Europe needs to have an open and democratic discussion about its future.
It is fitting that Europe is looking to leverage its bailout fund into a collateralized debt obligation. Just as financial engineers created complex financial instruments to disguise dodgy assets in the lead up to the financial crisis, Europe is now creating complex technocratic instruments to cover up its own ugly truth: in order to survive, the European Union must adopt fiscal policy measures which violate the EU’s current charter—it must become a transfer union. It is time for Europe’s leaders to present voters with an honest choice: financial integration or disintegration.
Europe’s institutions are fundamentally unsustainable and need reform. In the 2000s, the euro pushed down interest rates and led to overheating in peripheral countries like Greece. Now, without common finances, those countries are starved for financing. Without external support they would be forced into a massive contraction. Austerity like this—without the easing provided by devaluation, which is impossible within the eurozone—is often counterproductive, leading to situations like that in Greece, where the debt load has become crushing. Resources must eventually be transferred to these countries in one way or another. Having exhausted all alternatives, Europe’s leaders have finally realized this.
However, determined not to rile voters with the phrase “transfer union”—sending resources from rich to poor countries—European leaders have preferred to hoodwink them instead. Rather than asking for more taxpayer money, they are pursuing measures that would have an equivalent effect but are presented in such a way so as not look like “transfers.” Like the financial engineers, Europe’s leaders are attempting to hide the costs of their bailouts by moving them off of their balance sheet.
To achieve this, Europe’s leaders are pursuing several different options. One is to expand the funding capacity of the European Financial Stability Facility, a bailout fund created in 2010, to support the financially needy: French banks and Mediterranean governments. Failing that, Europe’s leaders want the European Central Bank to buy up all unwanted bonds and provide unlimited support to banks. Either measure would use German and Dutch taxpayer money to underwrite the massive liabilities of weaker countries. What is most disturbing about these backdoor financing methods is that they are apparently being used for the sole purpose of hiding the costs of bailouts from voters. There is no technical reason to prefer these methods over direct financing.
One might argue that the United States had its own technocratic solutions to crises, namely the Troubled Asset Relief Program (TARP) of 2008, and that this policy was necessary to avert disaster despite its unpopularity. In fact, UK Prime Minister David Cameron is calling for just such a plan, explicitly channeling then-U.S. Treasury Secretary Hank Paulson’s “big bazooka” approach whereby policymakers assemble an overwhelming show of force to shock markets into cooperating. Yet there is a fundamental difference between TARP and what Europe needs. Where Paulson sought an extraordinary measure to get the U.S. economy back on track, Europe’s leaders are seeking to move the EU onto an entirely different track.
Europe does not need a temporary financing facility like TARP to get it through a rough patch; it needs a pooling of resources―and thus a permanent change in the EU’s political makeup. This would be an egregious violation of the Lisbon treaty. Once Europe’s taxpayers agree to cover each other’s liabilities there is no going back; they must then find a way to hold each other accountable. This road can only lead to a transfer union of some sort. It is therefore disingenuous to bill current measures as temporary crisis-fighting. The measures needed to end the crisis are not temporary. Europe’s leaders should be honest about that.
A democratic way forward is inconvenient but essential. European integration has gone through many fits and starts, but this process has been at the core of its success. The plodding process has reflected the hesitancy of European voters: the success of each step towards integration has garnered the necessary support for further steps. If Europe’s leaders overreach and abandon this approach, Europe’s voters are likely to abandon them, and the EU will not survive.
The European people bought into the euro on the premise that it would not entail bailing out the imprudent. This premise has been violated. A new deal must be struck, but it must not be negotiated behind closed doors, it must be settled by voters in the light of day. A de facto transfer union built by technocrats rather than voters will buy time, but it cannot stand the test of time.
Photo courtesy of Images_of_Money via Flickr.