The eurozone leaders will hold yet another summit on June 28 and 29 to try to put Humpty Dumpty back together again. They have been pressured at the G-20 summit in Los Cabos, Mexico, and urged by the International Monetary Fund (IMF) -- in the 2012 Article IV Consultation with the Euro Area Concluding Statement of IMF Mission, as well as the IMF discussion note “Fostering Growth in Europe Now” -- to act decisively as the wobbly world economy confronts a major shock from a possible eurozone collapse.
The recent national and international economic data points to a global economic slowdown. According to the World Bank’s latest Global Economic Prospects, “The world economy is once again in a precarious situation, within months of the sharp deceleration in economic activity seen in the fourth quarter of 2011.” Global GDP growth is now projected to decelerate to 2.5 percent in 2012, from 2.7 percent in 2011 and 4.1 percent in 2010. High-income countries are expected to grow 1.4 percent, but the eurozone to contract 0.3 percent and developing countries to expand 5.3 percent. Moody’s Investors Service’s downgrading last week of the credit ratings of 15 major international banks, followed by its slashing of the ratings of 28 Spanish banks this week, highlighted the global financial system’s weaknesses.
To put the eurozone crisis in historical perspective and assess the hopes for its resolution, we can ask whether the eurozone is another “fatal conceit.” The great Austrian-born economist and political philosopher Friedrich Hayek, who was awarded the Nobel Prize in Economics in 1974, espoused classical liberalism and free enterprise against totalitarianism and socialism, the dominant ideologies of his time, during and for four subsequent to World War II. Hayek, best known for his 1944 book “The Road to Serfdom,” published his last book in 1991, “The Fatal Conceit: The Errors of Socialism.” He argued that socialism was a fatal conceit because its creators ignored the evolution of modern civilization and, rejecting private property and markets to allocate scarce resources, tried in vain to impose a planned unnatural order to solve the economic calculation problem centrally.
I see a strong parallel between Hayek’s depiction of failed socialism as a fatal conceit and the folly of the planned top-down creation of the eurozone, as a currency union without a fiscal union, which requires effectively a political union among 17 culturally, economically and socially disparate countries. It was argued by many economists at the time of and following its establishment in 1999 that the conception of the eurozone was deeply flawed and that its survival would ultimately be threatened by its severe birth defect. But the engineers of the eurozone, like the engineers of socialism, misled by their hubris, ignored the evolution of modern civilization and natural economic order to impose, without public support, a common currency on a bunch of nations far away from political unification, putting the cart before the horse.
The eurozone, wracked by the wrangling between Germany, its pay and task master, and most other eurozone countries -- in particular France, Italy and Spain -- about how much and how soon German taxpayers should pony up to salvage the eurozone, is now facing its moment of truth. Germany wants to move closer to political union through a fiscal union, which it expects to dominate as it has dominated the eurozone, before making an open-ended financial commitment. According to German Chancellor Angela Merkel, “The lesson of this crisis is more Europe, not less Europe, and more Europe means that we must give up more powers to Europe.” But much of the rest of the eurozone, which rejects the austerity prescribed by inflation-phobic Germany and refuses to yield more sovereignty to appease Germany, believes that it is in Germany’s interests to preserve the eurozone as it is, and is waiting for Berlin to cave in.
That is the crux of the matter. The rest is all highfalutin technical stuff that often obscures what is at stake. Many controversial issues continue to be discussed with no end in sight. There is the buying of troubled eurozone countries’ bonds by either the European Central Bank (ECB), via its Securities Markets Programme (SMP), or the EU bailout funds -- i.e., either the European Financial Stability Facility (EFSF) and the European Financial Stabilization Mechanism (EFSM), or the forthcoming European Stability Mechanism (ESM), which will replace EFSF and EFSM. There is the ECB’s funding of eurozone banks through longer-term refinancing operations (LTROs), and multiple other issues: the banking union; the Europe-wide federal deposit insurance program and unified system of bank supervision; pan-European financial transactions tax; debt mutualization through issuance of euro bonds, i.e., jointly backed eurozone government bonds to finance public budgets, etc. The eurozone summit, which will consider the proposal “Towards a Genuine Economic and Monetary Union,” a report by the President of the European Council Herman Van Rompuy, will not bring closure to these issues.
Germany’s quixotic quest for political union in the eurozone is bound to fail. No other eurozone country wants to be shackled in a United States of Europe under German dominance. The eurozone as a currency union without a political union is a fatal conceit that will not survive in its current form.