(Το παρόν κείμενο αποτελεί προϊόν προσωπικής ακαδημαϊκής προσπάθειας στα πλαίσια του μεταπτυχιακού μου στη θεωρία των Διεθνών Σχέσεων. Λάθη και παραλείψεις βαρύνουν αποκλειστικά τον υποφαινόμενο)
The aim of this essay is to present the case of the
Euro being a tool towards German Institutional Hegemony. First we will show the
mechanisms through which the current crisis initiated and then we’ll show how
the structure of the Euro is designed to augment German economic power. We’ll
make a presentation of Optimal Currency Areas and how the Euro compares to
that. Then with the aid of International Relations Theory we’ll use a systemic
approach towards the Euro and how this aids Germany’s bid for regional
hegemony.
It is often said
that the current economic crisis is the worst to hit the global economy since
1929. Decision makers around the world often use this cliché in order to
explain why the global economy is not moving towards a more stable growth path.
Governments and Central Bankers around the world state that since the 1929 crisis
we have learned and we’re bound not to repeat the same mistakes. And yet some
mistakes are not only repeated but they’re being aggravated by indecision and
pro cyclical measures that are being advocated.
Taking the case
of the Euro zone we can say with a certain degree of confidence that what begun
as a financial crisis in 2008, has escalated into a full blown liquidity crisis
which bears all the hallmarks of a speculative attack. This liquidity crisis
has as its main actors the member states of the Euro zone and more
specifically, the so called PIIGS (Portugal,
Ireland, Italy, Greece,
and Spain)
which are faced with increasing difficulties with respect to their debt
refinancing. From an economic viewpoint the mechanism which is the driving
force behind the ongoing speculative attack is rather straight forward. For
various reasons, investors consider the public debt that they’re holding as a
riskier asset than in the recent past. This triggers a sale on these assets
which forces the interest rate with which states borrow upwards by imposing a
risk premium on it. This increase in the interest rate can be particularly
devastating for states which are vulnerable to such changes, such as countries
which belong to the PIIGS group that have already amassed a considerable amount
of public debt. Normally this wouldn’t present a problem because when a country
is faced with such a crisis, the central bank steps in and buys public debt in
exchange for printed money. Thus the crisis is alleviated in exchange for an increase
in inflation and public debt but in general a liquidity crisis is avoided and
the speculative attack stopped.
In the case of
the PIIGS group however what started out as a simple ripple in the surface may
well turn out into a full fledged tsunami leading to state bankruptcies and
severe economic recession. Again the mechanism for this is pretty straight
forward. With the introduction of the Euro, the countries of the European south
suddenly had at their disposal a solid currency backed by the powerful, export
oriented economies of the north. Using this currency as collateral they
increased public and private spending fueling the economic boom of 2001 -2008.
These states could get away with this behavior because both private and public
debt was issued in the new, robust currency. Investors considered such debt to
be secure and this allowed for lower interest rates. With variations (Ireland’s
explosive banking growth, Spain’s housing boom, Portugal’s, Greece’s and
Italy’s public debt explosion) these states massed public debt by running
considerable deficits which in turn fueled domestic consumption causing
inflation and overheating. In some cases (Greece in particular) the explosion
in domestic consumption and private credit caused a massive increase in imports
thus creating the so called “twin” deficits (budget and balance of payments). As
long as the investors considered the debt assets issued by the states as secure
there were no clouds in the horizon and the system worked smoothly. Problems
arose when, under the shock of the subprime crisis, investors started to sell
off riskier assets to move towards safe havens such as US T – Bills or German
Bonds. In addition to the rising premium on public borrowing, bonds which were
already under circulation steadily lost their liquidity. Because private banks
considered such assets as fully liquid, this chain of events forced them to
shut down the flow of private credit thus aggravating an already bad situation.
