Thursday, January 12, 2012

Monti’s Message

I won’t get into his “rescue” program for Italy, but Mario Monti is saying what needs to be said about the current moment in EU politics.  In a word, the situation is dangerous and moving in the wrong direction.

To begin with, the continent is clearly in recession.  Economies are in the process of contracting, and every indicator of future demand—fiscal policy, consumer sentiment, investment and exports—are pointing down.  Economic misery is already baked in for 2012.

The countries that will be hardest hit, like Greece, Italy, Spain, Portugal and Ireland, have no policy levers to defend themselves.  They gave up monetary policy when they joined the euro, and fiscal deficits can’t be financed.  They are in a terrible situation.

The combination of economic hardship and political blockage is a recipe for volatile politics.  People rightfully demand action to fight unemployment and cuts in services, but the established parties have nothing to offer.  Fringe groups will be the beneficiaries, and many of them will be practitioners of the worst forms of xenophobia.  Fascist movements, complete with paramilitary wings, are on the rise in Hungary and Greece, and I would be surprised if more countries are not added to this list in the coming year.

In this context, Monti’s urgent words need to be heard.  Germany in particular needs to listen, because resentment against German policy and its moralistic pronouncements (the grasshopper and ant business, the paranoia about printing presses) will only increase, with repercussions for the German position in Europe.  If the German public thinks that the post-WWII era of humility is over, they will be in for an unpleasant surprise.  This does not mean that Germany cannot behave as a “normal” country, but it cannot set itself up as the chief enforcer of economic punishment for what is seen elsewhere as the crime of being insufficiently German.  I am not taking sides: this is the real political context of European fracture.

On a practical level, Monti is also right about Eurozone policy.  The ECB has to step in and guarantee sovereign debt inherited from the past.  Without this, a massive wave of defaults, with all this implies for the fragile European banking system, is unavoidable.  It is a choice between a difficult but manageable situation and full-tilt disaster.  Why dither any longer?

Meanwhile, the recession demands a response: its economic as well as political costs are too great.  Most European countries are unable to finance the fiscal deficits rational economic policy now requires.  This means that those who can, like Germany and the other net exporters, need to do some of this lifting themselves.  Above all, it means that there is an urgent need for a Eurozone-wide fiscal entity that can carry on countercyclical policy as the situation requires.  The constitutional process for creating such an entity should be deliberative and methodical, but a temporary, ad hoc version can and should be put into place immediately.  The alternative is simply the breakup of the zone.

Behind these particulars lies the underlying political question: is there a European people corresponding to the institutions of the single market?  If there is, then there is a reservoir of solidarity to draw on and the basis for a politics that puts the common good above short-term self interest and pejorative moralizing.  If not, the European project was always an elite illusion, waiting to fail its first serious test.

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