Eight days ago, Der Spiegel reported that Eurozone supporters wanted to learn a lesson from Alexander Hamilton on how to use national debt to unify and strengthen a monetary union. I argued at the time that if they look to Hamilton, they would miss one key to his success — namely, a unified central government in control of monetary policy, which replaced the 13 sovereignties that couldn’t handle their debt individually. After the shocking-yet-not-unexpected defeat of austerity in Italian elections this week, Bloomberg’s editors come to the same conclusion, if not to the same scope:
Italy’s rebellion against austerity — egged on by Berlusconi’s populist pledge to reimburse property taxes — bodes ill for other euro-area countries. Some have much further to go than Italy to get their finances in order. Spain must still cut spending or increase revenue by almost 6 percent of gross domestic product to stop its debt burden from growing. That’s more than seven times the across-the-board spending cuts that are set to take effect March 1 in the U.S. Polls in Greece, which still has a lot of belt-tightening to do, already suggest that the anti-austerity Syriza party would triumph in a new election. …
The way out isn’t easy. Austerity measures will never be popular with voters unless they are convinced the pain is widely shared and short-lived.
That’s not just a Eurozone problem, either. Americans seem to believe that either (a) we don’t have a structural fiscal problem that’s barreling toward a Greece-like conclusion, or (b) we have a problem, but hiking taxes on the rich will solve it. Our political class is as susceptible to populism and denial as Europe’s, but we have two advantages. One, we’re not as bad off as the Eurozone is (although we’re certainly getting there), and two, we have one unified central government to control monetary and spending policies, even if what we have isn’t doing so at the moment.
The big question for any democratic republics is this: will voters who have spent their entire lives in a government-spending bubble willingly endure austerity for long enough to right their fiscal structures? That may be difficult in a single-sovereignty environment like the US, but it’s going to be impossible in a multi-sovereignty environment like the Eurozone:
What’s more, countries with such divergent economies can’t share a currency unless they put in place some risk-sharing mechanisms. The best way to deal with both shortcomings is through a system of fiscal transfers. This would involve sending money from growing economies to those in recession, easing the difficult adjustments the latter must make to recover. We have demonstrated that such a mechanism, if properly designed, need not entail a permanent subsidy from Germany to governments in the euro-area periphery.
The euro area also needs a better way to keep its members’ borrowing in check. Jointly issued and collectively backed euro bonds, for example, have the potential to lower borrowing costs while giving a central authority significant control over individual governments’ ability to run budget deficits. Interestingly, this idea is supported by German Chancellor Angela Merkel’s main opponents in elections scheduled for September.
All the best solutions to the euro crisis have one thing in common: They involve the creation of a much deeper union. It’s up to Europe’s leaders — and particularly Germany’s — to convince their constituents that such a union is in their best interests.
They’re right, and that’s the problem. As much progress has been made on the shared currency, it seems impossible to believe that Italian voters who just rejected austerity will embrace a devalued sovereignty to the level of, say, California. German voters might not like the idea all that much better, even if it did mean greater influence on keeping Spain, Italy, and other debt-crisis EU nations from tipping over and ruining their own economy. Without that central political control over monetary policy, the Euro is a project with a very bleak future.
Update: Speaking of bleak futures, Italy will have to pay more to borrow money in the immediate aftermath of their election:
Italy saw its borrowing costs jump in a pair of bond auctions Wednesday after an inconclusive election that has raised fears Europe’s government debt crisis will flare up again.
The country sold 4 billion euro ($5.2 billion) in 10-year bonds at a yield of 4.83 percent, way up from 4.17 percent last month. The yield on five-year bonds rose to 3.59 percent from 2.94 percent, as ?,?2.5 billion was auctioned.
Bond interest costs are a key measure of Europe’s effort to keep its debt problems in check. Higher rates mean more skepticism about an indebted country’s ability to pay.
That will make the need for austerity even greater, especially in the long run.