Monday, December 5, 2011

A Few Thoughts about the Eurocrisis

So what do Sarkozy and Merkel think they accomplished with the agreement reached at today's Élysée lunch to press for a new European treaty? Markets are looking for a "wall of cash" large enough to prevent speculation against banks holding the debt of distressed European sovereigns. Nothing in today's agreement about strict budgetary rules and stringent oversight provides such a source of cash, nor would such rules have prevented the debt problems of Spain and Italy, both of which were running primary surpluses (tax revenues exceeded government expenditures net of interest payments) in 2008.

What seems most likely is that the agreement by the leaders of the two largest economies in the Eurozone was intended as a signal to the ECB that they are serious about deficit reduction. Presumably, the ECB, perhaps in conjunction with the IMF, will take this assurance as reason enough to stifle its qualms about market intervention, inflationary expectations, and moral hazard in order to do whatever is required to put a ceiling on Italian borrowing costs, Italy being Europe's sickest sick man at the moment. Meanwhile, the Italian government under Mario Monti has put in place an austerity program sufficiently draconian to have reduced one Italian minister to tears, literally.

So, now we wait to see if the ECB will in fact respond to this signal. Many commentators have remarked on the "undemocratic" nature of the reforms imposed first on Greece and now on Italy. By this they presumably mean that Greek and Italian voters would never have punished themselves so severely in order to save their creditors. But if we look at the European demos writ large, it is by no means clear that a majority of voters would disapprove of the punishments being inflicted on those whom the German tabloid Bild refers to as Schulden-Sünder, or debt-sinners. Angela Merkel has dragged her feet as she has because she is afraid of being voted out of office by German taxpayers opposed to footing the bill for what they regard as southern European profligacy. Although opposition in France is more muted, I have no doubt that it is virulent: one has only to listen to the speeches of Marine Le Pen and Jean-Luc Mélenchon to divine the hostility to the EU in a substantial segment of the French electorate.

The proposed treaty change will respond to the charge that the Franco-German approach to the eurocrisis has been undemocratic, but the outcome of a treaty-reform process is by no means clear. The proposal to be put to the voters is apparently intended to appease those dismayed by free-spending governments, but as we know from past European treaty ratification episodes, the actual content of constitutional amendments matters far less than their symbolic import. Nationalists everywhere will seize this opportunity once again to rebuke Europe's would-be constitution-builders.

And this time the surrender of sovereignty is at the heart of the measure: automatic sanctions for SGP violations mean loss of budgetary autonomy. The technical requirements for what economists call an "optimal currency area" will likely carry little weight with many voters frightened by the way in which past commitments to "Europe" brought consequences no one was prepared to deal with. The "democratic" response to the Eurocrisis may prove to be more damaging than the "technocratic" response. In fact, it is not hard to envision a new round of ratification debates unleashing more anti-Europe vitriol than any previous consultation, absent a quicker end to the debt/banking/currency crisis than anyone would be rash enough to predict.

In short, I fear that Sarkozy and Merkel, with this latest temporizing measure, may well precipitate a constitutional crisis even more serious than the economic predicament from which they are trying to extricate themselves. It is very difficult to feel optimistic for Europe on this fifth of December.


FrédéricLN said...

"automatic sanctions for SGP violations mean loss of budgetary autonomy."

Yes, but they were already in the 1992 Maastricht Treaty… which was approved by a referendum in France… They've just been dropped in practice, in order to allow the States to borrow as much as each wanted.

bouillaud said...

My guess is that the Treaty revisions will be calibrated so as to deter any referendum to be hold. There will be no referendum, that is as simple as this, even in Ireland.
It will be a clear dismissal of democracy, but it will be the only way to get through this at full speed.