Some of the essential urgent components have now been put in place at last night’s Brussels summit, so that the Eurozone is safe for at least a few months ahead. But this was dealing with the immediate symptoms. The underlying structural flaws remain. The main one is that the Eurozone was always built on the fallacy that tying together Germany – and its comparators Austria, Finland and the Netherlands – with Greece, Portugal, Ireland and maybe Spain and Italy could be made to work where the weaker economies were no longer able to change their interest and exchange rates. That problem has not been solved and is perhaps insoluble. The theory is that fiscal union, redistributive transfers and common European bonds, together with strict budgetary discipline, would enable compatibility. They won’t, for some very good reasons.
First, the scale of the redistributive instruments that would continue to be needed make the proposal politically untenable. Beefing up the EFSF to nearly €1 trillion is a one-off which was only very reluctantly accepted as an absolute last resort when the break-up of the Euro was becoming a real possibility. It would never be agreed as a regular on-going facility.
Second, countries with a single political and cultural unity such as the US or UK can live with significant redistribution within their own borders. However, cross-border fund transfers on the scale required, say between Germany and Greece or Italy, let alone between the UK and one of the failing Southern economies, would simply not pass muster with the creditor electorates.
Third, whilst East Germany was steadily brought up to the West’s standards after the 1989 reunification, the idea that the weaker EU under-belly could be robustly upgraded by grinding Teutonic discipline to withstand German competitiveness is pure fantasy. One size does not fit all. Misquoting words from another context, it’s a two-speed Europe or bust. The truth is that at the accession of many of the weaker brethren the convergence criteria were blithely airbrushed away, and the Eurozone is now paying the price of putting political or federal aspirations above economic realities.
Germany, now the dominant political and economic power in Europe, is behaving as selfishly as the US did at Bretton Woods in 1944. It refuses point blank to reflate its economy to help its struggling partners, yet at the same time rejects continuing cross-border redistributive transfers as the price of EU disparities. All the burden of adjustment is being placed on the debtors, none on the creditor. On that basis long-term the Eurozone is doomed.