Democratis­ing the Eu­ro­zone

“The last five years of eco­nomic pol­i­cy­mak­ing in the eu­ro­zone have been a re­mark­able com­edy of er­rors”

Financial Mirror (Cyprus) - - FRONT PAGE -

Like Mac­beth, pol­i­cy­mak­ers tend to com­mit new sins to cover up their old mis­de­meanours. And po­lit­i­cal sys­tems prove their worth by how quickly they put an end to their of­fi­cials’ se­rial, mu­tu­ally re­in­forc­ing, pol­icy mis­takes. Judged by this stan­dard, the eu­ro­zone, com­pris­ing 19 es­tab­lished democ­ra­cies, lags be­hind the largest non-demo­cratic econ­omy in the world.

Fol­low­ing the on­set of the re­ces­sion that fol­lowed the 2008 global fi­nan­cial cri­sis, China’s pol­i­cy­mak­ers spent seven years re­plac­ing wan­ing de­mand for their coun­try’s net ex­ports with a home­grown in­vest­ment bub­ble, in­flated by lo­cal gov­ern­ments’ ag­gres­sive land sales. And when the mo­ment of reck­on­ing came this sum­mer, China’s lead­ers spent $200 bln of hard-earned for­eign re­serves to play King Canute try­ing to hold back the tide of a stock-mar­ket rout.

Com­pared to the Euro­pean Union, how­ever, the Chi­nese gov­ern­ment’s ef­fort to cor­rect its er­rors – by even­tu­ally al­low­ing in­ter­est rates and stock val­ues to slide – seems like a paragon of speed and ef­fi­ciency. In­deed, the failed Greek “fis­cal con­sol­i­da­tion and re­form pro­gramme,” and the way the EU’s lead­ers have clung to it de­spite five years of ev­i­dence that the pro­gramme can­not pos­si­bly suc­ceed, is symp­to­matic of a broader Euro­pean gov­er­nance fail­ure, one with deep his­tor­i­cal roots.

In the early 1990s, the trau­matic break­down of the Euro­pean Ex­change Rate Mech­a­nism only strength­ened the re­solve of EU lead­ers to prop it up. The more the scheme was ex­posed as un­sus­tain­able, the more doggedly of­fi­cials clung to it – and the more op­ti­mistic their nar­ra­tives. The Greek “pro­gramme” is just another in­car­na­tion of Europe’s roset­inted pol­icy in­er­tia.

The last five years of eco­nomic pol­i­cy­mak­ing in the eu­ro­zone have been a re­mark­able com­edy of er­rors. The list of pol­icy mis­takes is al­most end­less: in­ter­est-rate hikes by the Euro­pean Cen­tral Bank in July 2008 and again in April 2011; im­pos­ing the harsh­est aus­ter­ity on the economies fac­ing the worst slump; au­thor­i­ta­tive trea­tises ad­vo­cat­ing beg­gar-thyneigh­bor com­pet­i­tive in­ter­nal de­val­u­a­tions; and a bank­ing union that lacks an ap­pro­pri­ate de­posit-in­sur­ance scheme.

How can Euro­pean pol­i­cy­mak­ers get away with it? Af­ter all, their po­lit­i­cal im­punity stands in sharp con­trast not only to the United States, where of­fi­cials are at least ac­count­able to Congress, but also to China, where one might be ex­cused for think­ing that of­fi­cials are less ac­count­able than their Euro­pean coun­ter­parts. The an­swer lies in the frag­mented and de­lib­er­ately in­for­mal na­ture of Europe’s mon­e­tary union.

Chi­nese of­fi­cials may not be an­swer­able to a demo­crat­i­cally elected par­lia­ment or congress; but gov­ern­ment of­fi­cials do have a uni­tary body – the sev­en­mem­ber stand­ing com­mit­tee of the Polit­buro – to which they must ac­count for their fail­ures. The eu­ro­zone, on the other hand, is gov­erned by the of­fi­cially unof­fi­cial Eurogroup, which com­prises the mem­ber states’ fi­nance min­is­ters plus rep­re­sen­ta­tives of the ECB and, when dis­cussing “eco­nomic pro­grammes in which it is in­volved,” the In­ter­na­tional Mon­e­tary Fund.

Only very re­cently, as a re­sult of the Greek gov­ern­ment’s in­tense ne­go­ti­a­tions with its cred­i­tors, did Europe’s cit­i­zens re­al­ize that the world’s largest econ­omy, the eu­ro­zone, is run by a body that lacks writ­ten rules of pro­ce­dure, de­bates cru­cial mat­ters “con­fi­den­tially” (and with­out min­utes be­ing taken), and is not obliged to an­swer to any elected body, not even the Euro­pean Par­lia­ment.

It would be a mis­take to think of the stand­off be­tween the Greek gov­ern­ment and the Eurogroup as a clash be­tween Greece’s left and Europe’s con­ser­va­tive main­stream. Our “Athens Spring” was about some­thing more pro­found: the right of a small Euro­pean coun­try to chal­lenge a failed pol­icy that was wreck­ing the prospects of a gen­er­a­tion (or two), not only in Greece, but else­where in Europe as well. The Athens Spring was crushed for rea­sons that had noth­ing to do with the Greek gov­ern­ment’s left-wing pol­i­tics. Time af­ter time, the EU re­jected and den­i­grated com­mon-sense poli­cies.

Ex­hibit A is the two sides’ po­si­tions on tax pol­icy. As Greece’s fi­nance min­is­ter, I pro­posed a rate re­duc­tion for sales tax, in­come tax, and cor­po­ra­tion tax, in or­der to broaden the tax base, in­crease rev­enues, and give Greece’s bro­ken econ­omy a boost. No fol­lower of Ron­ald Rea­gan would quar­rel with my plan. The EU, on the other hand, de­manded – and im­posed – in­creases in all three tax rates.

So, if Greece’s tus­sle with its Euro­pean cred­i­tors was not a left-right stand­off, what was it? The Amer­i­can economist Clarence Ayres once wrote, as if de­scrib­ing EU of­fi­cials: “They pay re­al­ity the com­pli­ment of i mput­ing it to cer­e­mo­nial sta­tus, but they do so for the pur­pose of val­i­dat­ing sta­tus, not that of achiev­ing tech­no­log­i­cal ef­fi­ciency.” And they get away with it be­cause the eu­ro­zone’s de­ci­sion-mak­ers are not obliged to an­swer to any sov­er­eign body.

It is in­cum­bent upon those of us who wish to im­prove Europe’s ef­fi­ciency, and lessen its gross in­jus­tices, to work to­ward re-politi­ciz­ing the eu­ro­zone as a first step to­ward democratis­ing it. Af­ter all, doesn’t Europe de­serve a gov­ern­ment that is at least more ac­count­able than that of com­mu­nist China?

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