Forcing Europe to Face Its Demons

Richard Boyd-Barrett is many things.  He's well educated, well heeled, and well raised.  He's considerate, impassioned, and idealistic.  He's articulate, and convincing.  However, he is inexperienced in government, under-qualified in economics, and at times naive in his dealings with the Government parties.  Suggesting stratospheric taxes for the super rich, ignoring behavioural economics and the science of incentives, is crazy stuff.  Demanding a re-balancing of the wealth distribution, while campaigning against increased taxes, is similarly mad as a box.  But on RTE's The Week in Politics show last night, he said something simple and interesting.  To paraphrase, he said "the fiscal treaty is intended to save the Euro.  The Government say we have no option but to say yes, because otherwise we would have no access to money, and therefore our economy would collapse.  But if we collapse, then the Euro collapses, so Europe won't let that happen."

He's right, of course.  All of this is smoke and mirrors, designed to avoid the reality of Europe's crisis.  The Euro project has failed, and everything that the European political leadership has been doing for the last three to four years has been designed to delay the inevitable, in order that each domestic government can put in place the necessary structures to offset the impact of its inevitable termination. It's not a completely negative picture, of course.  Growth in global markets would provide the tools for a possible escape, at least until the next crisis. But growth has been sluggish, and even Chinese growth has slowed, with some fearing a hard landing there.  And even if growth were to come back, the weakness in the Euro structure - essentially that currency union cannot be divorced from political union - will not be easily overcome.

There are two ways to fix the problem.  The first is to scrap it, take the short term pain (two to three years) of the correction, and start again.  The problem with this is that most governments in Europe would likely fail, there would quite possibly be social unrest, even some attempted coups d'etat, and inevitable damage done to the EU.  Whatever about looking for growth, it would be likely that we would see contraction, and stagflation.   The global economy - denuded of one of its two key markets - would see recession again, and things would generally speaking be very bad.  Banks would be exposed as defaults on everything from car loans to soverign bonds accelerate, and the holes created by excessive asset leveraging over the past ten to fifteen years would cause them to collapse in on themselves.  Weeping and gnashing of teeth indeed.  On the other hand, it would force a correction over a relatively short period of time, and a re-boot of the European economy.  We would in effect have something akin to a blank slate, upon which we could begin anew, though like I said, not without a lot of pain.

The second way to fix the problem is to combine austerity and "bridging bonds" with a fundamental restructuring of the Eurozone Fiscal Architecture.  This, over a long period of time, would see Europe remodeling its management structures through deep relationships between the countries.  Those who over-extended themselves - Ireland, Greece, Spain, Portugal, Italy - would need to correct their spending.  In return, those who were more cautious - Germany, emmm... - would underwrite their current accounts during the period of the correction.  (At the same time Germany demanded the support of the IMF in order to offset the domestic impact, which would otherwise have been too much for German domestic politics to bear)  The Fiscal Compact Treaty is the first major instrument in this; Lisbon went some way, but was framed at a time when none of these problems were seriously considered.  There will be others coming down the line - on tax harmonisation (the elephant in the room), bank regulation, auditing and monitoring, and hardening ever more the penalties and disincentives for fiscal recklessness.

Scrapping the Euro may seem like a much more chaotic solution, and a less elegant solution, and in many ways it is.  It won't happen because Eurozone leaders decide that it's the best course of action - they all think it would be awful (as do I, in many regards, as a good mildly socialist European).  It will happen because events take it out of their control.  A euroskeptic government takes office in France, or Holland - both of these events would be damaging, though not fatal.  All countries can still be expected to act with rational self-interest, and therefore can be brought onside.  Should Ireland vote no on the Fiscal Compact, it would need to be managed; as a small country, the cost of managing Ireland should be relatively small, and the integrity of the Eurozone can be protected.  Even if Spain was priced out of the bond market, there appears to be enough support there at this point to bail her out.  Just about.  But should any of these things happen together, then the decision to scrap the Euro may well be taken out of their hands.

For Ireland, unfortunately, there is only one choice.  She is already substantially feeling the pain of a Euro implosion.  There is a massive correction alongside great austerity underway.  While Foreign Direct Investment remains encouraging, unemployment rates are still enormous, and showing little sign of easing.  It appears that should Ireland continue to support the strategy of the Eurozone, that Ireland would continue to suffer for an indefinite period of time, without control of its own resources, the same as Spain, Portugal, Italy and Greece.  Not only that, but the Eurozone project is highly unlikely to succeed anyway, given the precariousness of its position.  Saving the Euro remains preferable, but is this country willing to see ten to fifteen more years of pain and suffering in the hope that they might pull it off?  And then, at the end of it all, see even more disaster if and when it does indeed fail?

Voting no on May 31st will tell Europe that Ireland has had enough.  Just like France is doing through Hollande, like the Netherlands are doing, and like the Bond Markets have been doing for some time in Ireland, Portugal, Greece, and more recently Italy and Spain.  And we will take the consequences.  Europe must face her demons, however painful that might be.