EU: What Are Latin Countries Waiting For ?

 July 23, 2015

Very few American experts grasp the motivations behind the construction of the European Union. As a result, American specialized literature abounds with misguided comparisons, such as that between the US Civil War from the 19th century and today’s tense situation between Europe’s North and South.

Yes, the EEC was initially formed in 1957 to prevent intra-European military conflicts in the future and to create a large-enough internal market for aspiring member-states to rebuild their economies and prosper.

Nonetheless, the European Union does not and will never have the same objectives as – to use another example in US commentary columns – American colonists did against British domination at the end of the 18th century. This is so because unlike nations around the world, the countries of Europe appeared on the ruins of the Roman Empire. Whenever politicians, kings, emperors and military leaders attempted to unite the continent’s nations into larger political units, their inspiration – whether consciously or not – has always been the Roman Empire.

Before 1957, quite a few European nations had tried their luck, rather unsuccessfully, at duplicating Roman hegemony across the continent. The emperors of the Holy Roman Empire, followed by Napoleon or Hitler have all done their best, in their own way, to emulate the Romans’ success by military means. Their efforts eventually ended up in failure, as no European nation was either big enough or strong enough to impose its will on all the others except for brief periods of time.

For the first time in the continent’s history, however, the launch of the political project of the European Union aimed to achieve unification by peaceful and democratic means. The experiment has been partially successful until two decades ago, when neoliberal policies and an ill-inspired monetary union have fatally undermined it.

When it comes to monetary union, it is also useful to remember that this was largely a French-inspired project which Germany joined only grudgingly. The first monetary union on the continent was also initiated by the French under the name of Latin monetary union (LMU). It lasted from 1865 to 1927 and included at first France, Belgium, Italy and Switzerland. Interestingly enough, the LMU was joined by Greece as early as 1867. The Latin bloc’s objective for all participating countries was to impose common standards for coinage at a time when the gold standard dominated commercial transactions on the continent. More astute than Germany of late, Austro-Hungary refused to join the LMU, as it rejected the bi-metallist approach of the French to coinage.

Today’s monetary union is now clearly in danger of disintegration, but preventing such an outcome is still possible. The first step in the right direction would be for the Latin group of countries to act again as a bloc. The latter should make it clear to Germany that a Dexit solution to the current predicament is necessary in order to salvage both the euro and what remains of European political unity. As matters now stand, the political systems of the southern half of the Union are close to implosion, witness recent developments in Greece, Spain, Italy and even France. Germany, meanwhile, does not only enjoy a healthy economic growth rate, but is basking in a political stability obtained at the expense of every other country in the Union…

Again, the historical experience inherited from the Roman Empire is a very useful guide to preventing a Soviet-type implosion of the union. Naturally, Germany’s recurring hegemonic tendencies and the fact that it has benefitted handsomely from the introduction of the euro for its exports, mean that in Berlin there is at present no appetite for doing the right thing by its European partners. This fundamental lack of empathy with the difficulties experienced by economically and politically less stable members of the EU has been proved time and again, with the EU leaders’ conference held on the 13th of July 2015 being just the latest in a string of such episodes.

Still, France, Italy, Spain and Portugal need to get together to gently ease Germany out of the euro and subsequently of the EU. As I have explained elsewhere, the German departure from the current financial and political structures of the Union should not, however, be an acrimonious process. After all, a diminished but more cohesive European Union will still have to trade and live side-by-side with Germany and its satellites, and vice-versa. For the political leaders of the Latin group of countries, however, there is no better solution to the euro-crisis than asking Germany to revert to the D-mark, as it is much better able to withstand an exit from the Eurozone than countries like Greece, Spain or even Italy.

Is the Eurozone Shrinking ?

 September 14, 2011

Over the next few days, EU political leaders have to decide what to do about the Greek debt crisis. Leading economists and quite a number of EU politicians are deeply divided when it comes to putting together another large financial rescue package. Economists like Professor Hans-Werner Sinn and Professor Kenneth Rogoff argue for a shrinking of the eurozone in order to save the common currency. Romanian-born French professor Florin Aftalion was kind enough to answer some of my questions regarding the euro crisis and the possible shrinking of the eurozone.