The ECB, lacking the ability to increase monetary supply by exchanging
undervalued state debt for fresh money, opted instead to continue using
depreciated assets held by the banking sector as collateral in order to ease
the liquidity crisis. This however has proven to be only a stop gap measure as
private banks and national pension funds have exhausted their capability to
scoop up state debt. The joint response of the IMF – Eurozone countries has
proven so far to be ineffective, since the rescue packages for Greece, Ireland
and Portugal
are accompanied by severe austerity measures which act as accelerators in a
self fulfilling prophecy cycle. The only measure which would alleviate the
speculative attacks on the weaker members of the Euro, the so called Eurobond,
has been vehemently rejected by Germany
on the grounds of moral hazard. The moral hazard proponents state that it is
improper to ask the taxpayers of countries that enjoy sound fiscal conditions
to shoulder the burden of countries which pursued irresponsible economic
behavior. Irresponsible economic behavior should be punished by making those
countries see the error of their judgment. This line of thought, while
certainly holding considerable truth in it, first of all fails to address the
immediate problem at hand and moreover, by letting these irresponsible
countries fail, the risk of triggering a global economic crisis of far greater
proportions than the subprime collapse is greatly increased. The Eurobond solution
would allow member states to exchange part of their public debt for commonly
issued Euro zone bonds. These would have a very favorable risk rating and if
combined with the empowerment of the ECB to exchange them for fresh money
supply directly, this would spell the end of the monopoly that the market has as
the sole buyer of Euro zone public debt.
Germany, backed by
other northern states such as Holland, Finland and Austria, has refused to even
consider such a plan. If we leave the realm of economics and enter those of
International Relations, this is perfectly normal and rational behavior, in
full accordance with German national interest. Before we go any further in our
analysis, we need to explain what the concept of an Optimal Currency Area is
and how the Euro zone compares to that.
An Optimal
Currency Area is a geographic region in which economic efficiency is maximized
under a common currency. This geographical region does not always coincide with
the borders of a nation state. Indeed, from an economic viewpoint it can be
argued that the United
States is not an Optimal Currency Area and
that certain regions would benefit more from the introduction of a local
currency. For a currency area to be optimal there are several criteria which
have to be satisfied:
- Labour Mobility: This translates as the ability of
workers to move freely from one region of the currency area to another. This
movement allows the relocation of workers from an area hit by recession and
unemployment to an area of high growth.
- Capital Mobility: This allows the market forces to
distribute money and goods to where they’re needed the most.
- Price and Wage flexibility: If the two criteria above
are to be successfully met price and wage flexibility are an absolutely
necessary ingredient. Sticky prices and wages inhibit both capital and labour mobility.
- Risk Sharing Mechanism: This translates as a fiscal
transfer mechanism redistributing tax revenue to areas which are adversely
affected by the first two criteria. Such a mechanism mitigates the effects of
an economic crisis or a recession.
- Similar Business Cycles: When one area is experiencing
a boom whilst another is in the throws of a recession it’s very difficult for
the monetary authority to adopt an optimal policy for both.
- Production Diversification: When different regions
produce different goods and services, a common currency area greatly reduces
interregional trading costs and risks thus facilitating growth.
- Homogeneous Preferences: This means that the various
regions comprising the currency area have similar expectations from their
monetary authority, for example, to keep prices stable at all costs.
- Commonality of Destiny: The regions which comprise the
currency area feel that they are bound together in a common cause. When one
region is in trouble the others will try to help it out.
If we were to
apply the above scorecard to the Euro zone area we would find it lacking in
several aspects. Labor mobility is very low and all this despite the abolition
of physical restriction on travel and relocation. In addition, there are
cultural barriers (multitude of languages and cultures) which hinder labor
movements. Capital mobility has been achieved but in several states prices and
wages are sticky (Greece)
which causes an outflow of capital from these states to others which are more
efficient. Therefore capital mobility turns into a liability instead of being
an asset. A risk sharing mechanism has been explicitly banned from the Euro
zone by its founding treaties. The ECB is under no circumstances allowed to
purchase public debt in exchange for an increase in monetary circulation. The
ongoing debt crisis has caused a de facto shift in this approach, as the hasty
conjuring of the EFSF mechanism shows. The inclusion of a risk premium for
private bond holders though, practically negates any positive effects from the
transfer of EFSF funds to crisis stricken states. Of a more fundamental nature
is the lack of common business cycles between the Euro zone states. This and
the absence of any meaningful convergence mechanisms between the states force
the ECB to pursue suboptimal policies. The recent rise in the ECB interest rate
signifies just that; whereas Germany
feels threatened from a possible inflationary burst, the states of the south
desperately need low interest rates to rekindle their stagnating economies.
This issue goes hand in hand with what the states expect from the ECB; Germany wants
the ECB as a mirror image of the Bundesbank. The southern states expect a
central bank with a more intervening role in the European economy. The German
psyche has been marred by the hyperinflation episode of the 20s and therefore
desires strict price control. This approach causes the rift in productivity
between the countries of the north and those of the south to widen further
still. Stable prices and tight inflation controls mean that, all else being
equal, productivity will flow from the south to the north thus exacerbating the
problem. As for the commonality of our destiny, all recent polling data suggest
a major disappointment from the EU experiment as it is.
