagerness unions or state-funded income economic adjustment mechanism, to earn income in order to pay its support, money wages were namely movement of exchange staff, as well as the fact that its sufficiently responsive to market rates between currencies. Countries Managing Director is traditionally forces to maintain equilibrium deprived of this mechanism come a European, and latterly from a in international payments. The under pressure to lower or to eurozone country (France). process was also assisted by raise their internal money wage large-scale migration of labour levels, according as they are in All this was not unpredictable or from European countries to other incipient deficit or surplus on their unpredicted. Indeed, virtually parts of the world (especially balance of external payments. no respectable economist outside the Americas), together with In practice, surplus countries – official circles defended creation simultaneous exports of capital Peter M. Oppenheimer which in the eurozone means of the single currency. Rather, the through the London bond market. chiefly Germany – resist pressure to inflate. This is partly because IMPACT OF THE EURO their businessmen do not like to DEPRESSION IN THE DEFICIT COUNTRIES sacrifice competitiveness. So the deficit countries (in the eurozone, MAY BE TO SOME EXTENT POSTPONED THE VIEW FROM mostly in southern Europe) OR RELIEVED BY BORROWING. BUT THIS undergo intensified deflationary MEANS ACCUMULATION OF SHAKY DEBTS pressure. This means depression ON THE PART OF EITHER PRIVATE OR of their output, employment and, of course, aggregate domestic PUBLIC BODIES. demand. That includes their demand for imports, which in turn BRITAIN spreads the depressive impact euro’s advocates and designers – Furthermore, much of the output of both to other members of the from Pierre Werner in the early food and raw materials generated eurozone (ironically offsetting 1970s to Jacques Delors in the by these resource flows to new some of the stimulus enjoyed by 1990s – turned a blind eye to its countries was absorbed as imports German producers from their over- implications and sought to justify it by the United Kingdom. Total competitive cost level) and to third in economic terms by proclaiming British imports in 1913 amounted countries around the world. that a single European market to about 40% of the rest of the requires a single European currency world’s exports. Depression in the deficit countries to eliminate foreign-exchange may be to some extent postponed transaction costs. This was like By then, however, this remarkably or relieved by borrowing. But seeking to eliminate transport costs self-regulating system was already this means accumulation of shaky by outlawing distance. Their real fading. With new industrial debts on the part of either private motive was of course political – to technologies, more powerful or public bodies. The creditors too set up a rival currency to the US trade unions and the beginnings are partly banks or private non- dollar, and nowadays also one of the welfare state, money wages bank lenders in other countries, covering the same domestic expanse lost their flexibility. The First and partly (mostly!) official as the Chinese renminbi or the World War massively disrupted lenders. These comprise national Indian rupee. demographics, commerce, and governments and international international finance. The sequel institutions, notably the European The dysfunctionality of a single was twenty years of market Central Bank and the International currency for the bulk of Europe instability, economic slump and Monetary Fund (IMF). stems partly from Europe’s cultural erratic struggle for new weapons

40 41 of economic policy. Leaving aside across much of the North Atlantic full-blooded socialist planning, area after the year 2000. The need, the two most important new from 2007 onwards, to rescue failed weapons were, in chronological banks, along with a big jump in UK order, exchange rates and fiscal unemployment from 5 to 8% of the or budgetary management. The labour force, put further strain on second especially was associated Britain’s public finances. with the rising ratio of government expenditure and taxation in market A coalition of Conservatives and Peter Oppenheimer taught (or “mixed”) economies. Liberal Democrats took over economics at Oxford University for 35 years until 2000. He also has government after the general considerable business experience, Britain in the 1920s and again election of 2010. It pursued a far including two years as Chief in the 1960s, and France in the more balanced policy of gradual Economist with Shell and non- executive directorships with a variety 1930s, damaged their economies fiscal consolidation without of companies in finance, retailing, by maintaining an over-valued extreme deflation. At the same publishing and commodity trading. currency for confused motives of time, Britain now benefited briefly prestige, morality or nostalgia. Such from non-involvement in the recovery – which were rashly attitudes appeared after 1970 to financial travails of the eurozone, permitted by the UK authorities have vanished – until the Maastricht not least the massive expansion of to induce a 15% appreciation Treaty and the creation of the euro national government debts within of sterling against the euro. at the end of the century. the zone. The second half of 2013 Admittedly, Britain has slowly been rebalancing its external trade NEW DIRECTION Gordon Brown in goods and services away from the EU. Since 2000 continental The Foundation for European Reform Europe’s share of Britain’s exports and imports has fallen, roughly speaking, from 55 percent to 45. But even this lower figure represents is a Brussels-based free market, euro-realist think- some 13.5 of Britain’s GDP; and in any case appreciation of sterling tank and publisher, established in 2010 under the handicaps Britain’s trade not merely within Europe but world-wide. patronage of Baroness Thatcher.

