On the suicide of ruling classes: Do EU leaders themselves know the euro is doomed?

Emmanuel Todd

I am more and more optimistic these days. I say this even as, or especially because, of the ever-worse economic figures. Even as EU leaders are declaring the “end of crisis” and are hailed by the markets for  saying with apparent conviction they’ll “do whatever it takes,” we find out the eurozone’s recession accelerated at the end of last year shrinking -0.6% annually in Q4 and with ever-higher unemployment at 11.9% now spreading even to core countries like Austria and the Netherlands.

Why does this make me optimistic? Here is Emmanuel Todd (one of the few French intellectuals worth listening to):

The euro is not an economic problem but a psychological one. The right comparison is with the Algerian War. Like back then, the ruling classes knew they had failed. But it took four years for de Gaulle to get us out of there. Why can’t we grant the same credit to Hollande? He arrived saying: “I’m going to keep the euro.” Just like de Gaulle had said: “Algeria will stay French.” I have one reason to hope, the interest that Hollande has shown on questions of medical relentlessness [at] the end of life [e.g. not keeping the fatally ill alive beyond all reason]: the euro could be his warm-up!

French Algeria is an interesting example because, whatever one says, it was simply not reasonable to expect that France could subjugate in a postcolonial world 10 million non-citizen Arabs and Berbers forever. Nor was it plausible that French democracy could make them citizens if they were to become 20 or 30 million. These simple facts, in addition to more detailed consideration of the situation, had brought reasonable men like Raymond Aron, who was hardly a sentimentalist on questions of international power and empire, to conclude in a 1957 book that independence was simply inevitable.

But when a ruling class commits a mistake, when it invests the country’s prestige, money, economic livelihood or even its citizens’ very lives, it is often very hard to break out of the vicious circle. The best analogy in this respect is with a war of choice. As John Kerry said of the Vietnam War: How do you ask a man to be the last one to die for a mistake? How do you pull back from a project once you have already asked the nation to sacrifice its blood and treasure?

The comparison with war may seem excessive, but if the stakes are different, the mechanism is the same. Here is former Bank of England official Alan Budd on the difficult decision to devalue the pound against the Deutsche Mark in 1992 and being kicked out of the European Exchange Rate Mechanism (which boosted the UK’s economy but meant huge losses on the money the Bank of England had spent to defend the pound):

I felt as if I knew what it’s like to be a German general at the end of the war, with defeat after defeat and people coming into the room with more bad news. The question is then raised: When do you surrender? In a sense it’s always too late, because if you had surrendered a day earlier, fewer people would have been killed. (quoted in David Marshs The Euro, p. 167)

The fact is, most often, elites (as with individuals) are incapable of admitting their mistakes. They simply push harder and deeper into the cycle of psychological self-preservation and personal self-destruction until they are purely and simply eliminated from power (and sometimes physically eliminated). It’s what happened to Imperial Germany at the end of World War I, to the French Fourth Republic’s politicians during the Algerian War, to East Coast American liberals during the Vietnam War… In a way, and this comparison is usually trite, it is something like ideology-justified-denial-of-reality of Soviet leaders in the 1970s on the state of their economic decadence. And there is nothing more normal than this, as Vilfredo Pareto famously said: history is nothing but a graveyard of elites.

I see no indication that the eurozone is any different. There is no “slow improvement,” economic collapse is continuing despite so-called solutions and concessions. So-called improvements in the situation are derisory: We face at least 5 years of non-growth and recession because the eurozone is legally committed to bring deficits to 0% (from circa 4% now); improvements in terms of the GIPS’ (or France’s ) economic competitiveness relative to Germany are either simply not happening or will take at least 10 years to happen. Any imagined Germany or EU concessions, even after Angel Merkels eventual reelection, are simply utterly marginal to the scale of the changes needed.  It’s simply not sustainable. (On the scale of worsening problems and of non-improvement see for example a recent, lucid article by Hans-Werner Sinn.)

The question then is when will national elites choose to admit their error rather than engage in the ritual self-disembowelment we have seen in Portugal, Spain, Ireland and Greece in service to the “European ideal.” Will democratic parties ensure the transition or will they prefer suicide to the shame of admitting error, ceding power to extremists? Perhaps even worse, it is possible that national democratic elites will suicide themselves, but that the euro-elite will survive, indifferent to electoral majorities. Then Europe would be left in the hands of the unsentimental and dogmatic men of the European Commission’s DG ECFIN and the European Central Bank. But I am not convinced this will happen. The case of Italy is encouraging: anti-austerity and anti-euro sentiment go hand in hand (unlike the nonsense of French or Greek leftists, who think they can oppose austerity while staying in the euro).

So I am optimistic. This crisis will end. I am hopeful the nations will regain their economic power and our democracies will then be free to manage the difficult economic adjustment underway worldwide in the best manner, tailored to their own social contract and national circumstances, to preserve political liberty and social cohesion. And more than that: to fully adapt to the ambiguous, confusing economic realities of postmodern capitalism. And, speaking of France, would that not be an inspiring and worthy project for a great nation?

(To be clear: standards of living must fall in Europe, the United States and Japan as the illusion of debt-based growth is dissipated, the question is who bears the burden and whether this is done in a wasteful manner.)

