It’s getting pretty exhausting living inside the Eurozone. We screw up our nerves for the next moment of crisis, which is narrowly averted, only to find that the same old problems lie in wait just around the corner; but worse this time, because they were’t properly sorted out the first time.
Last week’s worries were put to rest for a short while: Greece is still in the Eurozone, the Euro hasn’t imploded, the banks are still open. Spanish banks teetered; a fix was found for the time being. But it doesn’t mean anything has been solved, and the moments of respite get shorter and shorter.
It seems to me that we’re strung out on Dani Rodrik’s trilemma of global politics in an increasingly dangerous way. His contention is that you can only have two of these three things:
‘hyper-globalization’ (in the EU context, the free market in goods and services and mobility of capital and labour);
‘national sovereignty’ (in which national governments have realistic choices to make between options that may be ideologically quite distinct);
and ‘democratic politics’ (in which there is meaningful involvement by actors and electoral accountability for decisions made).
Kevin O’Rourke (whose work I’ve mentioned here before) pointed out that the odd design of the Eurozone was meant to avoid it getting definitively boxed into any two options in this triangle. Trans-national oversight of the currency was delegated to the ECB. Nation states were charged with making fiscal and financial policy within a loose-ish trans-national framework of rules. Democratic debate was expected to internalize the requirements of pooled sovereignty.
But the sharp ends of the trilemma are becoming more and more difficult to span. The fuzzy compromises are under growing strain, and the Eurozone is being pushed into classic trilemma trade-offs. It’s at growing risk of ripping apart entirely.
First, the fuzzy compromise between supposedly depoliticized trans-national rules (run by the ECB), and national-level responsibility for compliance, is now increasingly problematic. Countries in loan programmes find their national capacity for choice dwindling to nothing. National autonomy is subordinated to the requirements of the transnational official lenders. What gets squeezed out is the democratically determined policy choice at national level. They are in Rodrik’s ‘golden straitjacket’. It’s politics without policy choice.
The two recent rounds of Greek elections show that you can blow off anger once, but the second time, when real fear strikes, the politics of ‘no alternative’ seems horribly compelling. Most Greek voters hate the austerity, the five-year recession, the unemployment of over 22%. But 87% want to stay in the Eurozone because the alternative is even more horrible to contemplate. Greece desperately needs a game-changing five-year plan. But notwithstanding Paul Krugman’s bland optimism about the potential gains from leaving the Euro, the wrenching destabilization and future uncertainties seem deeply unattractive to most people. The deliberate ambiguity of the left-wing anti-bailout but pro-Euro SYRIZA coalition seemed too risky for many voters. The conservative New Democracy party seems set to form a new government.
Something very similar happened in the referendum Ireland was obliged to hold recently to ratify the fiscal treaty (and future eligibility for ESM loans). I have no doubt that most of the ‘yes’ voters behind the 60:40 win did so with little conviction and no enthusiasm. The fear factor of finding yourself at the wrong end of both market opinion and future loan options had a pretty concentrating effect on many minds.
But it’s hard to see this as a stable political option over the long term. People may endure harsh policies for a year, two years, three years; they may acquiesce for longer if they feel under severe enough duress. But what kind of way is this to run a democratic polity? It hasn’t proven to be sustainable historically, whether our examples are Argentina a little more than a decade ago, or Germany’s catastrophic deflation in the 1930s.
Secondly, although the country-by-country approach clearly isn’t working, we don’t have any real capacity to generate a politics of common interest across the Eurozone. ‘Austerity’ is clearly having seriously deflationary effects across the Eurozone. Krugman regularly advocates a coordinated Keynesian stimulus programme to prioritize growth, led by a Germany willing to bear higher inflation and more domestic consumption.
But while this might seem like an attractive solution from afar, we don’t have either the political capacity or the economic space to get anywhere near this at the moment. It is far from clear how we could have proper debates about alternative policy options, nor is it clear in what political forum new ideas could gain traction.
And in any case, while dearth of demand has crushing effects, it is not necessarily the most urgent problem that has to be addressed right now. We have slow-motion capital flight in one country after another. We have a rolling banking crisis – Spain’s problems won’t be the end of it. We have a sovereign debt crisis – both Spain and Italy face growing problems with their borrowing, and that won’t be the end of it either, the way things are going. Banks and sovereign debt are deeply entwined with one another, making the markets very nervous indeed about extending further loans. Market confidence requires political stability. European leaders at the G20 are under growing pressure from the others to sort out the chaos. But what we see instead is official insistence upon a country-by-country response to systemic crises that can really only be controlled at a European scale. It’s ‘sauve qui peut’, which translates as ’every man for himself, and the divil take the hindmost’ – a far cry from earlier EU ideals of solidarity.
