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Learning by failing is not an option in the eurozone


Supporters of the conservative New Democracy party attend a speech of Greek Prime Minister and leader of the party Antonis Samaras. Greeks will go to polls for general elections today (Getty Images)

Supporters of the conservative New Democracy party attend a speech of Greek Prime Minister and leader of the party Antonis Samaras. Greeks will go to polls for general elections today (Getty Images)

AFP/Getty Images

Supporters of the conservative New Democracy party attend a speech of Greek Prime Minister and leader of the party Antonis Samaras. Greeks will go to polls for general elections today (Getty Images)

Trying and failing is part of life. Taking one path sometimes only happens if another - usually an easier one - has already been taken, but without success. Learning from the mistakes of going down the wrong path is central to the learning process, and to the process of doing things better. That is as true in politics as it is in personal life.

But the creation of the euro has severely constrained the scope for learning by failing for its members, individually and collectively. It is a reason to be pessimistic about the future of the euro, and Europe.

Two potentially historic events illustrate this: Greece's election today and the launch of quantitative easing (QE) by the European Central Bank three days ago.

Greece first. Consider the parallels between that country now and France of yesteryear. Among the defining moments of Europe in the post-World War II era was the 1981 election of Francoise Mitterrand as French president.

His manifesto then was similar in many ways to that being offered to the Greek electorate today by Syriza, that country's hard left party. A big increase in both government spending and public sector employment were planks of Mitterrand's policy in the early 1980s, just as they are of Syriza's manifesto in today's election.

Mitterrand's policies failed almost from the outset. And as money flooded out of the country in greater volume as the months passed, matters got worse.

By 1983, he was left with what became known as the 'Albanian option'.

Mitterrand's advisors told him that the only chance of his policies working would be effectively to close France's borders: to stop further capital flight and to limit imports, which would allow French companies capture more of their home market.

Mitterrand baulked at this. Then came the U-turn. Instead of closing France's economy, he led a push to open Europe's up.

Within a year of abandoning the policies which had got him elected, he was instrumental in setting in motion the creation of today's Europe - a single market and, ultimately, a single currency.

It is highly doubtful that he, his party and the people of France would have taken the route of European integration if they had not been convinced that, having tried and failed with hard left policies, an alternative route should be tried.

But owing to the strictures on eurozone countries today, the path Syriza has promised the Greek people in today's election will only be possible if Greece exits the euro. That is because the money to fund its promises is to come from a very large reduction in debt servicing on the Greek state's massive debts.

As it is mostly other EU member states to whom Greece's debts are owed, cutting debt servicing would depend on their agreement. That simply will not happen to the degree that would allow Syriza to fund its spending commitments.

The euro can only work if all its members accept that they do not have the freedom to take policy decisions which others feel will, or could, be detrimental to them and the entire bloc.

This limits the options - including bad options - that countries can take. But it also prevents the often cathartic, learning by failing process from taking place.

However damaging Syriza's policies would be if implemented - the notion that a stronger economy would result from expanding a public sector that is as badly functioning and corrupt as Greece's is delusional - it may be that the Greek people will only accept the reforms the troika advocates after Syriza's policies have been tried and then fail.

But unless they are tried, many people will believe that they are being prevented from solving their problems. Loathing towards the troika and the EU more widely will fester. Something eventually will have to give.

In Frankfurt, something finally gave on Thursday. And long past time. The case for trying QE has trumped the case for not trying it for many years.

The eurozone economy has been the poorest performing of all major economies since 2008. It is smaller now than it was seven years ago, a performance without precedent in living memory.

That all other major economies have tried QE and have grown faster than the eurozone in no way proves that it works - the available evidence is very far from conclusive and there are clear downsides and risks to pumping more money the way of financiers - but experimentation is warranted. Without growth, Europe will, sooner or later, hit the rocks.

As the ECB has been missing its inflation target by a wide margin for a long time, it had every justification to experiment with QE. But that it has taken so long to do what was announced on Thursday is indicative of the chronic inertia that is built into the eurozone and which severely limits the scope to try new policies.

Reliable reports suggest that both German members of the governing council, along with the Austrian, Dutch and Estonian members, voted against QE.

The opposition of this small minority - the ECB's governing council is now 25-strong - over a long period has delayed rolling out this experiment. Running a monetary union in this way is doomed to failure.

The economic management decisions needed to run a single currency have turned out to be entirely different from those needed to run a single market, the core element of the European integration project up the launch of the euro. A single market needs agreement on how markets should be regulated.

This involves making legislation on such mundane things as health and safety standards for products and how to regulate cross-border services provision.

The scope for disagreement and rancour when grinding out the legislation to do this is limited. Differences can be split.

Running a currency union is profoundly different. Instead of thousands of technocratic details, choices are often big and binary - to do QE or not to do it, for instance.

Now that QE is finally being rolled out, it is in everyone's interest that it works - to stimulate demand, thereby pushing inflation out of negative territory and spurring growth in the process.

If it does not, Europe's currency union - in which its members can't experiment and its shared institutions do so only after lengthy delay - does not have a bright future.

Sunday Independent