The $125 billion Spanish bank bailout announced this weekend is more of the same: another temporary dose of pain meds that (we hope) prevents a market meltdown for a while but does not address the underlying conditions.
Fair enough, in a way; Via Meadia has no desire to see a full blown European financial panic and although the danger of the financial apocalypse has not been ended it has been successfully put off for a while. If the only thing you can do at the moment is buy time, we say, “Buy.”
The underlying problems of the eurozone remain, and they are likely to remain for some time. They are rooted in hard and unforgiving realities; policy makers cannot make these realities disappear with the wave of technocratic wands and so this saga is going to go on for a while.
Problem 1: Markets move fast, but Europe is slow. Financial markets can melt down in a few minutes, but it takes Europe a couple of years (or more) to make and to implement serious political change. This means that even if the European elites reach a consensus, and even if their consensus position is smart and would work, we are going to have recurring bouts of financial anxiety and crisis as the consensus position slowly winds its way through the complicated European process of treaty ratification.
Problem 2: The Europeans have no consensus position and are unlikely to reach one soon. The issues in the euro crisis are too deep to be easily compromised. Financially, France and Germany have very different visions of what a currency is and how it should be managed. Neither side is willing, and perhaps neither side is able, to compromise on this point. On top of this, monetary union is a political question and not just an economic one. Europe can only have a single currency if it has a single government in some respects, but all the major European countries have different visions of what that government should look like. Finding a workable economic compromise over the nature of the euro and melding that with a workable political compromise over the nature of Europe is a very hard thing to do — and it may be impossible.
Problem 3: The European negotiators do not have the power to impose any solutions they may find. Even if a “grand compromise” on both money and political union can be found, this compromise has to be sold to parliaments and public opinion back home. There is no way to make these changes without new treaties, and under the dysfunctional EU system, treaties need to be ratified by all 27 countries to go into effect. Many countries have coalition governments, and there is no guarantee that parliaments will back whatever the policy makers and architects come up with. Worse, in many countries referendums are required before major new European treaties can be ratified and it is by no means certain that voters will accept the kinds of treaty arrangements now on the table.
This is to be expected; what Europe is debating now is the nature of its money and the degree to which proud and ancient nation states will cede vital elements of sovereignty to a set of institutions which, recently, have not worked very well. The debate is being held at a time of great economic uncertainty and, in some countries, of massive economic pain.
Problem 4: It’s far from clear that all the European countries could live up to the terms of a new and deeper union even if they signed up for it. The cultural and social differences among the 27 EU member states are very wide. Countries like Bulgaria, Romania and Greece have already failed by many measures to live up to agreements they have already signed with the rest of Europe. Spain may find that the stress of living up to European fiscal requirements literally leads to a breakup of the country. Some of the changes Germany wants to see in Italy are changes that Italian governments have repeatedly tried and failed to make — going all the way back to Italian unification 150 years ago. The euro is in trouble partly because European countries — including both Germany and France — have violated agreements they made when the currency was established. There is little reason to believe that future agreements, however solemn and detailed, will or even can be carried out.
Problem 5: The gap between Europe’s publics and its elites has grown into a chasm. Europe’s technocratic, cosmopolitan architects must now demand a huge leap of faith from a justifiably and rationally skeptic public. A true fiscal union is a leap in the dark, and it involves the painful sacrifice of national control over national finance. Whatever compromise and grand design emerges from the coming meetings of the European political grandees, the peoples of Europe will be asked to accept, on faith, that this new system will work and work well. The trouble is, that the last big proposals of the European establishment to the public are dismal, honking, stinking, obvious flops. The euro, which has led to an economic catastrophe in many places of truly epochal and historical dimensions, was one of the establishment’s bright ideas. And the European governance mechanisms which have shown themselves to be so dismally and pathetically inadequate in the face of the euro crisis that they must now be redesigned, were just recently sold to European public opinion by the establishment as a grand and beautiful design when the Lisbon treaty was ratified.
Almost everybody in Europe knows and feels that Europe’s leaders are not very good at building European institutions and planning and running a European currency, but they are being asked to put more faith than ever in the people who have just handed them two grotesque and expensive flops in a row.
Given all these factors, buying time seems the most rational thing for Europe’s leaders to do. It’s not even hopeless; people want to succeed and economies want to do well. It’s quite possible that Europe’s solutions won’t come from grand designs developed by technocrats in Brussels, but will come out of the improvisations and innovations of hundreds of millions of smart Europeans just trying to dodge economic bullets and get ahead in life. Keeping the financial system from collapse while individuals, firms and governments all over the continent figure out what to do next may not be the kind of dramatic Grand Design that ambitious eurocrats like, but it may in the end be the best they can do.