Home > Eurozone Crisis, Politics and the economy > Why won’t the Eurozone disintegrate?

Why won’t the Eurozone disintegrate?

from Deniz Kellecioglu

About a year ago, while having coffee with friends in Addis Ababa, I postulated that the Eurozone would break up, probably by May, but certainly by September. Of course, I was not the only one offering such projections. But why did we miss the mark (so far)?

Economically, it does not make much sense to go on with the Euro, especially if we have the general populace at heart. Last Thursday, statistics from Eurostat confirmed that the Eurozone remains in recession. The day before that, millions of people across Europe, but predominantly in the most affected countries Portugal, Spain, Italy and Greece, took to the streets against austerity. As you already know, the unemployment figures are at record heights

So far, there are no concrete signs of dismantling the austerity. As a matter of fact, the Troika (IMF – International Monetary Fund, ECB – European Central Bank, and the EC – European Commission) hold the position that austerity is needed to produce confidence in the Eurozone economies, which, in turn, is expected to uplift the economy. Of course, implicitly, this is also their way of keeping the Eurozone intact, as Mario Draghi, the head of the ECB pledges to “do whatever it takes”.

But why go on? I think there are four main reasons for obstructing a disintegration process:

  • practicability;
  • uncertainty;
  • economic interests; and,
  • political prestige.

Surely, there will be practical challenges in turning one currency back into multiple ones. This is a particular concern considering the possibility of exchanging currencies instantly. The problem is especially delicate for currencies that are likely to be more prone to capital evasion, unless offered costly incentives to mitigate outflows and incite inflows.

In terms of uncertainty, I believe the Swedish economist Stefan de Vylder said it best. In his recent book on the Eurozone crises (currently in Swedish only) the following German proverb is offered: Rather a horrible end than a horror without an end (Lieber ein ende mit schrecken als ein Schrecken ohne Ende). Surely, the consequences of a disintegration will be painful, but it would also untie a great range of economic policies. In so, each country would be able to implement an appropriate policy mix to embark on a recovery and a new development path. This would also allow collaboration between borders and currencies (racing to the top rather than racing to the bottom, in terms of economic competitiveness).

Economic interests are, of course, almost omnipresent, as we continue to live in a world with enduring neoliberal governmentality. In short, this involves an elite methodology which usurps democracy, hi-jack institutions, and impose top-down policies (elite co-optation) by way of indoctrination and obfuscation (particularly through mainstream media, politicians, and economists). In this case, the austerity measures save debtors and capitalists while outsourcing their burden on people at large.

I believe political prestige is the factor that I grossly underestimated in my projection. Assembling the Eurozone seem to have been as much of a political project as it was an economic one. To be diplomatic, it was supposed to strengthen the European integration further and contain or even extend the power of Europe. To be harsh, assembling the Eurozone was sort of a forced assimilation, especially into the realm of German political economy. For instance, as highlighted by Stefan de Vylder, it was a well-known fact to relevant stakeholders that the authorities of Greece had tampered with their statistics in order to meet the criteria for Eurozone membership. All in all, it would be an enormous loss of political prestige to dismantle the Eurozone, as its idea and process was played out by contemporary political players (remember, the Euro is only about 13 years old).

Of course, economic interests and political prestige are closely intertwined. In relation, note the omission of incompetence or similar factors above. I think they play little role in matters of aggregate policy direction, such as fiscal expansion versus contraction, or the distribution of the financial burden among economic groups. In my view, at the aggregated level, decision makers know quite well what they are doing, including the fact that they are, more or less, forced to obey elite economic interests. Although I must admit that incompetence may play a somewhat greater role in times of turmoil and confusion, compared with rather normal times. All the same, the elites will aim to reach an optimal level of illusion and deception under the auspices of democracy.

Of course, we could take this discussion one step further and ask why the elites would choose to implement policies that are harmful for their countries. This is a complicated question to answer here, but a couple of issues could be advanced. First, the elites are aiming for short-run gains, which may well perpetuate into long-run gains. Second, in my opinion, the elites either hold, or have caved in to, moral systems of elitism and egoism. In so, they merely implement the values they hold on to.

I think the longer the artificial breathing, the more dreadful demise of the Euro.

