Tuesday, January 29, 2013

Political Unity Must Come First

by Aristides N. Hatzis

New York Times

January 28, 2013

If you are a eurosceptic this is the time when you are justified to growl, “I told you so.” The European Union seems to have reached an impasse and the euro zone is still a mess. Great Britain is ready to cross the Rubicon and be the first country to leave the E.U. Or at least it’s the first country ready to play the chicken game with Brussels in order to renegotiate its standing. Poland was never too enthusiastic and now, despite its ambition to become a major player, sounds more than reluctant to make the extra step and join the euro zone.

Milton Friedman, in a prophetic article published 16 years ago, predicted that the adoption of the euro would have the opposite effect of the one anticipated from its founders: “It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.”

This is exactly what happened. The troubles in the euro zone shattered the European edifice. The crisis led to political divisions between North and South, rich creditors and poor "PIGS" (Portugal, Italy, Greece, Spain) but also to schisms in every single country: Austerity or growth? Bailout or exclusion? Payment or default?

These divisions might lead to extreme solutions that were almost unthinkable until recently: exiting from the euro zone or the E.U., or perhaps even abandoning the unification project altogether, which could result in isolationism or even something worse, like a rise to power of extremist parties touting radical agendas of nationalism, protectionism and statism.

Needless to say that such a development will have dreadful repercussions for Europe as a continent of peace, democracy and wealth. The divisions could be further exacerbated and war could be back. Not the military kind of war but an economic one where barriers will replace cooperation and reciprocity.

I am sure that almost everybody understands that this could be catastrophic in the long term in a globalized world with the U.S. and the BRIC countries (Brazil, Russia, India and China) as fierce competitors. I am also sure that most European leaders realize that Milton Friedman was right in emphasizing political unity as a necessary prerequisite for the monetary union. However I am not sure that they are ready to make the necessary steps. These steps are not politically costless and we are, after all, talking about politicians.


See also

Patrick Chappatte (International Herald Tribune, Jan. 24, 2013)

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