Author of The French Revolution: An Economic Interpretation (Cambridge University Press), Mr. Aftalion is Professor of Finance at ESSEC (L’École supérieure des sciences économiques et commerciales), and has taught finance at New York, Northwestern and Tel-Aviv Universities.

Q: In an article published in May this year, “Let’s Save the Furniture”, you have advanced the solution of saving the euro by suspending countries like Greece, Portugal or Italy from membership in the eurozone. Why do you think that both southern European countries and the eurozone’s core countries, France and Germany, would benefit from adopting such a solution?

Prof. Florin Aftalion: – Given that with insufficient growth its debt can only inflate, whatever “help” Greece gets, at the end of the day it will have to leave the euro, restructure its debt and devalue its currency. This being the inevitable outcome, it would be less costly for everyone concerned to have it happen sooner rather than later.

Q: The qualifying criteria for membership, as outlined at Maastricht, have been ignored when countries like Italy or Greece were admitted in the euro-club. Italy’s public debt, for example, was from the start far above 60 percent of GDP, and apparently so was Greece’s.

Was this a case of sound economics being overridden by political considerations?

F.A: – Remember that the whole “single currency” project was essentially political. When, in 1998, it came to be decided which countries were ready to join the euro, if I remember well, only Finland should have been admitted. All the other countries used creative accounting in order to satisfy the Maastricht criteria. When even that wasn’t enough to qualify a country, it became sufficient for that country to have criteria tending towards the Maastricht norms.

However, in 1998 the case of Greece was beyond any possible compromise and this country was allowed to join the euro only in 2001. It is not that its economic situation had changed radically in the meantime, but more “sophisticated” accounting techniques have been used. Everybody should have known that Greece was cheating.

Q: Forking out hundreds of billions of euros in order to try to avoid the risk of country default for Greece and possibly Ireland, Portugal and Italy, seems like a losing strategy. For how long do you think EU politicians can prolong the moral hazard situation that is touching a raw nerve with German, Dutch or Finnish taxpayers?

F.A.: – Two outcomes are possible. Either Greece decides to leave the euro (and at the same time restructures its debt and devalues its new currency) because it doesn’t get all the “help” necessary for remaining solvent, or Germany and the other “Nordic” countries decide to restrict the euro zone to solvent economies like their own.

Q: In the long run, do you believe that a truly solid European monetary union could be viable in the absence of some form of fiscal policy convergence among member countries?

F.A.: – Even financial centralization wouldn’t be enough to keep the eurozone together. That’s because it wouldn’t solve the problems of inflation differentials and heterogeneous labor legislations (among other problems).

Q: According to professor Hans-Werner Sinn of Munich University, the interest rate convergence which followed the introduction of the euro has saved Italy some 6 percent of its GDP for the last decade, owing to reduced interest payments on the country’s public debt. It was calculated that if the windfall had been used to pay Italy’s national debt, this would have been reduced by about two thirds by now. In your opinion, who is responsible for not enforcing the fiscal discipline among the eurozone member countries?

F.A.: – At the time nobody seemed to care about enforcing the Maastricht criteria. France and Germany for instance ran “excessive deficits”, didn’t pay any penalties and nobody objected.

Q: Coming back to your May article, you have decried the fact that the politicians of the day at the time the euro was introduced have ignored the warnings of many economists who considered the initial group of countries as too heterogeneous to make the common currency be viable in the long run.

In your experience on both continents, how big a challenge is it for economists to contribute constructively in shaping policy, given that many politicians seem to misunderstand macroeconomic theory ?

F.A.: – Politicians use political means in order to attain political objectives. Given that economists never agree among themselves, politicians will always find some professor who will approve their positions and claim against all evidence that the euro zone is an optimal currency area.