Two flawed analogies are trotted out: comparing the eurozone to Argentina's 1990s dollar-pegging, and the EU to the US
A true giant of modern thought, Ludwig Wittgenstein believed that all problems in philosophy arise from the misguided use of language. Although this opinion, put forward in his early writings, seems far-fetched nowadays, Wittgenstein had a point.
Since the start of the sovereign debt crisis, two false analogies have prevailed in the public dialogue regarding Europe: the first draws parallels between the present situation in the eurozone periphery with the crisis in Argentina in 2001, while the second, especially popular in the British press, compares the European unification process with the federalisation of the United States of America.
Starting with the first analogy, it is almost impossible to follow the debate on the euro crisis for a week without bumping into an article that likens Greece and the rest of the European south to Argentina. The most recent example I saw, is by Thomas Catan and Marcus Walker, published in the Wall Street Journal, on 19 May: "Like countries that joined the eurozone, Argentina in the 1990s gave up control over its own currency, fixing it 1-to-1 to the US dollar… Like euro members today, Argentina had to grin and bear it until wages and prices fell far enough for the country to become competitive again," reads the article. The authors claim that Argentina should be "a cautionary tale" for leaders in Europe, because Argentineans, like Greeks or Spaniards, supported the peso's peg to the dollar, until they suddenly stopped.
The analogy is outrageous. Argentina, like dozens of countries before and after it, had opted to peg its currency to another, namely the dollar. In fact, this is not unusual in international economics. The 17 members of the eurozone, on the other hand, have chosen to denounce their own currencies and "irrevocably" adopt another. I sometimes wonder how the hell people cannot see the difference here: the drachma, the lira, the deutsche mark, simply do not exist today. Hence, no one can unpeg them from the euro or the dollar. Let me put it another way: Argentina devalued its own currency; Greece will have to introduce another one. The new currency will not be the drachma of the 1990s. It will just have the same name as the drachma.
True, no decision in politics is truly irrevocable. So the Cypriots or the Greeks, for example, could choose to ignore the logistical chaos of abandoning the euro and print a new currency. But will the new currency, which will be issued by effectively bankrupt states, have any exchange value whatsoever? Will the Russians accept it in exchange for oil, and the Americans in exchange for medicines? Especially Greece, which, unlike Argentina, is not a net exporter of raw materials (or any materials for that matter), will have no means to support the new currency. Greeks can print as much as they like of it, but will they be able to buy electrical appliances, cars or even foods produced abroad with it? The answer is no. Sure, they will be holding real money in their hands, but they will still be "poor", probably much poorer than they are now.
There is another, even more obvious difference between the eurozone and Argentina. The government of Buenos Aires chose to unpeg its currency from the currency of a foreign nation. In the case of eurozone, the single currency is the most crucial part of an immensely complicated structure of unified decision-making we came to call the European Union. Like the euro, the EU is also a unique construct in modern history and all analogies drawn between it and other cases of economic crises are unfounded. The EU is based on the premise of an "ever closer union". Sure, you can slow down the whole process and even bring it to a halt, as the British government demands. But if you put it in reverse gear by dissolving the euro, this will trigger a chain reaction of "renationalising" that will bring the EU to an end. And that is only the best-case scenario. In fact, the most likely scenario is that the chaos that would ensue immediately after the dissolution of the euro would lead to the sudden death of the EU. It doesn't take a genius to understand that the economic, political and geostrategic stakes are immensely higher for the eurozone member states than they were for Argentina in 2001. I am not arguing that such an eventuality is impossible, but it will be like nothing we have seen before, just as the EU is like nothing we have seen before.
And that brings us to my second point. The term "United States of Europe," which is so often used in the British press, mistakenly likens the EU to the USA and implies that Brussels is (or soon will be) the capital of a federal state. Nothing could be further from the truth. In every single federal state in the world, the central government is responsible for "high politics", most notably defence, foreign policy and budget. Local governments, in turn, are relatively free to decide on "low politics" issues, like schools, healthcare, etc. What happens in the EU is exactly the opposite. Its member states are close allies (most are members of Nato anyway), but they do not have a common defence policy. There is some degree of coordination in foreign affairs, but rarely unanimity, let alone central planning. And the central budget of the EU is just 1% of the region's total GDP. The nation states collect taxes and decide where and how they will spend most of their money. The fiscal pact, which was voluntarily signed between sovereign EU governments, just puts a limit on how much they are allowed to spend.
Unlike federal states, the EU is responsible for the micromanagement in "low politics" fields. It is obviously annoying for some of us to have Brussels decide on trivial things, but it is also the only way for a single market to function. Someone needs to draw and enforce the rules for competition, trade, patents, recognition of professional qualifications, etc. Otherwise, the free movement of goods, capital, services and people that makes the EU by far the largest market in the world would be impossible. In fact, it is the member states and the representatives of national governments who decide most of these rules, in the Council of Ministers' meetings. The EU commission largely suggests directives to member states, implements their decisions and acts as the guardian of the treaties as national governments have agreed. Even for the eurozone member states, the most powerful decision-making body is not the commission, but the Eurogroup, which comprises of the finance ministers of member states.
In other words, both the EU and the eurozone are unique structures. Analogies with the US, Argentina or other places in the world, are erroneous and only confuse the issue. So please, colleagues, just stop it, if for no other reason than that Wittgenstein would be furious with you.
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