The pound’s appreciation vis-a- vis the euro is entirely defensible in relation to the depressed or stagnant economies of southern Europe. In relation to Germany, We have satellite offices in London and Warsaw. Gordon Brown, Chancellor of saw a clear upturn in the British however – with that country’s the Exchequer in the Labour economy, at a rate of 2 - 2.5 % per massive trade surplus and near- Government after 1997, kept Britain annum. This was a modest figure 50% share of exports in GDP - it out of the euro. This created an beside the 7% drop in Britain’s is beyond belief, and underlines opportunity to enhance Britain’s GDP since 2008. Parallel gains the iniquity of the single currency. competitive position by depreciating in employment, though welcome David Cameron needs to have sterling against the euro, and in themselves, pointed also to this in mind when embarking thereby prevent a fresh widening poor productivity performance, on his quest for the reform of of the country’s trade deficit connected obviously to the EU institutions. Preserving (previously narrowed since 1992). alarming shrinkage of Britain’s the sovereignty of national manufacturing sector, which Parliaments and re-thinking EU Regrettably, Brown then threw currently constitutes little more policies on labour migration are away his own opportunity than 10% of GDP. clearly key issues. But at least by pursuing a grossly over- equally vital for the harmony expansionary and irresponsible In any case the upturn has not and prosperity of Europe – and fiscal policy. This was maintained its momentum. It infinitely more important for accompanied, moreover, by tapered off in the course of 2015. Britain than the parochial interests Britain’s participation in the wave This was largely due to higher of the City of London – is to restore of imprudent banking policies and capital inflows – induced partly by a rational basis to currency poor financial regulation that swept premature confidence in Britain’s arrangements. ■ Oxford, September 2015. www.europeanreform.org follow us @europeanreform 42 THE POLITICAL ROMANTICISM OF EUROPEAN ELITES HAS EXACTED THE PRICE OF MAJOR ECONOMIC MISERY, WHICH UNDERMINES THE SOCIAL FABRIC THE OF MANY EUROPEAN SOCIETIES, AND ENDANGERS THE VERY EU ITSELF, BREATHING EURO-RESCUE LIFE INTO RADICAL POPULIST PARTIES QUESTIONING ANY AND ALL BENEFITS POLICY OF EUROPEAN AND INTEGRATION.

Hans-Olaf Henkel

he eurozone crisis Eurozone, even while a Grexit borders. The eurozone tragedy is the one-size-fits all monetary regions suffering for a strongly interests of European economies has had profound combined with a debt write- now bleeding into Shakespeare’s policy suits nobody. According overvalued currency, should and undermines democracy in implications for the off constitute a sine qua non of homeland, where the euro-rescue to conventional wisdom in restrain enthusiasm about Europe, which work the best at functioning of the recovery. EU institutions and policy is slowly pushing Britain Brussels, the eurozone needs to this idea. But this historical national level. The only viable TEuropean Union. The Greek some European governments out of the EU. be backed by a transfer union consideration does not seem solution for Southern Europe’s drama is certainly its most present the crisis as a justification in order to make the European to figure in the mainstream economies to return to the path of illustrious example. After seven to push towards more economic At the heart of the eurozone economy work again. Any European public debate. A real economic growth is a sharp years of depression, the situation integration and a fiscal union. Yet crisis lies the euro itself. The historically informed reflection call for a more centralized currency devaluation, which in in Athens is now a humanitarian the scale of the tragedy is such single currency has long been on the Italian experience and European political union with some cases ought to be combined crisis. Yet the Greek establishment that it now has consequences far too weak for Germany and too the miserable effects of attempts a common treasury has no with debt restructuring. shows a strong commitment to beyond Greek, and even beyond strong for Southern Europe, at fiscal transfers intended to economic grounds. Even more, Obviously, a sound economic continued membership in the Italian, Portuguese and Spanish including France. Moreover, improve competitiveness of it is against the economic policy must follow.

