The European Game Changer

In last week’s elections, did Europe’s voters plant the seeds of a post-EU Europe? The question has surfaced in response to the strong showing of Euroskeptics and outright anti-EU parties across the continent. While most observers of European politics are still at loss trying to comprehend the fact that some of their fellow citizens actually don’t like the EU, some sharp-minded analysts see the writing on the wall for what it actually is. In addition to Yours Truly, you can always trust Daily Telegraph columnist Ambrose Evans-Pritchard. Again, he has elevated himself above the murmur. Starting with Britain, he gradually expands his perspective, laying out a credible scenario for Europe’s future:

If Europe’s policy elites could not quite believe it before, they must now know beyond much doubt that they have lost Britain. This island is no longer part of the European project in any meaningful sense. British defenders of the status quo were knouted on Sunday. UKIP won 27.5pc of the vote … Margaret Thatcher’s Tory children are scarcely more friendly to the EU enterprise.

This is an important observation. The British vote shows two things: first, that British democracy, unlike continental Europe’s, still has not succumbed to Europhoristic centralism – on the contrary, Brits still believe in their traditions and their way of governing themselves; secondly, classical Anglo-Saxian liberalism still has a voice in Britain.

The second point carries more weight than perhaps even the Brits themselves realize. Deep down, UKIP’s ideology is a mild version of what we here in America refer to as “libertarianism”, namely a solid refutation of all government beyond a small set of strictly contained and enumerated core functions. A UKIP prime minister would never pursue the termination of the British welfare state, but he would most likely revive some of Thatcher’s legacy, a legacy that has been carefully squandered by the Conservatives.

Britain needs more Thatcherism. Europe could use a big dose of it as well. Hopefully, an invigorated UKIP can deliver that, with the right cooperation in the European Parliament.

Back to Evans-Pritchard:

Britain’s decision to stay out of monetary union at Maastricht sowed the seeds of separation, as pro-Europeans fully understood at the time, though almost nobody expected EMU officialdom to clinch the argument so emphatically by running the currency bloc into the ground with 1930s Gold Standard policies and youth unemployment levels above 50pc in Spain and Greece, and above 40pc in Italy. European leaders must henceforth calculate that the British people will vote to leave the EU altogether unless offered an entirely new dispensation: tariff-free access to the single market along the lines already enjoyed by Turkey or Tunisia; and deliverance from half the Acquis Communautaire, that 170,000-page edifice of directives and regulations that drains away sovereignty, and is never repealed.

In a nutshell, Evans-Pritchard is saying that the euro was doomed without Britain’s participation – a statement that is only partially correct. The structural imbalance of the euro project goes deeper than that. But more on that later. Evans-Pritchard refers to reckless austerity policies as having removed the fiscal and, especially, monetary policy foundations for a sound, strong common currency. He is right about austerity, as regular readers of this blog know; the Liberty Bullhorn contains more analysis of Europe’s austerity policies and their consequences than any other website in the world.

But even if we disregard the structural imbalances built into the euro project, it is important to note that the ECB has exacerbated the crisis by frivolously printing money right, left, up and down to save credit-crashing welfare states from fiscal ruin. If there is one single policy move that really drove the pole through the heart of the euro, it was the ECB’s decision to bail out its worst-rated welfare states. That open-ended commitment to print money reduced the euro from Deutsch Mark status to something of a business-class Drakhma.

Evans-Pritchard also makes a note of the ever-growing regulatory burden on EU’s member states. In this category, the EU is competing with the Obama administration, though in the latter case things have slowed down considerably in the last couple of years. Also, it is increasingly likely that the next president of the United States will have libertarian roots – probably stronger than those of UKIP leader Nigel Farage – which will vouch for a historic regulatory rollback. For that to happen in Britain, the country has to leave the EU.

Which, again, is probably going to happen in the next few years. Now for the broader perspective, and Evans-Pritchard’s analysis of where France is heading:

It is a fair bet that EU leaders would search for an amicable formula, letting Britain go its own way while remaining a semi-detached or merely titular member of the EU. Let us call it the Holy Roman Empire solution. Yet Britain is the least of their problems. The much greater shock is the “Seisme” in France, as Le Figaro calls it, where Marine Le Pen’s Front National swept 73 electoral departments, while President Francois Hollande’s socialists were reduced to two. … It is widely claimed that the Front is eurosceptic only on the surface. Perhaps, but when I asked Mrs. Le Pen what she would do no her first day in office if she ever reached the Elysee Palace, her reply was trenchant. She would instruct the French Treasury to draft plans for the immediate restoration of the franc… She vowed to confront Europe’s leaders with a stark choice at their first meeting: either to work with France for a “sortie concertee” or coordinated EMU break-up, or resist and let “financial Armageddon” run its course. … She said there can be no compromise with monetary union, deeming it impossible to remain a self-governing nation within the structures of EMU, and impossible to carry out the reflation policies necessary to defeat the economic slump.

Given that the Front National has suffered no notable setback in national voter support over the past decade, but instead gradually grown stronger, the prospect of a Madame President Le Pen is one that both Europe and the United States should get used to. Therefore, as Evans-Pritchard rightly explains, it is also time to get used to the prospect of Europe returning to national currencies.

The one point in this that I disagree with is that reflation is the way out of the recession. More on that in a moment. First, one more point from Evans-Pritchard, this one about the future of the euro with rising Euro-skepticism among voters:

The euro will inevitably lurch from crisis to crisis without some form of fiscal union and debt pooling. Yet voters have just let forth a primordial scream against any further transfers of power.

Indeed. So long as there is any form of government involved in the economy, there has to be a fiscal policy tied to that currency. Furthermore, so long as there is a welfare state there will be government deficits, either in recessions or on a structural basis as has been the case in Europe and the United States for decades now. Such deficits will be denominated in a currency, and that currency has to be the same that the government accepts for, e.g., tax payments, as well as the same currency that they use to pay out entitlements. In other words, there has to be a jurisdictional overlap between a currency and a fiscal government, or else the currency inevitably becomes unstable.

Some of these points were made by economists, among them Robert Mundell, already 15 years ago, before the euro was minted. However, they were drowned out by the Europhoria that dominated most of the ’90s in Europe, leaving the continent with a fundamentally unsustainable imbalance between monetary and fiscal policy.

So long as national government deficits were of manageable levels the imbalance did not have any notable political or macroeconomic consequences. As I describe in my forthcoming book Industrial Poverty, this was the case between the Millennium and Great Recessions. However, as soon as budgetary sink holes opened up around Europe from 2008 and on, the imbalance became a true problem.

The full explanation of this requires an intricate but fascinating macroeconomic analysis. I am working on it separately, hoping to share it later this year. In the meantime, let’s acknowledge that Evans-Pritchard hits it right on the nail: the mounting voter resistance to more EU power is a game changer for both the EU and the future of the euro currency. What is missing from his column is the right economic conclusion, namely that dismantling the welfare state – not reflation – is the way forward for Europe. But that is a minor point. Do take a moment and read the rest of his entertaining yet sharply analytical column.