WHAT SHOULD we make of this extraordinary moment in European politics? The events that unfolded during the past few weeks confirmed the intolerable systemic fragility of our financial and economic global edifice. A week ago, interbank lending had not quite frozen but the ice sheet was reforming, triggering US president Barack Obama’s anguished European telephone diplomacy, the spectacular decision to create a gigantic European Union/International Monetary Fund bailout reserve of €750 billion, and the no-less-sensational European Central Bank move to hoover up large amounts of euro zone government debt.
The Financial Times ‘s Martin Wolf coined the best term to describe the world in which we now live, likening today’s financial markets to a doomsday machine neither our economies nor our political systems can afford.
When we lustily dismantled regulatory barriers during the backlash against the over-regulated 1970s, we did not know the potency of this cocaine administration to the markets would be lethally increased by the near-simultaneous injection of huge quantities of amphetamine as a consequence of the electronic revolution.
The result is an economic alien prone to cardiac arrest, threatening at every moment to destroy itself and its host.
Greece, an economic midget well-known for dodgy accounting practices in the private and public sphere, owns up to having cooked its books more vigorously than previously acknowledged. Less than 29 weeks later, a toxic mix of euro zone prevarication and market panic pushes the world financial system back to the brink from which it had only recently managed to back away at huge cost to taxpayers.
This grim tale, less than two years after the big wave of banking bailouts, is a brutal reminder that global policy makers and legislators must find a way urgently to force some of the toothpaste back into the tube. We need a framework of rules, safeguards and interdictions enforcing transparency and solidity.
The alternative is to live with an intolerably high probability of devastating economic and political shock in the not-so-distant future.
The global dimension of the new slide into the financial and economic abyss, mercifully halted by the common resolve of European governments and central bankers in the wee hours of Monday, remains to be addressed. In a first but partial response to the latest developments, the European Commission published a hastily adapted communication on “reinforcing economic policy co-ordination” containing a carefully balanced set of proposals to strengthen macroeconomic surveillance and co-ordination within the euro zone and the EU.
Their general thrust is sensible: more co-ordination of national budgets during the planning stage; more focus on debt rather than just the annually reported deficit; better mechanisms to ensure penalties are applied; a broader focus on all aspects of the economy that pose a risk to the cohesion of the euro zone as a whole. The commission also suggests retooling the EU budget so expenses are responsive to emerging economic faultlines.
The trouble is, as with all previous exercises aiming to push euro zone and EU countries towards a better integration of their economic and fiscal policy, the commission’s new set of proposals reflects the mindset and world view of enlightened technocracy rather than the reality of democracy.
This matters: the main reason for the failure of economic policy co-ordination in the first decade of the euro resided much less in misguided prescriptions or unsound analysis than in the inability to connect jointly agreed recommendations with the reality of policy processes and democratic choices in the euro zone member states.
Finance ministers were tasked with implementing common decisions even if, in some countries, a finance minister has little political authority – but it would have been rude to say so. Heads of government were hardly ever asked to make a real commitment to policy choices they would ultimately have to defend, and were rarely held to account by their peers.
National parliaments were largely ignored in the European economic policy making process. And no account was taken of the fundamental fact the promise of lower taxes – or higher ones for the rich – is the main weapon for political parties in electoral battle.
Every commission proposal so far for better economic governance in the euro zone has been contaminated by the platonic ideal of a commonwealth run by wise men in grey suits, striving to sanitise economic policy by shielding it from the vagaries of the electoral cycle. The commission, with its outwardly non-partisan politics, is the embodiment of such a concept of politics; and while this has worked quite well for competition or trade, the notion the economic, fiscal and budgetary policy choices of countries can be similarly shielded from the interference of democratic politics is a dangerous illusion.
To make economic policy reform a success, it will be vital to anchor the elaboration of sensible policies firmly in the political life and political reality of each participating country. Heads of government and parliamentary majorities must be nearly as fully involved as finance ministers, who should welcome such involvement and abandon the failed and counterproductive attempt to use euro zone or EU co-operation to strengthen their position within their governments.
The European Commission has touched on these matters but refrained from highlighting their vital importance for the success of any future co-ordination scheme. And it has remained silent so far on the need to create a European policy mechanism giving newly elected governments leeway to change their predecessors’ policy.
The wise men of Brussels have tabled their proposals; governments and parliaments should now take the discussion away from the technocrats and lay it firmly into the hands of committed politicians of a distinctly realist bent. At least a few should be election-hardened MPs with an understanding of the economic risks we are facing and of the political reality we live in.
Unless that happens, the prognosis for a successful economic policy system in the euro zone and the EU remains negative.
This piece was published in The Irish Times.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.