Friday, May 25, 2018
Euro Crisis (Again)
UPDATE (2018-05-28): The European governing elites managed to undershoot my already low expectations for their political competence. Thwarting a democratically elected government on the theory that its proposed finance minister might have a secret plan to leave the euro is insane. Who is this guy -- Dr. Evil? Rather than using multi-national institutions to grind the shaky coalition into the dust, they managed to force a straight up and down vote on euro membership -- which is the only way to get a country out of the euro (as I wrote below...).
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The "hard money" interpretation of the euro (favoured in Germany) is unsustainable, which is a fairly standard critique. In practice, the euro shifted from a rules-based system to a system that says whatever the European Central Bank wants to do is acceptable. As a result, it has considerable capacity to keep the show on the road.
As the Greeks found out the hard way, the European establishment has the capacity to smash its boot on the face of small countries indefinitely. This is not true for the larger countries, as a default risks taking out the entire creaking banking system. As a result, negotiations are a game of chicken, and the European establishment attempts to muddle through. Will this time be any different?
It is a conventional observation to note that the European countries have put themselves into the same position as Canadian provinces. However, very few people want to explore the analogy. Leaving the euro is remarkably similar to a province exiting Canada -- a prospect that has been dangled in front of Quebec voters since the 1970s.
The mechanics of Quebec separation are not very well understood -- particularly in Quebec. It was always viewed as a process where Quebec negotiated the terms, then separates. The obvious problem is that Quebec's counter-parties had no mandate to negotiate terms. They could just reject Quebec's position, and we are back at square one. Quebec needs to either declare independence and then negotiate, or (more likely) have a strong mandate to declare independence if negotiations fail. (The problem with past referenda was that the questions were deliberately weasel-worded, and so no such mandate existed if they passed.)
Until a European party that is specifically taking a run at euro membership rises, all that will happen is that they will make protest noises, then cut a deal with the euro authorities. I could be wrong, but I am not seeing any signs that the current crop of "populists" in Europe have the will to confront directly the prospect of euro exit. (That said, the strategy of weeding out weak political movements poses risks in the longer term on natural selection grounds.) This makes some form of face-saving compromise inevitable.
Things are more difficult in the case of a synchronised downturn. Once again, we would see rapidly rising unemployment, banking system stress, and cross-country imbalances would explode higher. In that environment, the magnitude of interventions required to save the euro might be enough force the savings surplus countries to pull the plug.
(c) Brian Romanchuk 2018