A Note on #Grexit

(from The Telegraph (UK))

With the Eurozone crisis in full swing, and ‘Grexit’ now seeming inevitable, the differences between France and Germany seem stark. In particular, the position of Germany appears to have veered significantly from the position it had taken at least in the aftermath of unification, and certainly at the time of the Maastricht Treaty. This is troublesome on many levels, not least the inevitable parallels that will be drawn between a belligerent and newly assertive Germany, and its inter-war counterpart.

The Germans are insisting on fiscal discipline. They are content that they can weather the immediate losses from Greek default, and that the Euro as a currency project can survive.  They are also of a mind that they can bolster the Euro by effectively laying down a marker to other possible dilettantes. This has two problems.  First, who are they to decide? Why is their country more righteous on debt controls than the others? As Irish economist David McWilliams put it today, the generation of then-three-year-old Wolfgang Schauble got a shot at redemption because of post-war debt forgiveness in Germany. This is the moral hazard argument. Second, there are far more fundamental problems, as Milton Friedman presciently pointed out in 1997. This project is not merely about economics, it is fundamentally about politics. Fiscal discipline is really, really good economics; in this context, however, it is really, really bad politics. You have to expect that at any time in the future, there will be weakness.  There will be inequality. The systems and the structures require that the rich, strong countries continue to support them both directly – through net contributions to the EU – and indirectly, through the socialisation of unequal economic distribution.

The French, on the other hand, insist that the integrity of the Eurozone be maintained. They are far more lenient, it appears, though one could cynically argue that their erstwhile broad alignment with the Germans may have been abandoned in the interest of domestic politics, making a bet that the strength of the German imperative was at this stage irresistible. Still, taken at face value, the French position seems far more Monnet, and far less Merkel.

Germany agreed to the Euro project in the negotiations around German reunification after the fall of the Berlin Wall in 1989. Their European colleagues remained at that stage strong in their wariness of a resurgent Germany. This whole European thing, after all, was designed to avoid the unpleasantness of the early twentieth century.  Currency union, it was argued, would force greater political union. The neoliberals of America may have been a little off on many things, but the democratising effect of trade was at least something we could all agree on. The unifications of capitalism, capital, and trade could only have a galvanising effect on the members. This was certainly true. But the position from which they started – even ten years after German unification – was still a long way from a United States of Europe.  Our counterpart in the USA – as the recent controversy over the Confederate flag has shown – retains to this day issues in terms of true union. There even remain issues about whether United States should be referred to in the singular or the plural! But it has for some decades now – perhaps since the great crash of 1929, and certainly since the Second World War – had sufficient integrity to support a common currency. Europe did not, and does not; that much is now clear.

The real danger is what happens next. The exit of Greece from the Euro could foreshadow a European reaction to Germany, and Merkel’s leadership of Germany. That could have a far more damaging effect on the Union – not just the Euro – than the simple removal of Greece. Europe, weakened, could be damaged still further, in which circumstances Germany may be forced to act unilaterally in defending its interests. Russian encroachment on its interests in Eastern Europe, economic threats from North African and middle-eastern refugees, and terrorist threats from increasingly mobile jihadis all threaten German and European prosperity. The more pronounced those threats become, the more likely Germany is to act unilaterally, and the more likely the Union is to deteriorate. And ISIS and Vladimir Putin know that all too well.

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