Procrastination, prevarication & paralysis: an idiot’s guide to the Eurozone crisis

Henry Hopwood-Phillips 9.46am

I always thought that the EU had secured the winning hand.

In success, it could boast that its social democratic model, inching towards fiscal and ultimately political union, had created a permanent and enlightened route to general prosperity. In failure, the globalised proportions of its wreckage would ensure that only its supranational intervention could offer succour.

Yet the EU’s problem is that its chief creditor, Germany, has been thinking like a nation, rather than a supranational overseer. It is not that Germany is not willing to play paymaster to a transparently political project. Rather, Germany resents the fact that beneath the surface, economically the EU project resembles a cheese grater.

ClubMed, eager to ignore the holes, yearns for closer political unity because of the accompanying German credit card.

The Germans, not wanting to subsidise the European periphery forever, has suggested mandatory terms and conditions and requested appropriate collateral in return for pooling proportions of debt, privatisation, teutonic budgetary discipline, and flexible employment laws. ClubMed baulks at the small print.

The tension between German realism and Mediterranean myopia is painfully apparent. Angela Merkel has said that under no circumstances would she consider Eurobonds. Italy’s ex-prime minister, Silvio Berlusconi, retorts that if Germany continues to prevent the ECB from printing money she should quit the euro. Italy’s current leader, Mario Monti, tells the German chancellor that “six decades of integration are at stake”.

In the past, at least, political obfuscation of economic realities was intelligible while the the direction of the EU’s hopes was centripetal. However, with the EU’s economically strongest member now in direct confrontation with the rest, the outcome of the crisis is far from predictable.

The impending Spanish bank bailout ought to be as conventional as a banking crisis can be, following a relatively simple process. Nonetheless, foreign investors are shunning the prospect - not just because they believe the books are cooked but because how they might be cooked is no longer discernible. An efficient and free market should not be run on fiddled facts but it routinely is. Cynicism does not ruin markets on its own. Rather confusion over the target and form of that cynicism, as with the current EU chaos, appears to. It certainly paralyses credit flows, meaning that Spain is now required to spend $600,000 to insure merely $10 million of debt.

The president of the ECB, Mario Draghi, has identified the systemic weaknesses and trends and said it cannot continue, recently describing the Eurozone as “unsustainable”.

Exasperation is noticeable even in the EU’s own reports. Its top brass has informed the new French president, Francois Hollande, that the economic assumptions behind his budget plans are “optimistic”, measures to hit budget targets “not sufficiently specified”, and France’s record on meeting past targets has been “mixed”.

In this febrile climate, the technical solutions suggested in answer to the European crisis - from a ‘Grexit’ to Eurozone deposit schemes - seem to me to be superfluous. At this pretty pass the repair of the EU body seems more dependent on the cogency and cohesiveness of its soul than any mere physical tinkering.

A Reply to Charles Moore…

Daniel Cowdrill 6.40am

The collapse of the banking system and the recent phone-hacking scandal have led some to question the wisdom of market forces.  In a now famous piece in the Telegraph, Charles Moore considers whether the Left were right all along about the free market being a ‘set-up’ designed to benefit only the rich. After recent events, ‘Everything is different now’ - but is it?

 In the post-war period the Conservative party was haunted by the memory of the ‘hungry thirties’ - a period of mass unemployment. This was compounded by election defeat in 1945, viewed by many on the Right as a delayed verdict on their economic policies during the wars.

Across public policy, but especially with the nationalised industries, industrial relations, and economic management, the Conservative party ceded ground to the left. Churchill focused his fading energies on establishing his position as an international statesman. The grand old man was not prepared to risk his reputation over a battle with the unions, and every effort was made to avoid confrontation. Tories fond of State planning, like Harold Macmillan, sidelined before the war yet profoundly affected by his time as a MP in the industrial north-east, were now promoted.

But had things really changed that much? As Andrew Roberts has argued, instead of treating the 1945 election as the freak result it was, Tory politicians were emasculated by it. They drew the false conclusion that it represented a turning tide which they were unable to hold back, even if they had wanted to.

There is a danger of the same happening again. Most Conservatives still believe that spontaneity is preferable to state direction, and that variation and competition lead not just to higher productivity but to a richer society. I assume that Charles Moore still believes these things. What disappoints me is his willingness to buy into a left-of-centre narrative of recent events.  We need to beware the false conclusion that confidence in the free market has collapsed.

 Some of those who benefited the most have certainly abused their power. Rupert Murdoch, once the heroic defender of a free press versus union intimidation, has presided over (unknowingly or not) allegedly corrupt and illegal practices at some of his newspaper titles. Bankers made reckless investments tied to the US subprime market. Some of our largest banks have been humbled. These are indelible stains on capitalism’s record but the lessons of the post-war period stand.

Between the end of the Second World War and 1980 the British economy was in relative decline. Harold Macmillan’s claim that we had ‘never had it so good’ and Harold Wilson’s ‘technological revolution’ belied lacklustre productivity, rising inflation, and deteriorating industrial relations. Mrs Thatcher’s governments changed course and Britain began to gain some lost ground.

Relatively unfettered markets and a relatively light, normative tax regime are a source of much higher growth and technical innovation than nationalised industries and are more compatible with democratic values than centralised bureaucracies.  The free movement of capital allows for the more efficient allocation of resources in an economy.  This allows for more entrepreneurship, innovation and job creation.  In a globalised market, those economies that are uncompetitive and protectionist will spiral into high unemployment and low growth, leading to sovereign debt difficulties, as Southern Europe is discovering today and Latin America discovered a decade ago.

In the 1970s, a new generation of economically liberal Conservatives made a vigorous case for de-regulated markets. As the economy struggles to adjust to recent hardships, this is the worst possible time to cede ground to the Left and thus allow the state and not the market to direct the economy.

Read more on this subject:

'I'm starting to think Charles Moore might be right, but not quite', by NIk Darlington (25 July)

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