How the Eurozone is holding Europe back

On 20 October, Phil Mullan took part in a debate entitled ‘Euro and the Economy: the final countdown’, at the Battle of Ideas in London. His opening comments are published below.

Although it takes an economic form, the underlying problem with the Eurozone is not necessarily economic; it’s political. And the political solution to the problem of the Eurozone would be to wind it up, because as it is, the Euro is aggravating everything that is wrong about the economies in the Eurozone area.

The reason I think the Eurozone is bad for the economies, weak and strong, is not because of the current mess. Even if, hypothetically, a stable, recession-free Eurozone could be created, I would argue that it would still be a problem for these economies. The reason for this is that you cannot have a stable, durable monetary union without a pre-existing political union – and a political union is what we don’t have with the Eurozone.

The problem is this: a monetary union alone can never deal with the inevitable economic inequalities that are bound to exist across any broad geographical area, differences which are all too evident today. To deal with economic inequalities, you need to have fiscal transfers and other such policies to address them. These mechanisms cannot be gradually and retrospectively introduced. To attempt to impose fiscal and political union on top of what presently exists will only make things worse, not just economically but, more importantly, politically and democratically.

I think it’s much better to start from scratch. This would entail a controlled dissolution of the Eurozone and after that there would be a chance for a proper public debate about how to realise the benefits of European integration.

We have to be clear what the economic problem is. It is not to do with the sovereign-debt crisis – that is a symptom, not a cause. And I don’t think that the core problem is a dysfunctional financial and banking system. I think we have to go deeper to identify the problem within all the European and Eurozone economies. And that deeper problem emerges when we ask why it is that since the creation of the Eurozone in 1999, all the countries involved (particularly the weaker ones) have had to rely on credit and easy money to keep going. Why has so much money been borrowed from the banks, creating the huge debt piles that have now come to the fore? And the underlying truth is that all the European countries, the weak and the strong, possess defective productive engines that fail to generate the growth and wealth which are the normal ways a country becomes prosperous.

Instead, because those productive engines have effectively decayed, these nations have had to resort to an artificial means of maintaining both the semblance of prosperity and rising living standards. And they have done this by living off the future, living off credit, living off debt. And now, during this time of crisis, this artificial way of maintaining the semblance of prosperity has come up against its own limits.

So the core problem, then, is the underlying weakness of these economies’ productive capabilities, and their inability to create sufficient wealth to fund rising living standards. The roots of this problem reach back beyond the past three years of the Eurozone crisis, and even beyond 2007. In fact, they reach back to the Eighties and the Nineties, the period, that is, when these countries began to reveal a low level of productivity and anaemic levels of economic growth. Therefore, all the Eurozone economies need to be renewed, to be restructured in some way in order to establish an alternative and real basis for prosperity; not more credit, not more debt, but a productive base on which to make their way in the twenty-first century.

But there are three reasons why the Eurozone is a huge barrier to such a necessary restructuring.

Firstly, it provides a comfort blanket for all the various national elites across Europe. The fact that you can have single interest rates across the region, which has allowed weaker countries to borrow at very low levels, or the fact that balance-of-payments deficits have been pretty much irrelevant because you’re all under one currency, rather than being subject to national currency pressure – all these apparently short-term benefits of being a part of the Eurozone are actually ways in which different national elites have been able to evade taking responsibility for tackling the economic problems festering in their midst.

The second reason is that the Eurozone comes with rules and regulations which are actually restricting the ability of countries to deal with the need to restructure. In order to restructure an economy, in order to support technology start-ups, in order to fund research and development, in order to fund the infrastructure and investment that’s needed, you’re going to have to spend money. But the rules and regulations prevent that from happening.

The third reason is that the undemocratic essence of the Euro inhibits popular participation. And economic revival or restructuring can only work if people are involved in it. It’s not going to be an easy way out of the mess that exists across those European countries; there is going to be a lot of tough choices that have to be made. For any proposals and policies to succeed, people need to be engaged in the debate.

Yet it is precisely that level of popular participation which is anathema to the way the Eurozone works. More than anything else, it is for that third, democratic reason that the Eurozone will have to go in order for us to get to the root of today’s economic malaise.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000. (Buy this book from Amazon (UK) or Amazon (USA).). This article is an edited transcript of his introductory comments at the Battle of Ideas festival.