reddytoread

A friend commenting on my earlier efforts to understand the strategic reasoning that might lie behind the decisions of the Greek government in the days prior to Sunday’s referendum asked me whether one might think instead in terms of Albert Hirschman’s triad of exit, voice and loyalty. This is indeed another way of thinking about the problem, especially if one steps back and looks at the travails of the Eurozone over the longer period.

Hirschman pointed out that exit and voice were distinct means of putting pressure on firms, organisations, social arrangements or even countries to change. The Eurozone was structured in a manner that did not foresee at all the possibility of exit, but neither did it provide for very much voice, instead embedding in its constitutional order inflexible requirements (such as the Maastricht criteria) which had a technical flavor but little ultimate justification. That inflexibility was compounded by the public culture in some of the creditor countries, in which moralizing economic outcomes became a popular sport, even though some of the asymmetries encountered were less to do with morality than with the design of the Eurozone itself.   While it may be understandable that Northern European workers experiencing wage repression and contraction of the welfare state should resent supposedly spendthrift Southern Europeans, the fact that the former had benefited in various ways from the Euro (for instance because German exporting industries were less disadvantaged than they would have been by an appreciating Deutschmark) was largely lost to public view.

The risks were inadequately foreseen.  These were associated with the presence of persistent deficits and surpluses within the Eurozone based not only on price differentials but on structural differences between countries, and the emergence of associated destabilizing asset bubbles and government debt accumulation.  Even now these underlying sources of national problems are obscured in the public debate in Northern Europe.  The constitution of the Eurozone made insufficient provision for mid-course adjustment, instead fetishizing specific fiscal criteria under the overall rubric of sound finance (although Germany, and then France, were in fact the first to break the supposedly sacrosanct rules).   The negotiations on Greece have been shadowed by the threat of exit but that has done very little to generate a greater role for voice, perhaps because Greece is viewed as too small to modify the rules for, or because the consequences of breaching the orthodoxy are still viewed by its keepers as too shocking to contemplate. 

The Greek government has highlighted the absence of options in the Eurozone by calling a referendum in which a plaintive expression of voice (which remains, however, a hollow invocation, as isolated within the nation state and given no constitutional authority in the Eurozone) has preceded a possible exit.  In the meantime, the US Treasury has improbably emerged as a voice from without, driven by pragmatism rather than conscience.  It has called forcefully, if behind the scenes, for the European creditors to drop their inflexible orthodoxy in favour of business as usual in the international sovereign debt market, making a deal that will balance debtor and creditor interests in the ultimate interest of the creditors themselves, and thus negating the need for exit.   In short, its position is not discernibly distant from that of Greece. Even today, as potential Grexit nears, the necessity to revise the Eurozone rules gets nary a mention by the creditor country governments, although it is evident that the Greek crisis was brought about not merely by bad behavior but by flawed rules which make it entirely possible that such a crisis will reoccur in three, five, ten, or twenty years (although some fondly hope that the existing patchwork will suffice to avoid that). The measures taken by the European Central Bank, unprecedented for it but expected of an ordinary central bank, to stabilize interest rates through monetary policy, have so far been sufficient to quell the crisis in all peripheral countries but Greece but have already skirted the edges of its formal mandate and may not by themselves suffice in the future. To borrow the terminology used by George Soros, the bursting of the peripheral countries’ bubble has not sufficed as of yet to burst the Euro superbubble.  What will?

The failure of the other deficit countries, newly converted to the religion of austerity, to push for needed institutional changes only increases their collective long-term risks, even if some or even most among them will ultimately escape an undesirable fate. Although it is true that a few of the governments will incur direct losses from a Greek default and perhaps experience higher borrowing costs through contagion, these short term costs mask the deeper issue.  The situation resembles that of a schoolyard in which children hasten to join the dominant group that determines who is favoured and who is not lest they face the ignominy or harm that is the lot of the others. This points to the one card that Syriza insufficiently used: appealing directly to the governments and people of the other peripheral countries and indeed the creditor countries themselves for revised institutional rules. These could have have been framed in terms of pragmatic considerations or in terms of the need for a Europe that gives greater attention to popular interests (whether of underpaid German workers or Spanish youth harmed by austerity) .  If major deficit countries (Italy, Spain or even France) were to join Greece in a demand for a new ‘constitutional conference’ for the Eurozone to take advantage of the new findings and the new facts, this would be irresistible, but they are rather far from doing so, and instead Greece appears the spoiler.

Those private sector interests which had something to lose from a Greek default have largely already been bailed out.  The intransigence of Northern European governments is now ostensibly driven by a desire to safeguard public moneys and to avoid moral hazard infecting other debtors.  In fact, it has a great deal more to do with the desire to maintain the existing institutional order of the Eurozone, even if it is increasingly far from obvious whose interest that serves (as it has been since the very inception of the Euro, when obscurantist rhetoric about deepening the European project substituted for economic reasoning although few then noticed that fact).

What of loyalty? This is one of Hirschman’s more slippery terms, and has been notably less successful than exit and voice in gaining widespread use. The European idea (situated and compromised as it is) refers to membership in something shared, which goes beyond instrumental reasoning and encompasses the expressive, a sense of a collective idea or the idea of a collective.  Such a sense gives psychological and moral impetus both to Southern and Northern Europeans in making their respective claims and counter-claims.  This fact may help to explain the charged nature of the debate, and the senses of betrayal that are felt.  It provides a reservoir of feeling that can be drawn upon by the kind of political leadership that can speak to this shared sense, but that seems sorely lacking.  In the medium term there is little alternative but to have a debate over changing the rules, and that must be based in a sense of shared identity as well as instrumentality, as all worthwhile common projects are.  There are many reasonable proposals as to how that can be done, including creating commonly backed Eurobonds, loosening the constitutional constraints preventing the ECB from directly supporting governments even in crises,  and introducing European investment vehicles to recycle surpluses and reduce gaps in costs and competitiveness.

Europe needs both more democracy and more expertise. The failure of the Eurozone is a failure of both.  If exit is to be avoided then there must be voice, extending to basic constitutional questions. That need is hidden by the seeming consensus around the Eurozone’s constitutional order, through which the past “weighs like a nightmare upon the brain of the living”.