In a recent article, Larry Elliott from The Guardian wrote this about the Eurozone:
“The eurozone is economically moribund, persists with policies that have demonstrably failed, is indifferent to democracy, is run by and for a small, self-perpetuating elite, and is slowing dying.”
He describes this as the elephant in the room in discussions over Brexit.
I have some sympathy with this, but with one crucial difference. I do not think the Eurozone is slowly dying. I also differ from many who think it will escape death by morphing into a full fiscal and political union any time soon. Instead I think the Eurozone will continue in something like its present form for some time (decades rather than years): a monetary union with fiscal and most political decisions at the national level.
In terms of macroeconomics there is no obvious crisis that will lead to its demise. As I have noted recently, I think it is more likely that we will see reasonable (or better) growth over the next couple of years. Yes unemployment will remain too high and this is a shockingly unnecessary state of affairs, but as the UK discovered in the 1980s it is not one that threatens the existing social and economic order.
The Eurozone’s treatment of one of its own members, Greece, is intolerable: I have compared the Troika’s treatment of Greece to British actions during the Irish famine. But that does not mean it will not continue. I was surprised at Germany’s willingness to countenance Grexit and the desire of the Greek people to remain. As an economist might put it, the resulting situation may be incredibly suboptimal (even in a Pareto sense), but it looks like an equilibrium. In simpler language, virtually everyone could be better off by doing something different, but unfortunately the only people who might be better off by continuing the status quo are the politicians in control.
The biggest threat facing the Eurozone right now is not economic but political. It is dealing with migration and the associated rise of the far, and often Eurosceptic, right. That challenge will ensure that no one will risk further union, even though it is indeed the prefered option of many in the governing elite. The threat to liberal democracy posed by not only these groups, but also the current governments in Hungary and Poland, is worrying indeed. But so is the possibility of Donald Trump as POTUS.
What does the likely survival of the Eurozone in something like its present form imply for Brexit? My own view is not much, because our opt out from the Euro is safe. On other matters? I have spent much time on this blog and elsewhere criticising German macro policy, but that largely influences the Eurozone. On issues that do influence in the EU, German policy often puts the UK to shame, such as on the environment or migration. It was also the EU that legislated to cap bankers bonuses, a measure which George Osborne tried everything to reverse. On issues like this political cooperation across borders is vital because we live in a globalised world where capital is highly mobile.