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  1. November 22, 2012 at 11:18 am | #1

    How about the simplest and most charitable explanation? A common currency is not unrealistic in principle. But there are prerequisites if it is to function.

    1) All member countries must operate robust tax systems
    2) All member countries must apply tight budgetary control
    3) Their tax systems must have no deadweight losse ie they must not inhibit economic activity.
    4) The wealth that naturally tends to flow to those countries with the greatest locational advantage, in reality, economic rent, is recycled to the periphery efficiently.

    Without the last proviso, the result is a scaled up version of the situation experienced in countries such as the UK, where the South-East region is prosperous whilst the economy of most of the rest of the country languishes. Germany flourishes and the southern countries languish. Scandinavia is an exception, possibly because of the low population and natural resources, which compensate.

    None of these prerequisites apply in the Eurozone. How could Europe’s politicians have fallen into this trap? Clearly they were not aware of the need for these prerequisites, but then they would not be, given the theories of economics which they and their advisers subscribe to. The problem of the Euro, as with most other problems with the economy, originates with defective economic theory – there are several rival theories but all of the accepted ones are defective. One should not underestimate the power of vested interest but one way in which it operates is by keeping these deficient theories in circulation, and there are also those with a vested interest in sustaining the theories themselves.

    In the absence of sound understanding of economic principles, the effects of these mistakes will take their course, eventually leading to political and social instability and unrest. The end will be messy, but it is probably a decade or two away. It could have been otherwise.

  2. robert r locke
    November 22, 2012 at 5:29 pm | #2

    The Euro Zone cannot break up because the people who set it up and now run it, do so not in the interest of Europe but the US and British finance-banking system. The Euro Zone is in fact an expression of the extention of Anglo-American interest into Continental Europe investment banking after 1990, carried out through an alliance with the CEnter-Right neo-liberal governments. In the aftermath of the fiscal crisis, their austerity packaage is just a way to make the middle classes pay foor the banking fiasco. If the midle classes win political power in Europe (they never will in the US & the UK where neoliberalism is triumphant), then the austerity could be abandoned. Bu then the Center Right banking circles will do all they can to break up the Euro Zone. The issues are puely political.

    • Deniz Kellecioglu
      November 22, 2012 at 6:52 pm | #3

      Dear Robert, your thoughts are partly in line with the ones I am presenting above. However, it is quite possible that austerity (if it fails to produce recovery and take-off, which it will) is likely to be detrimental even for the upper classes, not only in Europe but also elsewhere, including the US. In essence, nobody is really interested in shrinking demand from Europe (which austerity entails). In such a scenario, little vested interests will remain and political prestige is likely to bow down.

  3. Podargus
    November 22, 2012 at 6:48 pm | #4

    Of course, the primary reason for the formation of the EU was political.It came after the political disaster of WW2 and all the previous disasters.Perhaps the motivation was worthy and the experiment may well have worked if it had been left as a political solution.
    But big egos require even bigger demonstrations of prowess and,naturally,once there is an entrenched bureaucracy then the cancerous growth becomes a life threatening tumour.

    The European Monetary Union is a failed experiment.This seems to be obvious to all except those with a vested interest in its continuation..How long it takes for reality to have the final say is a guess at best.

  4. November 22, 2012 at 7:18 pm | #5

    In whose interest is the free movement of labour and capital?

    • November 22, 2012 at 8:47 pm | #6

      Everyone’s surely?

      • November 24, 2012 at 11:46 am | #7

        In whose interest are rules that make privatisations virtually impossible to reverse?

    • robert r locke
      November 23, 2012 at 5:54 am | #8

      When I firt came to Europe in 1956, the monetary disunion presented crises almost everyday and there was rioting in the street. Communist parties were very strong in Western Europe and in Italy. After the European Union began, the working class disappeared and the Communist disappeared with them. Do you want, with your monetary disunion to go back to that. Europe prospered enormously up to the fall of Communism in 1990, then Anglo-American banking mania made a bid to impose their system globally. We live in that world. When Europe seizes control over its own destiny, and throws the UK-Us financial system out, then perhaps some sensib le expansionist policies can ensue

