A misbegotten Union – Guest post by Lorenzo

By skepticlawyer

[SL: it is now compulsory, in order to practice in either England or Scotland, to study European Union Law (I managed to evade it at Oxford, just), which I suspect is misconceived, at least on the part of those who rather like the European Union. It exposes the bones of an organisation so badly run that one is put in mind of what would happen if one ran a community association the same way: a Rugby club, say, or Rape Crisis Centre. No rugby would be played and no women in need would be helped, but a great number of busy meetings where everyone has to agree would be held, and that’s about it. 

I have never been on the Euroskeptic wing of the Tory Party, so discovering how bad it is, is rather shocking. It has suited us all to laugh at the Common Agricultural Policy and shake our heads at the Euro, but the latter is now so big and so broken that the capacity of anyone in Brussels to make a decision about anything of greater import than how many rolls of stickytape should be purchased for the European Parliament is now routinely called into question.

It is also interesting to encounter people on all sides of politics — including SNP supporters — who recognise that if Scotland becomes independent and remains in the EU, it will be a simple case of exchanging one behemoth who wants to bugger with our legal system for another. 

The Euro, of course, is the biggest and saddest story — and the reason I know next to nothing about the ongoing difficulties faced by La Gillard and the Australian Labor Party. It is only through Legal Eagle and Mark Bahnisch that I have learned a few scraps. Here is Lorenzo (his bloggy home is here) on the Euro; he has helpfully put all the information you need in the one place.

Read it and weep.

Lorenzo’s piece is over the fold.] 

The people who supported the Euro, and particularly UK entry into the Euro, were wrong. Not arguably wrong, not partially wrong; just flatly, unequivocally, completely wrong. Rarely in the history of public policy has one side in a public policy debate been so swiftly, and so comprehensively, vindicated.

A tale of two islands

The debacle is so complete that citing specific evidence seems unnecessary but we merely have to compare Iceland with Ireland. Iceland decided that a small island of 320,000 people had some niche advantage in grand finance. It was hubristic nonsense that went horribly wrong. But Iceland had two saving graces in the disaster. First, it realised that it was far too small to guarantee the banks and did not do so, thereby failing to saddle its taxpayers with enormous liabilities. Second, it was not in the Euro so could let its exchange rate reflect the change in its economic circumstances.

Contrast this with Ireland. The “Celtic Tiger” bought into the nonsense that is land-rationing and suffered the normal penalty of land prices surging way beyond likely income returns as expectations of capital gain fed themselves, helped by cheap credit. (I say ‘land prices’ because houses are large decaying physical objects, it is the land a house is on which shoots around in value.) When it all came tumbling down, the Irish Government made things worse by guaranteeing the banks (who therefore had much less incentive to change behaviour or fix their own problems) saddling the hapless Irish taxpayers with huge liabilities. Ireland was also stuck with the Euro, so could not let its exchange rate reflect the change in its economic circumstances, thus becoming a test case in exactly what was wrong with the Euro. Hence Ireland’s drop in employment has been considerably worse than Iceland’s.

Looking at the graph of 2007 to 2010 changes in employment for OECD countries, Australians can note what a different place we have been in compared to the US and most of Europe: for us, the Great Moderation is still going (particularly clear if you move the start year back to 1959). While any Australian who has been paying attention over the last 30 years can appreciate the useful role of a floating exchange rate as economic “shock absorber”. That is what countries in the Euro now lack.

ECBing downwards

The European Central Bank (ECB), with its trumping focus on maintaining price stability, has made things worse. The point of the Euro was, in effect, a deutschmark-for-everyone, just sign up. The ECB has pursued a policy that makes some sense for the German economy and no sense for anyone who is not. In a weird historical resonance, the ECB is playing a similar role in our period of the Global Financial Crisis and the Great Recession that the Bank of France did in the 1928-1932 period (pdf): driving down expectations of the path of money supply and spending, so having a depressing effect on economic activity—just the thing to make a debt crisis worse (pdf).

Once as tragedy, then as farce

In another weird historical resonance, while many Americans seemed to have thought they were electing a new FDR, what they ended up with is a new Herbert Hoover—someone with a high reputation for intelligence and energy, willing to break from the “stale” patterns of the past, who engages in a lot of activity (pdf) which is either pointless or actively counter-productive while failing to pay attention to the Fed’s disastrous monetary policy. Kevin Baker offered the Obama-as-Hoover analogy early but it is now in some danger of becoming conventional wisdom.

