Chaos of euro break-up 'price to pay' for failed project

The imposition of technocratic governments and the intervention of the ECB are profoundly undemocratic and will not solve the euro crisis, a new report argues

As the eurozone crisis worsens, proposals to resolve it are becoming increasingly authoritarian. Two in particular are now widely advocated by commentators across the political spectrum. First, that technocratic governments should be installed to carry out necessary reforms in stricken economies. Second, that in the short-term the European Central Bank could halt the crisis, if only Germany could be persuaded to drop its opposition.

Unfortunately, neither claim is true. Even worse, these apparently innocuous proposals are used as cover for the introduction of policies and reforms that are socially destructive and profoundly undemocratic.

The first claims that, with the implementation of policies such as public expenditure cuts and further economic liberalisation, growth would return and debts would eventually be cleared. Lack of success so far is put down to incompetence and corruption on the part of the political classes in afflicted countries. What is required is the replacement of these self-interested incompetents with technocrats: disinterested, hard-working men who understand the arcana of economics. Once the crooks and clowns are replaced with engineers, the machine will run smoothly once again, oiled by free trade and flexible labour markets.

In practice, liberalisation and austerity are making matters far worse. In Greece, Ireland and Portugal, adjustment packages imposed from the outside but with the collusion of domestic governments have resulted in sharp falls in economic activity, large rises in unemployment and painful social dislocation. Government deficits have risen.

Work by Research on Money and Finance and others has shown that the build-up of debt in peripheral economies was not the result of government profligacy. The fundamental cause has been diverging competitiveness between the economies of the periphery and those of the core, above all Germany. By heavily repressing the wages of its own workers, Germany ensured that there was no chance for peripheral economies to compete, locked as they were into monetary union and unable to devalue their currencies.

This divergence of competitiveness resulted in entrenched structural imbalances between core and periphery, leading to surpluses for Germany and deficits for others. These deficits in peripheral countries were matched by borrowing abroad resulting in accumulation of private and public debt. When the sub-prime crisis struck, public deficits soared as private liabilities were taken onto government books, tax revenues fell and social security payments rose.

It is clear that the proposed policies for growth – liberalisation, privatisation and austerity – are a hopeless strategy. Deficit countries need investment, new technologies, and a strengthening of demand. The policies that will be implemented by technocratic governments will only worsen the unfolding social catastrophe.

The second proposal views the bankers, and more specifically the ECB, as the other potential saviours of the eurozone. By printing money without limit, the ECB could buy up the debt of Italy and other countries, pushing down interest rates and restoring order. Although the financing of government deficits by the ECB is illegal under European Union law, various mechanisms have been suggested that would get around this, such as allowing the ECB to lend to the European Financial Stability Facility or the International Monetary Fund for the purpose of government bond purchases.

Widely quoted estimates in the financial press put the capacity of the ECB to create new money, without causing inflation or other problems, at up to €3tn. This is pure speculation. The outcome of ECB intervention on such a large scale is simply unknown. As the latest RMF report argues it is not easy for the ECB to act like the United States Federal Reserve, the Bank of England, or the Bank of Japan.

Unlike these institutions, the ECB has no unitary or federal state to stand behind it as a guarantor. Further, the ECB would not be buying the debt of a single state but of seventeen, some of which are manifestly insolvent. The threat to its balance sheet of default on these debts would be significant, directly undermining the position of the euro as an international reserve currency.

Even more than the economics, however, both assertions imply that the problems of the eurozone would only be resolved by suspending democratic accountability. Economic and political decisions would be increasingly dictated by the unelected bureaucrats and bankers of the ECB, the EU and the IMF. Their orders would be carried out by local technocrats and former employees who will ignore their electorates, no matter how loudly they protest.

The European project has always suffered from a lack of democratic accountability. Recent developments move it further in the wrong direction. Many had hoped that Europe would generate mechanisms for democratic decision making that would result in economic policies that would benefit working people. Instead, Eurozone members are faced with the forcible imposition of policies that cause social destruction.

It is unlikely that this trend will be reversed within the confines of European Monetary Union. The eurozone appears to be heading for a break up, possibly resulting in the exit of some peripheral countries, and the division of the rest into groups. The resulting chaos would be the price that the peoples of Europe would have to pay for the hubris of bankers, big business and the leaders of core countries in rushing headlong to create an unviable global reserve currency.

Jo Michell works out of SOAS, University of London, and is a co-author of the RMF report Breaking Up? A Route Out of the Eurozone Crisis