|This entry has been inspired by the Charlemagne
column Currency Disunion in the Economist.
The image is borrowed from the same source.
How rotten is the euro? Should Latvia at all consider joining the euro? I guess it depends on what the euro has to offer and how that matches up with the challenges Latvia is coping with.
Well, yes, the euro has turned out to be no miracle. Good, we now know it’s no cure-all. It’s no cure against political lies—Greek stats, accepted by the euro fathers and mothers, or against economic imbalances and overindebtedness that most euro economies have been dragging through the years, a clear violation of the euro area’s own proper behaviour—Maastricht Treaty—criteria.
Isn’t that easy? You have the criteria, scientifically built and politically approved. Stay committed, observe. And yet, if the voluntary commitment is scanty, apply controlling mechanisms. Yet another laborious political task—to agree on the controlling mechanisms. It’s easy to grasp. Of course, it’s extremely difficult to materialise.
Who is there to implement?
We, in Latvia, are bad at it. We don’t control our institutes and those in power. We don’t know how and we don’t really seem to care being busy chasing ghosts from the past, distrusting every little moving creature and believing in miracles and conspiracies, devouring Putinian propaganda, and still not sure which way to go—East or West, Russia’s 2% of the world’s economy or the EU’s 28%, eight years after we joined the latter. We are silly people and we need the IMF and the European Commission to keep an eye on us, read, our silly, unreliable politicians. That’s us, a young, fragile democracy, EU backwater.
Is Germany, the powerhouse of the euro, just as bad? Because all it can suggest is that the euro area scrapes up another several hundred billion euros to waste in the abyss of the PIIGS imbalances, or a special EU budget controller for Greece. Or is it corrupt? Because it itself compromises the Maastricht criteria.
Whatever the answer, one thing is crystal clear. It’s the lack of commitment in political decision-making. Although there is nothing astonishing in this conclusion, the outcomes of political compromises keep surprising us. Greece cheated to join the euro, oh really? Germany’s public debt is over 80% of GDP and France’s over 85%, oh really? Saving Greece from default by subsidised loans is in fact against the Maastricht Treaty, oh really?
Why not drop Greece?
Or is it OK to be flexible about rules? After all, agreements are there to be, yes, adjusted—to the reality. What’s the reality? A united Europe with zero threat of war, cheated by Greece or not. A Europe exercising solidarity and sharing responsibility for the ailing economies of the indebted euro members, be it against a formal treaty or not.
For sure, this may seem and is in fact quite embarrassing from the ideal and unconcerned market point of view. Why not drop Greece, let it drown in its debt, let creditors ravage it and other weak and irresponsible ones?
I guess Europe should not let it happen for the very same reason why it has the euro, whatever it is—a strong currency for a larger common market, stronger competitiveness and lower risks.
Or not? Or didn’t the now euro members join together of their own free will? Or don’t PIIGS want to continue to be members of their own free will? Or don’t we want to join the euro?
I mean no, silly, Europe is no empire, no reich, no soviet union, not even a federation. How on earth are the haves benefitting from such a have-not like Latvia joining their club? Europe is hugely political. It’s all a political ambition, huge, larger than life. Well, definitely, as it turns out, larger than the immediate economic gain.
Imperfect and bureaucratic, lacking democratic decision-making and suffering from deficient interest of democratic voters, who still see it as a remote and irrelevant body, the EU is an immense success. Or how would you explain the EU gravity? It’s not only about have-nots seeking in, it’s also about haves staying put and still willing to pay.
After all, who stands to gain from Greece becoming a wreck? Not the creditors who, in that case, will no longer be negotiating haircuts, they will simply face them or no pay. Not the EU, not Greece, no one. Still, there are of course limits of pouring money into the abyss; there are limits of sharing responsibility with the irresponsible.
Well, having reached this point, I’m afraid I have to make up my mind on what I think about the federalisation of Europe. No doubt, I do believe it could be a cure against the poor budgetary discipline, and I do hail Germany’s efforts resulting in the EU members agreeing on the fiscal pact. And yet I don’t believe federalisation will ever materialise, simply because that will be the end of the EU as a union of democracies.
The EU as such is not a democracy, and seems to have no real chance to become one any soon. Hence, its federal-style supervision of national budgets and national democratically elected governments would simply not enjoy full legitimacy. Killing democracy and the precious European accord for sake of budgetary discipline? A bad idea. A dead EU would have no use of sound finances, but we would have no use of another ugly bureaucratic empire on the EU’s place.
The new fiscal pact, too, only suggests stricter rules to obey by the national governments (Germany also suggests close monitoring of national policies by panels of academics), not that any EU body take over from the national governments. The national sovereignty stays intact, and that’s the only way democratic European nations can keep the EU alive.
Having said that, I cherish the hope that one distant day the Europeans will afford much more synergy than a union of national states.
What’s the bottomline for Latvia?
How is Latvia better off with the euro? The advantages of being a member of the euro area stay unchanged, and the stability of the euro is not one of them. The euro will keep coughing and sneezing for quite a while yet, so much lies and imbalances it has so far tolerated. If the euro area has learned anything at all from the crisis, I sincerely hope it’s zero tolerance on lies and imbalances.
I guess the bottomline is—don’t cheat and don’t expect someone or something else will be dealing with your economy, develop it, make it more innovative, attractive and produce more added value for you and your folks. Inside or outside, Latvia will need to observe the strict rules of the budgetary discipline, think and act responsibly and intelligently. It’s simply easier to do, if you’re inside. Just a little bit. Sounds like an opportunity—why not use it?