Monday


The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

There is no question that it is unwise to engage in speculation at a time when events are poised at a moment of decision, but is there any moment that is truly free of historical consequence, when speculation might be a safer and more certain undertaking? I think not. Another time I will attempt to explain why not, which involves a careful consideration of several points in the philosophy of history, but I will leave that particular justification for another time and boldly press forward on the prospects of the Euro and the Eurozone, even as the Greeks continue to have difficulties forming a government after their recent elections, and even as the new president-elect of France, Francois Hollande, has not yet revealed the precise policies that will be implemented in the attempt to make good on his campaign promises assuring growth instead of austerity.

I have several times discussed the nature and difficulties of the Eurozone, first in a trio of posts about the crisis in Greece as it first become evident — The Dubious Benefits of the Eurozone and Will the Eurozone Enact a Greek tragedy? and Can punitive fiscal policy work? — and then in further posts about the Eurozone periphery more generally, beyond Greece — A Return to the Good Old Days, Can collective economic security work? and Poor Cousins. My most frequently read post on the Euro, Shorting the Euro, while still accurate is no longer timely. Since then I wrote What would a rump Eurozone look like?.

The Eurozone is a great economic experiment in the way that the US is a great political experience: both have represented a revolutionary new order while building on past experience. This, if nothing else, makes the Eurozone fascinating. In the categories of my own thought the Eurozone is not quite an intelligent institution since it was constituted with mechanisms for nation-states to enter the Eurozone but no mechanisms for a nation-state to exit the Eurozone. Most culpably of all, the Eurozone was designed without a mechanism for either 1) forcing compliance of member states with its standards, or 2) forcing member states to collectively come to the aid of a failing member state (or, I could also observe, some combination of the two).

If the Eurozone had had either of these two mechanisms — compulsory and enforceable standards, or compulsory wealth transfer from richer to poorer states — the acute problem in Greece at the moment, and the possibly chronic problems in Italy, Spain, Portugal, and Ireland, would present definite options. Without a formal mechanism for resolving the crisis, the financial crisis becomes a political crisis that it did not have to become.

The consensus in the financial press at the present time is that the Franco-German core of the Euro will remain intact, and that Francois Hollande will not set out to enact any radically socialist policies (cf. President Hollande and the IMF) that would doom either France or the Euro to the kind of perpetual economic twilight experienced by the nationalizing likes of Hugo Chavez, Evo Morales, or Cristina Fernandez de Kirchner. Hollande knows well enough on which side France’s bread is buttered, and his campaign rhetoric must be understood as something entirely parallel to the “red meat” speeches given in the US by both Republicans and Democrats during the primary season, only to be dialed back drastically when it comes to the general election.

But matters are altogether different outside the Franco-German core of the Eurozone, as what was once merely whispered is now on the front pages of the newspapers: the likelihood that Greece will leave the Eurozone. (cf. Greece, France and the future of the euro and EU central bankers ponder Greece euro exit) Indeed, today’s Financial Times had Greece on the front page (Fear grows of Greece leaving euro) and the inside pages (Greek exit from eurozone ‘possible’) as well as a new week-long series, “If Greece goes…”

What will the Greeks do if they leave the Eurozone? Will they take to the printing presses and start printing Drachmas until everyone has a satisfying pocketful of money and the economy is driven into hyperinflation and the Greeks impose on themselves the austerity that they were unwilling to accept from the Germans? Since it seems to be universally believed that a bloated public sector and no expectation of paying taxes is a good thing, maybe they will suspend taxes altogether in Greece, and add anyone who likes to the public payroll dole. Not surprisingly, such steps aren’t going to revitalize the Greek economy, promote prosperity, or stoke economic growth.

What Greece does have to offer is an enormous tourist industry, whose beaches and islands and quaint hotels with tavernas around the corner will suddenly become attractive to northern Europeans when they once again because an inexpensive playground, which will happen if Greece exits that Euro and allows a fully floating Drachma that can be bid down on the international currency markets. Of course, tourists hate riots, and they would prefer not to see news stories about pensioners committing suicide in the capital as a protest. A single negative newspaper story can ruin an entire tourist season, and the hotels and restaurants wait and hope that next year will be better.

This may sound cynical, but it is realistic, and as close to true as I cam capable of getting. In actual fact, the reintroduction of the Drachma will necessarily be partial. The very wealthy already hold their assets in financial instruments not directly linked to Greece. Those not truly wealthy, but who have enough assets that they know to protect themselves, will already have their assets (other than real estate) moved out of Greece to the extent that this is possible. For the lower income bracket, the lower prices that will likely come (barring hyperinflation) from Greece re-adjusting its internal price mechanisms will make life slightly more affordable, but any assets held in Greece will essentially be ruined.