44 45 THE EUROZONE IS NOT AN OPTIMAL CURRENCY UNION. THEREFORE, ANY SOLUTIONS WHICH ARE SUPPOSED TO FIX THE CRISIS BUT FAIL TO ADDRESS THE ROOT OF THE PROBLEM, THE EURO ITSELF, CAN MAKE THE SITUATION WORSE.

The vision of ‘ever closer union’ ‘more Europe’ as a solution to not be subject to a rule-based AT THE HEART OF sacrificed the well-being of many elites must understand that the embodied by the single currency the eurozone’s woes is seriously regime, so promises made to millions of Europeans at the euro is also their problem. Not has turned out to be a trap for diminishing the attractiveness of the British government will be THE EUROZONE altar of the euro. Calls for more being a part of the eurozone does Southern Europe. The political the European Union in the eyes of broken. Economic reality will CRISIS LIES THE harmonization, centralization not make Britain immune to the romanticism of European the British public. However, we always come with vengeance, EURO ITSELF. and debt socialization cannot consequences of its crisis. ■ elites has exacted the price of should not be surprised with this which has become clear during solve the situation. This can only major economic misery, which development. recent years and the seemingly be accomplished by a controlled undermines the social fabric of endless sequence of emergency faith in the credibility of the dismantling of the eurozone. many European societies, and The eurozone is not an optimal crisis summits that demand the European Union? The continuous Exchange rates realignment is a endangers the very EU itself, currency union. Therefore, any attention of European leaders. mismanagement of the eurozone must for economic recovery in breathing life into radical populist solutions which are supposed The most recent act of the still- crisis creates a picture of the Europe. The failed philosophy parties questioning any and all to fix the crisis but fail to unfolding Greek drama proved European project as a failure, and of ‘ever closer union’ must be benefits of European integration. address the root of the problem, this point strongly, when in this for sure is not an argument rejected to revive the European There is, however, an alternative the euro itself, can make the July 2015, EU leaders decided for staying in the EU. project. One of the great vision of the European Union, situation worse. Many aspects to use the European Financial paradoxes of the euro-rescue which has at its heart the of the new European financial Stabilisation Mechanism to The euro-rescue policy, based on policy is that it pushes Britain principles of subsidiarity, self- legislation and the Banking grant a bridge loan to Greece, a blind commitment to saving the out of the EU, when it is precisely governance and strengthening the Union undermine vital British despite a previous promise euro ‘at all costs’, largely explains the British vision of integration, why, contrary to the United States Single Market. This very vision interests and transfer more made to the British government which represents the best strategy Hans-Olaf Henkel is a former CEO embodied by the Great Britain power to Brussels. Moreover, the that it would not be used to and the United Kingdom, the for securing the future success of IBM Europe and a former head of represents the best strategy eurozone is prone to constant bailout the eurozone countries. eurozone has not experienced of European project. As a result, the German Federation of Industries (BDI). He is a member of the for a prosperous and strong crisis, because any currency in Given this, how can anyone the long awaited economic the British call for a reformed EU European Parliament and the Vice- Europe. Tragically, the faith in a suboptimal currency area will expect the British public to have recovery. European leaders have deserves support, but the British President of New Direction.

46 47 Roland Vaubel BANKING UNION A BREACH OF FAITH

he project of the European in a speech: “Do you know what on vacation in France, I read the “banking union” covers it means for me to see for the following statement by Jean- Paul legislation at the EU level first time in 50 years a French Gauzès, French rapporteur for and at the eurozone European Commissioner in charge financial market regulation in the Tlevel. I shall focus on the EU level of the internal market, including European Parliament and member regulation and especially the financial services, including the of Sarkozy’s party UMP, in Le European Banking Authority (EBA). City (of London). I want to see the Figaro: “Dans un pays comme la victory of the European model, France, il y a une vraie tradition The EBA regulation was the first which has nothing to do with the de surveillance des institutions piece of EU legislation imposing excesses of financial capitalism” financières. L’avantage d’une EU regulatory control on the City (The Times, London, 2 December supervision européenne serait of London. It was initiated and 2009). Christine Lagarde, French d’étendre les mêmes régles promoted by EU Commissioner Minister of Finance at the time, partout” (7 July 2010). In other Michel Barnier. When Barnier was declared: “We need a City that words, the idea was to impose the appointed Commissioner for the plays by different rules” (Financial regulations of the more restrictive Internal Market, Nicolas Sarkozy, Times, London, 4 December majority, including France, on the the President of France, exclaimed 2009). A few months later, when less restrictive minority.

