The Polish Foreign Minister’s Case for Saving the Eurozone

Radek Sikorski: Polish foreign minister

At a time when the world is looking at Euroland and wondering whether any courageous leaders will step up and do something about the unraveling economic situation, Radek Sikorski did not disappoint. In a speech delivered in Berlin yesterday, the Polish foreign minister succinctly made the case both for establishing fiscal union throughout the eurozone and for enhancing the currently quite pathetic political unity of the EU as a whole. As the following quote attests, he displayed some humor as well:

I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity.

Among other things, Sikorski called for retaliatory measures against states that breach budgetary guidelines. Some great powers think that this kind of thing might actually make things worse – especially in a confederational system with a central bank (ECB) so averse to last resort lending. The argument is basically this: the eurozone is made up of countries with very different growth patterns and punishing states that loosen fiscal policies to offset slow growth years would cause more procyclical problems than it would solve. Economies are variable and states need to have some countercyclical leeway over their own budgets.

I’m not sure where I stand on this debate. On the one hand, I think that without a pan-European identity and a sense, among EU citizens, that they have a real democratic stake in what goes on in Brussels, the anti-retaliatory measures argument has some teeth. Not only could things get worse, but it’s also not much fun to be punished by an entity you don’t identify with. Furthermore, such measures might simply incentivize more shady accounting practices. On the other hand, fiscal guidelines seem kind of important for currency unions and the ones currently laid out in the Growth and Stability Pact are rather meaningless. There’s not much sense in having guidelines if no power exists to enforce them. As Sikorski reminded Germany, when nobody watches the playground, everyone gets dirty:

[A]s you know best, you are not an innocent victim of others’ profligacy. You, who should have known better, have also broken the Growth and Stability Pact and your banks also recklessly bought risky bongs.

With the possible exception of some recalcitrant Germans in the ECB, everyone seems to be in agreement that something must be done. And that something, most people now agree, is some kind of monetary loosening from the ECB (it needs to lend like the last resort that it is and stop harping about the perils of inflation so much) and some kind of greater fiscal, if not also political, integration.* At issue is just how this should get done. The form of the how likely will be more closed-door bargaining amongst Eurocrats. The content of the how remains to be seen.

US dollar : Hungarian Forint, source: oanda.com

ECB obstinacy has not only hurt core states – e.g., Italy, France and Belgium have all seen their cost of borrowing rise dramatically – it has shot fear throughout the eurozone’s periphery as well. Hungary’s bonds are now junk and its currency has depreciated strikingly, along with that of many other euro-rim states. And when everyone is in a recession, having cheap exports doesn’t matter all that much. In addition, not only do states with weak currencies find it increasingly difficult to import things, their ability to attract capital for further development diminishes as well. It’s not hard to see how things can easily spiral out of control. In such times, lenders of last resorts are good things to have. They can lend to core states, boost demand there and thus help to stabilize trade and capital flows between the core and the peripheral zones.

Apparently, when things get bad capitalists don’t like keeping their capital in emerging markets. This is one of the reasons, among many, that the euro has maintained relative stability throughout the crisis. As crappy as some eurozone finances may be, Euros are still a safer bet than anything an emerging market can offer. Being a reserve currency has its benefits. And these last few months (and years) have taught us that “the Euro is not a good measure of European sovereign stress.”

With new crises seemingly unfolding daily and the argument for euro-skepticism gaining force, it’s refreshing to see a European leader make a reasonable case for why preserving the eurozone is essential to the maintenance and further development of the idea of European union:

Money exists because communities exist. A community in which people live and trade – they exchange freely – creates value. Their money symbolizes that value.

This moral significance of money intrigued Immanuel Kant, who wrote that the entire practice of money lending presupposed at least the honest intention to repay. If this condition were universally ignored, the very idea of lending and sharing wealth would be undermined.

For Kant, honesty and responsibility were categorical imperatives: the foundation of any moral order. For the European Union, likewise, these are the cornerstones. I would point to the two fundamental values: Responsibility and Solidarity. Our responsibility for decisions and processes. And Solidarity when it comes to bearing burdens.

* Regarding looser monetary policy, the argument is that this wouldn’t necessarily cause runaway inflation (see here for this debate w/r/t US monetary policy). Regarding fiscal policy, most of this just means transfer payments. Richer euro-regions need to transfer some of their wealth to poorer euro-regions. As Sikorski mentioned in his speech, this is what happens in federations, like the US and Switzerland. Of course this brings us back to the identity issue: while everyone in the US and Switzerland identifies as American or Swiss respectively, and so accepts this system, this isn’t the case in Europe. In the US, the debate over transfer payments is framed as a class issue not, like it is in Europe for obvious reasons of nationality, as a regional issue.

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