European Union: a Tale of Two Futures

<!-- @page { margin: 0.79in } P { margin-bottom: 0.08in } -->

A couple of weeks ago, I severely criticized another writer (by name) in a commentary (“Fiscal Follies: Greece versus the U.S.”): the Telegraph's Ambrose Evans-Pritchard. Given how I singled-out Mr. Evans-Pritchard, and given that I acknowledged the positive contributions he also makes with his writing, this is an opportune time to look at one of his more notable pieces.

On January 31^st, Evans-Pritchard wrote Should Germany Bail-out Club Med or Leave the Euro Altogether? In that commentary, he constructs a very persuasive argument that the European Union is headed for one of two fates: a precedent-setting bail-out of Southern Europe's “PIGS”, or a political “divorce” with affluent Northern Europe going one way, while Southern Europe is left to flounder in its own, fiscal nightmare.

The reasoning of the author is solid. Given current parameters, the EU's disparate economies cannot remain united without “rescuing” those members who cannot cope with the fiscal constraints of the EU – due to their reckless/incompetent fiscal policies, which have resulted in massive debts. Conversely, an economic (and political?) “divorce” would solve the problems of the current economic schism – by having EU members willingly group themselves into the “strong” and the “weak”.

The nations of Northern Europe would go to economic “heaven”: an economic grouping with a strong currency, high standard of living, low inflation and (most importantly) solvent economies. Meanwhile, the near-bankrupt southern members of the EU would be left to descend into their own fiscal Hell: the only currency which could rival the weakness of the dollar, a low (and crumbling) standard of living, high inflation (leading inevitably to hyperinflation), and economies still heading toward certain bankruptcy.

It is here where Evans-Pritchard's logic breaks down, in my opinion. He argues that this option would be equally appealing to the South as it would with the North. He is correct that over the very short term that this “helps” those southern nations by allowing them to continue their reckless expansion of their debts – in order to continue totally unsustainable social spending. But it is only a respite of (at best) two or three years, before those debts would spiral so far out of control that hyperinflation or total, debt implosion becomes the only possible options (as it is now with the U.S.).

Here, once again, I would argue that Evans-Pritchard's cultural bias is showing. While the incentives for Northern Europe to “go it alone” are unequivocal, I think that he gives too little credit to the peoples of those southern nations – and even (what passes for) their “leadership”. The future consequences of economic “divorce” would be obvious to the governments of the “PIGS” (Portugal, Italy, Greece, Spain), and I submit that even these weak-willed opportunists would be extremely reluctant to willingly seal their own fates in this manner.

All that would be required for these governments to reject the path to fiscal Hell would be to offer them some sort of economically – and politically – viable alternative to the current EU economic-straitjacket, or fiscal suicide. I believe that such an alternative can be created; more importantly I would argue that such an alternative must be created.