Democratizing The Eurozone

Yanis Varoufakis

Like Macbeth, policymakers tend to commit new sins to cover up their old misdemeanors. And political systems prove their worth by how quickly they put an end to their officials’ serial, mutually reinforcing, policy mistakes. Judged by this standard, the eurozone, comprising 19 established democracies, lags behind the largest non-democratic economy in the world.

Following the onset of the recession that followed the 2008 global financial crisis, China’s policymakers spent seven years replacing waning demand for their country’s net exports with a homegrown investment bubble, inflated by local governments’ aggressive land sales. And when the moment of reckoning came this summer, China’s leaders spent $200 billion of hard-earned foreign reserves to play King Canute trying to hold back the tide of a stock-market rout.

Compared to the European Union, however, the Chinese government’s effort to correct its errors – by eventually allowing interest rates and stock values to slide – seems like a paragon of speed and efficiency. Indeed, the failed Greek “fiscal consolidation and reform program,” and the way the EU’s leaders have clung to it despite five years of evidence that the program cannot possibly succeed, is symptomatic of a broader European governance failure, one with deep historical roots.

In the early 1990s, the traumatic breakdown of the European Exchange Rate Mechanism only strengthened the resolve of EU leaders to prop it up. The more the scheme was exposed as unsustainable, the more doggedly officials clung to it – and the more optimistic their narratives. The Greek “program” is just another incarnation of Europe’s rose-tinted policy inertia.

The last five years of economic policymaking in the eurozone have been a remarkable comedy of errors. The list of policy mistakes is almost endless: interest-rate hikes by the European Central Bank in July 2008 and again in April 2011; imposing the harshest austerity on the economies facing the worst slump; authoritative treatises advocating beggar-thy-neighbor competitive internal devaluations; and a banking union that lacks an appropriate deposit-insurance scheme.

How can European policymakers get away with it? After all, their political impunity stands in sharp contrast not only to the United States, where officials are at least accountable to Congress, but also to China, where one might be excused for thinking that officials are less accountable than their European counterparts. The answer lies in the fragmented and deliberately informal nature of Europe’s monetary union.

Chinese officials may not be answerable to a democratically elected parliament or congress; but government officials do have a unitary body – the seven-member standing committee of the Politburo – to which they must account for their failures. The eurozone, on the other hand, is governed by the officially unofficial Eurogroup, which comprises the member states’ finance ministers plus representatives of the ECB and, when discussing “economic programs in which it is involved,” the International Monetary Fund.

Only very recently, as a result of the Greek government’s intense negotiations with its creditors, did Europe’s citizens realize that the world’s largest economy, the eurozone, is run by a body that lacks written rules of procedure, debates crucial matters “confidentially” (and without minutes being taken), and is not obliged to answer to any elected body, not even the European Parliament.

It would be a mistake to think of the standoff between the Greek government and the Eurogroup as a clash between Greece’s left and Europe’s conservative mainstream. Our “Athens Spring” was about something more profound: the right of a small European country to challenge a failed policy that was wrecking the prospects of a generation (or two), not only in Greece, but elsewhere in Europe as well.

The Athens Spring was crushed for reasons that had nothing to do with the Greek government’s left-wing politics. Time after time, the EU rejected and denigrated common-sense policies.

Exhibit A is the two sides’ positions on tax policy. As Greece’s finance minister, I proposed a rate reduction for sales tax, income tax, and corporation tax, in order to broaden the tax base, increase revenues, and give Greece’s broken economy a boost. No follower of Ronald Reagan would quarrel with my plan. The EU, on the other hand, demanded – and imposed – increases in all three tax rates.

So, if Greece’s tussle with its European creditors was not a left-right standoff, what was it? The American economist Clarence Ayres once wrote, as if describing EU officials: “They pay reality the compliment of imputing it to ceremonial status, but they do so for the purpose of validating status, not that of achieving technological efficiency.” And they get away with it because the eurozone’s decision-makers are not obliged to answer to any sovereign body.

It is incumbent upon those of us who wish to improve Europe’s efficiency, and lessen its gross injustices, to work toward re-politicizing the eurozone as a first step toward democratizing it. After all, doesn’t Europe deserve a government that is at least more accountable than that of communist China?

© Project Syndicate