The dangers of Europe’s technocratic busybodies

By Wolfgang Münchau - munchau@eurointelligence.com July 14, 2013 2:32 pm

EU officials care little about the deep causes of the economic crisis

©EPA

Ihear it all the time in European policy discussions: we have done so much more than you ever thought possible.

This familiar argument made by EU officials goes as follows: would you have thought three years ago that the EU would create a rescue umbrella to protect weaker members against a run on their sovereign debt markets? That the European Central Bank would offer a lender-of-last-resort bond purchase guarantee? Or that we are now creating a banking union? Come on, give us some credit here. Of course, there are problems. But you have got to realise that we can only fix this mess one step at the time.

It all sounds pragmatic, realistic, responsible. Statements such as these are often interlaced with some disdain for economists, and the inevitable comment that whatever isolated economic problems the eurozone may have, they are surely structural, meaning they are someone else’s problem.

It is not just the view of some hard-nosed policy makers. It carries support among many lobbyists, academics and journalists. Depending on the extent that your university institute or think-tank enjoys funding from European institutions, national governments or central banks, that would be your official view as well.

One problem here is what optical engineers would describe as perspective distortion. If you work in Brussels, you get obsessed with those inter-institutional dogfights – the European Commission versus the European Council versus the European parliament. In the policy circles of Brussels, theeconomic depression is not near the top of your to-do-list. You are more likely to be obsessed with the question of who is going to be the next president of the commission, and whether it can make up the political ground it has lost under its current head, José Manuel Barroso.

In addition to seeing the world from a distorted perspective, officials also care little about deep causes, and focus mostly on technical, legal and institutional aspects. When they defend austerity, they do so from a framework of the European treaties, which tell them in great detail how fiscal adjustment must take place and what happens if it does not. It is not so much that they are in denial over the effect of fiscal austerity on unemployment. Some are, some are not. But it is outside their frame of reference. It is no surprise therefore that the system prescribes the wrong medicine. Instead of rebooting monetary and fiscal policy, everybody is wasting precious time with cynical programmes to deal with youth unemployment – notwithstanding that all the empirical and theoretical evidence tells us that such programmes are a waste of time and money if not supported by macroeconomic policy.

The problem is thus not a general lack of reaction, but a busybody technocratic response that can be relied upon to miss the point.

It is the same with banking union. European officials now accept what they denied for a long time – that a monetary union cannot function without a joint banking system. But the way they have been doing it was to think up a catchy headline first – banking union – then allocate jobs, and then have a long and tedious debate about the legal and institutional aspects, who does what to whom.

But in all of this, they sidestepped the most important point. There will be no common fiscal backstop. Why even bother with a banking union if you are not prepared to accept any form of joint liability or joint insurance? The €60bn allocated to the European Stability Mechanism for the purpose of bank recapitalisation is pure deception. As the chief spokesman of the eurozone finance ministers admitted in an interview last week, these funds are a political signal only; in other words, a pot to be seen, not to be used.

I bet the eurozone will also deal with the problem of deflation in a similar way. This is probably the clearest and most present threat to the economy right now. The right response to an anticipated deflationary threat would be for the ECB to get interest rates down to zero, and to start buying bonds immediately. But unfortunately, there is no consensus in the ECB’s governing council, which was only able to agree on a commitment not to raise interest rates for an extended period. Appearance has once again triumphed over substance.

Those who keep on saying that the EU has done more than anyone thought possible are ultimately implying the situation has improved and that the worst of the crisis is over. Therein lies the sheer horror of the statement. The economies of Greece, Portugal, Ireland, Cyprus, Spain and Italy have collapsed, and are mostly still contracting. Unemployment is at record levels, and rising. Official forecasters have been pretending for the past four years that the turnround is just around the corner. They have been wrong each year. And they will be wrong again.

So when you say that you have done more than I thought you would, you are merely telling me how bad things have become, how much you are lagging behind and how little you care what is going on in the economy.