The historical resonances continue, as the Fed has engaged in a mix of passive (and not so passive) monetary tightening intermixed with feeble and temporary easings—the net effect being to drive down expectations of the path of money supply and spending, which encourages people to hold onto money, given falling inflation and economic activity expectations, causing a downward spiral in transactions, pushing the US economy well below its trend growth path. Yet people babble on about inflationary risks, just like the 1930s. (Alas, much of the economics profession seems clueless, the key central banks seem to be running on myths, worrying about inflation is popular, though misguided, even as financial markets have very low inflation expectations, which is not helping asset markets while international prudential bank regulation is set to make things worse.)

Euro nausea

As the Euro disaster unfolds, it is worth remembering what is at stake. There are more Euros (banknotes and coins by value) in circulation than US dollars. The Euro is the second largest reserve currency and second most traded currency. The question increasingly becomes, not whether Greece will default, but where the process of default will stop and how much of the financial system is at risk of collapsing as sovereign bonds fall to, and then beyond, “junk” status. With the IMF issuing serious warnings about the global implications. As does George Soros while the co-author of the classic study of financial panics This Time is Different: Eight Centuries of Financial Folly thinks the situation is (fairly but not absolutely) dire.

Now, it is true that Greece is a deeply fiscally dysfunctional polity. But that is the point: Greece should never have been part of a common currency with Germany. There was simply never enough economic commonality among the members for the thing to work (a problem expressed nicely here). But, here’s the thing: the attempt to do what could not be done made things worse. This is not a crisis that the poor Euro got caught up into, this is a crisis that not only has the Euro made worse, it is one that it (and especially the ECB’s management thereof) did a significant amount to cause.

Eurotrashing

Given the scale of the looming disaster, it is understandable that those so thoroughly vindicated in their opposition to the Euro might engage in a bit of gloating and finger pointing. But they have something to gloat about and there is plenty of finger-pointing worth doing.

In the way supporting the Euro was treated as what the “good people” did, with only fools and cranks opposed, we can see starkly the problems of cognitive conformity. There is considerable social science support for the proposition that cognitive conformity leads to bad decision-making. The conformity acts to limit the information available, or used, and the questions asked. If the conformity becomes a matter of mutually supporting status based on marker-opinions (“good and clever people believe x, stupid and wicked people believe y”) then the effect is magnified. Supporting the “European project”, in all its harmonising glory, has long since become what “good people” support and only mad folk and cranks (or worse) oppose or seriously criticise; so even the questions, let alone facts, that the “wicked” opponents cite are to be dismissed. There has even been a certain amount of EU “harmonising” of debate, with lots of Euro-subsidies for NGOs with “useful” opinions and advocacy roles.

It is important not to exaggerate the degree of prescience in those who thought the Euro a bad idea:

Even those of us who thought the Euro was a bad idea didn’t really know it was such a bad idea. If we had really known it would end this way, we could have presented overwhelming evidence in a convincing enough manner to have been able to persuade everyone else it would end this way. And we couldn’t do that. So we didn’t really know it.

A nice statement of Euro-scepticism was provided by Milton Friedman in 2000 (pdf: Pp9-10):

I think the Euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it.
… the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks—and the ?oating exchange rate gave them one. They have no mechanism now. If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles.

Which it spectacularly has. Citing Milton Friedman’s low probability of success would have been sneered at by many of the Euro-virtuous. Yet his skepticism has proved justified and their self-satisfied confidence very not.

The good bits

There is much to admire in the European project. After two disastrous megacidal wars in 30 years, trying to transcend past enmities, and build a common prosperity, is and was deeply worthy. The insistence on being a democracy if one wanted to join “Europe” has done much to strengthen the democratic impulse. The European project has been a very useful means of integrating former Soviet bloc countries back into a (free and democratic) European mainstream.

The bug which is a feature

And yet, there is the democratic deficit, the mad bureaucratic “harmonising” and the unfolding Euro disaster. None of which is remotely necessary to achieve what is genuinely worthy in the European project.

