Monday, May 09, 2011

The euro and the EU

Helmut Schmidt, former German Chancellor, EU in der Krise: Die Währung ist gut Süddeutsche Zeitung 08.05.2011. Schmidt was and is a Social Democrat. But his economic viewpoints are very much influenced by neoliberalism, aka, "the Washington Consensus." This is an illustration, as he touts the value of low inflation and stabile currency:

Aber auch die etwas bescheidenere Nachricht von einer angeblichen Krise des Euro geht ganz und gar an der Wirklichkeit vorbei. Denn tatsächlich ist der Euro nach innen wie nach außen stabiler als der amerikanische Dollar. Unsere Inflationsraten sind deutlich niedriger, der Währungskurs liegt hoch. Der Euro ist in seinen bisher zwölf Jahren sogar deutlich stabiler, als die Deutsche Mark in ihren letzten zwölf Jahren gewesen ist.

[But even a relatively careful report about an alleged crisis of the euro completely and totally ignores reality. Because the euro, domestically and internationally, is more stable than the American dollar. Our inflation rates are distinctly lower, the currency exchange rate is high. The euro in its 12 years so far has been even distinctly more stable than the German mark was in its last 12 years.]
He also frets that if people express doubts about the euro, the confidence fairies will go on the rampage: "Das Gerede von einer Euro-Krise ist nicht nur leichtfertig, sondern auch schädlich. Es schafft Misstrauen." (Talk about a euro crisis is not only frivolous, but also does harm. It creates mistrust.)

Schmidt praises the tight-money policies of the European Central Bank (ECB), which is compounding the economic crises in Greece, Spain, Portugal, Ireland and other countries of the EU. The fundamental weakness in the euro is in a situation just like the current one. A country that doesn't not control its own currency is vulnerable to being economically devastated by bond speculators. This happened to Argentina in 2001, when their currency was still pegged to the dollar, effectively removing immediate control of their currency from the Argentine government. They've done much better since ending that currency pegging to the dollar.

For the EU and the euro to work in the long run, the EU needs enough of a combined economic policy that in a recession, the economically harder-hit portions of the Union can receive the needed countercyclical stimulation. That means abandoning neoliberal economic policy and the hard-money bias that goes with it. And abandoning an irrational standard for national budget balancing in good times and in bad. Countries also need to be able to issue euro-bonds guaranteed by the whole EU, not just by single countries. If Portugal issues bonds guaranteed by the Portuguese government but denominated in euros, it can get hammered by speculators driving up interest rates without having to worry about getting repaid in depreciated national currency.

Schmidt lectures Germany about the danger of being arrogant and overbearing within the EU. But his basic argument is a general one about how Germany needs to be a good neighbor within the EU and how the EU is in Germany's interests in preserving a peaceful Europe. And in the longer run, a united Europe is necessary if Europeans want to be part of a world power, not just members of small states in the global power alignment.

Schmidt isn't so much of a neoliberal, however, that he fails to recognize the need for more effective enforcement of financial regulations on major banks, both in the US and Europe. And he criticizes the anti-EU noises that Christian Democratic (conservative) Chancellor Angela Merkel has occasionally been making.

Schmidt ritually recognizes the democratic deficit in the EU today. But he doesn't make it central to his concerns. People in Greece and Spain have a legitimate reason to ask whether membership in an EU that lets them hang out there in an economic slump and pursues Herbert Hoover economic policies that values currency stability and low inflation highly, but values job creation in the hardest-hit EU countries hardly at all. Spain's unemployment has been running at 20% or more, i.e., Depression levels. Yet under current EU austerity and tight-money policies, Spain can expect little immediate relief and only a slow recovery. Especially since their euro participation has left them at the mercy of the bond vigilantes. The real ones, not the confidence fairies that conservatives endlessly fret about.

If the EU wants democratic support and long term legitimacy, they will have to give the needs of the public higher priority in comparison to the greed and Herbert Hoover inclinations of the financial elite.

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