The Duck of Minerva

The Duck Quacks at Twilight

Europe can stay irrational longer than the EU can stay solvent


November 10, 2011

The horror, the horror

 What the hell happened to Europe?

There’s still a chance that the EU may be pulled back from the [metaphor], whether that metaphor be an “abyss“, a “chasm”, or “the flames”. But it’s beginning to look a lot like the end of Europe-as-we-knew-it.

Much as the fall of the Soviet Union simultaneously showed that most Soviet experts were unable to predict the central event of the twentieth century, so too will the fall of the European Union leave a lot of Europeanists with (as Dan Rather put it) not just egg on their faces but omelettes all over their suits. (Not that this is wholly bad for Europeanists. Sovietologists enjoyed a brief dead-cat bounce in citation counts from justifying their bad predictions; surely Eurologists will have the same good fortune.)

“Europe” is a fascinating construct for students of institutions and international relations alike. It is neither domestic nor foreign; neither a democracy nor an autocracy; neither a dessert topping nor a floor wax. This was by design. But if Europe’s architects thought that obscuring accountability in a maze of councils and commissions would bolster the edifice’s stability, they have been proven decisively wrong. There are still loci of accountability, albeit by default located in the bond markets instead of in parliaments.

The fundamental difficulty, however, is that national governments coexisted with the supernational. More than coexisted: They got the supernational government’s credit ratings. And that has made all the difference.

The crisis of Europe is the gravest political-economic crisis of the past hundred years. The goals of European integration were to move the continent into a bright future and away from a sanguinary past. The logical corollary is that European disintegration will do the opposite. (For IR theorists, this may mean that John Mearsheimer may yet have the last laugh.)

If grand bargains and fervent hopes built Europe, however, gritty realities will undo it. And the most banal point is the most critical one: In political economy, politics comes first. Europe is not dying because the eurozone is not an optimal currency area. The eurozone is dying because it was not designed to be an optimal currency area. Europe is not dying because the European Central Bank is unable to bolster its credibility. The union is dying because the European Central Bank (and the lack of a concomitant fiscal mechanism) was designed to be incredible.

In the language of software engineers, the institutional arrangements whose failings are now becoming woefully apparent were “known issues”–and even more, they weren’t bugs, they were features. The fact that the PIIGS could issue bonds using Germany’s credit rating was the whole point of the arrangement–and the fact that the Germans couldn’t ultimately guarantee that they would bring cheaters to heel was also the whole point of the arrangement. To wonder what could have been done better–what miraculous set of technocratic policy arrangements could have avoided these potholes–is to misunderstand what Europe was all about.

Megan McArdle puts her finger on it:

When I was a young and naive economics writer, I used to write about developing countries a fair amount.  Time and again they would make these bizarre and pointless moves, like suddenly and for no apparent reason defaulting on a bunch of debt.  They would engage in obviously, stupidly unsustainable fiscal practices that caused recurring crises.  They would divert critical investment funds into social spending which was going to become unsustainable when underinvestment reduced government revenue.  And the other journalists and I would cluck our tongues and say “Why can’t they do the right thing when it’s so . . . bleeding . . . obvious?” Then we had our own financial crisis and it became suddenly, vividly clear: democratic governments cannot do even obvious right things if the public will not tolerate it. 

Keynes once wrote that “Markets can remain irrational a lot longer than you and I can remain solvent.” Criticizing the behavior of Europe’s leaders and publics as “irrational” is more than a little unfair–Silvio Berlusconi is extremely rational, and so are the Greek pensioners and Irish voters–but the essential point is the same. Whenever European bureaucrats have had a choice between making the “right” choice and making the socially justified one, they have chosen the latter, even when it has clearly been the wrong one.

+ posts