Inequality and The Demise of the Euro

This is not going well.

The coalition negotiations in Germany appear to have stalled on the question of whether Chancellor Merkel will authorize further European capital (read: German capital) for Irish banks.  Further more, the SDP is trying to force Ireland to raise its corporation tax rate, an incentive that has diverted investments away from the rest of Europe in key areas such as the Internet and Biotechnology.  This is not the first time that Germany has taken on the appearance of a reluctant bully in Europe, forcing itself on the weaker nations who are not deserving of its largesse.  It is of course symptom, not cause, and the true reason for the current difficulties – perpetuated now for five years or so – is the structural failure of the European project to manage economic diversity.

There is some great wealth in Europe, concentrated in pockets such as the Ruhr valley, Northern Italy, Southern England, and other places.  Big industries such as auto manufacturing and pharmaceuticals employ hundreds of thousands, while financial services help to facilitate the trade of those products all over the world.  The wealth, however, is poorly distributed if we consider the wider context.

Think of the UK, for example.  It has its own great wealth, yet it has desperately poor people in the regions. Northern England, Northern Ireland, and Wales in particular, and even Scotland, notwithstanding the great North Sea oil and Military facilities there, have nothing on the luxury and wealth that one sees in and around London.  Representative democracy seeks to redistribute the wealth, but wealth is sticky.  If there is perceived excess wealth in Westminster, for example, then the job of the Newcastle MP is to relieve Westminster of some of that wealth – through the tax system – and place it in Newcastle. The wealth in Westminster will do all it can to stay, and so while there is some leakage, the preponderance of the wealth remains.

This appears to be common in most capital cites, and is a trend that has appeared to accelerate as the World has modernised, and urbanised.  Balanced development is a way to counteract that.  Locating new investments in underdeveloped areas ultimately re-balances the wealth within a country, but it is a hard thing to get right.  Inequality is inevitable, it is everywhere in the way we try and organise ourselves.

Most people, and most peoples, recognise and accept inequality.  We accept that there are elites, that there are people who are better off by birth, and that there are people even who are better off by genes.  The heritability of intelligence, for example, remains high, and while political rhetoric may laud the equality of man, that has been interpreted more recently to mean equality of opportunity, rather than of our gifts.  Warren Buffet has said that, had he been born in Bangladesh, he would be poor today, that life is determined by accident of birth. There are many aspects to that – gender, race, parents – and not just location.  But two men of more or less equal gifts, one born in Bangladesh and one born in New York, will have different opportunities, and different outcomes.  Unless, that is, the Bangladeshi man moves.

This is at the heart of Europe’s problem.  There is a single currency, without political union; countries, rather than regions or constituencies, have unequal representation in fiscal negotiations because of their unequal wealth.  In turn, their capacity to defend that wealth is disproportionately high.  This, by extension, is bad for weaker, poorer countries, who are weaker or poorer because they are remote, peripheral, and not possessed of the mineral or resource wealth of the more affluent states.

The crux of the German problem is an insistence that the country should be no poorer for its European association. If by association with Europe some of Germany’s success should improve their lot, then that is fine. The truth of the matter, of course, is that in the short term at least, Germany, and the richer countries, must contribute to a program of balanced development if they are to benefit in the long run from a stabilisation of the immediate environment.  That’s hard to do.  The long run, in this case, is likely decades away.  In the long run, as John Maynard Keynes famously declared, we are all dead.  Politics struggles with such ambition.

It has to be said that this is not a problem with Germany, or with Germans, any more than it is a problem with Greece or the Greeks.  It is tempting, and intellectually lazy – not to mention historically dangerous – to stereotype one nation as either industrious or lazy, frugal or spendthrift.  These are socio-political structural problems that have to do with scale and geography.  The three largest countries on Earth – China, India and the USA – were constructed through conquest.  Europe is attempting to construct a country through consent, having failed on numerous bloody occasions to do so through conquest.

I am generally an optimist in my private life, but I am pessimistic in international affairs.  I cannot see a way out of this crisis for the Euro.  It has had near death experiences several times in the last five years, like a cat with many lives.  That does not go on forever.  My country, Ireland, needs to choose its time of exit, rather than have exit visited upon it; the hardship will be difficult to bear, and the world may find itself plunged once more into recession.  But just as Germany insists on defending its interests, so too must we.

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