2 February 2015

The euro has been a disastrous experiment


In the matter of Greece versus the Eurozone, it is easy to summarise what is happening. The irresistible force is crashing into the immovable object. There is a lot of ruin in the Single Currency. After all. membership was supposed to be irrevocable. It was to become the thousand-year Euro Reich. Those of us who predicted from the outset that it would turn into an Ozymandias currency have worn out several sandwich boards. This does not mean that we were wrong. We had merely underestimated the obstinacy and irrationality of the Euro’s defenders: their contempt alike for history, economics and democracy.

Yet we cannot convict them of lacking ambition. After all, they had set out to refute Marx. He argued that economics determines politics. They were determined to make politics determine economics: the Euro was always a political project. But this version of politics owed nothing to democratic consent. The Euro-nomenklatura intended to impose their view of Europe’s destiny upon its peoples, irrespective of those peoples’ opinions. That created an insuperable problem.

In any country of any magnitude, it is difficult to run a single currency. There are bound to be poorer areas, which find it hard to earn enough of the stuff. If there are attempts to compensate them by a loose monetary policy, this will incite inflation in the better-off regions. The alternative is fiscal transfers. Mississippi can use the same currency as Manhattan because Uncle Sam redistributes tax revenues in Mississippi’s favour.

Something similar could have happened in Europe. Amsterdam could have agreed to subsidise Athens while Munich took care of Messina. There was just one slight obstacle to that obvious solution. The taxpayers of Munich and Amsterdam had no intention of complying. Without subsidies, the poorer countries couldn’t have agreed to a reign of austerity unprecedented in peace-time. Real wages would have fallen and with them, living standards. There would have been drastic cuts in government expenditure plus a drive for higher productivity whatever the cost in unemployment.

All of that has happened, in Greece and Ireland. In Ireland, it has worked surprisingly well. In part, this is due to the Puritanical strain in Irish Catholicism. A lot of Irish voters believed that they deserved to suffer as punishment for over-indulgence. The Irish had a further advantage. They had never been invaded by Germany.

That was not true of Greece, where the scars of German occupation are still raw. The German occupiers plundered the country and treated its inhabitants with great brutality. To many Greeks, the reform measures demanded by the Eurocrats sounded like a new instalment of gauleiter rule. Greece has another weakness. At the end of the Second World War, there was a vicious civil war. The Leftists and Communists narrowly lost. Many of their political descendants have never accepted defeat. Such attitudes are a powerful element within the Syriza government.

Those who run the Eurozone ought to have understood that. On the whole they are neither ignorant nor stupid. Yet they seemed to have assumed that a finger-wagging from Brussels would bring the Greeks to order. So how can we explain their arrogant naivety? Simple: the Germans and the French find it hard to think straight about history. In France’s case, there are too many defeats and too much collaboration. It is even easier to understand why the Germans shrink from contemplating their own recent history and why they distrust themselves. They know that Hitler came to power by electoral means, that there were tens of millions of adulatory collaborators and that he would have easily won re-election, at least until Stalingrad. Some still wonder what might be lurking in the German psyche.

The Germans fear themselves, and the French fear the Germans. This explains the paradox at the core of French attitudes to Europe. On the one hand, they saw it as a means of constraining Germany; on the other, as a way of projecting French power. Essentially, Europe should be run as a French jockey on a German horse. Thus mounted, France would have no need to fear a third onslaught and would indeed be able to project herself as a super-power. That is why the master-illusionist De Gaulle wanted to keep the Anglo-Saxons out of the stables. French post-war foreign policy is largely an attempt at therapy. The French patient is suffering from post-traumatic stress disorder.

But the French also fear themselves. In late 1940, Petain would have strolled to victory in a free election. There is also 1968. De Gaulle seemed to have restored France’s self-esteem. The regime which he had installed appeared to be stable and successful. Then there was an earthquake. When he was the French Prime Minister, Edouard Balladur told a senior British diplomat that he should never underestimate the effect of 1968 on French official consciousness. Just below the quasi-monarchical pomp and circumstance of the Fifth Republic was the constant anxiety that a crisis could suddenly emerge from a clear sky.

That helps to explain France’s chronic inability to embark on economic reform. Even politicians who know what ought to be done fear the consequences of trying. What would happen if the students and the workers took to the streets? There might have been one leader who would have been bold enough to try. He was nominally a man of the Left, which would have helped. An alleged incident in a New York hotel bedroom could prove to be a turning-point in modern European history. Otherwise, Dominique Strauss-Kahn would have been President of France. He would have had the self-confidence to embark on reform. And then? An endlessly fascinating “what if?”

As it is, France is unreformed and its political system shows no sign whatsoever of being able to generate the energy to rectify that. This is one reason why Frau Merkel is being so tough on the Greeks. The German dominatrix is using them as a whipping-boy to make it clear to the French and to other potential backsliders that there is no alternative to the Euro-zone’s disciplines. She is wrong. There is one: chaos.

Greece is on the verge. The frightened French politicians who were worried that reform would provoke riots may end up with riots anyway. Then there is Spain, another country overshadowed by a recent Civil War and by a longer-term instability. It is more than five hundred years since the Catholic Kings began to unite Castile and Aragon, yet that union is still not stable. Although the Spanish economy has shown some recent signs of improvement, the unemployment rate is still appallingly high, the public is losing patience and the political system is menaced by incoherent populists. As for Italy, there is less risk of disorder. The Italians are accustomed to ignoring their government. But there is no prospect of reform; there are massive debts. All these vulnerable countries’ debts are denominated in Euros. Does anyone believe that the Greeks will ever repay? What if breakdown becomes contagious? How stable is the European banking system? If all these Euro-liabilities crumble, who is the payer of last resort? Will the Germans be Alcindoro in La Boheme, left with all the bills when everyone else has vanished?

In Brussels, the assumption was that these tiresome Greeks would submit and that if they refused, they could always be expelled. They will not submit. Grexit could be contagious. Greece could be the stone that produces the avalanche. The Euro had neither democratic legitimacy nor economic rationality. It was a currency too far. What happens next?

Bruce Anderson is a political commentator.