Understanding developments in the European crisis has become rather like Kremlinology, trying to figure out the meaning of subtle changes in wording, and rearrangements of the Politburo on the podium for May Day parades. In particular, Mario Draghi of the ECB goes back and forth, sometimes suggesting that the ECB will do what nearly everyone else can see is minimally necessary to the survival of the euro (namely, print lots of them, and use some to buy EU government debt, as was done by the Fed and the Bank of England). At other times, though, it’s as if Jean-Claude Trichet is doing a ventriloquist act.
In one respect, todays EU agreement was anything but subtle. The fact that the Eurozone countries and those aspiring to join them were prepared to go ahead without the UK (and a few others) suggests that they have something serious in mind. But what – the announcement is pretty much a restatement of the Growth and Stability pact, and under present circumstances, the deficit targets can only be seen as aspirational.
Applying one of the approaches that used to be standard in Kremlinology (not necessarily a reliable one, then or now) I’m going to assume that the EU leaders are acting with some sort of coherent goal in mind and work from there. In particular, I’m going to assume that everyone who matters now recognizes the need for a big monetary expansion and the use of newly created money to resolve, or at least stabilize, the debt crisis.
There are a bunch of obstacles to this:
(i) The desire of the ECB to save face, to avoid admitting its large share of responsibility for the crisis and, if it can, to hold on to its central position and to the inflation targeting system<
(ii) The belief of the German public (and some others) that they are being made to bail out a bunch of feckless Southerners, rather than (the reality) saving French and German banks from the consequences of their bad decisions, and preserving the European economy on which the Germans depend as much as anyone else from the disastrous regulatory failures of the Euro-elite, including the ECB, European Commission, financial regulators and so on
(iii) the problems with EU treaty amendments requiring unanimous consent
Obviously, problem (iii) is no longer an issue. From now on, eurozone economic policy will be made within the eurozone, through a still informal negotiating procedure. How this evolves remains to be seen, but there won’t be any effective national veto. And with the UK out of the picture, it’s unlikely there will be much room for carveouts or exemptions. Problem (ii) will take some time to fix, but Merkel can certainly sell the deal as a victory for Germany. Finally, it hardly seems possible that the EU leaders would have gone through this whole process unless they expected the ECB to play ball. And, the balance of power between the ECB and the national governments has changed pretty sharply. The old rules have been suspended, and there’s no reason to suppose that ECB independence would survive an intransigent refusal to move. The deal offers Draghi the chance to make a virtue of necessity.
Of course, given the history, it’s equally reasonable to suppose that the agreement has just kicked the can down the road, and that everyone will keep on doing as little as possible while austerity turns recession into depression.
And even if things work out well in the short term, there are big problems down the track in the failure to make room for a Keynesian fiscal policy. Even more serious is the democratic legitimacy crisis. Until now, it’s been more of a theoretical issue – people enjoyed grousing about various bits of the EU, but no one really cared. Now the big decisions that used to be made by national governments will be subject to a largely unaccountable central veto.<