In practice, Greece will use both the Drachma and the Euro, because the Euro isn’t going away; the Euro will continue to be used in the rest of Europe, and will continue to be used as a secondary reserve currency around the world. The Euro will continued to be used in Greece, but Greece will no longer have any rights in determining administration of the Euro. I suggested once that the adoption of the Euro in peripheral European countries could be understood as a pre-emptive Euroization of the European periphery, with “Euroization” understood analogously to “Dollarization.” Greece will be related to the Euro as Ecuador is related to the US dollar. In fact, Greece will come close to approximating what I have called currency pluralism.

Under these conditions, the Greek economy will slowly and gradually improve its position, but no one will mistake the Greek economy as a peer competitor to the core states of the Eurozone. The Greeks will learn that if they riot, they will damage the one source of revenue that they can count on — tourism — and those who can accept this deal will reconcile themselves to life in the slow lane. The ambitious will leave for other parts of Europe or to America.

What will the rest of Europe do upon the exit of Greece from the Eurozone?

The Eurozone is a paradigmatically technocratic institution that presumes to organize and administrate the ordinary business of life without imposing any kind of ideological constraints on member states. Critics of the free market model of western capitalism linked to liberal democracy never tire of pointing out the ideological presuppositions of trans-national institutions like the Eurozone, the World Bank, and the IMF. I imagine that many of the Greek leftists now aspiring to form a government probably buy into much of this critique. But as they rail against the center and consciously enact policies intended to prove that they were right all along, they will only be guaranteeing the economic marginalization of Greece.

The implicit ideology of the Eurozone, however, is not that of the “Washington Consensus” with its deregulation and privatization, low tax rates and minimal government (otherwise known as Yanqui imperialism). Rather, the ideology of the Eurozone is that of the post-modern welfare state, with its cradle-to-grave social support system and a social consensus in which (in the words of the oft-disparaged Malthus), “each man’s share of labour would be light, and his portion of leisure ample.” You can call this the “Brussels Consensus” if you like.

In very small nation-states with ethnically homogeneous populations and a strong Protestant work ethic, the Brussels consensus works marvelously — in fact, it works better in such places than it works in Brussels itself. And that is why the Scandinavian nation-states regularly top all lists of the world’s stable democracies with the highest standards of living. But the rest of Europe, much less the rest of the world, cannot make itself over as Sweden or Norway, Denmark or Finland. However, those regions of Europe and the Eurozone that already approximate this social milieu, will continue to thrive in the economic context of the Eurozone.

As the Eurozone moves northward and begins to add stable and growing economies from the former Soviet periphery — chiefly Poland, but also the Baltic states — the geographical area of the Eurozone will come more and more to resemble that of the Hanseatic League, the great medieval trading network of Northern Europe (a trans-national corporation from before the age of nations and corporations). If you are unfamiliar with the Hanseatic Leagues, I urge you to watch Jonathan Meades’ wonderful documentary, Magnetic North, which offers a sketch of the trading bloc that is both erudite and amusing.

The Glory that was Greece and the Grandeur that was Rome may soon be severed from the industry and commerce that is Northern Europe, and Europe will continual to evolve regionally in ways that are consistent with regional economic cultures. Balkan Greece will have its own Orthodox tradition in the Balkans. Catholic Southern Europe (Italy, Spain, Portugal, and the Mediterranean islands) will eventually realize its own slower track version of the Eurozone, closer to the Eurozone than Greece, but not quite the same as the Franco-German core. Protestant Northern Europe will continue to optimize the currency union for those nation-states that are capable of maintaining the economic standards of the Eurozone.

If the Eurozone treaty can grow and evolve and change with the times, the Eurozone that will result will be more efficient and effective than the Eurozone as it is known today. If only those nation-states that are peer competitors can enter the currency union on terms of being true economic equals, this bond will grow and strengthen over time. The “Euroized” periphery will benefit from the trickle-down from a vibrantly economically competitive Northern European economic zone, but life will be different for them. It is silly to pretend otherwise.

There will be both opportunities and dangers in this changed and changing Europe. As has been the case from time out of mind, the clever and the ambitious will exploit the opportunities and will live well; the slow and the timid will will accept their lot.

Thus Europe will come to exemplify the maxim that Thucydides attributed to Athens at the height of Athenian hubris, though displaced from the political into the economic realm: the strong will do as they will, while the weak will suffer what they must.

Is this kind of economic hubris unsustainable? Not in the least. It was the model for Europe in antiquity, as we have seen in the case of Athens, and which was no less true of Rome, and it was the model for Europe again throughout the Middle Ages. This is the European way, however much they seek to deny it.

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Grand Strategy Annex

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