Monday, June 18, 2012

Grexit Cynicism

On Friday, I had dinner with some fellow die-hard cynics when another (and non-European) dinner guest raised the question of Grexit. To my surprise, their cynical answer was the complete opposite of mine.

My thinking on this matter was pretty much summed up in this post: Grexit and non-Grexit are both an unpredictable mess, except with different kinds of unpredictable. For this reason, I felt I could not make a recommendation either way, at least not on economics alone. Adding in my personal policy preferences, I suggested that Merkel should bite the bullet and cut the Greeks loose, and that the Greeks should try to stay in the Euro for as long as possible.

In terms of what I think will happen, this translates into the prediction that Mrs. Merkel will not spend a massive amount of political capital in order to do something that potentially cost just as many unknown hundreds of billions as kicking the Greeks out. This is a cynical prediction because it assumes that Mrs. Merkel will throw the Greeks, as well as the Portuguese, Spanish, Italians and Cypriots, under the bus for domestic political gain.

My interlocutors on Friday, however, deployed their cynicism in the opposite direction. To begin with, they denied the premise that European bailouts are unpopular in Germany. Instead, they argued that Grexit as such would be unpopular among German voters, because it would amount to a defeat for the European project. For this reason, they predicted that Mrs. Merkel would throw democracy under the bus to prevent a Grexit. In a nutshell, what they predicted was something along the lines of Piris' Two-Speed Europe, with a core of strong European countries like German, Finland and the Netherlands dictating a "growth package" to Greece as a condition for Greece staying in the Euro. This Growth Package would essentially mean that Greece would be mostly governed from Brussels.

In this scenario, not only would European democracy be sacrificed because this Growth Package would be pushed through at all cost, but even more seriously the Package would imply a serious and lengthy loss of sovereignty for bailout countries. No more right of veto for the Commission, but an outright Brussels diktat. All of this as the price for non-bankruptcy.

I have to say that it all sounds improbable to me. It came from intelligent and knowledgeable people, so I tried to consider the possibility carefully, but I don't see it happening.

To begin with, and even though I pointed this out on the night, I don't think they understand what fantastic amounts of money would be involved, and not just once but every year. Recently, Paul Krugman put the annual net transfer to Florida at $ 31 billion. That's a gift, not a loan. Likewise, as a result of the Savings & Loans crisis in the 1980s Texas received a gift of 25% of its GDP or $ 75 billion. When I did some back-of-the enveloppe comparisons between the suffering of net contributors in the EU and in the US in this post in March, I ended up with Denmark making a net contribution to the EU budget of 0,53% of its GDP and New Jersey losing out to the tune of 6,4%. The winners of this game, Lithuania and Mississippi, gained 5,33% and 16,9% of GDP, respectively. The paradox of the "political integration" idea is that, on the one hand, its proponents always repeat that the EU will never be like the US federal government - it will never govern social security, etc. in the same way - but on the other hand it is inevitable that it will have to generate comparable international money flows in order to do what it was meant to do: save the Euro.

These are two seemingly distinct yet connected problems. Political union will have to do one or both of two things: reduce the trade imbalance between the core and the periphery by creating growth among the latter, which seems difficult in the middle of a global economic crisis and ongoing banking issues, and prevent a further escalation of the debt crisis by replacing loans by grants. Put crudely: if we're not going to kick Greece out of the Euro, we're going to have to start giving them money outright. Not even ECB operations are enough to keep Greece solvent and liquid without them.

Now the question that the politicians will have to answer - if they want political union rather than Grexit - is: Which form do we give these transfers? The most obvious short-term candidate seems EU-FDIC. We insure periphery banks, and give them a prize for every bank they manage to collapse. And this is merely the most palatable policy initiative. Anything else that Merkel and Hollande could come up with to explain why they're sending money Southwards is going to be even more unpopular. The Wiedervereinigung is one thing, at least that involved sending massive amounts of money fellow-Germans and having massive numbers of fellow-Germans move in next door. How can such a thing ever be sold on a pan-European level?

The second big problem with the "throwing democracy under the bus" scenario is a legal one. While I was being accused of being "too much of a lawyer", I think that is too easy. While the Bundesverfassungsgericht has so far always limited itself to barking without biting, I don't think it would uphold a drastic Europeanisation of the power to tax-and-spend. Under the Lisbon-judgement, that is a core power of the democratically elected Bundestag that cannot even be transferred to the (in my opinion but not theirs) equally democratically elected European Parliament. While there is some uncertainty about whether the Ewigkeitsklausul of art. 79(3) GG also covers the writing of an entirely new Verfassung under art. 146 GG, in practice I don't see how such a loophole could matter, because I can't imagine the German people using it in order to overrule the Constitutional Court. For that, the status of the Court is much too high.

This is why I cannot escape the conclusion that throwing the periphery countries under the bus, rather than putting democracy there, is the path of least resistance for Mrs. Merkel and her Dutch and Finnish friends. Am I wrong?

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