Eurozone backers evade arguments

Supporters of the eurozone project generally prefer to sidestep any discussion of the intrinsic weaknesses of the monetary bloc. The European Commission (EC) proposal for eurobonds amounts to embodying this evasion of hard arguments into a new form of debt.

In principle the idea of eurobonds is simple. National debt issuance should be replaced by bonds commonly issued by the eurozone. In that way all the nastiness of widening spreads on eurozone debt can, the scheme’s supporters hope, be avoided.

If anything, the effect is more likely to be that the stronger eurozone economies are dragged down by the weaker ones. The failure of yesterday’s German bond auction is an apt warning in that respect. Attempting to muddle through is only likely to intensify problems rather than lessen them.

Given that the structural flaws in the eurozone seem to be so little understood it is important to revisit them: a monetary union is inherently unstable in a world of nation states. Trying to bind together countries with greatly different levels of productivity into a common currency and monetary policy is always likely to prove unstable. If anything is remarkable about the eurozone crisis it is that it has taken so long to materialise.

The record of the eurozone since its advent in the late 1990s is a perfect illustration of the intrinsic flaws in the bloc’s design. Rather than creating a convergence of the member economies has made them diverge further. The differences in competiveness between, for example, Germany and Greece have widened rather than narrowed. Until the bubble burst, Greece experienced a credit boom, as it benefited from access to artificially cheap credit, while German living standards were constrained.

On a political level this arrangement also had the disastrous effect of creating animosity between the citizens of northern and southern Europe. A project carried out in the name of European solidarity has ended up entrenching divisions across the continent.

To be fair, the more sophisticated supporters of the eurozone recognise its inherent structural weakness. That is why they are pushing for measures that will strengthen the move towards fiscal union while weakening nation states. There are differences of opinion about how this goal should be achieved but the eurozone elites are intent on moving towards further integration.

A key problem with this initiative is that it is fundamentally undemocratic. It means that unelected technocrats will override the opinions of democratically elected politicians. The imposition of unelected governments in Greece and Italy is not an aberration but captures the autocratic essence of the eurozone project.

As I have previously argued in Fund Strategy this lack of democracy is a fatal flaw in practice as well as in principle. Democracy provides a mechanism for politicians to gauge what is happening in society as a whole and to gauge popular views.

Technocrats, in contrast, are insulated from public opinion and therefore have little understanding of how their schemes relate to the real world. They imagine their elaborate plans are exceedingly clever but when implemented they turn out to be disastrous.

The eurozone’s supporters often warn of dire consequences if their prescriptions are not followed. Yet the technocrats’ schemes have played a key role in getting Europe into such a mess in the first place. Prolonging the reign of the techno-elite will only make matters worse. The quicker technocratic rule is replaced by genuine democratic government the better.

This is my latest blog post for fundweb.co.uk