Brexit and Democracy

Ambrose Evans-Pritchard writes eloquently and honestly about why he will be voting for the UK to leave the EU. Honestly because he gives chapter and verse on how “anybody who claims that Britain can lightly disengage after 43 years enmeshed in EU affairs is a charlatan or a dreamer.” His argument to nevertheless Leave is straightforward:

“it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error.”

Although he does attack the Commission “with quasi-executive powers that operates more like the priesthood of the 13th Century papacy than a modern civil service”, and although he talks about the European Court of Justice on which I have no expertise, most words are spent denouncing those that created the Euro, and here I have some knowledge. He writes

“Nobody has ever been held to account for the design faults and hubris of the euro, or for the monetary and fiscal contraction that turned recession into depression, and led to levels of youth unemployment across a large arc of Europe that nobody would have thought possible or tolerable in a modern civilized society. … We do not know who exactly was responsible for anything because power was exercised through a shadowy interplay of elites in Berlin, Frankfurt, Brussels, and Paris, and still is.”

Is this really the case? We know that the push for a monetary union came from France in particular. Germany was less enthusiastic, and therefore demanded as a price some central control of national budgets because they feared that a profligate government could cause systemic problems. When those fears proved correct, they doubled down on that central control and also believed a union wide demonstration of austerity was required. I strongly disagree with all of this, and have thought a lot about why it happened, but a lack of democracy is not high on my list of culprits. After all the Eurozone did not cause austerity to happen in the UK and US.

The fact that democracy was overridden in Greece so cruelly was not the result of actions of unelected bureaucrats, but of elected finance ministers from the other union countries. One reason these finance ministers refused to write off any debt was because of pressure from their own electorates. This exercise in raw political power worked because the Greek people wanted to stay in the Euro. The ‘bad equilibrium’ Evans-Pritchard talks about happens in part because of democracy. The lesson I would draw is that union governments should not lend money directly to other union governments, precisely because governments are democratic and so find it hard to accept write-offs.

Dani Rodrik talks about an impossible trilemma: how you cannot have all three of ‘hyper globalisation’, national sovereignty and democracy. The key question is whether you can find acceptable arrangements that partially limit each of these rather than abandoning one altogether. That is a tricky issue of design, and it is clear that the Eurozone has not succeeded so far. Too many assume that this failure condemns all attempts at monetary union, and that the only way forward is full political union. If that is what is meant by saying there is no chance of a democratic Europe anytime soon I agree, but I think that form of democracy was always a step too far too soon.

There is no shortage of ideas of how the Eurozone could be improved that fall well short of political union. It is simply not the case that you can only have one monetary union design, so you cannot reject the whole concept based on one failed experiment. It is quite possible that in the short term Germany or others may block reform, but it is far from obvious why Germany or others should prevent reform in the longer term. Germany does not want to repeat what happened in Greece.

Above all this, there is a fundamental point. The Eurozone as it currently stands is not immutable, or inevitably dying, or some kind of monster that is bound to ensnare the UK or bring it down. If the Eurozone did become one of these things, we can always exercise our option to leave. In contrast, once we leave, it will be a long time before we can change our minds.

Is a monetary union without fiscal/political union doomed?

This seems to be a very common view at the moment. The view that the Eurozone will have to move to fiscal union, which implies some form of political union, comes from two directions.

1) Those working in the political unions that are the United States or the United Kingdom, know combined monetary and fiscal unions can work. From this perspective, the monetary only union of the Eurozone was a largely untried experiment, and it appears to be failing. (For just one example of this view, see Acemoglu and Robinson here.) Let me rephrase that: it is failing. The perpetual crisis of the markets may be over as a result of OMT [1], but the crisis that is unemployment in the periphery just gets worse. (Kevin O’Rourke puts it bluntly but accurately here.)

2) Within the Eurozone itself, there has always been a powerful lobby for further integration. It is therefore not surprising that actors like the Commission see further integration as the longer term solution to the Eurozone’s problems.

Yet we should be very cautious about making generalisations from a single observation. It may be worth reminding ourselves about why the Eurozone has not been a fair test of monetary union without fiscal union:

1) The crisis of competitiveness was partly a result of a mistaken belief in the market that default risk on everyone’s debt was similar to German debt, a mistake that is unlikely to occur again in decades. In the years before the recession, no attempt was made to use fiscal policy to offset overheating in periphery countries. (For more on why countercyclical policy is key, see Antonio Fatas here.)

2) In probably only one case, Greece, was there a clear problem of underlying fiscal excess. Yet instead of recognising the need for default early on, the union made a futile attempt to avoid it by replacing private debt with intergovernmental lending, which had disastrous consequences. This major and avoidable error produced the worst moment of the crisis, when Greece was threatened with exit. It continues to impose a disastrous degree of austerity on Greece.

3) The fiscal position of other Eurozone economies became critical because the ECB refused to act as a lender of last resort. If the ECB had introduced its OMT programme two years earlier than it did, the crisis might well have dissipated very quickly. This is hardly wisdom from hindsight, as anyone reading Paul De Grauwe (or indeed this blog) will know. Market reaction always had much more to do with the ECB than the fiscal position of the countries involved, an observation that inspired my first blog post and which research confirms.

4) The current double dip recession in the Eurozone is largely about a collective failure of fiscal and monetary policy. The position of the Eurozone would look significantly better if the ECB acted more like the US Fed, and if Germany and other fiscally untroubled economies were less obsessed with austerity. Neither has much to do with the absence of fiscal union.


To use evidence from one very badly designed test case to condemn the whole concept of  monetary union without political union is far too hasty. It is also potentially very dangerous. We should not forget that monetary union itself was encouraged by a belief that the fixed exchange rate regime that preceded EMU was untenable because of market pressure. (For more on the origins of the Euro see Harold James here.) The lesson of Eurozone failure so far is mainly about bad design, rather than disproof of concept. If this failure leads to a fiscal and monetary union imposed from above on an unwilling electorate, by an elite that played such a big part in creating the current failure, we may go on to find out that a badly conceived political union could be even more disastrous than a badly designed monetary union.


[1] The ECB’s programme to become a conditional lender of last resort