48 In the political economy literature, in national financial regulation is and the ESMA case, i.e., C-270/12). this is called “the strategy of perfectly compatible with the free The only way to restore the raising rivals’ costs”. It has become movement of capital because these original meaning of Art. 114 would common practice in the EU – also regulations are process regulations, have been legislative override in the field of labour market not product regulations. Thus, the by treaty amendment. However, regulation and the taxation of the EBA regulation could not have been in the Treaty of Lisbon, Gordon art market (by the so-called “droit based on the Single European Act. Brown agreed to a “Protocol on the de suite”, a levy on art sales first Internal Market and Competition” introduced in France). However, in 1989, two years which legalized what the Court after the Single European Act, had done. According to the The strategy of raising rivals’ the European Court of Justice protocol, “the internal market costs requires voting by simple or fundamentally changed the as set out in Article 3 of the qualified majority. Commission, meaning of the term “internal Treaty on European Union Council and Parliament based market”. In its “Titandioxide includes a system ensuring the EBA legislation on Art. 114 decision” (C-300/89), it declared that competition is not TFEU, the so-called internal that “by virtue of Articles 2 and distorted”. market article, which had been 3 of the Treaty, a precondition introduced unanimously (as Art. for such a market [i.e., an The lesson in 100a TEC) in the Single European internal market] is the existence clear: without a Act in 1987. It permits qualified of conditions of competition fundamental majority decisions. The Single which are not distorted” (nr. 4). reform of the Court, the rule of law cannot be restored at THE LESSON IN CLEAR: WITHOUT the EU level. A FUNDAMENTAL REFORM OF THE The judges COURT, THE RULE OF LAW CANNOT should not be BE RESTORED AT THE EU LEVEL. chosen by the governments THE JUDGES SHOULD NOT BE but be CHOSEN BY THE GOVERNMENTS delegated by BUT BE DELEGATED BY THE HIGHEST the highest NATIONAL COURTS, AND THEY national courts, and they should SHOULD BE REQUIRED TO HAVE be required to JUDICIAL EXPERIENCE (WHICH MOST have judicial OF THEM DO NOT HAVE). experience (which most of them do not have). This reform and the interpretation European Act had been signed Since any difference between of Art. 114 TFEU ought by Margaret Thatcher. So did national regulations may be to be central issues Margret Thatcher open the claimed to distort competition, in David Cameron’s floodgates for Brussels legislating the Court opened the whole field renegotiation. ■ the regulation of the City? of government regulation for qualified majority voting in the Art. 114 TFEU requires that the EU Council. This was a blatant regulations “have as their object breach of the Treaty, and a breach the establishment and functioning of faith. The internal market of the internal market”, and it article refers to the definition of explicitly refers to Art. 26 TFEU the internal market, not to Art. which defines the internal 2 or 3 which, at the time, did not market as “an area without even contain the term “internal internal frontiers in which the market. The Court reasserted its Roland Vaubel is Professor of free movement of goods, persons, position in several decisions. The Economics at the University of services and capital is ensured.” UK challenged the use of Art. 114 Mannheim, Germany. He is a Fahey, Elaine (2011), “Does the emperor have TFEU several times before the member of the Advisory Council As Fahey (2011) and others to the German Federal Ministry of financial crisis clothes? Reflections on the legal pointed out at the time, diversity Court but in vain (see Fahey 2011 Economics and Technology basis of the European Banking Authority”, The Modern Law Review 74: 581-595.

50 widening chasm separates the American left and its European counterpart on the question of the eurozone. To mainstream observers onA the left and centre-left in the United States, it is increasingly obvious that the European single currency is a problem. Astonishingly, the European left rejects this notion, and even more shockingly, it has served as an architect of the continent’s most severe austerity policies. Consider the observations of three of the most influential economic thought leaders on the American left.

