Friday 28 October 2016

Ray Kinsella: Europe is broken - and it won't be healed by denial

Ray Kinsella

Published 02/04/2016 | 02:30

Photo: Andrew Parsons/PA Wire
Photo: Andrew Parsons/PA Wire

Europe has lost its way. What makes it even worse is that all who are appalled at what is happening are caricatured by the establishment as 'extremist' or 'right-wing'.

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Not so; there are compelling reasons to oppose the direction in which Europe is being impelled, both politically and economically. This twin-crisis is now metastasising.

The political crisis is dividing member states, one from another. The Schengen Agreement has collapsed. The pall of terrorism hangs across EU capital cities. Walls and barbed wire have opened up wide fissures across what is ostensibly a 'union'. The flood of refugees is reshuffled from one location to another, with 'huddled masses' existing in overcrowded and unsanitary camps. This is truly the stuff of nightmares.

What is happening is not some random catastrophe visited upon Europe. It is, at least in part, a consequence of EU-endorsed western military intervention in Libya and Iraq; and, indirectly, of the failure to achieve stability with justice across the Israeli/Palestinian nexus.

The European establishment have neither the humility to accept some culpability for what is happening nor the clarity of thought and strength of purpose to forge an effective and principled response.

Worse, they have shown themselves willing to barter the EU's own principles, using EU visas and billions of Euros, to outsource the guardianship of the problem to Turkey. This is bleeding the credibility of all that 'Europe' ostensibly stands for.

This political crisis is unfolding against the background of a protracted macroeconomic stasis in Europe. The ECB's most recent 'package' is being spun as a 'we will do what it takes' initiative to get some kind of traction for a 'recovery' in the Eurozone. It's nothing of the sort. It is the most obvious indication that, in macroeconomic policy, too, Europe has lost its way.

The ECB is printing tens of billions of euro to buy government bonds, reducing its deposit rates further into negative territory with all of the distortions this generates. It is willing to pay commercial banks to borrow - to facilitate a 'bubble' in Corporate Bond issuance - but is not willing to countenance debt relief. This, too, is the stuff of nightmares.

ECB governor Mario Draghi has asserted that there are 'no limits' to what the ECB will do in support of its present policy.

But there should be limits. Its balance sheet is waterlogged. It is contravening its own rules not to engage in monetary financing of governments.

The Bundesbank contested QE, aka bond buying, from the outset and they are being vindicated. Policy is being orchestrated to the agenda and the expectations of markets. This is obtuse. The markets have their own agenda and it's not always aligned to the common good.

The European economy has been stalled, more or less, since the imposition of austerity on structurally weak, highly indebted member countries. The Eurozone's response, enabled by the ECB (a member of the Troika), has been a skewed, overly restrictive fiscal policy, combined with a 'loose' monetary policy aimed at increasing aggregate demand.

What is increasingly apparent is that the ECB has misdiagnosed the underlying problem. Recent research suggests that the primary cause of stasis may not be a deficiency in aggregate demand - one that can be 'fixed' by printing currency and flooding it through the same model that created the problem. The problem arises from the impact on productivity of the misallocation of resources generated by the 2008 'credit boom'.

If that is the case, printing money and negative interest rates will make things worse. Not alone is the ECB's approach not working, it is creating distortions in the global flow of savings. It doesn't begin to address the debt overhang.

Both of these policy failures - political and macroeconomic - were spawned by flawed strategies and by the obdurate defence of these strategies.

Each forms a backdrop to the other, as they merge and metastasise across peripheral Europe now confronted with an unprecedented inflow of refugees - and massive debt and refinancing problems.

There is no sense of 'unity' about 'Europe' - no road maps to where policy ad hocery is taking us. Europe's culture, which lit up its foundational values, has been emasculated of its unifying Christian ethos and values. But it is these same values which have been objective reference points for serving the needs and upholding the rights of the individual and the community. A Europe that is ruled by the strong and enforces that rule through political power is no substitute.

Europe has an identity crisis which it has, very largely, brought on itself - a crisis of values, democracy and macroeconomic imbalances that no amount of 'Summitry' waffle begins to address.

Alternative approaches are being 'crowded-out' by political ad hocery and financial alchemy, aka QE. It continually asserts that just a little more of what hasn't already worked will resolve all problems. Whose orthodoxy is this anyway - and against what values is it legitimised?

In war, as in economics, trust is central to engagement and resolution. There is no trust in Europe. The governance of the Eurozone is characterised by self-interest, subservience among weaker indebted members and, also, tenacity beyond all reason, in persisting with failed policies.

The blame does not lie with what are dismissed as 'unorthodox populist parties'. The status quo is battened down across Europe. Hegemony has displaced solidarity.

Any suggestion of a political and economic alternative to the existing model is caricatured. This is beyond foolish. It is dangerous to democracy.

Eurosceptic political parties are not exploiting political and economic failure - they are drawing attention to it.

The 'deal' negotiated by British Prime Minister David Cameron, however it is choreographed, does not change these realities. It seeks to insulate itself against all that is not working in Europe.

In fact, a two-tier European Union is an absurdity dressed up as 'pragmatism'.

Europe is being steered by an establishment in denial both of its own identity crisis and the need for change. The crisis in macroeconomic policy - and in the increasingly frenetic actions of the ECB - is exacerbating all of this.

As Europe strains under multiple pressures and threatens to fracture, the need to look again at the sustainability of Europe in its present form and at a rebalancing of macroeconomic policy, crucially including debt relief, is not even in the script.

A relationship gone wrong will never heal where there is denial and 'more of the same'. Sometimes there are no happy endings.

Happy endings require openness to a different way of living and working together.

Irish Independent

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