Wednesday, 8 July 2015

European integration should not come at the cost of humiliating an entire people

David Begg: The Greek situation looks difficult. The economy is in danger of seizing up if the current standoff between the Greek Government and the rest of Europe cannot be resolved. Earlier reports that the parties were within €60m of a settlement had not been convincingly denied.

So we can assume that there is more at stake here than money. Given the failure of the austerity programme over the last seven years and the unsustainable level of its debt, Greece has a strong case for debt relief. It has a strong case for shifting the emphasis away from austerity and towards economic growth. The European establishment wanted regime change in Greece.

They didn’t get it and the result is that the legitimacy of EMU is now challenged in a way that goes beyond money. There is much media concern about the absence of trust between the eighteen prime ministers and Tsipras, but that cuts both ways.

That said, the management of the Greek economy even prior to the crisis has not been stellar. Greece continually increased its public sector debt even during the high growth years after its accession to the Eurozone in 2001.

By 2008 the current account deficit was 15 per cent of GDP. Outside of monetary union such deficits would have provoked a currency crisis because financial markets would challenge the state’s capacity to maintain an unrealistic exchange rate. Inside EMU, when the 2008 crisis first manifested itself, the stronger governments would doubtless have liked to involve the no-bail out clause (Article 125 TFEU), leaving Greece to cope with its problems on its own.

But they couldn’t because the integration of Capital markets meant that contagion via the effects of a Greek insolvency on German, French and other country banks heavily invested in Greek Bonds would lay the crisis at their own door. It is now been suggested that contagion can be limited, but can it?

Even if the European Banking System can be insulated from financial contagion the same cannot be said for the European Integration project. Nor can the geo-political issues for a country with Greece’s history be discounted.

It is important to have a rational perspective on this problem. The portrayal of Germany as an aggressive power, exercising in a new form, Germany’s old ambition of dominating Europe is plain wrong. The fact is that, by virtue of its economic dominance, Germany is Europe’s hegemon even if it does not want that responsibility. As part of the political settlement to create a European Germany we are confronted with the paradox of a German Europe.

The Ordo-Liberalism that Germany insisted upon for the institutions of EMU, in the absence of the political union it has always aspired to, is at the root of the problem. Ordo-Liberalism works for Germany in the context of its social market economy and the culture underpinning it. In a different cultural context it presents as a Hayekian nightmare.

This problem was compounded by an enlargement to the east in 2004 which means that the resources to achieve convergence through social investment were spread too thin. The alternative convergence path we are on is dictated by the rules – the Ordo- leading to permanent austerity and deflationary policies. It is not economically, socially or politically sustainable.

There is a deeper significance to what is happening in Greece which can be explained by reference to the ideas of Karl Polanyi as outlined in his book The Great Transformation published in 1944. This is a most insightful critique of Liberalism which advances three key theses, viz:

That land, money and labour are fictitious commodities;

That the economy must always and everywhere subsist in society and not the other way around i.e., the notion of ‘embedded liberalism’;

That people will eventually push back against the market forces oppressing them – the ‘Double Movement’.

It can be argued that German liberalism is embedded in society by virtue of the rules under which it operates and the institutional structures of the labour market – such as codetermination – which enjoy popular support.

Those Institutions do not exist in all countries of Europe. One can discern the beginnings of a Double Movement in the Greek referendum vote and, indeed, in the changing political landscape of other European countries where so called populist political parties have achieved electoral success.
The trouble is that this pattern lacks coherence since the push back from voters diverges to the Left and the Right.

It may be that the EU is right to believe that financial contagion from a Grexit can be contained. But the political costs in terms of the future of the European integration project could be incalculable. It is not likely that the political support for the further stages of Integration necessary to consolidate the currency will be forthcoming unless some accommodation of the social needs of citizens can be achieved.

This is not possible so long as the mandate of the ECB remains in sync with the German Bundesbank. Sooner or later its mandate will have to change, perhaps in line with the US FED, requiring it to take account of a broad range of social and economic conditions.

Unfortunately, this change in direction, if it happens at all, will be too late for Greece. The bottom line in relation to the current Greek crisis is that it is a collective mistake. The European Project was never meant to mean humiliating an entire people.

No comments: