Eurozone: It Seemed a Good Idea At the Time
By Anthony de Jasay
In the type of society we live in, two kinds of order are intertwined. One is driven by agreements, contracts and custom resulting in exchanges between individuals exercising the freedom of choice that the circumstances of each permit. Their circumstances are partly a result of the past, partly of their own doing. The other kind of order is driven by command. Command in the form of laws and ad hoc regulations and orders determining what society or its various groups and categories must and must not do. It thus produces collective choices to which individuals are forced to conform by the principle of submission leading to political obedience. Political obedience is considered legitimate because the collective choice rule on which it rests, for example majority rule, is claimed to be of people’s own choosing.
Collective choice where some, perhaps a majority but perhaps just a small and assertive group, decides for society as a whole, has the power to pre-empt or otherwise override the order based on freedom of exchange. They have obvious, identifiable incentives to do so. The response to incentives takes two major forms. One is redistribution; by collective choice, taxation on the revenue side and the provision of public goods and services on the expenditure side transfer resources from those who produce them to those who will consume them. The welfare state is the typical result, but a warlike state armed to the teeth could also be created in this way by collective choice.
Collective choice can, and all too often does, produce another and potentially quite vicious result. Friedrich A. Hayek, whose severe diagnosis of this result was his most valuable contribution to political philosophy, called it Constructivism.1 Disrespectfully and suggestively, one might also call it “Toys for the Boys.”
The Boys are usually well-educated, intelligent and very ambitious men and women forming networks at or close to the centres of power. They are over-represented in political parties, the higher reaches of regulatory agencies and in the better sort of print and audio-visual media. Their fertile minds keep producing good ideas, blueprints of new structures that, if duly constructed, should make the world a better place. For the Boys, such Toys promise a double boon. One is the satisfaction of being the champion of a good thing, of progress. The other less easily avowed, is that as newly constructed institutions come with new job opportunities, exciting career prospects will beckon to the inventors and promoters of the new Toys.
A grand and ambitious one was being constructed module by module over four decades, starting with the Coal and Steel Community, continuing with the Common Market and then the European Union. In the crucial 1992 Maastricht Treaty, the member states undertook to respect certain rules of good fiscal behaviour (an undertaking contemptuously ignored by both Germany in some years and France nearly all the time) and agreed to adopt a common currency, the euro. The Eurozone, intended by the more nationalistic and socialist of its sponsors “to look the dollar area in the face”, became reality in 1999.
Its appeal was not only to Euro-idealism and anti-Americanism, but also to economic interest. It was confidently forecast to raise the area’s growth rate by between 0.5 and 1 per cent a year, a cumulative gain of astronomical proportions. It was also promised not to raise prices: 2 deutschmarks were to become 1 euro, but a 2 DM cup of coffee was not supposed to become a 2 euro cup. (Those who promised this have not learnt of the “money illusion”. The cup of coffee promptly rose to 2 euros—but this was the least of the euro’s disappointments). Perhaps the main economic effect of the common currency was that under its umbrella, staunchly held over them by the European Central Bank which in its early years acted as the spiritual heir of the highly conservative Bundesbank, the member states had a fairly free hand to run up budget deficits with little fear for the effect on their currency. The country that went the furthest out on this limb was Greece, and the Eurozone woke up to the weight of the sovereign debt pressing upon most of its other member states, too, when Greece was found to be facing almost imminent bankruptcy with its sovereign debt at about 160 per cent of its modest GDP.
Two rescue plans and a lot of acute pain later, Greece is edging closer and closer to insolvency and the prevailing intention of the Eurozone powers-that-be is that they must keep throwing good money after bad, for Greece must be “saved” at all costs even if she preferred not to be saved. Extravagant calculations of the cost of quitting the euro are being floated, Greece would lose 40 per cent of its GDP if it reverted to the drachma, while if Germany led a dissident group of the fiscally honest countries, Austria, Finland and the Netherlands, into a separate currency area—as proposed by H. O. Henkel, one of Germany’s most prestigious industrialists—she would lose 20 per cent of her GDP straight away and 10 per cent in subsequent years. The absurdity of these estimates is exceeded only by the childish credulity of their audience. The gravest forecasts of the Cassandras do not even have numbers attached: they simply say that if Greece went, Portugal, Ireland, Italy and Spain, and maybe France, too, would “necessarily” follow and the consequences would be “incalculable”. Therefore neither Greece nor any other country must leave the Eurozone. Q.E.D. With everybody busily engaged in frightening everybody else, and this in a modern economy with an advanced financial system that cannot function without a measure of confidence, the consequences may be “incalculable” indeed. It does seem a pity that freedom of speech comprises the freedom to spread panic on the back of half-baked scenarios and a refusal to lose face and admit honestly that the good idea was not such a good one after all.
It is hard to credit but sadly true that it has become a firmly held dogma that if Greece is not “saved”, the whole Eurozone will fall apart by way of a cataclysmic chain reaction. Looking so marvellous and exciting in 1999, the great Toy looks fragile and a source of anguish in 2011. No one is courageous and sceptical enough to ask why default by a country accounting for a minuscule 3 per cent of the zone’s economy should fatally cause the whole zone to “explode”. “Chain reaction” is the muttered answer. But is economics really the same as nuclear physics? The grim answer probably is that if enough people believe it, it may become rather like it.
Logically enough, the Boys, refusing to lose face over their currency area, are pinning new hope on another and more powerful new Toy, a real federal union with a centralised budget for the whole area—the sole realistic condition for converting the national debts of the member states into a common Euro debt for which all are jointly and severally responsible and that the “nasty speculators would not dare to attack”. Much could and no doubt will be written about the whys and wherefores of such a budget and debt union, about sovereign nations willing to submit to it and about Germany accepting the role intended for her, namely that of guarantor of last resort and rich aunt. All this column can predict at this stage is that no folly is too great, and that we can look forward to many a future summit meeting just like the dozens that brightened the past.
See Friedrich A. Hayek’s chapter on “Reason and Evolution” in Law, Legislation and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy. Vol. 1 Rules and Order. (University of Chicago Press, 1973), for a full description of this topic.
The State is also available online on this website.
For more articles by Anthony de Jasay, see the Archive.