Alberto Mingardi  

Grexit, Brexit and the uncertain future of the EU

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Grexit or Brexit, which is worse for the European Union? Joschka Fisher, one of the leaders of the environmentalist movement in Europe and formerly the German Foreign Minister under Gerhard Schroeder, has an interesting piece on "Project Syndicate". Fisher is convinced that "60 years of European integration - the entire European project - could be undone" because Europe is now a "perfect political storm".

He writes that

The pace of erosion could accelerate in the next two years. The United Kingdom now seems certain to hold, by 2016, a referendum on remaining in the EU, and a far-left party - determined, as in Greece, to escape the rigors of economic reform - could win Spain's general election next autumn.

Certainly, events could turn out positively, with the UK remaining part of the EU, and Spain opting for the status quo or a more moderate vision of change than Greece's Syriza-led government has embraced. But the worst-case scenario for the EU's future looks increasingly likely: "Grexit" (Greece leaving the eurozone), "Brexit" (the UK leaving the EU), and a Spanish election result that resembles Greece's.

Fisher's article is interesting because he is one of the few European politicians to take these "threats" seriously, and not ascribe them to voters' myopia. His prescriptions are a bit troublesome to me:
Greece needs both money and reforms - rapidly and within the eurozone and the EU. The governments in Athens, Brussels, and even Berlin cannot live with Greece as a failed state and economy. The continuing poker game between the Greek government and the troika (the European Commission, the European Central Bank, and the International Monetary Fund) hurts all parties involved (...)

If Grexit is to be averted (which should be the EU's highest priority), the challenge posed by Brexit would already look significantly less daunting, given that here the risks are spread much more evenly between the Union and the UK. In fact, the risks are greater for British Prime Minister David Cameron, because it is almost certain that Scotland will not accept a Brexit, placing the UK's own future in jeopardy.

So, despite Cameron being in a largely self-dug hole, the EU should show some flexibility in its negotiations with Britain over questions that do not concern the Union's basic principles. The UK could be offered additional opt-outs from EU policies (such as it now enjoys from the euro). And EU leaders could find a formulation that reassures Britain about the eurozone's impact on the single market.

Sure the continuing poker game between the Greeks and everybody else hurt all parties involved, but can you really give Greece both "money and reform" and everybody will live happily ever after? We'll see how the agreement worked out in these hours will work. It seems to me that, if you could "get money" no matter what you do (or at the price of some cheap promises), your incentive to reform decreases sharply. Plus, the governing coalition leading party in Greece, Syriza, won votes precisely because it opposes the idea of "reforms" that were pursued following the Troika. I doubt that the legitimacy of Brussels' institutions will be strengthened by twisting their arm into doing reforms they openly do not want to pursue. EU puzzle2.jpg

On Brexit, many things have been said. People have pointed out that keeping Britain in the EU is central for the US interests (for TTIP but also to have a friend in foreign policy among Europeans), how Brexit will make a Scottish secession all the more inevitable, et cetera. My point on Brexit would be the same as one I made on Scottish secession: the referendum is one thing, whereas the process is an altogether different animal. Negotiations will be articulate and complex, but at the very worst, England is probably going to be integrated in the European Free Trade Area - which is the status of Switzerland and Turkey today. Both players - the UK and EU - will have a great incentive to work out things as smoothly as possible, not least to save face in front of the world: the UK is not Cyprus.

Surely, Brexit would change the balance of power in the EU: French-German hegemony will be unchecked. This is why Northerners and the Baltics would much prefer the UK to stay.

But precisely because the EU as it is doesn't work very well, are we sure that a narrower European Union might not perhaps work better? It might be one with more limited ambitions: but Fischer doesn't like the idea, as he cares for an EU that shows foreign policy stature like a proper nation state. Or it could be narrower in terms of geography. A free trade area can have relatively loose boundaries, but a state cartel, in which an ever-increasing share of the decision making process is centralised, faces a trade-off between size and effectiveness.

The other thing I would disagree with Fischer on is the idea that Grexit/ Podemos governing after the Spanish election/ Brexit are three pieces of a domino. Of course, they might happen at roughly the same time. However, I would suggest that Grexit decreases the likelihood of Podemos winning in Spain: Spanish citizens may have the impression that a similar experiment, like the one Podemos would like to join, didn't end up very well. Podemos winning elections in Spain may increase British disillusionment with the EU. Instead, an EU that says, at a certain point, "no" to Greek may be keener to consent to some of David Cameron's demands, to avoid two exits in a couple of years. Also, would Grexit convince the Brits that the Germans are the bosses of the club and so they'd better go alone, or rather that this club is less unserious than it looked? I don't know, but one thing I am sure about: just giving money to the Greeks in expectations of reforms which aren't likely to be pursued will not secure the future of the EU as we know it.

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CATEGORIES: Eurozone crisis

COMMENTS (4 to date)
Shayne Cook writes:

Dr. Mingardi:

It seems that, notwithstanding the "negotiations" that have transpired between Greece and the rest of the Euro area, the Greek government has been offered more-or-less an "all in or all out" proposition.

If I remember correctly, a German finance minister proposed a less binary option a year or so ago. It went something like this ....

Greece stays in the EU, for most intents and purposes, but re-institutes/recognizes the drachma for servicing its internal debts and cash flow needs - governmental employee and pension payments, and internal tax receipts. External trade receipts and payments are made only in Euros.

The obvious concern is that the drachma would hyper-inflate, but the ECB could offset that concern by offering a scheduled, predictable exchange rate of drachma to Euros in a step-function - say, a 5% decline in exchange rate per month - until an equilibrium is achieved. That would allow the Greek government time to service its internal cash flow requirements with drachma, but at least allow controlled decline in external purchasing power externally.

Is that sort of 'solution'/option being considered?

R Richard Schweitzer writes:

In these considerations of what cohesions hold the EU together, in general, and in particular for Greece and G.B., we should probably look at the differences in the cohesive effects of commonalities compared with complementaries.

Whereas, the complementary may "fill a need," which differs for each participant (A needs to borrow; B needs to make loans that "book" interest); the commonality usually evidences a common need that is equivalent for each participant.

In the case of Grexit, the needs are no longer complementary. A still has the same needs or reasons to borrow, but B no need to lend since the prior capital has been consumed by the borrower. Cohesion is gone

In the case of Brexit, the originally presumed commonalities derived from differing objectives. The differences in the objectives (federalization, e.g.)are now superseding the presumed commonalities, weakening the cohesions -unless- the ojectives can be reconciled.

Larry writes:

Giving Greece flexibility, money and/or debt relief doesn't fix the problem. Greece fundamentally can't keep pace. They'll be back in trouble in no time. Better to recognize the inevitable. They'll have a horrible transition and then go back to being...Greece.

Carl writes:
The UK could be offered additional opt-outs from EU policies (such as it now enjoys from the euro)

Ha! I like that he thinks the British using their own currency is a favour from the E.U. Gotta love these Eurocrats.

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