Are we asking too much of our politicians?

Rioters confront the Greek police (picture Athens Indymedia)

The recent events involving the Greek economy are enough to make even a harden Europhile like me think again about the arguments behind the euro. The financial difficulties that beset Greece threaten to spread to the rest of Europe: is this what the single currency was for?

The fundamental problem in Greece is that its private sector is not productive enough to support the size of its public sector. This gap has been consistently covered by borrowing on the international markets. However, such a chronic lack of productivity has now accumulated to the stage that international lenders are no longer willing to lend to Greece any further for fear that the Greek government cannot pay its debts. Other EU member states have assembled a rescue package, guaranteeing loans to Greece themselves to enable the Greek state to continue to function. However, all this rescue has done is bought time: it has not solved the underlying problem.

But how did this mess happen? Wasn’t the euro supposed to usher in a better era in European state finances and not a worse one?

The problem is that different countries have reacted to the creation of the euro in different and contradictory ways. Some, such as Germany, have embarked on domestic reforms to boost their export competitiveness; others, such as Greece, have not. Greece settled for relative economic decline instead.

What is so absurd about the worsening of the Greek public finances, the consequences of this decline, is that it was avoidable. The launch of the euro, with its low interest rates and new market opportunities opening up, was the time for the Greek economy to undergo reforms. But it didn’t, and the problems that were not faced then can be avoided no longer.

There was nothing inevitable about the economic problems faced by Greece. They are the consequences of domestic political choices that were made. Nor have those problems been caused by the euro: membership of the euro is what has brought them to the surface. We should not shoot the messenger.

What is the lesson for Britain: should we look at the fate of Greece and think that it could have been us? Indeed, had we been in the euro, would it have been worse? After all, our balance of payments and public finances are in equally bad shape, but at least, unlike Greece, we have the option of devaluing the currency and relieving some of the burden that way. (This blog has commented before on how unsatisfactory an outcome devaluation has been, but on occasions it may nevertheless be preferable to the alternatives.)

It is plain that our politicians have made mistakes. Different mistakes from those in Greece – they failed to reform their public sector and stimulate private sector growth, while we put all our eggs in the basket of banking – but equally serious. As Gordon Brown observed in his Mansion House speech in 2004: “And what you have achieved for the financial services sector, we as a country now aspire to achieve for the whole of the British economy.”

Maybe giving the Greek government lower interest rates on its debt was like putting a teenager behind the wheel of a sports car. Perhaps we should not be surprised that things went wrong. Allowing British politicians to fall under so much under the influence of the financial services industry was a similar mistake. A more balanced approach to policy making would have been better.

But the case for the euro was never based on allowing politicians to escape responsibility for their decisions. It wasn’t just a random group of countries thrown together to share a currency, but a political project founded on the idea of greater unity between them and greater political accountability within them. If that latter limb, an integral aspect of federalism, has been neglected, then it must be addressed.

Mistakes will always be made, which is why our political institutions need to have accountability and responsibility built in. If there is a criticism of the euro, it is that the political institutions have not been solid enough to enable such mistakes to be identified and corrected, not that they have been too strict.

The argument that politicians can never be trusted, that they will always make the wrong choices and biggest mistakes, is a dangerous one. If so, what on earth are we doing letting them loose with a Trident nuclear submarine fleet?

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