European Foolishness

from Peter Radford

There isn’t much to say: anyone who thought that the appointment of a couple of tired, traditional, economists as heads of Greece and Italy respectively would cure anything was decidedly deluded. Lucas Papedemos and Mario Monti are not elected, so they have little, if any, democratic legitimacy and yet will implement drastic revisions to the social contracts and institutions of their nations. In my opinion this rule by technocrats is just another example of the attempt by a failed elite to impose its unpopular vision on Europe.

I am all in favor of European integration – in a global economy dominated by massive national or regional blocs, being Switzerland is a strategy that only the Swiss are likely to pull off. Being French, German, or Italian is a recipe for long term irrelevance. Maybe irrelevance is attractive at first, but later, when you need a voice on international standards, trade, or other similar issue, the big blocs will win every time. Thus an integrated Europe makes sense, as long as it doesn’t unravel into a bureaucratic elitist nightmare. Which it has. So, I am disgusted at the way in which the project has unfolded, and the way in which it is been constantly fudged by an elite unable or unwilling to describe the costs or benefits to voters.

Electorates are far too sensible for this. Eventually – and it may take a long time – they will reject the entire enterprise if they see no benefit, or fail to see the need for duplicative layers of bureaucrats all of whom meddle incessantly, and none of whom seem to add value to the average person’s life.

The crisis has exposed the failings of a poorly thought through system. The politicians thought that they could tighten the union slowly without foregoing national sovereignty. Among other things this meant they could set up a European Central Bank, but not an integrated fiscal policy. Central banks, after all, are vastly abstract to the average voter and don’t add a lot of stupid red tape to everyday life. Fiscal policy, on the other hand, is intimately tied up with practical local decisions like taxes, and no one wanted to give up the right to decide what gets spent in their own back yard. The idea of a bunch of distant bureaucrats in Brussels – who had hardly covered themselves with glory – making those decisions was too tough to sell to voters. So no one tried.

We thus ended up with a Euro zone hobbled from the start and whose currency was priced by international bankers and other investors as if it were the old German mark. Yes France had a AAA rating, but everyone knew that it was the German economy that provided the stability investors relied upon.

So when a crisis erupted and the Germans steadfastly refused to react by inflating their domestic demand to eliminate their trade imbalance, or by refusing to underwrite the debt of the so-called periphery nations things were always destined to go belly up.

The result has been a race to the bottom. Ferocious domestic deflation is being imposed in the name of recapturing competitiveness with the Germans. Without currency devaluation to act as a buffer, nations like the Greeks are being asked to absorb the entire adjustment via domestic wage and price shifts that threaten livelihoods. They also threaten political stability: it is no accident that we are seeing a rapid revival of European extremism on both the left and right. Indeed it is this political aspect to the crisis that caused the appointment of the technocrats.

They will not succeed.

It is only a few days since we were all told that the arrival of the technocrats would solve the crisis and already the credit market has voted: it is leaving the Euro in droves.

Any sensible investor should get out of the Euro. Now. There is only one way this ends – as currently written – and that is more crisis. Today we saw the debt of every nation bar Germany rise in cost. Even AAA nations like the Netherlands and France have seen their interest rates rise alarmingly into territory that suggests the markets no longer see them as AAA. Meanwhile, Italy’s rates are back in the above 7% zone that we were all told last week was intolerable.

Evidently the credit markets don’t think of the technocrats as a solution.

Quite right too. They are not.

They are not for two primary reasons:

1. The first part of any true solution is for there to be a Euro Zone bank of last resort to underwrite the debt of all nations. Since the European Central Bank has refused to play this role, the markets are sensibly reasoning that crisis can still run out of control. Hence the urge to sell rather than buy Euro Zone debt.
2. The second is that austerity will aggravate not ameliorate the crisis. As nation after nation cuts desperately to reduce its debt it will plunge its economy into a downward spiral. The reduction in activity will make it harder to pay down debt. Ratios will worsen rather than improve. More austerity will be needed. Yet austerity is what the technocrats have decided is needed.

This is why the arrival of the technocrats is no solution: their policies are pernicious, counter productive, and fatally flawed. They represent disproven ideas. They will implement them anyway and, most likely, fail. Only luck, not theory, can help them succeed.

Apparently the markets understand this. Unfortunately the elites of Europe don’t.

Never has a continent been so horribly led, advised or managed.

Except for the US in recent years, of course.

More on that later.

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