A Lucid Statement of the Greek-Eurozone Conundrum

Not everyone in international law is quite so fascinated as I with CDS spreads on Greek sovereign debt.  However, the issues raised by the Greek debt difficulties and the urgent discussions in the Eurozone over a possible bailout, attendant moral hazard, and the like are far more than merely fiscal or monetary questions.  Rather, this crisis is one of those instances in which the deep economic and financial problems directly reflect the questions of founding political design.  Political economy in its purest sense.  Regardless of what one thinks the right policy for the EU, Germany, Greece, and others, is at this moment, economist Otmar Issing’s Financial Times comment today (Tuesday, February 16, 2010) lays out a lucid statement of the foundational political issue of monetary union without political (or fiscal) union:

It seems that quite a number of observers have forgotten what Emu is, and what it is not. The monetary union is based on two pillars. One is the stability of the euro, guaranteed by an independent central bank with a clear mandate to maintain price stability. The other is fiscal solidity, which has to be delivered by individual member states. Member countries are still sovereign. Emu does not represent a state; it is an institutional arrangement unique in history.

In the 1990s, many economists – I was among them – warned that starting monetary union without having established a political union was putting the cart before the horse. Now the question is whether monetary union can survive without such a political union. The current crisis must be handled in such a way as to produce a positive answer. The viability of the whole framework – nothing less – is at stake.

By joining Emu, a country accepts its rules. Greece, moreover, also knew that adopting a stable currency that was not controlled by its own central bank implied a total break with the past. Devaluation of the national currency and an inflationary monetary policy were no longer options. A single monetary policy is implemented by the European Central Bank and it is the responsibility of each country to adjust its economic policies so that this one size fits all.

The fundamental political problem is a collective action problem – the “responsibility of each country” to adjust its fiscal policies to comport with a single monetary policy.  The collective benefits, including those enjoyed by Greece, of a single monetary union with a currency widely trusted are enormous, starting with a lowering of borrowing costs – lower costs of which, however, could have been used either to lower public debts to put/keep Greece in line with the levels of fiscal policy of the monetary union, or leverage the savings to borrow ever more.  Greece promised the former and went for the latter:

The benefits of joining a stable economic area are greatest for countries that were unable to deliver such conditions before. Thanks to the euro, Greece has enjoyed long-term interest rates at a record low. But instead of delivering on its commitment at the time of entry to reduce public debt levels, the country has wasted potential savings in a spending frenzy. The crisis with which it is now confronted is not the result of an “external shock” such as an earthquake, but the result of bad policies pursued over many years.

I myself believe that the sanitized language of economists on display here hid, below a veneer of sense, a much more palpable ‘sensibility’ of “spend” that went with joining the monetary union.  It isn’t just that Greece and its public saw an opportunity to free-ride on the euro.  I’d say (from experience in Spain and other poorer countries of the “old” EU) that joining monetary union was seen as joining the lifestyle of the richest countries in the EU.  It was a powerful behavioral signal toward living like northern Europe, not toward seeing virtues in lowering the borrowing costs of the public fisc.  My strong impression of what many Spaniards in traditionally poorer parts of Spain thought the EU meant, when I lived there on sabbatical in the mid 2000s was that to “be European” mean to have a “European” lifestyle, based on a Euro income.  And, moreover, that the reason why the EU showered particular regions of Spain with money for so many years was not simply in order to promote economic development or political stability – both of which it did – or to purchase regional loyalty to the EU even over national solidarity – it did that, too – but, from the inhabitants’ view, to make them “European,” which meant, ultimately, to consume like Europeans were supposed to, and did, even if it was financed on debt-fuel.  This is another of those instances in which the sensibility – even though hard to document and measure – is hugely important and perhaps as important as the economic sense.

The EU is, from the standpoint of this sensibility, about equality, and it is unjust that there should be rich regions and poor regions.  Again, from the standpoint of this essentially EU citizenship=consumer sensibility, if you didn’t intend that the EU should be gradually moving not so much closer to political union as egalite, then why on earth did you create a euro, the point of which, from a consumer standpoint, is to put everyone on an equalized playing field?  I realize this sounds strange from the standpoint of economic sense, but that’s not what I’m talking about.  The great sociologist Zygmunt Bauman once remarked, in an essay in Telos in the late 1980s, that the fundamental condition of poverty in our age is not that it is a class as such.  It is that to be poor is to be a “flawed consumer.”

The euro, understood from this sensibility, took poor people who were poor because their countries were poor – a status that described whole national societies – and made them poor people within a unified social environment in which their poverty was no longer the condition of the country, but rather them as individuals who, within Europe, were now “flawed consumers.”  Small wonder, as a matter of sensibility if not sense, that they concluded that the point of the euro was to make them … not poor.  Small wonder that their governments responded in kind.  Which is why the conclusion of this FT article, so economically sensible, lucid and compelling – it gets my complete agreement as a matter of policy – misses the fundamental point from the standpoint of euro-sensibility.

This moment is a turning point for Emu, and for the future of Europe. Most observers point to the high risks – which cannot be denied. However, any crisis also presents an opportunity. This is a big chance – probably the last for Greece, and others – to adapt fully to a regime of stable money and solid public finances.

For Emu, the crisis represents a final test of whether such an institutional arrangement – a monetary union without a political union – is viable for an extended period of time. Lax monitoring and compromises when it comes to observing implementation of rules have to stop. Emu is a club of states with firm rules accepted by entrants. These rules must not be changed ex-post. Governments should not forget what they promised their citizens when they gave up their national currencies.

From the point of view of the sensibility of citizens who define themselves as citizens of the EU – at the Union’s own urging – as consumers, identifying “with” the European Union on the basis of the solidarity of consumption, Greece has not forgotten in the least what it promised its citizens in joining the euro.  It promised to deliver them from the condition of merely “flawed consumers” among the wealthy of northern Europe.