Business Standard

Daniel Gros: The sovereign peoples of Europe revolt

Europe's debtors are unwilling to accept their creditors' demands - and the Union is in no position to impose them

Related News

The is a voluntary quasi-federation of sovereign and democratic states in which elections matter and each country seeks to determine its own destiny, regardless of the wishes of its partners. But it should now be apparent to everyone that the was designed with a very different institutional arrangement in mind. Indeed, that design gap has turned out to be a major source of the monetary union’s current crisis.

Last October, Greece’s then-prime minister, George Papandreou, proposed a popular referendum on the second rescue package that had just been agreed at the European Union’s (EU’s) summit in Brussels. He was quickly told off by German Chancellor and former French President Nicolas Sarkozy, and Greeks never voted on it.

But, less than a year later, the referendum is de facto taking place anyway. In a union of democracies, it is impossible to force sovereign countries to adhere to rules if their citizens do not accept them any more.

This has profound implications: all of those grandiose plans to create a political union to support the euro with a common fiscal policy cannot work as long as EU member countries remain both democratic and sovereign. Governments may sign treaties and make solemn commitments to subordinate their fiscal policy to EU rules (or to be more precise, to the wishes of Germany and the European Central Bank). But, in the end, the “people” remain the real sovereign, and they can choose to ignore their governments’ promises and reject any adjustment programme from “Brussels.”

In contrast to the United States, the EU cannot send its marshals to enforce its pacts or collect debt. Any country can leave the EU, and thus the euro zone, when the perceived burden of its obligations becomes too onerous. Until now, it had been assumed that the cost of exit would be so high that it would never be considered. That is no longer true, at least for Greece.

But, more broadly, EU commitments have now become relative, which implies that jointly guaranteed eurobonds cannot be the silver bullet that some hope. As long as member states remain fully sovereign, no one can fully reassure investors that in the event of a euro zone break-up, some states will not simply refuse to pay, or at least refuse to pay for the others. It is not surprising that bonds issued by the European Financial Stability Facility (the euro zone’s rescue fund) are trading at a substantial premium over German debt.

The sovereign peoples of Europe revoltAll variants of eurobonds come with supposedly strong conditionality. Countries that want to use them must follow strict fiscal rules. But who guarantees that these rules will actually be followed? François Hollande’s victory over Sarkozy in France’s presidential election shows that an apparent consensus on the need for austerity can crumble quickly. What recourse do creditor countries have if the debtor countries become the majority and decide to increase spending?

The recently agreed measures to strengthen economic-policy coordination in the euro zone (the so-called “six-pack”) imply in principle that the European Commission should be the arbiter in such matters, and that its adjustment programmes can formally be overturned only by a two-thirds majority of the member states. But it is unlikely that the Commission will ever be able to impose its view on a large country.

Spain’s experience is instructive in this respect. After the recent elections there, Prime Minister Mariano Rajoy’s new government announced that it did not feel bound by the adjustment programme agreed to by the previous administration. Rajoy was roundly rebuked for the form of his announcement, but its substance was proven right: Spain’s adjustment programme is now being made more lenient.

The reality is that the larger member states are more equal than the others. Of course, this is not fair, but the EU’s inability to impose its view on democratic countries might actually sometimes be for the best, given that even the Commission is fallible.

The broader message from the and French elections is that the attempt to impose a benevolent creditors’ dictatorship is now being met by a debtors’ revolt. Financial markets have reacted as strongly as they have because investors recognise that the “sovereign” in sovereign debt is an electorate that can simply decide not to pay.

This is already the case in Greece, but the fate of the euro will be decided in the larger, systemically important countries like Italy and Spain. Only determined action by their governments, supported by their citizens, will show that they merit unreserved support from the rest of the euro zone. At this point, nothing less can save the common currency.


 

The author is director of the Brussels-based Centre for European Policy Studies.
Copyright: Project Syndicate

Read more on:   
|
|
|
|
|
|
|
|
|

Read More

Kishore Singh: Venice the menace

The Brazilian honeymooner was my age by any reckoning, his glamorous bride a little younger, and like us they’d reserved berths in the overnighter ...

Most Popular Columns

Rahul Jacob

Rahul Jacob: How Mr Modi has outplayed the media
Rahul Jacob

From a ruling party's perspective, the BJP is in a sweet spot; editorial independence and analytical coverage of governance is rapidly declining

Vanita Kohli-Khandekar

Vanita Kohli-Khandekar: The venom online
Vanita Kohli-Khandekar

Facebook, Twitter, WhatsApp and others have done us a world of good but they also unleash the worst of human nature. Can the law offer a middle path?

A K Bhattacharya

A K Bhattacharya: More to reform than meets the eye
A K Bhattacharya

There should be no doubt that there is a fresh momentum to the Narendra Modi government's decision-making process after the Assembly elections in ...

Advertisement

Columnists

Sreenivasan Jain

Sreenivasan Jain: Is Swachh Bharat repeating mistakes of the past?
Sreenivasan Jain

India's proposed toilet revolution is all set to repeat mistakes of the past

Andrew Sheng & Xiao Geng

Andrew Sheng & Xiao Geng: American-made financial repression
Andrew Sheng & Xiao Geng

The dollar's global dominance is contributing to financial repression

Lipika Pelham

Lipika Pelham: Enslaved abroad, oppressed at home
Lipika Pelham

We should be mortified by the terrible indignity that Bangladeshis face in their own land, which is forcing many of them into a life of ...

Back to Top