Nobel laureate and New York Times columnist Paul Krugman has seen straight through the two most common and puerile arguments defending the single currency, (a) that it is a “political rather than purely monetary project,” and (b) that the main problem with Greece is the lack of structural reforms. His apt comparison with Poland illustrates his point that barriers to productivity cannot A TALE OF explain Greek unemployment:

“Poland, like Greece…is closely linked to the rest of the European economy … [with] lower productivity than Greece by standard international measures… But Poland has not TWO LEFTS had a Greek-style crisis, or indeed any crisis. Instead, it has powered through the turmoil of recent years. What’s the difference? The main answer, surely, is the euro.” 1

AND THE EURO Similarly, Vox co-founder and economic journalist Matthew Yglesias offered the following analysis: David Liebers “Europe is currently mired in a depression whose initial cause was the single currency, and mainstream European leaders have no solutions to offer. The eurozone is fundamentally a political project rather than an economic one, but to succeed politically it needs to work economically.” 2

Last, Nobel laureate economist Joseph Stiglitz:

“We know the structure of the eurozone encourages divergence, not convergence…the euro was supposed to strengthen [European Solidarity]. Instead, it has had the opposite effect… Although the single currency was supposed to bring unprecedented prosperity, it is difficult to detect a significant positive effect for the eurozone as a whole in the period before the crisis. In the period since, the adverse effects have been enormous.” 3

52 The simple message from America’s in June 2015) sound engineered most influential leftist economic to echo the received wisdom in EUROPE’S FASTEST minds is clear: the euro is the Brussels—this perhaps an attempt critical variable causing Europe’s by the Obama Administration to economic (and unemployment) cosy up to European politicians still GROWING POLITICAL woes. This argument is unwelcome bristling over NSA spy revelations. in polite conversation among But this is a political chess move, moderate politicians in Brussels, and disparate from the views of MOVEMENT despite levels of unemployment his progressive supporters, and and economic despondency in academic opinion leaders. Greece and Spain not seen since the Great Depression. It should not surprise Europe if the United States begins taking The disconnect between the far greater interest in a speedy American left and European left is resolution of the euro-generated in part due to the American left’s financial crisis. It is no secret aversion to draconian austerity that economic turbulence buoys measures. But perhaps distance extremist politics. The current from the European Project allows catastrophe has breathed life into opinion-makers in the United States anti-NATO, anti-American, pro- to understand something that is Putin political parties across the rarely acknowledged in Europe: the political spectrum. Yet nothing will EU and the eurozone are separate get done if the dominant discourse (though related) enterprises. Almost continues to link the dismantlement universally, the American observers of the euro to the end of the EU. that have taken aim at the single As Yglesias puts it, it is the “the currency are strongly in favour of a professional consensus” that the healthy European Union, and view eurozone does not represent an partnership with a strong EU as a optimal currency zone. geopolitical imperative. It is time for moderate European European leaders that lump anyone politicians to display political who criticizes the euro currency courage and creativity and together with extremist populists, acknowledge this. The European have rendered untenable any left should remind itself that the form of serious pro-EU, anti-Euro values at the heart of left-wing politics. The inflexibility on this policies, such as protecting human point is so great that the President dignity and securing the social of the European Parliament, and well being of citizens, have been leader of the largest left-wing the central victims of the euro. party in the parliament, Martin Reconnecting with the American Schulz, has threatened to throw left on the euro question would be Greece out of the EU if it leaves the a most sensible beginning. ■ eurozone - the only real solution that has been tabled for returning to competitiveness. 4 Worse, the imprecision of the moniker “Eurosceptic,” squeezes out moderate, pro-EU, anti-Euro voices.

The Obama administration has been largely quiet on these David Liebers serves on the board 1. Krugman, Paul. “Poland Versus Greece.” The New York Times. September 11 2015. matters. Where the White of the Warsaw-based Democratic 2. Yglesias, Matthew. “I read the French far- House has intervened, its pro- Initiative Foundation. He is a right platform and it gets one big thing Humanity in Action Senior Fellow absolutely right.” Vox. January 12 2015. forma statements (for example, and was previously a Gates- 3. Stiglitz, Joseph. “Europe’s Last Act?” Project Syndicate. June 5 2015. admonishing the Greeks to “get Cambridge Scholar in the History 4. Elliott, Larry and Traynor, Ian. “Greece and Philosophy of Science at Trinity says bailout deal is up to Troika amid their house in order” during the College, Cambridge, and Fulbright speculation over exit from EU.” The Guardian. June 17 2015. most recent debt repayment crisis Scholar in Warsaw, Poland.

54 www.europeanreform.org Follow us @europeanreform