The eurosceptics have the best lines again
There are eerie parallels between the euro debates in the UK in the late 1990s and in the northern eurozone today. Back then, the anti-euro campaigners in the UK highlighted the shortcomings in the construction of the eurozone – an analysis that turned out to be correct – and also correctly predicted the euro would require a political union to succeed in the long run. There was also emotional stuff about the Queen on banknotes. But it was an internally consistent position. I did not share that view but I recall admitting back then that if you do not accept political union, logically you should not accept the euro either. There was never a purely economic case for the currency.
The pro-campaign in the UK,
by contrast, was pathetic. It was based on the notion that the anti-campaign exaggerated their case, and that a single currency was not such a big deal. Anyway, supporters argued, it was in Britain’s interest to remain in the heart of Europe, whatever that meant. I challenged a young pro-euro MP at the time. His answer was that in Britain advocating a political union was impossible; hence, a campaign to play down the implications would be a good second best.
Fast forward 13 years. Last week, more than 200 economists signed a petition organised by Hans-Werner Sinn, head of Germany’s Ifo economics institute and the most eurosceptic voice among the country’s economists. He has not yet advocated a withdrawal from the euro, but his recommendations are not consistent with the eurozone continuing in its present form. The petition focused on the banking union, and why this would open the door to a fiscal union and large-scale burden fiscal sharing.
Other economists then launched a counter-petition arguing that a banking union is a logical extension of a monetary union. That in itself is correct. But, like the pro-euro campaigners in the UK in the 1990s, they played down the implications. They said a banking union is nothing to be afraid of; there would be no transfers; there is no question of Germany taking on anybody else’s banking debt.
I disagree with the views of Professor Sinn and his group. But I have to admit their position is internally coherent. It opposes transfers and ultimately accepts the break-up of the eurozone.
The position of the so-called pro-euro movement, however, is a lot less coherent. A properly constructed banking union will, of course, imply permanent transfers, as would a properly defined fiscal union. The idea that you can resolve the eurozone crisis without transfers of any sort is delusional. Since the German banking system is relatively stronger than Spain’s, a banking union would, of course, imply a loss for Germany. If you have joint deposit insurance and joint banking recapitalisation, surely transfers will take place – just as they now take place inside countries themselves.
The pro-campaigners in Germany, as in Britain 13 years ago, pretend to be pragmatic. This is why they agree with Chancellor Angela Merkel’s rejection of eurozone bonds. They are not a sellable proposition in Germany, they say. Likewise, they agree that economic adjustment in the eurozone cannot be symmetrical, again on the grounds that it is not a sellable proposition. For the same reason, they also support all the deficit rules, despite the fact that they have never worked. They also reject changes to the European Central Bank’s mandate. With pro-Europeans like that, who needs eurosceptics? Hilariously, several professors signed both documents.
The proposal by the German council of economic advisers for a so-called debt redemption fund falls into the same category. It is another tribute to the shrine of pragmatism. It appears pro-European but, on closer inspection, it is not going to resolve the debt crisis. A debt redemption fund is an instrument to pool a portion of each country’s debt in exchange for the issuance of a eurozone bond. But the idea is for the debt to be repaid, so the bond issue will ultimately expire. That may be fine for relatively small amounts, but Italy’s “excess” debt is about €1tn. The idea that Rome can repay its excess debt in 25 years is insane, unless you assume a miraculous and sustained pickup in economic growth.
As in Britain in the 1990s, today’s pro-Europeans are incapable of defending the idea that a monetary union requires a banking union, a minimally sufficient fiscal union with tax-raising powers, and a political union with a legislative mandate independent of member states. The eurosceptics are saying they do not want any of this. The pro-Europeans want to obfuscate.
Much as I hate to admit this, Prof Sinn’s group is intellectually more consistent than the group whose ultimate goals I share.