The Euro-Zone Crisis: Neglected Origins and Political Legitimacy

The Euro has generated an unsustainable divergence of productive systems and national trajectories Robert Boyer Institut des Amériques Conference Erasmus Mundus, Paris, September 10th 2015

Introduction Two conventional explanations • A simple first generation crisis (fix exchange rate, capital mobility and public deficit) • No money without sovereign state They have a point, but are not all: • Why ten years of apparent success? • Monocausal, a-historical, normative approaches

The orientation of this presentation • Replace the concept of equilibrium by an analysis of interdependent social, political and economic processes • Replace exogenous adverse shocks leading to the crisis by the unfolding of endogenous trends generated by the Euro • Put in historical perspective half a century of European Integration • Recognize the strategic role of key collective actors at odds with a technocratic quasi determinist way out of the crisis

The argument of this presentation • The neglected intellectual origins of the Euro-zone crisis. • An institutional and historical analysis allowed to anticipate the current euro-zone crisis • A benign neglect for political legitimacy of the euro within democratic societies • The role of financial globalisation in the genesis and unfolding of the euro-zone crisis • The end of the euro or a united states of Europe? A future open to a large variety of configurations

I. THE NEGLECTED INTELLECTUAL ORIGINS OF THE EURO-ZONE CRISIS • New classical macroeconomics at odds with the major issues about the Euro

Table 1 - The consequences of the new classical macroeconomics upon the assessment of the viability of the Euro

A polarization over the relative frequency of symmetric and asymmetric shocks. • Governments as servants of economic rationality: they had to comply with the reforms required by the irreversibility of Euro membership. • The benign neglect for dissenting but probably more relevant theories and analyses

Table 2 - A more accurate and fair assessment by alternative approaches

Early warnings about the difficulties in implementing the Excessive Deficit Procedure

Table 3 - The drift of public finance could be (and has been) anticipated

II. AN INSTITUTIONAL AND HISTORICAL ANALYSIS ALLOWED TO ANTICIPATE THE CURRENT EURO-ZONE CRISIS Back to the basic principles about the viability of any economic policy regime

Table 4 – J. Tinbergen’s analysis of economic policy: the Euro means the loss of two key instruments and the ability to refinance public debt via the Central Bank

European Integration is a process of progressive institution building around basic public goods: financial stability was the next step after monetary stability.

Figure 1 –A bird’s view of half century of European integration Competition, a European public good Collapse of the IMS Lowering of internal customs duties Prevention of European Wars Single Act: revival of the common market Coal and Steel markets European Markets European Directives Recurring exchange rate crisis Common customs tariff European Monetary System Impact of financial liberalization Worsening of exchange rate crises Security, new public good? Strengthening of the competition principle Single currency and ECB: monetary stability Financial stability, a neglected public good? Financial integration

Significant transformations in “regulation” modes, especially difficult for some economies, poorly internationalised.

Table 5 - The Euro means an epochal change for national modes of “régulation”

The long legacy of a North/South divide in productive capacity and competitiveness

Figure 2 – How do the factors of crisis differ across the Euro-zone The Greek exceptionalism France as a barycentre between North and South Ireland victim of an unwise financial liberalisation

III. A BENIGN NEGLECT FOR POLITICAL LEGITIMACY OF THE EURO WITHIN DEMOCRATIC SOCIETIES From the start, a polarisation of the perception of the Euro by various social groups

Table 6 – France: the Euro is perceived to have different consequences for various social groups. Question: What are likely consequences of EURO for each of the following groups? Sources: SOFRES [1997]: 110.

Enter or not the Euro: the nature of the political process matters.

Table 7 - How a pluralist debate led Sweden not to join the Euro

Figure 3 – Is the Euro-zone politically viable in the medium-long run? An analytical framework

The resilience of the Euro versus a renationalisation of economic policy? A permanent threat.

Figure 4 – Success of the Euro…or renationalisation of national policies?

Europeanization as a modernisation process and a burgeoning of European procedures in order to legitimize possibly unpopular domestic reforms

Figure 5 – The use of European Union as constraints or incentives to reforms blocked at home

5. The same European Treaties but contrasted national interpretations: why rescue plans recurrently fail

Figure 6 – The same European treaties…but conflicting visions of the dynamics it implies Source: Boyer (2000)

Table 8 – The paradox of the launching of the Euro: fear in the North, enthusiasm in the South

IV. THE ROLE OF FINANCIAL GLOBALISATION IN THE GENESIS AND UNFOLDING OF THE EURO-ZONE CRISIS The surprising appraisal by international finance: all public debts are now equivalent from Germany to Greece

Graph 1 – A convergence of 10 years Treasury bonds interest rate Source : Patrick Artus (2010), « Quelle perspective à long terme pour la zone euro ?, Flash Economie, n° 158, 12 Avril, p. 4.