But the democratic deficit, and the consequent inadequate accountability of EU institutions is not a bug, it’s a feature: it is a direct result of the European project’s justifying analysis that the great problem of modern European history is nationalism, so a European identity has to be constructed to replace nationalism. Since nationalism is a popular sentiment, popular sentiment thereby becomes “the” problem. Creating institutions that are not directly accountable to such deficient popular perspectives is at the heart of the European project. The “you keep voting until you get it right” referenda are just a particularly blatant manifestation of the notion that nationalism, which is to say popular sentiment, is the ultimate problem.

As an analysis of the problems of European history, it is crap. (When it is used to wield the example of Auchswitz against the Jewish state, it is repellant crap.) Europeans have slaughtered each other for national reasons: they have also done so for ideological reasons, racial reasons, religious reasons, class reasons. If the problem is reasons to kill each other en masse, there is nothing distinctive about nationalism. (The related “imperialism as racism” analysis is also crap: one cannot find any viciousness that Europeans have done to non-Europeans that they have not also done to other Europeans, often more often and more comprehensively. Slavery and imperialism were not caused by racism, they generated racism as rationalising justification; a way of getting around any difficulties with moral universalism, just as cartelising social benefits generated notions of Jewish blood impurity.)

The great problem of C20th European history was not nationalism, the great problem was unaccountable power. 1914-1919 was the Dynast’s War, as the ruling elites of the Habsburg, Hohenzollern and Romanov Empires sought to maintain their power and authority against the threat of popular aspirations via military success. 1939-45 was the Dictator’s War, as Hitler and Stalin used military power to seize territory according to radically incompatible visions.

“Solving” the problem of European history by creating yet another structure of unaccountable power is not a cure, it is more of the disease.

The British example

Even taking the European project at its public face, the original purpose was to envelop competing nationalisms in a common European non-ethnic identity: which is to say, a new European patriotism. Ironically, the strongest example of this was denied entry at first: the United Kingdom, where a British patriotism attempted to encompass (with varying degrees of success) English, Welsh, Scottish and Irish identities.

The separation of Eire from the United Kingdom, and the revival of Welsh and Scottish nationalism, might well give one pause, given that England and Wales have shared a common monarch and Parliament since 1284 (though the English monarch’s suzerainty dates back to 1163); England and Ireland a common monarch since 1542 (though the suzerainty of the English monarch over large areas of Ireland dates back to 1171); England, Wales, Ireland and Scotland have shared a common monarch since 1603; England, Wales, and Scotland, a common Parliament since 1707; the entire British Isles a common Parliament from 1801 to 1922. All in all, this is a far longer and deeper shared institutional history than the Common Market-come-European Union.

As an aside, Welsh and Scottish attempts to undermine any sense of a common British identity and patriotism could turn out to be a dangerous game, since the English still greatly outnumber them and have never been comfortable neighbours. When backed into a corner, or otherwise seriously frightened or annoyed, they have proved repeatedly to be an angry and vengeful people (think Cromwell in Ireland, Cumberland in the Highlands, starving the Second Reich into defeat and then the new Weimar Republic into submitting to the Versailles diktat, bombing Nazi Germany flat): a cultural trait the Americans have inherited. (If jihadis ever do engage in nuclear terrorism against a US city or cities—even given that there may be good reasons such nuclear terrorism has not happened, yet—the “lose two buildings, take out two countries” response will seem a nostalgic period of restraint compared to what a seriously angry and frightened superpower is likely to do: a highly readable, if dystopian, fictional rendition of such a scenario is Tom Kratman’s military SF thriller Caliphate.)

Even merely in terms of creating a common European identity there are clear problems, as Michael Lind points out regarding the “global patriotism” of secular humanism:

Abrahamic monotheism insists on the brotherhood of man under the fatherhood of God. Darwinism insists at best on the distant cousinhood of humanity. Among humans, nepotistic solidarity can be transferred, with difficulty, to political units larger than the extended family. But national patriotism is much harder to promote than city-state patriotism, and global patriotism may be a bridge too far.

British patriotism proceeded on the basis of enforcing a common language (and hence common cognitive map [pdf, p.9]). A putative European patriotism does not even have that.

