I’m bored of hearing prejudiced nonsense about the Eurozone. A lot of what is said in the Anglo-Saxon press, with few exceptions such as Krugman or Ezra Klein, I interpret as either misinformed or pushing an anti EU, either pro-US or in the case of the UK exceptionalist agenda.
The Euro and the EU post-national project has many challenges, but not the ones that dogmatic US/UK commentators churn out. It’s not unsound and doomed to failure as a pegged currency system would indeed be. It’s not demanding of human perfection and discipline to work – that is just the flawed conception of the Merkel government. The Euro won’t collapse if some countries leave, though it would get stronger if a more homogeneous set of countries remain. The Euro is, indeed, a corporatist and pro capitalist construction. That is the idea, to compete with the dollar and to a lesser extent the Yen and RMB. Having the Euro doesn’t mean that European society as a whole has to change to be like America.
The real challenges of the Eurozone are: Different competitiveness amongst regions chiefly due to an imbalance of capital, unwillingness to fix that through redistribution, a single monetary policy that favors the center, and most damagingly a ban on the ECB making use of its powers as monetary sovereign. But rather than bore you by analysing the problems, I’ll offer instead solutions. There are relatively simple solutions to the Eurozone mess, and each of them involves fixing one or more of these problems. These are easy solutions, in the sense that governments can decide and do them. They do not require people or the economy to deliver an orchestrated outcome. All of these solutions are currently blocked, politically, by Germany.
- Pay the Germans higher wages. This would be in the long term the least effective way to address productivity imbalances in Europe, but it’s easy to sell on a narrow populist platform. Germany in recent years reined in wages, passing a large productivity surplus to businesses. Releasing that back to the German public would raise consumption and EU-wide demand, as well as make Germany relatively less competitive. That would reduce trade imbalances within the zone but drop the overall competitiveness of the zone. Still, it is a good and easy solution.
- Tax-based protectionism. Another straightforward way to deal with trade imbalances is to impose some protectionism within the zone. Leaving the Euro is a way to do that with a hatchet. The way to do it while holding the zone together is through tax policy. There are no tariffs, but there is differential VAT (sales tax) in the zone. In peripheral countries such as Greece VAT needs to be zero for necessities such as food and high, such as 35%, for non-essential industrial goods like electronics and cars. This would bring back the pre-EU price profile where living was cheap but enjoying modern luxuries was prohibitive. In some ways this is a backward step, but it’s much more humane and sustainable than the present situation where many people cannot afford to live.
- Stop or reverse privatisation. Governments throughout the EU have sold off all kind of economic assets, usually below their long-term value: utilities, telecoms, telecom licenses, land, trains, airports, seaports. After this massive divestment of capital, surprisingly, some governments find themselves with low revenues! Privatisation hits in three ways: the asset passes to the private sector, ownership and therefore dividend passes from poorer to richer countries, and once an entire class of service is privatised the cost to the consumer usually rises. Stemming or, wherever possible, reversing privatisation would help rebalance Europe in favor or peripheral states. There are much better ways to rebalance capital, but this one is simple.
- Bankruptcy protection. At present, Eurozone states are like businesses borrowing from the mob. They are not sovereign in the currency that they borrow, the actual sovereign (the ECB) is indifferent, and so states have to borrow from the market. They have to constantly refinance their outstanding debt at the current rate the market sets for them. The market, knowing this, picks on the weakest state and raises the rate, betting the value of a potential bailout against the self-fulfilling risk of default. This is a ridiculous borrowing arrangement. The easiest way to stem it is to bring institutional protection to states where they suspend liquidity, essentially extending the maturity of bonds rather than having to refinance them at punitive rates. It’s a form of controlled default, similar to Chapter 11 protection of US businesses. What’s needed to implement it is legislation to allow the exposed creditors, such as banks, to also freeze the loss. It’s Japan’s way out of a debt crisis, and although not the most dynamic it’s certainly stable and effective.
- Raise inflation in the zone to 5%-7%. A single currency means a single monetary policy, but it’s still important to have the right one! Inflation in the core countries is currently too low, while the periphery is in deflation. This insane state of affairs favors only old money: Creditors, idle capital, and mature businesses that have run out of expansive potential. Much higher inflation, of the order of 5%-7% is needed to drive capital back into real investment, to reduce the burden of old debt, and eventually to devalue the Euro bringing up overall EU competitiveness. This is the monetary policy that the whole zone needs. I’m not sure whom the current tight-fisted policy helps; not even Germany a a whole, perhaps a narrow clique of capital. More inflation is one of the most needed changes. It’s criminal that this is being doggedly refused.
- Allow the ECB to lend directly to governments. In sensible United States the Fed can and does routinely buy Treasury bonds. The Fed is like the ECB, and the US treasury is like all EU states combined. Some claim that such a common EU fiscal entity is needed but that is a red herring. The real difference is that the ECB is legally prohibited by its charter from lending directly to governments, in other words buying their bonds. Instead, the ECB has to lend at 1% or so to private banks, which in uncertain times buy the bonds of their own nations at 5% or more yield. LTRO had to be done this way, which is why it’s ineffective. This little technicality gifts billions of public EU revenue (technically called seigniorage) to private banks. More importantly, it divides exposure along national lines which is the opposite of what the zone needs to do to be immune from speculative attack. This is simple, obvious, and technocratic. It should just be changed.
