Thu Apr 12th, 2012 at 09:04:16 AM EST
I think we agree in varying measuresthat the EU and the Euro project both face existential challenges, with symptoms of those challenges being an increasingly acute financial crisis, a progressive deficit in democratic institutions among member states (with the EU effectively installing caretaker governments in, so far, two member states, Greece and Italy) as well as a persistent deficit in the putatively democratic institutions of the EU itself (whose parliament has been shown to be effectively irrelevant in confronting any of the major issues of the EU day).
In this, and especially as regards the first point, we are far from alone, with numerous commentators, though principally in the English-speaking world (accompanied by some on Europe's non-anglophone periphery, and in particular in Greece, where the crisis is most acutely felt), lamenting the rank inability of those insitutions which have the power to confront these challenges (principally among them the ECB, the European Commission and the dominant memberstate institutions behind these, notably the Bundesbank and the governments in Berlin and, to a lesser extent, Paris) to actually do anything other than fiddle and fudge, declaring victory as they negotiate yet another "historical" yet inconsequential (or, at least, far from up-to-the-task) accord, agreement or memorandum of understanding.
Today, George Soros, on the pages of the FT, adds his voice (paywall) ever more explicitly to the chorus, arguing that far from abating, the euro crisis is getting worse. The ECB may have provided temporary relief (in the form of 1tn free liquidity) to the sovereign credit crunch, stabilizing markets for the time being, a time which will not last long.
Why? Because the fundamental problems have not been solved; the BOP issues between debtor and creditor member states have worsened and will not improve without action. He therefore argues "the crisis has entered what may be a less volatile but more lethal phase."
Less volatile in the sense that formal public financial instutions in the EU appear to have stabilized a deteriorating situation, though that stability is likely to enter a period of and equally stable, secular decline rather than, as at present, treading water. But lethal in two senses: lethal to the viablity of the EU and the Eurozone projects in an instutional sense, and lethal in the very actual sense, as the liquidationist logic applied from core to periphery, via a degrading social and public health perspective, begins to result in increasing rates of mortality (as was observed two decades ago in the states of the former Soviet Union as in parts of Eastern and Central Europe).
Mr Soros is quite pessimistic, and rightfully so, but he does propose a few solutions to the issues at hand, all the while insisting on the ultimate irrelevance of the Bundesbank (and by extension, the ECB) in matters which are essentially political (and in so doing, Mr Soros arguably puts into question, and thankfully so, that ridiculous notion of "central bank independence".
Many of these solutions are akin to what you have been reading on this blog over the past three years, with a twist here or there. Guarantee of a uniform interest rate for all member-state official debt, importance of measuring private as well as public debt levels and takign proper account for these, necessity of increased German domestic demand, separation of public investments from public expenditures in the determination of public deficit levels, and so forth. All, very reasonable, all very logical proposals from a purely liberal perspective, with the added merit that they might actually work.
But one item caught my eye, which betrays the liberal optimism of even such a sobre and jaded market observer as Mr Soros, who while arguing for such extraordinary measures, cites the EU's fiscal charter, which requires member states with public debt in excess of 60% of GDP to reduce this debt load by 5% annually. He intimates this as a stick, to which he would add a carrot (and thereby, ostensibly, further avoid the member state moral hasard issue of constantly allowing breaches of the pact without consequence), naely, that good behaviour be rewarded (no discussion of what form of reward this would involve in the present article). He declares that such a reward would in and of itself head off the deflationary death spiral towards which we inarguably are heading, thereby improving prospects.
I argue that the exact opposite would happen for, as has been stated here and elsewhere often and by many, this crisis is above all a crisis of demand. "Rewarding good behaviour" in Soros-speak is an incentive to spending retrenchment on the part of EU member states at precisely the time this is most counterproductive, itself contributing to the deflationary feed-back loop into which the Eurozone has arguably already entered.
And not only is such spending retrenchment, which Mr Soros aims to incentivize, counterproductive, it almost necessarily will involve further cuts to European solidarity mechanisms, equally counterproductive. In this way, Mr Soros also neglects the political situation on the ground in most EU member states at present: out of touch elites, essentially unaccountable to the people on whose behalf they putatively govern, and who no doubt will be very happy to respond to incentives of the sort to which Mr Soros points, if only to use those incentives to reward their friends in a private sector which, as recent privitisation developments in the UK and earlier ones elsewhere underline, have increasingly merged with the State (and expressions of State interest) over the past few decades of neo-liberal regression and so-called "third-wayism," the resulting lack of alternance (expressed on these pages recently as "TINA") only sealing the deal.
I am sure Mr Soros means well, but the open society he beckons for is no longer, strictly speaking, open. The EU has bifurcated into its local elites and the people who tolerate their rule with increasing impatience. There will be no use of Mr Soros' carrot on behalf of the people, any more than present uses of the stick have taken account of the needs of those people to date. Strictly speaking, Mr. Soros is, as is often the case in that ideological sphere, that of liberalism, an unreasonable idealist.