EU crisis is not lack of liquidity but solvency

WITH every day that passes the fault lines within Europe become clearer and wider.

Germany’s Chancellor Angela Merkel now appears to be increasingly isolated, reminiscent of the Irish mother looking at children walking up and down the road saying “sure they’re all out of step apart from my Johnny” over how the crisis should be resolved.

There is a problem in my opinion of misdiagnosis of the crisis. Proposals have been put forward on the assumption that what European sovereigns are facing is a crisis of liquidity. It is reminiscent of the Irish government’s responses in 2008 and early 2009. Then we recall that the assumption was that Irish banks were suffering from a lack of liquidity when it was eminently clear that what they were suffering from was a lack of solvency. In the case of several European countries — Greece for the most part but perhaps also Ireland — solvency is the issue.

The European political system has been led up to now by a Franco-German axis which is acting like the black night in the Monty Python skit, crying out as successive governments and societies are amputated “it’s only a flesh wound”.

The European Central Bank has the tools available to it, but it’s also debatable as to whether these tools are the ones that should be used to end the crisis.

At the moment what we have is a veto by the troika on Ireland and Greece’s government spending. Handing over that veto, even if only in a flexible manner, to the European Central Bank does not make this an enormous improvement, and remains as deeply undemocratic as the present situation.

The issuance of eurobonds, or other forms of collective fiscal funding, ignores both the existing levels of debt and again runs the risk of handing over the power of the purse to an undemocratic organisation.

The history of political economy is that the power to raise and spend taxes is inextricably linked with the growth of the modern democratic state. If Europe wishes to move towards further fiscal integration, this can only happen along with further deepening of democratic control over this fiscal centralisation.

In my opinion the crux of the present problem is cultural. We all recall in Ireland the plaintive cries that “Ireland is not Iceland”. That is very true, and more’s the pity when you consider the relative performance of Ireland and Iceland over the last two years. But if Ireland is not Iceland, then Europe is not Germany. The E in the ECB stands for European.

It is as foolish to expect Greeks, Spaniards, or even Dutch, to become German as it is to expect Germans to overcome decades of cultural antipathy towards (the fear of) inflation. The institutions in Europe are a curious bunch. Most national or supranational institutions are an outgrowth of society.

The European institutions are a deliberate attempt by societies over time to produce institutions where no common cultural norms or commonalities exist. This will not make them any more or less valid, it just means they are inherently top-down rather than bottom-up.

People consider the United States to be a fairly monolithic whole while it is generally accepted that the US is an optimum currency region, but in fact this may not be the case.

Psychological and anthropological research shows that the degree of intra-state differences in attitudes towards individuality and a whole series of cultural indicators are just as large as those between various parts of the European Union.

Vast economic differences persist between various parts of the US, yet the currency remains intact with even defaults of large cities and states not seeming to threaten the whole.

The US has however a very powerful federal government, which it is easy to forget emerged out of the crucible of an extremely bloody civil war.

The experience of the US in forming political economic institutions such as the Federal Reserve Board shows that nation-building takes a long time, is not easily achieved, and takes political will.

At the moment the political will — to even see that the problem is systemic, and not one of liquidity, requiring give-and-take on both sides of the German/rest of Europe divide — is missing.

Brian M Lucey is professor of finance,School of Business Studies,Trinity College Dublin.


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