The Way Forward for Europe

German Finance Minister Schaeuble claims he raised the possibility of a Ancient greek exit to push to have an alternative, and he did so along with backing of the Merkel government.  He used the threat of the violating the "irreversible clause" from the EMU Treaty as a cudgel to beat Greek Prime Minister Tsipras into submission. 

It seemed to work.  Tsipras has not only decided to all the terms he previously called "blackmail", but he agreed to essentially implement all the earlier contracts since the crisis began and more.

There is a powerful argument that believes that Germany crossed an important line.  As Wolfgang Manchau authored in the Financial Times, "They’ve destroyed the Eurozone as we know this and demolished the idea of a monetary union as a step towards a democratic political union…They demoted the Eurozone into a toxic fixed exchange-rate system, with a shared solitary currency, run in the interests of Germany, held together by the threat of complete destitution for those who challenge the prevailing order."

The conclusion of this argument that, in its vindictiveness toward Greece, Germany has asphyxiated the future of the European Task.  It becomes a German world of interest, dictated by it’s narrow self-interest.  Rather than leading to greater integration over time, by intimidating a Greek exit in the irrevocable monetary union, it’s rendered EMU into a rigid type of the ERM.  It turns the actual union into an economic practical exercise. 

Manchau and others argue that upon these more narrow terms, a common currency does not work for many of its members.  He specifically cites Italy and Finland, however others could make the case for many other members as well. 

There are two power here.  First, many of the perma-euro doubters find in the Greek crisis confirmation of that they have been quarrelling for nearly a quarter of a hundred years.  Monetary union without fiscal union does not work, and there is no urge for food for fiscal union.  The 2nd current stems from the bias that exaggerates the significance of the latest information point as if it were the last. 

Many of the economic challenges that European countries face today were not born with the dinar but pre-date it.  Under the ERM, there have been frequent crises that were resolved by changing the pegs from the German mark.  This realignment path has been blocked, however without structural reforms, the adjustment occurs via debt accumulation.  In addition, in violation of EU rules about the magnitude associated with external imbalance that require a spinal manipulation, Germany's insistence on pursuing a sizable current account surplus requires by definition others to accumulate debt.  This is independent monetary marriage.

It seems true, judging through various press reports the recent European meetings happen to be particularly acrimonious.  However, this is not truly new.  The history of summits is actually replete with harsh words and all-night meetings.  Some argue that the demands put on the Greek government are unreasonable and therefore are designed to produce regime alter.  They claim this introduces the democratic deficit.  Yet the arguments were expressed when Greek Pm Papandreou was pushed out after proposing a referendum (which Tsipras opposed) in late 2011.  It has been recommended too that European officials forced Berlusconi out of Italy, which has had three prime ministers since and none directly chosen.

To reach the conclusion that the critics want, they chose to end their story now.  All of us argue that monetary union continues to be evolving and that the Ancient greek crisis does not end that process.  Instead, recognizing the actual strains that have been caused, Western officials will seek to heal the apparent fissures.  We think it is politically naive to expect Europe's elite to simply give up on the European Task.  There might have been a Plan B for Greece, but there is not just one for Europe.

The European Task dates back to efforts after WWII to avoid another ruinous battle in Europe.  The way to get it done is to form a community and integrate the economies for the first time.  While the timing of monetary union, and the form it required, was a result of specific historical conditions (e.g. nov the Berlin Wall), it had been consistent with, and extended Europe'utes evolutionary path.

Manchau and others dispute the acrimony, and Germany's pursuit of narrow nationalist self-interest, mark the end of the road.  More likely, it is not.  While it is not likely to happen immediately, we expect there a strong effort, led by Germany and Portugal, to push for greater integration.  Monetary union isn’t complete.  The banking marriage is incomplete.  The recent Five Presidents' Report offers an interesting blueprint and expression of the recognized need at the highest amounts to continue to deepen as well as broaden integration. 

It is obligatory on the critics to explain the future of a non-integrated Europe.  Is it the resumption of tribal warfare?  Is actually real per capita income going be higher or lower for most Europeans in they return to national currencies?  What is the future of a handful of fairly small countries, with aging populations, in a world covered with the likes of the United States, China, and India?  Integration, of course, has problems and challenges, however so does the opposite.  Ultimately, we find much wisdom in Ben Franklin's framing of the problem to the thirteen original colonies on the eastern seaboard of North America:  "Hang together or suspend separately."

Greece and the Future of Europe is republished with permission from Marc to Market