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So where now for Europe?

The irony for the EU, wPlanet of the Euros, by DonkeyHotey, Flikr, Creative Commons licensed Attribution 2.0 Generic, source image for the European Central Bank sign is a Creative Commons licensed photo from UggBoy?UggGirl's Flickrhich even its leaders now recognise must change course radically, is that it can’t. At least it can’t in its present structure without such dislocating changes as to be scarcely credible.

The central problem has been, and remains, the single currency. As long as countries, particularly on the southern periphery, remain locked within the eurozone interest rate and exchange rate and unable thereby to operate their own monetary policy, they have no option but to resort to austerity (i.e. cutting public expenditure, squeezing wages, letting unemployment soar) to regain competitiveness. But even that route is now blocked by these European election results. Even if that route were still open, it is clearly impossible for some eurozone countries under current conditions to raise their rate of growth sufficiently to prevent their indebtedness continuing to grow.

It is true that Mario Draghi, president of the European Central Bank (ECB), did famously say that he would do whatever it took to save the euro. That only worked – for the moment – because the US Fed had flooded international markets with dollars through its quantitative easing programme, and thereby vast quantities of those dollars reached European bond markets. Even that has now been undermined by the German constitutional court at Karlsruhe which, for pedantic legalistic rather than sound economic reasons, has now concluded that the ‘outright monetary transactions’ programme to buy bonds of countries, even if they agree to economic reforms, is illegal.

Excessive German legalism betokens deeper disagreements. Governments want the benefits of a single currency, but not the risk-sharing and transfers of a federation. Germany won’t accept liability for others, has blocked eurobonds and rejected a common backstop for banks. It has bailed out fiscal countries in trouble though loans, but only on strict conditions. It has tightened fiscal rules and persisted in running large surpluses, worsening deflation and creating eve-deeper political resistance which has now exploded.

The EU elections are to Germany’s self-centred intransigence what the irresistible force is to the immoveable object. It isn’t clear which will crack first, but in the absence of that there is a serious risk of the eurozone slowly sinking into deflation and facing a lost decade like Japan. That is certainly not what the electors throughout Europe voted for, but it may well be what they get.

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