      • November 23, 2012 at 8:11 am | #9

        robert r locke :
        When I firt came to Europe in 1956, the monetary disunion presented crises almost everyday and there was rioting in the street. Communist parties were very strong in Western Europe and in Italy. After the European Union began, the working class disappeared and the Communist disappeared with them. Do you want, with your monetary disunion to go back to that. Europe prospered enormously up to the fall of Communism in 1990, then Anglo-American banking mania made a bid to impose their system globally. We live in that world. When Europe seizes control over its own destiny, and throws the UK-Us financial system out, then perhaps some sensib le expansionist policies can ensue

        For most of the period of the EU that you are talking about, the countries had their own policies. Monetary union is only possible subject to the conditions explained here.
        http://www.landvaluetax.org/the-lvtc-blog-by-henry-law/the-euro-not-dead-yet.html

        Every government must bite this bullet if it is to survive. Otherwise is the Euro is a dead man walking.

  5. Deniz Kellecioglu
    November 23, 2012 at 11:47 am | #10

    Dear Robert, I don’t want to go BACK to anything. I would like to see Europe and the world economy to move FORWARD, preferably in the interest of the people around the world (not just for the powerful few). Remember that people are rioting now. A disintegration is no guarantee for moving forward, but surely keeping the Eurozone intact do not move the situation forward.

  6. robert r locke
    November 23, 2012 at 5:33 pm | #11

    I can see we don’t agree. I live in Germany, the Euro is my currency and I use it when I travel in mostt parts of Europe. I just had 10 Belgians visit me here; their currency is my currency, too. I like it that way and I hate to stahd in line at bureaux d’exchange when I go to the UK. That’s why I avoid the UK these days. You see, I like being a European; its a great civilization; join it. It brings joy not pain.

    • henry1941
      November 23, 2012 at 6:10 pm | #12

      Yes the Euro works at that level. I have little bags with £, SEK, DKK, NOK and €. But it will collapse unless the measures are put in place to make it function correctly at the economic and political level. I set these out in an earlier post which seems to have gone. You can read it here.
      http://www.landvaluetax.org/the-lvtc-blog-by-henry-law/the-euro-not-dead-yet.html

    • Deniz Kellecioglu
      November 25, 2012 at 11:51 am | #13

      Robert, I agree it is convenient with lower number of currencies. I wish the Euro did work out. But unfortunately, wrong kind of economics, extreme capitalism and co-opted politicians are not handling in a desirable way. This comment of yours is all good.

      But I must say I am shocked and saddened about your offshoot comment: “You see, I like being a European; its a great civilization; join it. It brings joy not pain.” I understand you are a historian, then it is weird that you managed to overlook the pain the European civilization (whatever that word actually means) has inflicted not only on its own population, but especially on other peoples around the world. This does not mean the European civilisation is “not great” or “great” – all civilisations have brought joy and pain. I suggest you read the article Why some countries are poor and some rich – a non-European view, available here: http://paecon.net/PAEReview/issue52/Kellecioglu52.pdf

      The only civilisation I will join is the human civilisation, in joy and pain.

      • robert r locke
        November 25, 2012 at 12:27 pm | #14

        Start with the premise that all civilizations that gain ascendency over others exploit and cause pain. Then ask youself what civilization brings beyond that. Try civilized living, the cultivation of refinement and beauty. That is what I am talking about and why I CHOOSE to live here.

  7. November 23, 2012 at 5:51 pm | #15

    Bravo! Great thread for exposing the causes of the symptoms and getting down to realities and considering a REAL solution. For the same reason that Robert wants to use Euros, I want to use Global Community Credit System credits AND Monalloy (my invention) tokens of exchange (occasionally). Monalloy tokens and medallions could be minted in metric weights and, being physically related (indexed) to the “value” of the metal commodities index (while being very impractical, difficult, and expensive for counterfeiters). Hence, they can be an ideal international commodity currency of exchange – or as good as it gets, anyway. A totally nonprofit, non-monetary credit system is the only thing that will REALLY solve the problem of Plutonomy, The World Game that always impoverishes the losers (non-plutocrats). Right?

  8. November 23, 2012 at 5:54 pm | #16

    In other words, the nonprofit GCCS serves as a separate yet equal countervailing system for the majority of us “little people” who care less for playing Plutonomy than for just enjoying lives of modest affluence, peace, family, etc.

