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Only Full Integration Can Solve the Eurozone Crisis

Posted on the 24 October 2011 by Periscope @periscopepost

Only full integration can solve the eurozone crisis

Euro woes continue. Photo credit: Matze Ott

The time has come for the leaders of the European Union (EU) to act decisively to end the Greek debt crisis one way or another. Actually, the time came a couple of years ago, but dithering and inaction in the intervening period have allowed weakness in peripheral countries such as Greece to become a serious regional problem.

Demands that the Greek government take further austerity measures are irrelevant and unrealistic, a smokescreen designed to placate voters in wealthy European countries.The ruling PASOK socialist party long ago reached the limits of what it can implement, and the New Democracy opposition would not be much better. The trades unions are simply too powerful and well organized (as well as being PASOK’s main constituency), and they will fight expenditure cuts to the death. The austerity measures seem to be making no impression on a national deficit which is actually growing, as costs remain stable and tax receipts from the devastated private sector continue to shrink. The hard line taken by the “Troika” of the EU, European Central Bank (ECB) and the International Monetary Fund is causing an economic death spiral that has pushed Greece to the brink of collapse and caused consternation in many other peripheral European economies.

So the EU must finally stop procrastinating, and take concrete and radical action; but what form should this action take? All that appears to be taking place is some extended horse trading about the size of the haircut that Greek bondholders must take. The banks had already agreed to a fairly derisory 21 percent, but now the arguments seem to be about whether the real haircut will be “only” 40 percent or as much as 60 percent. The latter figure is closest to reality.  However, such a haircut means that most European banks will have to be recapitalized, with the eurozone already on the brink of recession. Once again, the politicians are not thinking radically enough. For decades, they apparently favoured a policy of glacially slow integration while massaging the concerns of those who feared the loss of national sovereignty. More recently they followed a craven policy of “kicking the can down the road”. Basically, European politicians and policy makers have generally become so timid that they will do anything to avoid having to take tough decisions. In this emergency, however, tough decisions must be taken, and, rather than bickering about a haircut, a really bold move would be to decide between the following two radical courses of action.

First, to admit failure, throw Greece out of the eurozone, and move to prop up the banks that hold too much Greek debt. This is what many UK and some US commentators would prefer. They dislike the eurozone, and feel that recent events have vindicated their euro-skepticism. They argue that getting chucked out of the euro will make Greece more competitive (was Greece really that competitive when it had the drachma?). In reality, such a  course of action would be disastrous for the standard of living of the Greek people and the people of whichever countries follow Greece out, at least in the short term. In the longer term, it might lead to the eventual dismantling of the eurozone entirely.

The second, and preferrable course, is to move swiftly to full integration. Russian economist Vladislav Inozemtzev, among others, points out that the 2010 debt to GDP of the eurozone as a whole stood at a quite healthy 64 percent, and that 74 percent of this debt is held by European Union investors. The solution, he argues, is simple. The ECB should buy all the bonds of the most troubled countries due before 2016, at a yield of around 2.5 percent, or a little above their nominal value, and convert these bonds into 10-year notes with a rate of 0.25 percent. At a stroke, this will solve the sovereign debt crisis, and pour massive liquidity into Europe’s financial institutions. Requirements could be put in place that much of this liquidity should be used in loans to private sector companies, thus boosting economic growth and staving off the imminent eurozone recession. Admittedly, the current problems would be replaced by worries about asset bubbles and inflation, but these could be dealt with as they arose by the ECB, now a proper central bank. After all, massive and repeated quantitative easing has not led to inflation in the US, possibly because it has done little to reduce unemployment. At the same time, a proper, unified European treasury department should be put in place to set policy for the whole eurozone, and in particular to control the fiscal policy of countries such as Greece directly, at least for a decade or so.

Essentially, the EU would have to become a unified economic entity, which was surely the intention all along. The people of Europe will have to decide by referendum to become Europeans above all or remain a separate collection of mostly insignificant nations in the face of the rise of the emerging world. Better still, lengthy and expensive referenda should be avoided, as they are demonstrably manipulative and useless at determining what is really in the best interests of the people. The democratically elected leaders of Europe should exhibit some real leadership for a change.

The debt crisis has proved that half measures (currency union without full economic integration) are doomed to failure, and that we Europeans must sometimes put aside individual considerations for the greater good, much as the Germans did at the re-unification of their country in 1990. Of course, all the Treaties will have to be rewritten, but this will have to happen anyway, as they have proven to be unworkable.

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