Greece hangs in the balance

stefan-auer-thumb Dr Stefan Auer


First published in The Australian on 8th November, 2011.


It already seems like it was but a fleeting moment: democracy was going to return to Europe and national sovereignty to the Greek people.

To be sure, it was a measure of George Papandreou's desperation rather than his commitment to democracy that made him call for a referendum just a few days after he accepted another instalment of EU money and austerity. And clearly, a referendum in Greece was not going to solve all its problems. Indeed, it would have exacerbated its economic conditions and could have endangered Europe's common currency. Yet the responses coming from Berlin, Paris and Brussels were as predictable as they were depressing. They suggest that for Europe's political leaders, the preservation of the eurozone has become more important than their commitment to democracy.

Yet if Europe has anything to learn from its messy history, it is the simple insight that however imperfect democracy is, there is no better way to create conditions for liberty and prosperity. Ruling against the will of the people is costly and ineffectual. Only Greeks can save Greece, only Italians can mend their ways in Italy. The Franco-German victory over Papandreou's "irresponsible behaviour" will be short-lived. Where democratically elected politicians failed, technocrats are not going to succeed either, for there are no value-neutral technical solutions to Europe's economic problems. Whatever strategy is chosen, there will be winners and losers, which is why the solutions should be reached through a democratic process. This is where many right-wing opponents of the EU, including those in the British Conservative Party, are voicing criticisms similar to those emerging from the Left. The great German intellectual Jurgen Habermas, for example, has repeatedly called for more democracy in Europe, including supporting a referendum in Greece.

Paul Krugman, the New York Times columnist, has argued for more than a year that Europe's prospects are endangered less by the fiscal recklessness of Greece, Ireland, Italy, Portugal and Spain, and more by the German insistence on fiscal rectitude. German leadership of Europe is predicated on the idea that sustainable recovery is possible only once underperforming nations bring their spending under control, liberalise their labour markets and reduce the red tape for free enterprise. Austerity would lead to growth. This path to prosperity is painful, but there is no alternative.

The EU summit last week marked a partial victory for this German solution. The enlarged rescue fund to which Germans contribute more than any other nation will not be expanded with the help of the European Central Bank. French President Nicolas Sarkozy has started his election campaign by imploring the French to become more German: they should never have adopted their socialist ideas of 35-hour working week, for example. Greeks shall be forgiven half of their debt and in response accept the control of their national budget by the representatives of the ECB, IMF and the European Commission. And even Silvio Berlusconi's Italy is said to have promised to accept more austerity under IMF supervision.

Krugman has argued that this is a recipe for disaster by making a bad situation worse. Painful reforms have not worked and will not work, Krugman believes, because they are based on the fallacious belief that austerity will lead to the return of market confidence.

Instead of market participants regaining confidence in their future, the austerity measures further reduce any prospects for growth. What Krugman proposes seems no less magical: no pain, just gain. What Europe needs is more fiscal stimulus; that is, more money.

Will the newly appointed ECB president Mario Draghi dismiss German orthodoxies and adopt Krugman's recipes? If he succumbs to that temptation, Germans shall never forgive him. In their historical experience, quantitative easing doesn't lead to growth but to uncontrolled inflation that, by destroying savings, destroys confidence in money and democracy. Such policies paved the way for Hitler.

Yet if German strategies don't work - and they will not as long as they are perceived as a foreign dictate - the rest of Europe shall never forgive the Germans. This is why competing economic strategies are bound to reinforce traditional animosities between European nations. The battle for Europe's leadership is not over yet.

Whoever prevails, theirs will be a Pyrrhic victory. The process of rescuing Europe by imposing more unity on its disparate parts will lead to more resentment, if not Europe's disintegration.

Stefan Auer holds a Jean Monnet chair in EU inter-disciplinary studies at La Trobe University