  9. November 23, 2012 at 10:13 pm | #17

    The fourth point you have mentioned is the most important imo together with usually rather shortsighted politicians that won t allow a costly breakup to damage the next election. But you also have to question if a break up really makes sense because evaluating the Eurozone compared to the USA and UK in the same time period gives you a rather positive picture of the project. This fact is generally overlooked in the general debate:
    http://www.makrointelligenz.blogspot.de/#!http://makrointelligenz.blogspot.com/2012/10/war-die-einfuhrung-des-euro-ein-fehler.html

  10. November 23, 2012 at 10:14 pm | #18
  11. Ryan
    November 24, 2012 at 6:54 am | #19

    It is quite simple.

    Political inertia.
    And economics costs of breaking up the eurozone. Every minute there is the threat that the eurozone breaks up, the PIGS banks suffer a slight run as people panic. Since inflationary monetary policy would be result of local currency management.

  12. Deniz Kellecioglu
    November 25, 2012 at 12:46 pm | #20

    robert r locke :
    Start with the premise that all civilizations that gain ascendency over others exploit and cause pain. Then ask youself what civilization brings beyond that. Try civilized living, the cultivation of refinement and beauty. That is what I am talking about and why I CHOOSE to live here.

    robert r locke :
    Start with the premise that all civilizations that gain ascendency over others exploit and cause pain. Then ask youself what civilization brings beyond that. Try civilized living, the cultivation of refinement and beauty. That is what I am talking about and why I CHOOSE to live here.

    If you read the article, you will find out that your premise is based on a too short backward-looking history.

    • robert r locke
      November 25, 2012 at 4:06 pm | #21

      “If you read the article, you will find out that your premise is based on a too short backward-looking history.”
      In 1974 when I joined the History Department at the University of Hawaii, I was asked to teach a year’s course on World Civilizations (lst Semester to 1500, 2nd 1500 to the present). To do that I had to immerse myself into numerous nonWestern Cultures and Civilzations. If you had know this you wouldn’t have accused me of a “too short backward-looking history” I taught World Civilizations for thirty years.
      I had to come to terms with the subject of the recent hegemony of Europe and try to explain it. I could not use an ethic explanation, since Northern Europeans were not civilized; civilization in the Western Hemesphere started in the river valley Civilizations and then spread to the Mediterranean. In Asia and in East Asia civilization of brown skinned peoples had advanced far beyond anything in the West. I can’t think of any reason in the broad sweep of history to adopt an ethnic or racial theory of progress, and today, such a view is impossible considering the rapid shift of wealth, entrepreneurialism, and technological development to the brown skinned nonWestern World in the past 40 years.
      The explanation I came up with for Western superiority in the past 200 years are scientific and technological. I tied these into the evolution of European universities, which evolved a spirit of secular scientific inquiry out of the institutionalization of European universities in the late High Middle Age..
      Jean-Paul Sartre wrote: “Living history is not like reading it. History once written has the illusion of inevitability.” So don’t be so sure about what you write about the past. And please let people enjoy the spirituality of civilization. Without something that speaks to the heart, living is a dull business.

  13. Deniz Kellecioglu
    November 26, 2012 at 11:27 am | #22

    Robert, just because you taught World Civilization doesn’t mean I cannot question your stance or perspective on civilization. That would mean we cannot question economists because they have taught economics for decades. Anyway, I am glad you do not adopt “an ethic or racial theory of progress”. If you would like to discuss the matter further, I suggest we change venue to the forum for the mentioned article: https://rwer.wordpress.com/2010/05/25/why-some-countries-are-poor-and-some-rich-a-non-eurocentric-view/

    • robert r locke
      November 26, 2012 at 3:10 pm | #23

      Sorry Deniz, but you don’t know my “stance” on civilization. So how can you question it. I’m afraid that you have too many bones to pick against Europe for us to enter into a fruitful conversation about why I left America to live in Europe — which has everthing to do with civilization.

  14. henry1941
    November 26, 2012 at 3:13 pm | #24

    Carol Wilcox :
    In whose interest are rules that make privatisations virtually impossible to reverse?

    Rent seekers. Privatisation of monopolies is a boost to rent-seeking activity.

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