NATHAN WILLIAMS

"In their attempts to save the euro European politicians risk fatally undermining it by refusing an honest debate about the only realistic solution"

Nathan Williams
Account Director, Capital MSL

Political weakness at the heart of the eurozone crisis

The last few weeks have seen European politicians spout forth dire predictions about what the end of the euro would mean for Europe. The logic seems to run thus: the euro is great for the European Union, the European Union has been a great uniter, unity ensures peace, therefore the end of the single currency would pull at a unifying thread running through the continent, causing a big unravelling and the end of unity - and peace.

While it is difficult to argue against the idea that the creation of the European Union helped usher in an era of unprecedented peace on a previously war-torn continent, the idea that a single currency is integral to this union - and peace - is misplaced. Moreover, a German Chancellor invoking the spectre of war in order to force acquiescence to a position is a spectacularly unproductive way of winning an argument.

While it is clear that the euro needs fundamental reform, it isn't the case, as some commentators have suggested, that to survive the euro needs to become an exclusive club restricted to the strongest economies of Germany, Austria, France, the Netherlands and Finland. Monetary unions are not doomed to failure or always fatally undermined by their weakest links. As demonstrated by the United States, monetary unions can be widely successful.

In 1860 the United States had over 10,000 different types of bank notes, catering, in effect, to micro-economic zones. The introduction of a single currency gave the US huge economic clout abroad, underpinned by a centrally-administered fiscal system which imposed discipline and enabled the maintenance of a balanced economy. Unlike an American state which may find itself in trouble however, European countries can't turn to a federal government to keep sending the welfare cheques. Unlike Washington, Brussels can't control tax and spending arrangements at the centre which could alleviate the problems of a hopelessly indebted member state.  In Europe the problem is political. As the Chancellor George Osborne has said, there is a 'remorseless logic' to fiscal union, but at the time of writing the political will to act on this logic, however remorseless, is lacking.

To some analysts and commentators the solution appears relatively straightforward: 'collectivised debt' in the form of euro bonds to allow all (read 'weak') countries to borrow at the same, non-punitive rate. This may relieve immediate and even longer-term funding constraints for struggling member states, and would surely come with all sorts of caveats attached, but it would only kick the logic can further down the road. Such a move would not only require extensive EU Treaty changes but would promote the problem it was created to tackle: the ability of weaker economies to raise funds backed by guarantees provided by the strongest, with little thought to the underlying structural strength of these economies. While politicians of all stripes have remarkably short and selective memories, this would surely set a record for the largest single bout of collective amnesia. As a reminder, Ireland's debt-to-GDP was 23.3% in 2007. Cheap debt fuelled a property boom, debt-to-GDP surged past 90% in 2010 and led to an IMF bailout. Germany has a higher debt to GDP than Spain, but German debt is supported by an economy based on making and selling things.

The truth, as Jean-Claude Juncker the Prime Minister of Luxembourg, once said, is quite simple: 'We all know what to do but we don't know how to get re-elected once we have done it.' Scepticism of the European project is running at an all time high. The people of Europe would not stand for 'bureaucrats' in Brussels and Strasbourg (always 'bureaucrats', whether elected or not), to tell them how much money they can take home at the end of the month and when they can retire. Those politicians that forced such measures through would be signing their own political suicide note. And they know it. So they aren't doing it. Of course, there could be all sorts of unintended consequences if this was to happen. The far-right across Europe is waiting in the wings to capitalise on just such a move by an out of touch political elite. The way to avoid such consequences is to win the argument, but there is no political courage to have this debate, hence the imposition of unelected technocrats in Italy and Greece.

The problems of Europe are overwhelmingly structural. Without fiscal policies determined from the centre, a single currency will always rely on the strongest guaranteeing the debts of the weakest. In attempting to protect the European project, European politicians are in danger of fatally undermining it. The euro can be good for the whole of Europe and could fulfil in reality the role it has only played in the minds of idealists - as a unifying force. But to do all this politicians need to be honest about what will be needed to achieve it. Unelected governments imposing deep austerity measures under instruction from cosseted IMF mandarins or chauffeur-driven policy makers in Brussels will force the unravelling of Europe faster than the abandonment of the euro ever would.