Saturday, November 26, 2011

Self-serving myths of Europe’s neo-Calvinists

If you have half an hour, read this paper (pdf) by Philip Whyte and Simon Tilford for the Centre for European Reform.

It is a forensic look into the deeper causes of Europe’s crisis and why the reactionary policies being imposed on two thirds of the eurozone by Germany’s Wolfgang Schauble and the northern neo-Calvinists – with input from 1930s liquidationists at the ECB – will lead to certain disaster.

It has been out for a week, but I have only got round to reading it. Better late than never. The CER is a pro-EU group with a broadly free-market leaning.

Here are a few extracts:

European policy-makers have been reluctant to concede that the eurozone is institutionally flawed. Even now, many assert that the crisis is not one of the eurozone itself, but of errant behaviour within it. If certain countries had not broken the rules, they argue, the eurozone would never have run into trouble. The way to restore confidence, it follows, is to ensure that rules are rigorously enforced.

These claims are wrong on almost every count. It is now clear that a monetary union outside a fiscal union is a deeply unstable arrangement; and that efforts to fix this flaw with stricter and more rigid rules are making the eurozone less stable, not more.

The reason the eurozone is governed by rules is that few of its member-states – least of all its wealthier North European ones – have any appetite for fiscal union. Crudely, rules (gouvernance) exist because common fiscal institutions (gouvernement) do not. But rules are no substitute for common institutions. And tighter rules do not amount to greater fiscal integration.

The hallmark of fiscal integration is mutualisation – a greater pooling of budgetary resources, joint debt issuance, a common backstop to the banking system, and so on. Tighter rules are not so much a path to mutualisation, as an attempt to prevent it from happening.

This course of action is more likely to precipitate the euro’s disintegration than its survival. more