Europe has two big problems. Doubtless one of them is political, or to put it more precisely, it’s in the space of national politics.
The post-national European project has stalled. It has certainly taken us a long way, from warring nation-states to an open community where we feel free and entitled as citizens throughout the continent. We’ve largely lost our national identities, and it may come as a surprise to Americans that we don’t care about our flags. National cultures are cherished as heritage, but not something to be defensive or overly proud of – certainly not something to kill or die for. The nation state was born in Europe in the 1700s and it died in Europe in 1945. Generations of visionary leaders have taken the people of Europe from the aftermath of an existential war to a point where the state is little more than an old-fashioned cultural and administrative unit. It took a lot of paternalism and manipulation to get us here, but on the whole we are grateful. Even the insular British do not prefer to go back to a time of animosity where crossing the border to Germany or France had the significance that entering Israel or Iran has today.
The problem is that after the Maastricht treaty and the introduction of the Euro the post-nationalist transformation has stopped. The Euro obviously came too soon for Europe, but also obviously it was the first of a sequence of bold steps that the then heads of state could not take all at once. Having the Euro is like putting one foot on a moving streetcar, but not climbing on board, instead limping desperately after it with the other foot on the street. The onward steps were very much expected and obvious, but they didn’t come: an elected European presidency; real powers for the European Parliament or some reformed elected chamber; continent-wide taxation, social security, and pension systems; business reform to allow companies to operate across the zone without country subsidiaries; stronger education, development, and technology agencies. None of this happened. The Euro and the ECB were the last post-national institutions that Europe saw.
We haven’t stopped to ask why. Continue reading
There’s no shortage of voices explaining what Europe needs. I tried to collect the main recommendations here. The de-facto leaders of Europe, Merkel and Draghi, are doubtless very smart individuals who can clearly see what ought to be done if one had the common good in mind. I don’t believe the hyperinflation argument is anything but a populist stalling tactic.
What we are observing is the elite of the Eurozone accurately picking up a democratic demand and then deliberately offering something that sounds like the demand but is in fact the opposite, an attempt to distort and defuse what is earnestly demanded.
Eurobonds – what is needed:
Eurozone states need to pool their debt into a common type of bond, or “Eurobond”, so that a billion Euros of Greek debt is indistinguishable from a billion of German debt, much like US treasury bonds are all alike and not denominated by state. Bond markets initially perceived Euro sovereign debt that way, creating a somewhat unhealthy credit boom in the periphery. When markets realized the bonds were not the same they attacked the debt rollover of the weakest economies in turn, Greece being the first, with loan shark rates that predictably destroy the indebted economy. Eurobonds would restore the ability for the whole zone to manage debt at the same rate, which will be low since zone-wide deficit is a few percent.
Eurobonds – what was offered:
The red-blue Eurobond proposal by a German think tank was an attempt to offer something called a Eurobond that expressly doesn’t have the desired effect. That proposal calls for “blue”, essentially high credit rating, bonds that meet tight fiscal criteria and “red” junk rated bonds that don’t. The scheme is no different from the status quo, as countries like Greece would package some existing “senior” debt as blue bonds and would only be able to issue new red bonds for their deficit and rollover needs. The red-blue Eurobond proposal is thus a distraction that protects creditors and bond speculators.
In the aftermath of the financial crisis, and with a raging sovereign debt crisis in Europe, notably Greece, it’s worth stopping to consider what debt is. Even as so much is written on the subject, when I read journalistic or even some economists’ accounts of the debt crisis I’m left feeling that they don’t understand what debt is, or rather that they bring a moral frame to the concept that is unhelpful and out of touch with reality.
There are only three formulations of debt, as an economic transaction between strangers, that are moral and advisable:
- An investment future: If you have a pile of cash, the net present value of keeping it as cash for a year is a few percent below face value, because of inflation and the risk it might be stolen or destroyed. You can give it to someone who can realize a better NPV and share some of that with you, so you both win. You could give it to Facebook in exchange of stock, or to a bank that invests in sub-prime mortgages. You could give it to the government of Germany, or of Greece. These differ in risk and return, and the market does a rough job of pricing them, but it’s always your investment decision. You can ask politically for an investment to be insured, or bailed out, and that simply means socializing losses by inflation or other means. Often, this is the right thing to do.
- An option to sell: A secured debt, such as a mortgage, is really an option to sell the collateral to the bank at some future date, for some variable amount that’s equal to your then outstanding obligation. Again, it’s a business decision. The lenders should plan according to the possibility that they may get the full payment schedule or the collateral, presumably whatever is worth less in the ensuing economic conditions. If they forecast that poorly, well, too bad. There’s nothing moral or otherwise beholding of the borrower in a secured debt arrangement.
- Due payment: Invoices for goods or services are a short term loan from the supplier to the client, granted as part of the cost of doing business. This debt does carry moral weight because it affects the cash flow of both parties a great deal and because only the value of the relationship, and a firm’s reputation, really compel a firm to pay it.
These are acceptable, modern forms of debt. Notice that, apart from the case of honorable business debt, there’s no moral angle to it. If you have surplus you give it to someone in the hope of achieving a better NPV, and maybe you get that or you don’t. There are no reckless borrowers or predatory lenders, and debt is not some kind of crushing moral obligation in this world. Continue reading