Nov. 16 (Bloomberg) -- The European Union may not come through its current troubles in one piece. But if it does, it will need to engage, this time seriously, with fundamental questions that were raised and too quickly dismissed in the years before the euro was created.
Even in the midst of the crisis, it isn’t too soon to start this exercise. To mend the euro system, Europe must understand what went wrong and remember why it created the single currency in the first place. It must ask whether flaws that are now so apparent were intrinsic to the enterprise or avoidable errors that can be corrected.
As the crisis has deepened, leaders previously committed to the currency union have wondered whether it still makes sense for all its members. In the abstract, there is no good answer. It all depends on the details. Whether Greece -- or Germany, for that matter -- should remain in the euro system turns not just on the short-term costs of exit, which would be huge, but also on how the system is run in the longer term.
If crises like these are going to be a recurring feature of Europe’s monetary union, then dismantle it as soon as possible, short-term costs be damned. If they can be avoided, then work out now -- better late than never -- what it will take to avoid them.
Restrain Public Borrowing
The crux of Europe’s troubles is a sovereign-debt crisis. Governments in Greece and other countries borrowed more than they safely could (much more, in Greece’s case, than official statistics reported). The euro didn’t cause this overborrowing, but it did facilitate it.
Once Greek public debt was assumed to be about as safe as German public debt -- once devaluation of the Greek currency was no longer an option -- investors were willing to finance a public-sector binge. Then, in what should have been a predictable turn of events, fears over solvency shut off the supply of credit, and crisis ensued.
Repairing the euro system certainly requires, among other things, new and more effective restraints on public borrowing. But this is hard. Countries need to retain the option of fiscal stimulus in economic downturns, so a simple balanced-budget rule will not work. Under some new fiscal rule, how wide should this discretion be, and how should it be shared between national governments and some euro-region coordinator?
Whatever the answer, it is bound to constrain national governments to some degree: That is the idea. Aside from technical issues of monetary and fiscal policy, monetary union therefore raises basic questions of democratic accountability.
A Constitutional Crisis
If this wasn’t obvious before, it is now. Questions of sovereignty in the EU have moved from the theoretical realm to the street. People in Greece and other distressed countries are asking by what right foreign governments are demanding higher taxes, stripped-down public services and lower living standards. The current financial emergency isn’t just a sovereign-debt crisis but also an EU constitutional crisis.
You see the problem. At a time when many of Europe’s voters are blaming EU institutions -- and the euro in particular -- for their economic plight, they are unlikely to welcome a further transfer of political power from national capitals to the center. They think that this shift has already gone too far and needs to be reversed. Yet some further surrender of fiscal sovereignty must be part of any long-term plan to mend the euro system.
The problem is real, but not as insoluble as you might think. Curbs on public borrowing, as long as the issue of short- term flexibility can be dealt with, infringe on fiscal sovereignty in a relatively benign way.
An Arithmetical Constraint
The kind of rule that would be necessary doesn’t put bureaucrats in Brussels in command of taxes and public spending. It would require only that the public-sector’s debts are contained over the medium-term. This is a minimal requirement of sound public finance: really, an arithmetical constraint as much as a political or constitutional one.
Even in the extreme case of a balanced-budget rule, national governments would retain the essential strategic component of their fiscal sovereignty: choosing the role and extent of the public sector. EU governments would still be free to keep taxes low and public services lean, or tax more heavily to pay for more and better public services.
Once a country has decided what kind of public sector it wants, insisting it meets the costs (and will face sanctions otherwise) is hardly onerous. As Europe has discovered, if the rules of euro membership don’t insist on this in a timely fashion, the financial markets eventually will, only with much greater brutality.
Talking to Voters
Nonetheless, popular concerns about the drift of political power from Europe’s nations to the EU’s center are well-founded. New demands for central supervision must therefore be combined with a reversal of centrism in other areas. From now on, Europe should ask governments to surrender sovereignty only when strictly necessary. Starting now, voters must be talked to and heeded. Where integration has gone further than is necessary or wanted by voters, it should be rolled back.
You might say this is little to ask. In fact it will represent a wholly new approach. For years EU leaders have pursued an ambitious program of political integration, and voters have had little to say about it. At the outset the idea was to perfect Europe’s internal market. Regulatory and other policies acted as internal trade barriers. It made sense to harmonize them. That would lessen intra-EU economic frictions and get the greatest benefit from Europe’s single market.
No Way Back
Even that process, I think, should have been pursued with more restraint -- and more regard for popular consent -- than Europe’s leaders brought to the job. By degrees, though, the goal of political integration became an end in itself, not just a means to closer economic union.
The single currency was itself an instance of that, desired as much for its political and geopolitical potency as for its economic benefits. Attempts to integrate foreign policy, criminal justice and other spheres of governance had almost no economic rationale. On all this, Europe’s visionary politicians moved ever further in front of Europe’s voters.
This is why the present upheaval is so dangerous. The risk now is of an undiscriminating populist backlash that puts the EU’s undeniable achievements -- the economic union and, despite everything, the euro -- in peril.
With hindsight, no doubt, Greece and some others would have been better off never joining the monetary union. But there is no easy way back. Europe’s leaders need to understand that they have no choice but to make the euro work. In the future that must mean, among other things, limited but effective curbs on fiscal sovereignty.
Will Europe’s voters accept this? They might, despite their anger at the EU and its works, if the need was for once explained to them -- and, above all, if the Union’s leaders started giving popular sovereignty some voice in other aspects of the EU project.
(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)
--Editors: Timothy Lavin, Stacey Shick
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