In the preceding posts I started by describing the mechanism of integration and then moved on to describe the process of adaptation that our political economies go through once faced with an undeniable shock. In this post I lean over the consequences of reform delay. Specifically, in any crisis, time is of the essence in order to successfully cope with the most recent exposition of our system’s fragility.However, I fear that in this sovereign debt mess we may not have the time it normally takes EU leaders to go from the first denial of a crisis to the final gloating of its ultimate and far reaching solution. I fear that the delay in the creation of a sizeable fiscally redistributive EU mechanism may be taking too long and that the austerity its absence is imposing on Member States may endanger European integration, and through it peace and prosperity in Europe.
As I have argued before, reform delay is typical of the evolutive process of European integration. However I fear things may be very different this time. Lately, whenever European countries experience a negative shock it has tended to be somewhat mitigated by positive shocks. The oil and exchange rate shocks of the 1970s, 80s and 90s happened in parallel to the inventions of the PC and of the Internet, to the opening of the Chinese, Southeast Asian and the Euro-Asian ex-Communist bloc’s markets, the stabilisation of Latin America and of large chunks of Africa, to name but a few. These progresses cannot have avoided but to smooth the impact of those negative shocks.
However, with the financial crisis and the fiscal crisis now, absent momentous progress in African development, or technological prowess (fusion nuclear reactors, holograms, electric cars space exploitation), we do not have the benefit of such a smoothing act. More so, it is possible that in the midst of a currency war, our exports will be hurt if the ECB does not join the chorus of central bankers pursuing beggar thy neighbour policies. On the other hand, it is possible that joining that conflict may only jeopardise developing nations more, this accelerating their downfall, which would also hurt our exports. Finally, China is due for a bubble and burst anytime now. I read there might be a real estate bubble in the making (read the studies here and here).
In conclusion, the sovereign debt crises of one Eurozone country affect all the others, and imposing the austerity we have geared ourselves to, is going to threaten support for the EU. Moreover, not only do we lack the same sort of mitigating circumstances that we have been able to enjoy in the past, we are actually exposed to events that may endanger us further. Time may really be a commodity we do not have as we wiggle and wobble our way from denial to acceptance of the inevitability of EU wide fiscal transfers. If so ignoring this and counting on half baked solutions to do the trick may be very dangerous.
Alternatively, I could be wrong, one of the good things I mentioned above could happen, the global economy could just get better, pick up and soon enough we’ll be hearing our leaders gloat about how fundamental they were at saving us all… Not!