Why closer union can’t save the Eurozone

Gideon Rachman’s FT column today is an absolute must-read for anyone interested in the outlook for the Eurozone.

Right now, the conventional wisdom is that Eurozone policymakers face a choice: either the Eurozone will gradually fall apart, or they need to get their act together and pool more sovereignty. It was always illusory to suppose that you could have a currency union in which monetary policy was centralised but fiscal policy was not, so the argument goes – so if policymakers want to avert disintegration, then they need to go further and deeper on unifying Europe, through even greater institutional centralisation.

But Rachman’s having none of it:

Those who argue that “political union” is the solution to the current crisis seem to believe that Europe’s problem is institutional … This is a profound misdiagnosis of the crisis. The real problem is political and cultural. There is not a strong enough common political identity in Europe to support the single currency. That is why German, Dutch and Finnish voters are revolting against the idea of bailing out Greece again – while Greeks riot against what they see as a new colonialism imposed from Brussels and Frankfurt.

To argue that even deeper political integration is the solution to this mess, is like recommending that a man with alcohol poisoning should treat himself with a more powerful brand of vodka.

And while he observes that Joschka Fischer was unrepentant at a recent seminar about policy elites having driven the European project (“it’s called leadership”), he notes that

Such leadership is all very well, if it is vindicated by events. However, if elite decisions go wrong, they create a backlash – which is exactly what is happening in Europe now. German voters were told repeatedly that the euro would be a stable currency and that they would not have to bail out southern Europe. They now feel betrayed and angry. Greek, Irish, Spanish and Portuguese voters were told repeatedly that the euro was the route to wealth on a par with that of northern Europe. They now associate the single currency with lost jobs, falling wages and slashed pensions. They too feel betrayed and angry.

And so, he concludes, “a single currency that was meant to bring Europeans together is instead driving them apart”. Fiscal redistribution is hard enough even within long-established nation states, he observes (think of northern and southern Italy) – for a quasi-state that isn’t a nation, forget it. So what happens now? One of two things, he reckons. Eurozone leaders might manage to patch things up (and I struggle to see how, without the institutional integration that he opposes). Or weaker members of the Eurozone could start to leave. That’s what Martin Wolf reckoned at INET, too.