11 thoughts on “On the suicide of ruling classes: Do EU leaders themselves know the euro is doomed?

  1. Martin Holterman

    1. Im not sure what debt-based growth is, or what is wrong with debt per se. The problem certainly wasnt that countries like Germany, the Netherlands or the UK have or had too much debt, or even that Spain did. (Cf. this recent article by Paul de Grauw and Yuemei Ji about panic-driven austerity: http://www.voxeu.org/article/panic-driven-austerity-eurozone-and-its-implications.)

    2. More generally, heres Paul Krugman making a point similar to yours: http://krugman.blogs.nytimes.com/2013/02/23/little-statesmen-and-philosophers/. (I didnt realise that that famous Emerson quote was inaccurate.)

    1. craigjameswilly Post author

      I am going on the assumption that, at some point, debt needs to be either restructured or inflated. In either case, it would mean individuals and institutions wealth on paper being reduced to the countrys actual wealth. Although I understand domestic-owned debt is not actually problematic in-and-of-itself (Japan).

      Good Krugman piece as usual.

      1. Martin Holterman

        wealth on paper vs actual wealth??? That sounds like youre making some kind of sophist or otherwise non-economic distinction between real wealth and fake wealth. Theres only one kind of wealth, which is the ownership of assets, of whatever nature, whose value is determined by their ability to generate income. And income is, in some sense, the limiting factor for debt: on average the growth in debt public or private should be no higher than the growth in GDP. As long as that is the case, a pile of debt that keeps getting larger each year is not a problem.

        Moreover, be careful with that at some point. In the long run were all dead. Some appearances of the long run in economic theory have a way of behaving like the horizon: always far away, never actually reached.

        Anyway, welcome to the world of economics ;-)

        1. Craig Willy

          Heres what I mean (as an example): Foreign bondholders (including French/German banks) held a huge amount of Greek debt. They held nominal wealth which was fictional because it was not aligned with the real wealth Greece, as a country, produced. The Greek debt restructuring, long delayed a by pure denial, was a gradual recognition of a reality that was unpleasant for politico-financial elites.

          Its the same with British, American or Japanese debt. Bondholders own more than these countries real productive capacities can actually meet. For these countries, inflation will bring this theoretical wealth into line with reality by reducing their real value. (Only the U.S. has plausible growth prospects at this point, any reasonable possibility of outgrowing the debt.)

          Im sorry if this is not in line with standard economic jargon! Feel free to point me to some texts on the issues posed by unsustainable debt/restructuring/inflation!

          1. Martin Holterman

            O, youre certainly in the vicinity of being able to correctly analyse whats going on, you just need to banish this idea of fictional wealth from your mind. Thats not just a matter of jargon, it goes to the whole value-neutral thing I wrote about in my email the other day. We do not second-guess the revealed preferences of others.

            That said, there is I suppose one exception to that, and that is the theory of bubbles. (Although theres a lot of fun to be had with the theory of rational bubbles.) One can reasonably discuss the history of Greek debt in terms of bubbles, although this is not usually done. The problem was that investors imagined that those loans were guaranteed by other Eurozone countries more than they actually were. From the investors perspective, this simply means that they were buying something different than what they thought they were buying; gold-plated instead of gold. That didnt make their wealth fictional, though, because for years investors had no problem reselling these bonds on the secondary market. At that time, the bonds were capable of generating a cash inflow for the investor through sale that was exactly as large as the investor thought it was. Theres nothing fictional about that.

            From Greeces perspective, their borrowing was unsustainable in the sense that I put it earlier: their budget deficits exceeded their GDP growth. But in the short term they were achieving real (in both senses of the word) growth, nothing fictional about it. And many Greeks used that very real income to have very real houses built that they still very much actually live in. Nothing fictional about it.

            Historically, almost all peaks of debt in mature economies have been resolved through a mixture of inflation and growth. But you shouldnt focus too much on inflation. In the 1950s, everyones debt disappeared like snow before the sun, and that wasnt because of inflation, which was quite low. I honestly have no idea why you think British and Japanese debt cant similarly shrink, once they figure out how to get their economies growing again. Britain suffers from having the Eurozone as a trading partner, and from Tory mismanagement, and Japan has the unique problem of a shrinking working-age population, but none of that will last forever. It may take another decade, but growth will return, and in 50 years time, there is no reason to believe that growth will not have accounted for at least 50% of the reduction in debt ratio.

            (All that is needed for that is a level of real growth that is as high as the rate of inflation, and I see no reason why both shouldnt have a long-term average of, say, 1,5%.)

    1. craigjameswilly Post author

      @Martin On bubbles: It seems to me the entire peripheral economy was a giant bubble from 1999 onward, partly boosting consumption and jobs in those countries, partly financing the profits of core banks and exporting industries.

      On why the debt wont be repaid: Im very pessimistic about growth. Grosso modo, there are two places lasting growth comes from: increased working population and higher productivity. The former will not happen. The latter may only happen with a technological miracle. *And* it has to compensate for the declining workforce/rising energy costs/actually getting the deficit down/more outsourcing to emerging countries. Of course, we cant predict the innovations to come, but I think its more likely postwar years were an aberration and that low-growth is the norm. In this case, only restructuring and inflation can reduce the debt.

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