Euro

“Handing over the solution of the Europe stability problem to a direct democratic process”

A conversation with Dr. Hans-Jörg Beilharz, professor of political economics at the IUBH, about his current publication within the framework of the IUBH Discussion Papers, “A necessary condition for the survival of the eurozone: consequent democratisation”.

 

Your current publication has to do with conditions for the survival of the eurozone. What is it currently threatened by?

Prof. Dr. Hans-Jörg Beilharz: To a certain extent, the eurozone has always been threatened – from the very beginning, since its start in the year 1999. The underlying reason is in the great economic and cultural differences between the northern countries which use the euro and the southern countries which use the euro. Among other things, they are demonstrated with regard to economic competition or in the acceptance of national debt.
The current threat for the eurozone is from Italy, which is in debt to the tune of 131% of its gross domestic product. Furthermore, the Italian banks have loans in the amount of €187 billion, which could probably never be completely paid back by the debtors. Due to the new Italian government’s announcement that it would significantly increase government spending, the financial markets could lose trust in the solvency of the Italian state and the Italian banking system. In this case, the European safety nets would probably be overburdened, because as the third-largest national economy in the euro area, Italy is simply too big for successful rescue measures. Italy would have to leave the euro, which, under the circumstances, would also mean the political end of the euro area.

What would be the consequence if the eurozone didn’t survive?

Beilharz: A disorderly break-up of the eurozone would probably lead to a global financial and economic crisis, similar to what we’ve seen in 2008 and 2009. Worldwide, financial institutes, businesses, and states would become insolvent and as a result, economic growth would be substantially affected. The political consequences would be unpredictable as well. Because the political project of uniting Europe through the euro should have been decisively promoted, after its collapse, even the EU in its current form would be questioned.

What possibilities are there theoretically in order to solve this problem?

Beilharz: Essentially, the perspectives fall into two camps about how the euro area can be made stable over the long term:

The one camp – mostly made up of northern European economists and politicians – would like to strengthen the principle of the financial independence of the member states. In doing so, enough incentives should be made, without excessive debt economically, to become healthy or stay healthy. To do so, the debt rules should be maintained or expanded upon, such as through the possibility of sovereign default or effective and uniform European bank supervision.

The other camp – mostly made up of southern Europeans – sees the main problem of the eurozone in all of these debt rules, which they consider to be too tough. They should be loosened up, in order to support economic growth through additional government spending or tax abatement. That would put the countries in the position to pay their debts. Furthermore, financial transfers should take place if there are various economic developments. This is considered to be necessary, because the European Central Bank cannot individually support any country. For example, a joint unemployment insurance system could help solidly balance different economic cycles in different countries.

What do you recommend?

Beilharz: From my perspective, the dilemma of the eurozone is that the northern Europeans’ camp is principally correct, but these ideas are not politically enforceable against the south.

In my opinion, there are two ways out of the dilemma:

First, we ensure an orderly dissolution of the currency area, such as through the successive withdrawal of countries. Without a doubt, this path has significant risks. However, they are to be balanced against the also significant risks of a continuation of euro politics up until now, which consists of a gradual expansion of financial and liability transfers and, in general, is probably not sufficiently democratically legitimised. By the latest, during the next large financial crisis which also affects Germany, voters could estimate it to be ineffective, non-transparent and not very egalitarian, and therefore rejected. Our “euro stability anchor” of Germany could be gone – and as a consequence of that, the currency area could break apart, with all of its extremely negative consequences.

The second possibility for solving this dilemma would be to accept the ideas of the south, as well as to officially loosen up debt rules and build up a carefully-considered system of the transfer of finances and liabilities. One could also argue that in a system like this one, people could also be won over by the positive net effect of the euro for a majority of citizens in each individual euro country. In order to guarantee the acceptance by the voters even in times of crisis, you must directly democratically legitimise the introduction of transfer institutions, such as that of the eurozone household called for by Macron, the President of France. Furthermore, these institutions must be controlled by a eurozone parliament with the right to intervene in national expenditure policies, in order to ensure the appropriate use of the funds, also in accordance with the release of funds.

Why this publication?

Beilharz: My impression is that the current academic discourse amongst economists is too strongly focussed on whether the northern European or southern European camp is right. Even if I personally consider the northern European argumentation to be more plausible, the complete rejection of the southern European path is academically and intellectually oblique. Ultimately, no one can know what the best possible solutions are, because the connections are not just complex, but also possibly change over time.

Therefore, my suggestion is to not exclusively let a relatively small number of politicians or economics solve the euro stability problems, but rather hand it over to a direct democratic process. After all, there will be numerous difficulties to overcome, which the voters will only accept if they participated in the basic decisions.

 

Hans-Jörg Beilharz has been a professor of political economics at the IUBH in Bad Honnef since 2014. He studied macroeconomics in Heidelberg and Baton Rouge (Louisiana, USA) and completed his doctorate in the field of political economics about the macroeconomic effects of political decisions which were made by voters or politicians who were insufficiently informed. After his doctorate, Dr. Beilharz first worked as an adviser in the energy industry and then in the political economics department of the Munich Reinsurance Company (Munich Re). There, he dealt with the economic results of climate changes for insurance companies and the macroeconomic effects of natural disasters, among other things.

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