Graph 2 – A deepening of intra-European specialization: manufacturing in the North, service in the South • Beneath nominal convergence, divergence in specialisations and domestic growth regimes: a structural complementarity accelerated by the Euro…. Source: Patrick Artus (2011) “Pourquoi n’a-t-on pas vu, de 1999 à 2007, les problèmes de l’Espagne, du Portugal, de l’Irlande, de la Grèce? »”, Flash Economie, n° 534, 9 juillet, p. 5.

Graph 3 – A polarisation of external balance within the Euro zone Current balance / PIB (%) …and a polarization of trade balance surpluses and deficits.

Graph 4 – The evolution of Euro/dollar/yen exchange rates.Current balance / PIB (%) • The ambiguous blessing of Euro credibility: its appreciation puts at risk the competitiveness of many national economies

The consequences of the subprime world crisis: a brutal wakeup call by international finance in response to the deterioration of public finances…

Graph 5 – The deepening of public deficits after 2008: selected countries.

Graph 6 – The brutal explosion of the cost of refinancing of public debt of Southern Europe economies • … With the explosion of the refinancing costs of public debt for Greece, Portugal, Ireland

Figure 8 – Financial speculation reveals some of the institutional unbalances of European governance

From the Greek to the Euro crisis: a complex web of factors and responsibilities Figure 9 – Disentangling the various causes of the Euro zone crisis

Figure 15 – The North / South divide is an obstacle to the building of new federalist institutions

V. THE FUTURE OF THE EURO : open to the strategic behavior of a complex web of actors Prolonging the past has become impossible “Europeans would be as strong as if Europe was united, retain as much sovereignty as if it was not. This contradiction has become untenable.” Sylvie Goulard and Mario Monti (2012), De la démocratieen Europe, Flammarion.

Table 9– A tentative assessment of the seven scenarii Political viability / Legitimacy Scenario Strengths Weaknesses • “FEDERALISM BY TECHNOCRATIC RATIONALITY” New reduction in national sovereignty Weak unless strong political impulse by a charismatic leader Search for coherence and resynchronization of EU institutions “OrdoliberalismusfürAlle”: a German Europe Integration without fiscal federalism Does not overcome North/South structural unbalances Deepening of the Maastricht Treaty principles that failed “A North/South divide”: a flexible exchange rate between two Euros Overcomes the basic present unbalances by a return to growth in Southern Europe A de facto breaking down of the EMU A partial recovery of national autonomy but large political costs for federalists “Chacun pour soi”: A wave of nationalism and protectionism Recovery of national sovereignty Possible large economic costs A response to both left and ultra right demands

Table 3 (follows) – A tentative assessment of the seven scenarii Political viability / Legitimacy Scenario Strengths Weaknesses A reconciliation of the diversity of national interests The end of the political federalism in Europe A third way between complete collapse and a federalist Europe “A British victory”: free trade zone + ad hoc partnership A response to the erosion of EU legitimacy Assumes that an European citizenship can be the cornerstone of a new EU Dubious in the midst of economic depression “More democracy”: as a condition for a path towards a federal Europe “International finance strikes back”: The storm after the calm Puts a pressure upon an unsustainable European configuration Puts at risk the very basic European project The real economic global power: complete mobility of huge amount of capital

This is an abstraction of the sequence observed since 2010 North/South Divide Impulse of finance Reaction of ECB Conflict with ordoliberalism Chacun pour soi Under the scrutiny of British victory Federalism with democracy Exit from Euro The end of the Euro

But many other patterns may happen: an example Calms market Slower national reforms ECB leadership Assessment by finance New wave of speculation Bank Union Exit Agreement Need for fiscal federalism Lack of agreement Agreement Exit Exit

CONCLUSION C1. The Euro crisis was largely undetected because the paradigm shift to the new classical macroeconomics made such an event impossible: structural stability of a market economy, full rationality of private and public actors, neutrality of the money, absence of any bank or financial markets. By contrast, institutional analyses could anticipate the adverse consequences of the loss of autonomy of national “régulation” modes for the weakest economies.

C2. The structure of polity matters. It has played a major role in the decision to adopt or not the Euro, given the diversity of its impact upon various domestic socio-economic groups. Technocratic approaches have favored the adhesion, whereas some social democratic societies have favored a wide deliberation, leading to the statu quo, given the large uncertainties associated to the Euro.

C3. Financial globalization and innovations have too a clear responsibility in the genesis and the unfolding of the Euro-zone crisis. Basically they have removed the inter temporal constraints for households and State and generated real estate bubbles (Spain, Ireland). Unfortunately, the governments had delegated to international finance the control and monitoring of their public finances. Therefore, finance has first fuelled an economic boom and then revealed the non-sustainability of the sovereign debt of the weakest economies.

C4. Beneath the veil of smooth monetary integration, financial deregulation has temporarily hidden the diverging economic specialization between Northern and Southern countries. This is a major obstacle to the viability of a federalism built upon the absence of solidarity via a fully fledged fiscal federalism.

The Euro-Zone Crisis: Neglected Origins and Political Legitimacy