Merkel is correct about Eurozone reforms – But which reforms?

PS Protesilaos Stavrou

Contributed To hellasfrappe from Protesilaos Stavrou
PS Protesilaos Stavrou

 The policies of Merkel do not align with her rhetoric. Image Source: Flickr
In her speech at the World Economic Forum in Davos, German Chancellor Angela Merkel said among others the following (from euronews):

    Do we want coherence without ambition? If we do, we will meet somewhere in the middle. Or do we want to see who is best and try to do like the best in Europe, so we have a chance to play a role on the world markets?

Merkel points out a reality that sooner or later the European Union will have to face. Indeed reforms are necessary if the EU is to overcome the crisis and have an important role to play on the world economy, in the decades ahead. Any objective European citizen, regardless of ideology knows, at least unconsciously, that the current EU architecture is unsustainable over the medium to long term. As such the ongoing crisis is perhaps a unique opportunity to push for all those necessary structural reforms.

Though a broad consensus among diverse political groups could be reached over the need for change it is doubtful that the same will hold true once the objects of reform are put on the table. In other words what is that needs change? Which are the areas of policy that are problematic? What sort of beliefs, ideologies and mentalities underpinned the practices that brought us to this point? These and many others are the kind of questions that Merkel and the rest need to answer.

However, judging from the ongoing negotiations on (a) the fiscal compact, (b) the ESM, (c) the second Greek bailout; it seems to me that the kind of “reforms” Merkel spoke of are nothing more than a reshuffling of the same sort of (mal)practices that have brought the EU in general and the Eurozone in particular to its knees.

Let me be precise and specific. The negotiations are based on the mindset that gave birth to the Maastricht Treaty, the Stability and Growth Pact and the Euro. It maintains the following “principles”:

  •     No debt mutualization. National economies remain perfectly partitioned, in legal terms, despite the existence of a single market, single currency, and increased harmonization in other economic areas. In other words every single state is held solely responsible for asymmetric shocks even if those are caused by the structure of the system itself.
  •     No genuine fiscal union. Fiscal transfers, i.e. a credible set of mechanisms to rationally recycle accumulated surpluses into deficit regions, is completely out of the negotiations. So is a common treasury, with powers to raise revenue and issue bonds of its own.
  •     No deficits. All economies must maintain current account surpluses, following the paradigm of Germany/Netherlands, or must always strive to reach that goal. This is pure fallacy from beginning to end even using simple arithmetic, since the surpluses of one country will necessarily constitute the deficits of another. For instance Germany cannot have a surplus vis a vis the rest of the Eurozone, while at the same time the Eurozone has a surplus with respect to Germany. This is impossible. As Dutch econometrician, Thomas Colignatus once told me in an interview “[the IMF] wants all countries to become surplus exporters with somewhere some magic deficit hole”.
  •     Continuation of political status quo. The democratic deficit and the political complexity of the EU are not taken into account. It is well known to anyone who has been following EU politics that one of the main reasons behind the inability of policy-makers to draw a line under the crisis, is the multi-faceted complexity of EU decision-making, where the citizen has minor to no impact. Decisions are made behind closed doors, completely detached from the needs and desires of the average European entrepreneur, worker, consumer, voter. The political dimension of the economic crisis is not addressed at all.
  •     No failures – no deflation. Massive bailouts, both direct and indirect, have been given to private banks and sovereigns (and there are more to come) with the sole purpose of preventing the natural failures from occurring. The goal is to maintain the current order of course, since failures on a large scale will have a cathartic effect, which is not good for those who wish to preserve the system. In other words the ends are political and serve some particular (big) interests. In addition the economic theory that underpins this support for bailouts argues that deflation is a purely bad thing. What they miss though is that deflation in the midst of a crisis is a natural part of the business cycle and functions as a shock absorber that eventually kills off the crisis (see Deflation, haircuts and the ECB printing money to prevent them).

In addition to the above no serious reforms are being proposed with respect to other core EU policies. For instance the Common Agricultural Policy is a paragon of irrationality and malinvestment, yet it remains practically untouched, just because it favors certain cartels.

The purpose here is not to point out, one by one the flaws in the current architecture. My argument is that the rhetoric of Chancellor Merkel, which calls for reforms, does not align with her actual policy proposals. And this applies to several politicians, not just Merkel. The gist of the discussion is that the EU is in desperate need for reforms, yet those are nowhere to be seen in the months ahead. The EU requires drastic changes in the architecture of the Euro, in its “social” and “growth” model, in its institutional framework, in the way decisions are made.

The EU needs to implement healthy free market regulations that allow space for individual initiative and creativity, while at the same time ensure more transparency, accountability of policy-makers and real democracy, so that every policy is made “of the people, by the people, for the people”. These are the real challenges for Europe and not how to “play a role in the world markets”. When policy-makers realize this profound difference between the real world and the “markets”, our lives will be improved, otherwise expect more of the same practices that benefit the political and economic oligopolies.


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