Why won’t the Eurozone disintegrate?


About a year ago, while having coffee with friends in Addis Ababa, I postulated that the Eurozone would break up, probably by May, but certainly by September. Of course, I was not the only one offering such projections. But why did we miss the mark (so far)?

Economically, it does not make much sense to go on with the Euro, especially if we have the general populace at heart. Last Thursday (15th November – Ed.), statistics from Eurostat confirmed that the Eurozone remains in recession. The day before that, millions of people across Europe, but predominantly in the most affected countries Portugal, Spain, Italy and Greece, took to the streets against austerity. As you already know, the unemployment figures are at record heights.

So far, there are no concrete signs of dismantling the austerity. As a matter of fact, the Troika (IMF – International Monetary Fund, ECB – European Central Bank, and the EC – European Commission) hold the position that austerity is needed to produce confidence in the Eurozone economies, which, in turn, is expected to uplift the economy. Of course, implicitly, this is also their way of keeping the Eurozone intact, as Mario Draghi, the head of the ECB pledges to “do whatever it takes”.

But why go on? I think there are four main reasons for obstructing a disintegration process:

  • practicability;
  • uncertainty;
  • economic interests; and,
  • political prestige.

Surely, there will be practical challenges in turning one currency back into multiple ones. This is a particular concern considering the possibility of exchanging currencies instantly. The problem is especially delicate for currencies that are likely to be more prone to capital evasion, unless offered costly incentives to mitigate outflows and incite inflows.

In terms of uncertainty, I believe the Swedish economist Stefan de Vylder said it best. In his recent book on the Eurozone crises (currently in Swedish only) the following German proverb is offered: ‘Rather a horrible end than a horror without an end’ (Lieber ein ende mit schrecken als ein Schrecken ohne Ende). Surely, the consequences of a disintegration will be painful, but it would also untie a great range of economic policies. Each country would be able to implement an appropriate policy mix to embark on a recovery and a new development path. This would also allow collaboration between borders and currencies (racing to the top rather than racing to the bottom, in terms of economic competitiveness).

Economic interests are, of course, almost omnipresent, as we continue to live in a world with enduring neoliberal governmentality. In short, this involves an elite methodology which usurps democracy, hi-jacks institutions, and imposes top-down policies (elite co-optation) by way of indoctrination and obfuscation (particularly through mainstream media, politicians, and economists). In this case, the austerity measures save debtors and capitalists while outsourcing their burden on people at large.

I believe political prestige is the factor that I grossly underestimated in my projection. Assembling the Eurozone seems to have been as much of a political project as it was an economic one. To be diplomatic, it was supposed to strengthen the European integration further and contain or even extend the power of Europe. To be harsh, assembling the Eurozone was sort of a forced assimilation, especially into the realm of German political economy. For instance, as highlighted by Stefan de Vylder, it was a well-known fact to relevant stakeholders that the authorities of Greece had tampered with their statistics in order to meet the criteria for Eurozone membership. All in all, it would be an enormous loss of political prestige to dismantle the Eurozone, as its idea and process was played out by contemporary political players (remember, the Euro is only about 13 years old).

Of course, economic interests and political prestige are closely intertwined. In relation, note the omission of incompetence or similar factors above. I think they play little role in matters of aggregate policy direction, such as fiscal expansion versus contraction, or the distribution of the financial burden among economic groups. In my view, at the aggregated level, decision makers know quite well what they are doing, including the fact that they are, more or less, forced to obey elite economic interests, although I must admit that incompetence may play a somewhat greater role in times of turmoil and confusion, compared with rather normal times. All the same, the elites will aim to reach an optimal level of illusion and deception under the auspices of democracy.

Of course, we could take this discussion one step further and ask why the elites would choose to implement policies that are harmful for their countries. This is a complicated question to answer here, but a couple of issues could be advanced. First, the elites are aiming for short-run gains, which may well perpetuate into long-run gains. Second, in my opinion, the elites either hold, or have caved in to, moral systems of elitism and egoism. In so, they merely implement the values they hold on to.

I think the longer the artificial breathing, the more dreadful demise of the Euro.

Deniz Kellecioglu is an international economist who lives in Istanbul. This was first posted on the Real World Economics Blog