Et Dona Ferentes

by Henry on February 13, 2010

The _Economist’s_ Charlemagne “argues”: that any Greek bailout will have no long term implications for EU integration.

bq. THERE has been a lot of commentary, in the past couple of days, to the effect that Europe is on the brink of a great leap forward in political and economic integration. The theory goes: a bail-out of Greece, accompanied by intrusive monitoring by Eurocrats, would constitute an unprecedented level of EU interference in the fiscal affairs of a member country. … Paul Krugman … finds that logic dictates a swift move towards integration. … I fear I do not agree. Or rather, I think the siren lure of economic logic is blinding a lot of people to the political realities of this crisis. … I have watched the direction of EU travel head firmly away from closer federal integration, and towards a messy sort of intergovernmentalism … I don’t think a Greek default is a big enough crisis to change the political weather in the EU … cannot get that excited about intrusive, monthly monitoring of Greek government spending by officials from the European Commission and European Central Bank, matched by close scrutiny of Greece’s notoriously dodgy statistics by officials from Eurostat. … new territory for the EU … but the International Monetary Fund has been doing this kind of stuff for years. And nobody thinks that when the IMF meddles in the fiscal sovereignty of a country, it means that world government is about to break out …

bq. bailing out Greece is already proving so politically painful for leaders like Mrs Merkel that she would not tolerate any discussion of how such a bailout might take place … a message to voters in rich countries like Germany: do not fear, we are not about to establish a systematic series of transfers to countries in the euro zone … this stuff is toxic politics. … a golden lesson of politics is: political leaders only do really hard and painful things when they absolutely have to. Until then, they would much rather fudge things. … the prospect of a messy, ad-hoc fudge of a bail-out for Greece. … countries … like … Poland … likely to take it rather badly if future convergence flows are diverted away from them, and back to countries that have wasted so much EU cash like Greece … Add to that that newcomers outside the euro zone, like Hungary or Latvia have had to endure horrible austerity programmes in the last two years under IMF supervision, while countries inside the euro zone are to be spared IMF programmes.

But does this really amount to a proper counter-argument? I don’t see any real disagreement here with the basic propositions that (a) EMU isn’t working as it stands, and (b) that the only sustainable equilibrium outcomes here are complete collapse or regearing to allow substantial fiscal transfers (and, insofar as they will do any good, labour market reforms to make increased mobility easier). Saying that politicians will want to muddle through is stating the obvious – but the point is that muddling through is not a sustainable long term strategy. Either the muddling through will be insufficient, in which case EMU will finally succumb to one of the succession of crises that will almost certainly result, or it will be sufficient, in which case it will serve as the basis for a long term shift in the economic governance of the Eurozone towards coordinated fiscal policies and some degree of fiscal transfers in times of crisis, and perhaps more than that. As Adrienne Heritier and I have “argued”:, muddled looking informal deals very often lay the foundations for long term formal institutional changes in the EU.

Finally, the analogy to the IMF doesn’t really work at all. The IMF is not a notably clubby institution, and is particularly unclubby from the perspective of those countries unfortunate enough to need to seek its aid. The EU is quite clubby indeed (Greece will remain on the Council, and in the various eurozone coordination forums), so that whatever the final outcome, it will surely give rise to a lengthy decision making process involving the target countries, those giving aid, and those on the sidelines. This will almost certainly culminate in a set of general institutional mechanisms which applies to all the eurozone countries, including both those countries at risk of default _and_ those which are highly unlikely to get into trouble. That’s the way that the EU works – and this will be a quite significant step towards further integration. Of course – the rescue effort may fail (for example, Germany and Greece’s current spat may reflect irreconcilable political differences) – but if it does fail, so too will the euro project.