Bozen – The New Year began with hopeful signs of economic recovery in most first-world economies and the promise that the Eurozone sovereign debt crisis is abating. In fact, however, this optimism is due more to effective crisis management than it is a real solution to the problem. National debt is made up of two components, external and internal debt. External debt is officially termed “sovereign debt” and comprises bonds issued in a foreign currency to foreign investors to finance expenditure. The problem with sovereign debt is two-fold, first it is unsecured, and second, because the issuer has no control over the currency, it cannot print money to prevent a sovereign default. International financial shocks, like the US Banking Crisis of 2008-9 can have a knock-on effect, by raising bond spreads to such a level that the sovereign debt becomes unsustainable and sovereign default more likely. This is precisely what happened in the Eurozone crisis in Ireland, Greece, Spain, Portugal, and continues to threaten in Italy and even France.
Normally when a country’s debt becomes too high it has two avenues open to it: either raising taxes to increase revenue flow, or devaluing the currency by printing money. The US and UK, with the euphemism “quantitative easing”, have done a lot of the latter. But Eurozone countries have their hands tied – the currency is out of their hands and they cannot print money. They have tried raising taxes, but austerity measures imposed on already over-taxed citizens threaten their welfare and make growth impossible. It is easy to see that the term “Sovereign Debt” takes on a new meaning, because whatever way one looks at it, national sovereignty seems to be under threat. The debtor countries can rightly claim that they were simply following the spirit of IMF guidelines for development by investing in the future with large infrastructure projects, enhanced education projects, financed by sovereign debt, and that when unforeseen financial shocks like the US banking crisis impacted on them, they could not fairly be blamed for the consequences. On the other side, their creditors, and in this case mainly Germany, could claim that their prudence in saving rather than investing, should not be rewarded by having to bail out their more spendthrift neighbours. Both sides have a case, but had they pressed it to the limit the sovereign debt crisis would have become unmanageable.
As it was, crisis management, particularly on the part of Germany, with the combination of an official policy of austerity and an informal policy of diplomacy, has resolved the problem temporarily. But only temporarily. For decades political scientists have been debating the conflicting jurisdictions of finance capital and the nation state, but with the Eurozone crisis we face it squarely. Lying at its heart is the problem of “organized hypocrisy – the presence of long-standing norms that are frequently violated”, as Stephen Krasner puts it in his book “Sovereignty, Organized Hypocrisy” (Stanford, 1999). And this is true of sovereignty, as it is true of financial institutions that are “too big to fail”. Suddenly we exit the sunlight of legally enforceable rules into the twilight zone of contested jurisdictions. If this were not a problem already, we have the additional complication of traditional ideas of sovereignty, cemented in constitutional law and overlaid by centuries of national sentiment and patriotism that have real impact at the ballot box. The way the crisis played itself out, Germany was in the cockpit with the power to enforce austerity measures on the debtor members of the EU. This policy was heedless of the economic wisdom learned from the Great Depression, that growth and not austerity is the way out. But in a Federal Republic in which all the Lands have the right to vote on the matter, national sentiment in terms of the frugal Northerners bailing out the spendthrift Southerners plays an important role, as do constitutionally guaranteed notions of national sovereignty. On the other side, the debtor countries felt under the German jackboot – not a comfortable feeling, especially once the dangers of austerity and the consequent rise of far-right parties became clear.
To understand a possible road-map for the long-term resolution of the problems that the Eurozone sovereign debt crisis has raised, we need to consider the relevant facts. First, we have to look realistically at the development of the European Union. And second, we have to consider that the factor of “organized hypocrisy” impacts on the problem in two ways. First of all sovereignty itself is impacted by “organized hypocrisy”, because the moment a confederation was created its member states had necessarily to give up some of their powers, and this compromises traditional notions of sovereignty. And second, it impacts on financial institutions, as the Bank of England, over its long history understood. “Organized hypocrisy” in this case means that although the “lender of last resort” has a policy of “no-bailouts”, in fact there are institutions that are too big to fail.
If, as I suggest, the concept of “organized hypocrisy” is a key to understanding some of the complexity of the sovereign debt problem, we also need to be less starry-eyed, and more hard-headed in our assessment of European integration. The evolution of the European Union from the Coal and Steel Community involved incremental delegations of sovereignty, which the public more or less accepted over time. Full delegation of sovereignty to an economic and fiscal union was envisioned by some, but never widely canvassed until the crisis talks of 2012.
The seed of European integration was initially sown on very fertile ground. Under post-war conditions and promoted by leaders like Jean Monnet, Robert Schuman and Konrad Adenauer, intent on the solving the immediate problems of French-German relations and the peaceful reindustrialization of Europe’s heartland, and supported by the US, it bore immediate fruit. Monnet promoted his dream of a united Europe on the model of the US confederation with high moral rhetoric. But when indeed the rhetoric took wing and neighbouring states joined the bandwagon not only for the ideal, but also for their own practical purposes (for instance to piggy-back on the economic success of Germany and its low interest rate regime), complexities were introduced that were bound to work themselves out over the long run.
It is my thesis that the Eurozone crisis is the outcome of organized hypocrisy on at least two fronts: both in terms of the norms of sovereignty and in terms of the behaviour of financial institutions. Although “breaking the rule to save the rule” is typical of human behaviour, it is constitutive of bail-outs in a special way, precisely because to stipulate the rule behind the rule would be to structure incentives the wrong way. By this I mean, and as history demonstrates, the lender of last resort has to be prepared both to bail out banks, and to deny that it is prepared to bail out banks. In an analogous way, sovereignty was always a concept with overstretch, such that in many cases it could not live up to its own claims, as Stephen Krasner has so cleverly demonstrated. The most fundamental principle of the Westphalian Peace, the non-interference in the internal affairs of sovereign states, was already violated at its inception, in order to guarantee the freedom of religious minorities.
“Organized hypocrisy” is not a very stable basis for a complex political, social and economic confederation of the type of the European Union, but it seems to be the best we have. And this means that we must be ever-open to evolving and inventive solutions to the day-to-day problems that such a complex social system throws at us, because the obstacles to full economic and political integration seem much greater than those presented by maintaining a relatively open and fluid confederation of the type we already have. Specific policy changes may also help to alleviate the differences between Northern and Southern member states of the EU. Economists and policy makers have long pointed out that relaxation of the German export orientation, which drives down real wages to promote export competitiveness, and substitution of a policy in favour of greater domestic consumption, stimulated by higher wages and greater investment in education and infrastructure, would help the debtor nations as well as increasing the welfare of the creditors. This change in policy orientation is already reflected in some measure in SPD policies to be implemented by the Grand Coalition; while it seems that a combination of the carrot and the stick, in the form of tighter banking regulations, and an attempt to close off-shore tax havens, is encouraging debtor nations to try to tackle tax-delinquency and corruption.