We come to the
conclusion therefore that the Euro zone as it is set up today is far from being
an optimal currency area. If we were to see things from a different perspective
however, we would see that it’s the perfect instrument in the pursuit of power.
It is at this point that we must lay down several facts which govern the system
of states.
- States are the key actors in an anarchic world.
This means that there is no higher authority, no arbitrator above the
states which can meditate between them.
- States inhabit a competitive world. All states
strive to increase their power relative to other states. States are driven
to this behavior because they fear for their survival. And survival is the
premier goal for all states.
- The system of states is one of self – help. For
states to achieve their primary goal of survival, they have to increase
their relative power. To this end, states should undertake all necessary
measures to optimize their power output from all available resources
(internal balancing). Additionally, states can try to team up with other
states in alliances in order to increase their sense of security (external
balancing). It is obvious, that given a choice, internal balancing is
preferable to external balancing because an internal balancing process is
fully under the state’s control.
To take things a
bit further, it is necessary to cast a closer look in the policies of greater
states, the so called great powers. John J. Mearsheimer in his seminal work
“The tragedy of Great Power Politics” puts forth the theory of offensive realism
through which he offers a clarifying explanation on how great powers operate
within the system of states. Mearsheimer makes the following assumptions:
·
States are the principal actors of the system.
·
All states have some offensive capability
· There is always uncertainty about other states’
intentions. It’s difficult to gauge a state’s intentions and nigh on impossible
to discern future intentions.
·
The highest goal of the state is survival
·
States are rational actors
The quest for
survival in addition to systemic uncertainty causes states to fear each other.
Fear drives state to amass as much power as they possibly can; it’s the only
way through which they can feel secure. The safest possible position in which a
state can be is that of a regional hegemon i.e. that where a single state
dominates a greater geographical region and influences others. The United
States are considered to be the regional hegemon of the western hemisphere as
they not only dominating the Americas
but they also exert considerable influence upon North East Asia and Europe. A regional
hegemon does not wish to have peers and therefore when a competitor looms in
the horizon the hegemon will do its utmost to humble him.
This then
provides us with a very good explanation for recent historical events in Europe. Since its unification in 1871, Germany has strived to become a regional hegemon
in Europe. Twice Germany has been defeated in a
contest of military power, both times due to the decisive intervention of
overseas balancers. In both world wars, it was the intervention of the UK and the US
which ultimately caused the defeat of Germany. In this analysis, we will
be making the case that Germany
is once more seeking the position of regional hegemon. There is nothing
malevolent in this behavior because states do not conform to the ethical code
which applies to individuals. It is the very nature of the great power and the
system of the states that force it to pursue the Sisyphean task of hegemony. This
time Germany is not trying to achieve this position through sheer military
power; the introduction of nuclear arms has made this contest much less
feasible than before, at least as far as great powers are concerned. Instead, Germany, by flexing its economic might is
seeking to institutionally dominate Europe by
creating a system of satellite states which are economically dependent on her
for survival. It can be said that this institutional hegemonism replicates in a
way the feudal system of the Middle Ages where the fiefdoms swore fealty to the
baron. The baron had the obligation to provide security for his lieges while
they had the obligation to provide him with taxes; either in monetary or other
form (i.e. serving in the baron’s army).
Let us make the
following assumption; the Euro was created as a currency to cater primarily to
the needs of Germany.
The ECB was given a strict mandate to oversee price stability which greatly
benefits countries that have a lead in productivity. By not allowing for an
effective convergence mechanism and an appropriate risk sharing mechanism the
Germans condemned the weaker economies to economic obliteration. True enough,
whilst countries of the north (Germany,
Holland, Finland,
Austria and to a lesser
degree France)
strove to minimize the cost of production and maximize productivity, states
which already had a poor record in this department, deteriorated even further.
All that was needed was an external shock to act as a spark plug for the
ensuing liquidity crisis.
From an economic
point of view the best solution to the current crisis would be the issuing of
the Euro bond. This would immediately deflate speculative attacks against state
debt by allowing the ECB to trade Euro bonds for a fresh supply of money. This
should be accompanied by a Euro zone fiscal governance body which should impose
tight controls on the issuing of common Euro zone debt. This must act as a
reign to irresponsible public spending of member states which, through their
own actions, put their countries in such dire straits. Furthermore, only part
of state debt should be converted to Euro Bonds thus further restraining states
from runaway spending. Should states wish to accrue further debt they can do so
by issuing state bonds at a significant risk premium.