- Eurobonds which the ECB can convert to inflation. There is a huge advantage in having a currency desirable enough that you can borrow in your own currency, as the US, Britain, Japan, and the Eurozone can. The reason it’s an advantage is that debt denominated in your own currency can, if necessary, be converted to inflation. Again bless the Americans for they have figured this out. If China asks for its holding of US treasuries to be liquidated the Fed can sigh and print the trillions of dollars that would be needed to make that happen. It’s in no-one’s interest, so it doesn’t happen, but the option to ultimately convert debt to inflation keeps the debt immune from being called in. All the other currency blocks do it, but the EU doesn’t because it has surrendered monetary sovereignty to what looks and acts like a private banking body. The ECB needs to be yanked out of this “independent” nonsense and back into the role of monetary sovereign, yesterday. In the case of Greece, it would have kept interest rates around 2%, rather than let them spike upwards of 30%, it would have avoided Greece’s partial default and economic collapse, and would have removed the need to transfer hundreds of billions of taxpayer “bailout” money to bond speculators. All this at the cost of slight zone-wide inflation, which the zone actually needs!
- Transfer payments. It’s unintuitive, and the puritan nations don’t like it, but directly subsidising the periphery is one of the simplest and least costly ways to bring about European convergence. Before Greece blew up its economy its primary state deficit (ignoring borrowing costs) was about €8bn a year, and it was already receiving EU grants of €3bn. Another €5bn of running subsidy, although arguably unfair, immoral, and so on, would have defused the entire crisis and would have averted hundreds of billons of emergency bailout loans, in the end saving tens of millions of interest payments to speculators. As I argued elsewhere, the Eurozone can subsidise consumption in the periphery, or it can have less consumption through one messy means of adjustment or another. More consumption, more demand, and more economic activity would be good for all, including the center.
- Capital transfers. Even better than subsidising the daily lifestyle of the less competitive regions would be to transfer capital there. The difference in competitiveness is largely due to the massive imbalance in capital between the German-Dutch center and the Latin and other periphery. Direct captal transfers would fix this. I don’t want to use the word “investment” because it usually means moving the claims on an asset in the opposite direction of what we want. So we don’t want Deutsche Telekom to “invest” by buying out a regional operator – we want the opposite. More shares of EU enterprises need to find their way into peripheral societies, into the retirements funds of Greeks or Italians. More venture capital and mature productive capital needs to be bound to the periphery on the ground, in actual facilities, but also owned by the local people. Such a rebalancing of capital would be extremely effective, and it would be fairly easy to do if governments were prepared to meddle in stock markets. Capital doesn’t like it, but then Capital doen’t like the EU project where it’s distinguishable from the libertarian globalisation project.
- More EU entities. This one would take longer to pay off, but for the EU to achieve long term convergence it needs more EU entities and institutions. Many of these were created in the 1990s and up until the Euro, but then the momentum stopped. Conventional wisdom holds that any further EU institution would require a political union to happen first. Not so! We need more EU legal entities to come into being in parallel with and to assist further political convergence. The most needed are a form of EU-chartered corporation and an EU-wide social insurance scheme. These would be roughly equivalent to federally chartered US corporations, such as train companies and banks in the days when the US was still coming together, and Medicare/Medicaid. It sucks starting a company in Greece or Spain because of the unfavorable tax, legal, and investment environment. If one could start an EU company, with EU tax obligations policed by EU auditors, etc. this would be much more attractive. Similarly, social security can and has to be unified to provide labor mobility to any but the richest segment of the workforce. EU institutions need to be legislated, democratically, by the European parliament, which would then have serious business and quickly stop being a joke.
So, there are ways to fix the ship, and they don’t involve leaving the whole thing to the market and washing one’s hands while capital predictably concentrates in the center and the periphery becomes a cheap labor shop (attractive though that would be for some). Nor does the EU project require people to act unnaturally, with temperance, putting the common good ahead of their own welfare, acting long term, or anything of the sort. These are incremental, institutional changes that governments can agree and put into effect. The most potent, such as raising inflation and restoring ECB monetary sovereignty, are administrative changes that do not require stirring up the political will.
These actions, and of course others that I have missed, must be heard as political demands of the people on the streets throughout the EU. When the Greeks, or the Italians are throwing stones at police, in addition to chanting “No to austerity!” they should also chant “Raise zone-wide inflation!” and “Eurobonds with ECB backing, now!” I know, I’m not a born politician. These demands feel technical and not visceral. Better minds than mine can fix that. But the world is technical. Politics, today, is technical. Demands have to be partly technical. We cannot lose the political battle of Europe because the slogans feel unintuitive.