The logic of this would suggest that we desperately need a radical shift away from the usual EU summitry, which typically entails yet another fuzzy patch to the fuzzy compromise, and toward building systemic and Eurozone-wide political responses. We need risk pooling through some form of Eurobonds. We need scope for emergency fiscal transfers to distressed countries. We need the ECB to change its mandate so it can inject money directly into banks. The implication is that we have to move toward deeper political integration in order to get more coherent economic responses. It would mean a decisive shift toward the ‘global federalism’ point on Rodrik’s triangle. This would move real political decision-making to the transnational level, with a form of democratic accountability. But it would entirely bypass national sovereignty.
There are huge sequencing problems with all of this, as Wolfgang Münchau points out:
The Bundesbank said there should be no banking union until there is a fiscal union. Angela Merkel said that there should be no fiscal union until there is political union. And François Hollande said that there should be no political union until there is a banking union.
But that’s only the half of it. Cutting national sovereignty out of the picture could have lots of unforeseen consequences. Consent through gritted teeth can only be relied on for so long. In one country after another, and not just the countries in loan programs, support for further European integration is growing seriously problematic. EU institution-building was always an elite rather than a popular project – the democratic deficit is built into the woodwork. But people could live with this as long as it produced growth and stability. If ‘EU’ means your national concerns become invisible to your rulers, it’s hard to see how ongoing consent could be assured. If ‘EU’ equates to austerity and recession, the legitimacy of the whole project comes under increasing threat. You might end up trying to force closer integration on ever more fractious and resentful societies. How long could this last?
In Greece, for example, the conservative New Democracy party have won almost 30% of the votes, and with the bonus of 50 seats accruing to the party gaining the largest vote share, will control 128 out of 300 seats. With PASOK (punished more severely than ND at the polls for its past mismanagement) obtaining 12.3% votes and 33 seats, and Democratic Left (also strongly pro-Euro) with 6.2% and 17 seats, giving a total of perhaps 178 seats, they might be able to form a government the EU-ECB-IMF Troika will talk to, and they might be able to wring a few marginal concessions in the process.
But this policy stance should not be taken to reflect a settled disposition among Greek voters. SYRIZA is now is a pretty happy position as far as its concerns go. It’s gone from 7% just a few years ago, to 16.8% on 6 May, to 27% now, and it will control 72 seats. There’s no incentive for it to join a government of national unity, as the other parties propose. They plan to play an opposition role, both anti-bailout and pro-Euro, with different elements of its coalition of 13 organizations always available to argue the most plausible case, depending what flavour message suits the occasion. They are channelling an anger and despair that is undoubtedly more widely spread than their vote share reflects. They are likely to do even better in the next election. There’s also the nearly 15% of the votes that have gone to the extreme right, and the 5% to the extreme left, and altogether we’re looking at about 47% support for anti-bailout and anti-austerity policies.
Greece is not the only country tearing itself apart over the prospect of having to implement politics without policy choice, and where the electorate is likely to be highly resistant to further European centralization of political power. In Ireland, Spain, Portugal, Italy, and France, incumbent parties have already taken heavy electoral defeats. The rise of the Front National in France was contained in the National Assembly elections by the majoritarian election system. But Marine Le Pen came a strong third in the presidential elections in May, with a policy stance that is nationalistic, hostile to immigration, suspicious of the EU. The British Conservative Party is more Europhobic than it’s been in a long time. Germany’s usual allies in the ‘strong North’ axis – the Netherlands, Finland – are increasingly prey to instability coming from anti-austerity and anti-EU sentiment. In addition to all this, the pull toward territorial devolution and political segmentation in many European countries makes it even more difficult to sell the prospect of a stronger trans-national centralization of powers.
It’s hard to picture a less propitious time to be thinking about giant leaps toward deeper political integration. Yet it’s hard to picture a way out of the current mess without some form of deeper political integration. The next European Council meeting on 28 and 29 June will be the latest in the series of last-chance opportunities. We don’t yet know what, if anything, will result from this. But the implication seems to be the yet more politics without policy choice, and more sidelining of national concerns – deeply unappealing, deeply worrying.