No decision has been made about whether Greece will be able to avoid the moratorium remain in the euro zone and reverse the brutal contraction of its economy. But any fair panel would have issued a verdict on the political consequences of the common currency:. Total failure
Obviously, the case of the euro was always political and came in two ways: mundane and sublime. The mundane case, almost never in a transparent manner in polite society, was that the countries of southern Europe have spent too much, too little taxed and thus lent in excess. While they could finance deficits through local currency printing and promote a devaluation from time to time, they held their means of free spending. Only the euro straitjacket and a monetary policy governed from Frankfurt could discipline them.
That was the theory. The practical result was precisely the opposite. Without the risk of devaluation, the spreads of the interest rate plummeted, and also the borrowing costs. Cheap money from abroad flooded low-income countries of Europe. In some places – Greece, Italy and Portugal – the money funded an unsustainable public spending spree. In other – Spain and Ireland – financed the delusions of private real estate developers. The debt ballooned everywhere
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The sublime political case for the euro was pronounced most charming way in French . He promised peace, prosperity and growth of mutual respect, with political union as the ultimate goal. Never mind that no one seemed to know how to get there. As heard at several conferences over the years, the will and determination European will get the house. As a non-European, I was told (sometimes politely, sometimes not so much) that I could not possibly understand it.
Well, the results are visible, and even non-European can understand what happened. The legitimacy of the European institutions is low and neo-fascist movements increased. Prejudices against immigrants and clichés about the people of northern miser and the people of lazy south proliferate. Even respectable newspapers lowered the level and are portraying German politicians wearing costumes ( lederhosen ) and Hitler mustache. There may be a worse outcome for the project to build an integrated and tolerant Europe, but I have difficulty imagining.
It did not take well. Monetary union was always a gamble, but not necessarily had to produce mass unemployment (more than half of all young people in Greece and Spain have no job). A significant part of the problem reflects the flawed design of the euro zone, and that failure, it is also political.
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Yes, many of Greece’s problems were of his own. There were massive abuses of pension benefits, tax collection is a mess, and (in addition to beautiful beaches), the country offers some goods and services that the rest of the world wants to buy
But depression. – now half a decade – also has external causes. Other European countries are not only buying very little of Greece. They are buying very little from everywhere. As Martin Wolf, the Financial Times , never tires of pointing out, there is a huge imbalance in Europe, and is not the one you think.
Since the current crisis erupted, the current account of the euro area went from a small deficit to a surplus of almost 2.5% of GDP. While countries such as Greece have cut their spending, others, such as Germany, have not expanded theirs. The Northern Europeans are proud to live within their means – no matter that in doing so, they are helping to sustain a regional crisis
This type of problem has concerned John Maynard Keynes at the time of the negotiations. Bretton Woods the post-World War II. Foreigners can force a country to spend less, refusing to lend to it. But how do we force a country or group of countries to spend more? The eurozone does not have an answer to this inherently political dilemma – and therein lies one of its fundamental flaws
The euro area has neither the automatic elements capable of absorbing shock tax. – As is widely known now – that are essential to stabilize the income throughout the community. When the price of oil falls and the Texas and Oklahoma enter a recession, money flows your way at that time and without any corrosive political effect. But this circle transfer will not happen as a single European citizen northern stagnate. Thus, the euro area will be forever plagued by economic imbalances and political tensions.
And speaking of political tensions, negotiations between Greece and the EU have opened up new paths. The new government of Syriza relented after almost two weeks, when faced with the ultimate nuclear threat: with bad behavior, the European Central Bank will stop funding its banks. Not even finance ministers wearing leather jackets are willing to tolerate a run on the banks and the financial chaos that follows.
independent central banks are a great thing, and ECB President Mario Draghi is a great banker central. But such independence aims to implement monetary policy (raise interest rates, if necessary, however unpopular that is) and not fiscal policy (forcing a country to cut spending and raise taxes to pay the debt). Someone said “democratic deficit”?.
No doubt, this does not mean that the Greek exit from the euro zone is desirable. As the old joke goes, if you want to get there, I would not get here. But here – in the monetary union – is where Greece is located, and let her suddenly, without a plan B, would be disastrous
Bad economy turns easily into bad policy.. Due to its defective design, the common currency is now at risk of aborting the entire project of a political union that was intended to advance. That would be a Greek tragedy.
Andrés Velasco, a former finance minister of Chile, is Professor of Professional Practice in International Development at the University of Columbia.
Project Syndicate, 2015
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