The Greek drama that has been unfolding for a while now, has a tendency to trudge on. A co-operative game, where the unilateral policies of one can bring harm to all, has been played quite uncooperatively indeed. While both sides appear to be eager for a breakthrough, negotiations have been subject to numerous impasses, and it seems as though this drama has mutated into a game of chicken-either the Troika consisting of the EU Commission, ECB and IMF must blink, or the leftist Syriza Government of Greece must blink. Rather than making trade-offs, where the creditors cede ground on the demand side (by relaxing fiscal consolidation targets, primary budget surplus targets, etc.) in exchange of supply-side concessions on privatization and social security benefits from Greeks, this is made to look like a ‘one-victor, one-vanquished’ phenomenon. Grexit has now become more conceivable than it could have been, bringing great political and economic blunders to the EU in general, and the Economic and Monetary Union in particular. An optimistic air has been allowed to spread in Europe, downplaying the contagion effect of a Greek showdown. However, this optimism is as false as the periodic signs of thaw in negotiations, that fill the European air with hope, only to kill it with another dirty spat between Schauble and Varoufakis. Grexit threatens the following; the defeat of the idea that the euro is irreversible, the possibility of the defeat of the Euro-project, the creation of fear among investors, an addition of risk to investment in the Euro-area springing from the very tangible proof that the euro can fall and the creation of a divide in Europe from which only Putin has to gain. This contagion can be delayed by the bond-buying programs launched by the ECB to face deflation, however, the harm cannot be averted, for it will set a bad precedent to the rest of the members and return to haunt in the future.
The point, however, that is being missed here, is that a prospective Grexit is not the problem-it is only one of the more evident and painful symptoms of the true problem that the Eurozone faces. The cancer is hidden in the structure of the European Union, which runs not concurrent with but in parallel to the manner in which states politically function to reach their economic ends.
The European Union is indeed a unique experiment, and has achieved massive power-economic and political-for a group of tiny yet wealthy states, which throw around their weight using the Union as the principle instrument. However, the Economic and Monetary Union (euro-area) has in its structure that which makes it incompatible with the economics of macroeconomic stability. By ceasing monetary policy autonomy of member economies, it centralizes an important tool of macroeconomic policy, while leaving the rest to the individual states. Thus, states can enjoy considerable autonomy in policies pertaining to elimination of supply bottlenecks, areas of state intervention, extent of state control over economic activity, size of the public sector, level of social security spending, the nature of state spending(spending for investment or spending for consumption),etc. However, the regulation of interest rates, liquidity and currency are left with the all-pervading European Central Bank. Such a divide makes macroeconomic policy incomplete on both ends-leaving neither Brussels not the individual state in charge of state-de-affairs. The repercussions of this phenomenon are seen in the prelude to the Greek crisis as explained in a scholarly article by T SabriOncu (T SabriOncu: ‘Greece, Its International Creditors and the Euro’, EPW, February 14th, 2015). The monetary policy expansion of developed economies between 2002 and 2007 lead to the flow of private capital into peripheral economies, including Greece, creating easy credit conditions. Thus, the drivers of impressive growth rates in this period were means of easy credit. The government spending that thus occurred was of non-productive nature, such as the Athens Olympics of 2004. When the Lehmann Brothers collapsed 2008, capital reversed course, and started flowing towards the center, subjecting peripheral economies to capital outflows. Scarce capital lead to price rise and debts which non-euro countries averted by devaluing currencies and raising interest rates.
From this study, we understand that Greece could do none of the two, since the powers of monetary policy regulation weren’t with it. While the Greek economy already experiences massive state-spending and public sector participation, this phenomenon only hastened up the Greek showdown. On the other hand, the European Union was never in control of how much the Greeks spent on social security, or whether the Greeks invested in the Olympics or in bettering their productive capacities to meet their bills. Neither was it in control of whether the Greek economy privatizes. So neither did the state have the sufficient monetary arrows to deal with the crisis at hand, and nor did the EU have the fiscal swords to prevent the crisis in the first place. With Italian debt now equaling Greek debt in the pre-crisis period, the possibility of a nostalgia hitting Brussels a few years down the line cannot be ruled out.
The solutions are evident enough-either the long term aim of ever-closer union must be hastened up, or a new aim of a more devolved union must be put into place. The former would thus finally put Brussels in charge of macroeconomic levers, putting an end to the asymmetry that is being observed right now. However, this looks difficult given the active opposition to this plan by rightists from all member states, whose opposition now stands legitimized by the electoral triumphs that have made them a strong lobby in the European parliament. Moreover, whether rightists or leftists, expecting the citizens of erstwhile colonial masters to sacrifice their national identities in order to obtain a European identity is probably too much to expect- a liberal notion beyond the realms of possibility anytime soon. Therefore, the solitary solution that remains is the latter. A larger policy of renationalization of decision making needs to be mulled, under which monetary policy autonomy must be returned to the member states, if not wholly, then in part. The all-pervading European Central Bank requires a more representative leadership, and a more devolved character, wherein the monetary quiver is not seized by one entity alone, but is shared by the collective wisdom of all.
Lastly, the conservative policies of the German Government have had considerable control over the functioning of the monetary police euro-area for long. It is clear enough, that these policies have crossed all limits, bringing Europe to the doorstep of deflation. Even the current Quantitative Easing program has met considerable reluctance and opposition from the German front. The European Union is supposed to be a democratic project, where the voice of all states is heard, not a German monopoly, where the Berlin based ECB is thrown around by German politicians. By opening borders to free movement (in the EU), and by ceding monetary policy autonomy (in the euro-area), European nations have sacrificed a measure of their sovereignty. Hence, to save the European Project, two policies are of urgent need-first, a renationalization of decision making, and second, a fairer administration, in which Germany voluntarily chooses not to exercise its economic and political muscle to influence the center, thus reserving major benefits that it can exact over the long run if the Eurozone does not fall.
Tags: EU European Union Eurozone Greece Greece economy Grexit Renationalization