Pride going before a fall

Worse, the European project has, from the beginning, been an elite enthusiasm a key selling point of which is a sense of being a member of a moral and cognitive elite. This putative European patriotism is very much an elite patriotism, a mechanism to define oneself as a member of the (virtuous) elite; someone separate from, and superior to, the “vulgar” masses. Hence all the elite “harmonising” games, of which the euro “currency-harmonising” is just the latest and greatest (disaster).

Not a good basis from which to engage the designated “vulgar” masses. Particularly where it involves systematic discounting of their “vulgar” concerns. And, as the voting increasingly shows, said masses have noticed and increasingly resent it (which extends well beyond German voter resentment over the Euro bailouts).

Besides, an elite is as an elite does. The euro crisis has been one long pattern of too little, too late as Eurozone governments struggle to agree. Facing the reality that any successful plan is going to involve debt write-downs has been too hard, though things are apparently now moving that way, with the banks unsurprisingly opposed. Germany is up for expanding the bailout fund but Slovakia has to agree.

Ambrose Evans-Pritchard puts the case with mordant humour:

The only plausible option is for the ECB to let rip with unsterilized bond purchases on a mass scale, with a treaty change in the bank’s mandate to target jobs and growth. This would weaken the Euro, giving a lifeline to southern manufacturers competing with China. It would engineer an inflationary mini-boom in Germany, forcing up relative German costs within EMU. That would be the beginning of a solution, albeit a bad one.
Sorry Deutschland. History has conspired against you, again. You must sign away €2 trillion, and debauch your central bank, and accept 5pc inflation, or be blamed for Götterdämmerung. It is not fair but that is what monetary union always meant. Didn’t they tell you?

The same notion has been expressed rather more sedately by John Lancaster:

During the 21st century, the greatest danger to European stability is Germany’s reluctance to accept its special destiny. If the German taxpayer manages, however grudgingly, to accept that it’s her duty to shoulder the burden, the Euro will muddle through. But it won’t be pretty.

I think the idea is wrong, for the reasons Milton Friedman cited—this is not a “one off” crisis, it is the failure of a misconceived currency union. (Ambrose Evans-Pritchard at least wants to break the Eurozone into its Teutonic and Latin halves. As it is, the Euro is plausibly characterized as a doomsday device.)

Not that those outside the EU should sneer too much. Elites throughout the Western world have shown enthusiasm for the global export (and thus domestic importing) of the democratic deficit via “internationalisation”. While Australian federalism has increasingly been corrupted by the use of the “Brussels model”, where the Council of Australian Governments (COAG) agree on policies by processes that evade democratic accountability through “common agreement”. The Brussels model is very attractive in its lack of accountability sold via a sense of being members of a virtuous elite united in noble purpose. Which makes the Euro debacle a warning that extends even beyond its possible economic implications.

For the Euro debacle is not some mysterious affliction, it is a failure that arises directly from precisely what is wrong with the “actually existing” European project: inadequately accountable institutions engaged in projects which fit elite convenience and sense of status while ostentatiously dismissing critics. The Euro failure is the failure of self-satisfied, insular and hubristic elite networks whose level of self-satisfaction is directly connected to their collective ability to ignore the inconvenient; to what Clive James called, in a different but similar context, “inexhaustible resources of inattention”.

But what is the European project without that motivating sense of elite superiority? A European, democracies-only WTO? Which would be worthy, but not nearly so elite-useful. The Euro will be a double failure if this prolonged debacle still leaves European elites hiding behind their own self-satisfied hubris.

17 Comments

  1. Posted October 12, 2011 at 7:15 am | Permalink

    Kvd: in the words of a British comedian: You’re a bad man but I like you.

  2. Posted October 12, 2011 at 10:03 am | Permalink

    Now the euro has brought down a Government in Slovakia, and the Greek bailout is back for another round of negotiations.

    As Nick Rowe has pointed out, the lack of a lender of last resort is proving a problem.

  3. Patrick
    Posted October 12, 2011 at 12:27 pm | Permalink

    Or the Slovak could say, I’m already pretty fucked, I’d rather completely fuck you in the prospect that my kids might not be so fucked?

  4. kvd
    Posted October 12, 2011 at 12:35 pm | Permalink

    Blog Admin: how come Patrick gets to use such fruity language when the other day on the maps thing I used b-gger in an entirely acceptable Australian colloquial sense and got binned?

    Or do you also grade on artistic merit? 😉

  5. Patrick
    Posted October 12, 2011 at 12:48 pm | Permalink

    obviously the latter 😉

  6. kvd
    Posted October 12, 2011 at 1:31 pm | Permalink

    [email protected] well that’s alright then. So long as you are following the normal rules of human existence I have no problemo 🙂

  7. Posted October 23, 2011 at 11:45 am | Permalink

    Market Monetarist bloggers have just about universally praised Clark Johnson’s short and accessible paper taking apart six myths about (US) monetary policy in the current debacle.

    I agree, it is required reading if you want to understand our current circumstances.

  8. Posted October 23, 2011 at 12:06 pm | Permalink

    Getting back to the eurozone, this excellent guest post by Henry Kaspar explains how important economic adjustment is.

    If you reduce your unit labour costs, investors conclude you can grow out of your debt problems and your borrowing costs fall (Ireland, and to a lesser degree, Spain). If you do not, they get nervous and your borrowing costs rise (Portugal and Italy).

    Sclerotic, massively over-regulated labour markets are at the heart of much of Europe’s problems. They make having children more expensive (since women’s capacity to work and raise children is greatly reduced), reducing fertility rates helping to create seriously adverse demographics. They waste human resources, driving down revenue and up welfare expenditure. They encourage Muslim alienation.

    But protecting job-incumbents (including government bureaucratic job-incumbents) remains the political winner, so European labour markets mostly continue to be over-regulated disaster areas.

  9. Posted October 30, 2011 at 11:34 am | Permalink

    The euronews is getting surreal. Now we have the notion of Chinese eurobonds.

  10. Posted November 30, 2011 at 2:02 pm | Permalink

    Intrade has the odds of at least one country exiting from the euro hovering around 50%.

  11. kvd
    Posted November 30, 2011 at 2:29 pm | Permalink

    Intrade has the odds of no country exiting from the euro hovering around 50%

    I love alternate interpretations 😉

  12. Patrick
    Posted November 30, 2011 at 3:14 pm | Permalink

    sure, kvd, but if you read that back to yourself it isn’t exactly an optimistic statement!!

  13. Posted November 30, 2011 at 3:14 pm | Permalink

    [email protected]

    Intrade has the odds of no country exiting from the euro hovering around 50%.

    Not a great endorsement of a solid future either way 🙂

  14. kvd
    Posted November 30, 2011 at 3:37 pm | Permalink

    if you read that back to yourself it isn’t exactly an optimistic statement!!

    Patrick, after months of despair, gloom, and the sky is falling, I find it amazing that the ‘positive’ spin I put on it could be so high. And if you look deeper into Lorenzo’s Intrade reference you will also see markets quoted on “by Dec 2012, one of Greece, Portugal, Ireland, Italy will default” – or words to that effect, (maybe Spain was in there too). The “chances” are somewhat low; ranging up to 10%

    Conclusion: who knows? Lorenzo’s “not a great endorsement” is absolutely correct, but that’s all that can be reliably said, imo 😉

  15. kvd
    Posted December 1, 2011 at 4:16 pm | Permalink

    China has come to the rescue. A G20 behind the scenes agreement creating absolute pandemonium in the markets – “announcement was delayed as leaders dealt with more pressing matters”.

    (and ps, and by the way, Lorenzo’s intrade helicopter has reduced altitude to 46. ) 🙂

  16. Posted December 3, 2011 at 8:19 am | Permalink

    [email protected] So, the Chinese are finally pandering to the French 🙂

    This post explains the eurozone crisis in 8 graphs. The various levels of debt indulgence are quite clear. The ECB’s tight money, so tight spending, so tight income, policy is a bit less so.

2 Trackbacks

  1. By Skepticlawyer » We’re on the radio… on October 15, 2011 at 10:06 pm

    […] week, we published Lorenzo’s cracker of a guest post on the slow demise of the Euro, and someone at ‘Aunty’ ABC must have noticed, because […]

  2. By Bits and pieces « thiacassidy on May 1, 2012 at 8:33 pm

    […] European law on defamation, privacy and other such things. On animals and property rights. On the euro (the writer at the time was a guest poster, but has recently been added as a permanent writer.) On […]

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*