How to save Europe

Friday 29 Sep 2011

Across half the Eurozone sovereign yields are rising, neither investors, nor the people of Northern Europe, believe many sovereign states, including Italy, can be trusted to repay their debts. Many Northern Europeans, including the vast majority of Germans, Austrians, Dutch and Finns are unwilling to continue lending these failing states money. Some politicians are suggesting ignoring the will of their electorate and implementing a multi-trillion euro rescue operation, but outside of the political establishment few are confident it would succeed in the longer term, instead it could just lumber the healthy states with enormous debts.

So we are on the brink of a total breakdown of the Eurozone. Sovereign defaults invariably bring down the banking system because banks are large holders of sovereign debt, and the entire European Banking system is seizing up in fear. It is a far more serious situation than Lehman's Brothers because this time around countries no longer have either the cash or the credit rating to guarantee their banks. Even France could collapse in a Eurozone breakdown.

What can be done to prevent a break-up? I believe the only solution left is what I will call in this article "technocratic prison". Instead of trying to build a full federalist system that imposes better policy making on all member states in a non-national-democratic way, I believe the better solution is allow states maximal democratic freedom for as long as possible, but to impose technocracy on them for a period of say twenty years if they find themselves in an unsustainable debt position. Desperate times call for desperate measures, failing states would be given no choice but to accept technocratic management, it would be the equivalent of a war time total surrender demand. Only Greece need ever be subject to this extreme penalty, one hopes that other countries would reform themselves voluntarily given the extreme consequences of failure.

If this policy were adopted today, Greek democracy would be immediately suspended and a team of foreign technocrats would take charge of the country. They would impose whatever austerity measures are required to eradicate the deficit, and whatever structural reforms they saw fit to boost growth. They should have all policy options at their disposal, from nationalization of real estate to suspension of the right to strike and protest. A really tough transformation is vital to put the country back on its feet economically as quickly as possible, to preserve the moral hazard of economic failure, and to reassured the taxpayers in other European states having to pay for the rescue operation that justice is being serrved.

Implementing this policy would immediately eradicate worries over sovereign bonds and totally cure the Eurozone crisis. It would give Northern European voters confidence that any rescue operation they embark upon would be guaranteed to succeed and allow an eventual move to common Eurobonds.

Philosophically this policy has the following advantages:

(1) The EU has utterly failed, it has become a completely discredited political structure. I am a starry eyed philosopher, so I am a cosmopolitan who dreams of a utopian world government. The sight of a blue flag and gold stars naturally makes my heart leap, and I admit I used to love the EU. But it is clearly a totally and utterly dysfunctional organization unworthy of my or anyone else's love. A move toward federalism at this time makes no sense at all given the EU's enormous loss of popular support across multiple nations. Failing trades must be cut not doubled up, likewise failing institutions.

(2) The EU should be scaled back, stripped of responsibility for moral policy and given charge only of economic research and the management of failing states. Organization such as the European Court of Human Rights and the European Parliament should be pruned back or abolished. For all states except Greece, sovereignty will increase, much to the satisfaction of voters. This is desirable at this point in time when old orthodoxies are evaporating and incumbent politicians are perceived to have failed the performance legitimacy test. One day I hope the EU can grow back again, but it needs to start again from scratch to enable that.

(3) Countries should be free to decide their own political structures, their own moral boundaries, and their own economic models. One of the problems of federalism is it imposes a unified vision which take no account of either national preferences or the advantages of policy innovation and competition between varied states. China, for example, is a country that experiments with special economic zones and regional policies and then rolls them out nationwide if successful. But China is a paternalistic authoritarian technocracy and regional experimentation would likely prove too controversial under federalism. So let counties experiment for themselves and learn from each other in a Darwinian way.

(4) Democracy does not necessarily improve as one increases the number of voters. Greece would improve if diluted by German voters, but Germany would suffer. The idea of a Spanish President deciding how the Germans should run their country is decidedly undemocratic. Look at American Democracy - is it better because there are more people? A vast federal democracy across Europe might end up being as shallow as the Eurovision Song Contest.

(5) Democracy is known to promote nationalism. Rule by the majority alienates minorities. Across Europe countries are coming apart under democracy, for example in Belgium and Scotland. Federalism could turn into a nationalistic disaster.

(6) One of the problems of democracy is that it is motivated by self interest. The Greeks would happily default on debts to the Germans if they though they could get away with and become richer. In certain circumstances debt forgiveness is the correct choice, but for rich European countries it should not be an option except in the case of extreme natural disaster. Democracy has to have limits, and the sanctity of sovereign debt is at the heart of modern geopolitical stability. The "technocratic prison" system simply enforces that evolutionary principle.

(7) This system of government allows voters across Europe to grow toward a federal system at their own pace. For example, if Greece after ten years of technocracy became richer than Germany people across Europe would be clamouring for some of the policy options they choose. Instead of imposing policy federally, it treats people as adults who can do as they please, at least up until the point they prove themselves unworthy. So instead of trying to pull and trick people into better policymaking, it encourages them to vote for it on the basis of a performance gap between differently run states. It becomes a far less slavish political system.

I believe this policy could be easily sold to European voters, and I believe they would welcome it far more than federalism. Only the Greeks would really suffer, but frankly the Greeks deserve whatever pain it takes to restore their country to competitiveness.

It's not really a new idea, I realised this was the endpoint years ago. But the idea is presented here in a way which is more sellable to those who fear authoritarian technocracy. Only the incompetent need fear this policy, it leverages the Platonic principle called "non interference" or "minding your own business" which is described in The Republic as the simplest definition of justice. That means people should be forced to solve their own problems in a karmic fashion. It does not seek to build a Platonist Utopia, it simply adds one existential condition to democracy in order to preserve the stability of the Eurozone and with it the Western World. It is a democracy enabling policy which allows our current system of government to continue. Enforced technocracy replaces war, which is traditionally what happens when failing states start impacting their neighbours in negative ways.

Note this article looks at the short term technical measures to avoid disaster. Long term growth models are discussed in this article.