The opposing
view states that countries which keep their economies in proper order should
not be forced to pay for the inaction or mishandling of other countries (moral
hazard). In the end, Euro zone member states together with the IMF have ended
bailing out Greece, Portugal and Ireland with billions of Euros in
emergency loans. On one hand, the northern states wish to punish fiscally
irresponsible states by imposing very high lending rates and crushing austerity
measures. On the other hand, they very much fear a possible domino of
bankruptcies and continue pouring money towards those countries. From an
economic point of view, this is as efficient as pouring money down the drain.
The austerity measures fuel severe recessions which in turn require even more
loans, which require even more austerity in a never ending downward spiral. The
offering of emergency loans does not answer the fundamental problem which is
the monopoly of the market as a buyer of public debt and the inability of these
countries to increase the monetary supply to ease the liquidity crisis. So long
as speculators know this fundamental fact to hold as the truth, they will
attack again and again in the future.
If we were to
change observation platforms and view this from the scope of International
Relations Theory, we can clearly say that this is an optimal move on the part
of Germany.
Germany,
under no circumstances wants to relinquish its hold over the ECB. It does not
wish to cause mortal damage to the countries of the south; it merely wishes to
keep them constantly depraved and in need of northern funds. Germany is quite sincere when it says that it
does not wish for Greece
to go bankrupt. She wants Greece
(and for that matter all other countries of the PIIGS group) to be in the Euro,
at a constant productivity disadvantage, in a situation of constant need for
emergency funds. It is clear as daylight that at least Greece’s public debt is no longer serviceable,
yet Germany
facilitates talks for further loans made available. Therefore we conclude that Germany is
leveraging its considerable economic power in order to realize its goal of
dominance with the EU, hence the term institutional hegemonism. This is
perfectly rational behavior on the part of Germany and in full accordance with
their national interests. Germany
is simply behaving as it must by acquiring power in its bid for hegemony and
hence security. If we were to look for a historic parallel to this situation we
can offer the example of the Delian League. The Delian League was founded in
477 BC as a collective security organization of the Greek city states against
the Persian threat. Its original goal was to offer security to its member
states and to continue the war against the Persians. The League’s treasury and
congressional meetings where held in the sacred island of Delos
which was considered neutral ground by all participants. In 454 BC, Pericles
moved the treasury and the seat of the League to Athens and begun using the League’s treasury
and military assets in pursuit of Athenian state interests. Any insubordination
towards the will of Athens
was dealt with swiftly and heavy handed. Thucydides, in an excerpt which is
considered the basis of scientific research for International Relations, offers
us a dialogue between the Athenian delegates and those of the island of Melos.
The island of Melos was populated by Spartan colonists
who resented the Athenian yoke. Athens
threatened Melos with military retaliation
should it refuse to join the League. The Melians stated that it was unethical
on the part of Athens
to threaten such a small state. The Athenian delegates responded that it was
unethical of the Melian leaders to subject their citizens to Athenian
reprisals. If Melos desired an independent
status it should have acquired the means with which to pursue such a policy.
The above
paradigm sheds light to many economic decisions which at first light appear
suboptimal. The implications for a country entering the Euro zone where well
known and documented since before its inception. When a state surrenders
willingly part of its authority (monetary policy) it must have a very clear
vision of what it wishes to achieve and how it plans to offset this loss with
other benefits. When a state wishes to partake in an association of states it
must do so with the full knowledge that the governing rules are those of the
greater states. As Thucydides said, it is unethical for a state to subject its
people to punishment due to poor preparation on its part. Greece and
other countries of the south knew full well the implications of joining the Euro
club. The leaderships knew or should have known that they were entering a club
in which their countries where inferior in productivity, a club in which they
would have to emulate German economic behavior in order to survive. Countries
which did so benefited from the productivity transfer and utilized the Euro to
enhance their own power. States which saw the Euro as the key to the Eldorado
of cheap money are realizing to their horror that they will have to pay back
that money and much more. There is no such thing as a free meal in the world we
inhabit and on that both economic and international relations theory agree. In
a self help system of states what matters the most is what the state does or
neglects to do. A state which believes in Divine Intervention or in the good
intentions of others cannot possibly hope to survive. As the ancient Greeks so
eloquently said: «Συν Αθηνά και χείρα κίνει». You cannot wait for the miracle; you have to take
actions your self.
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