The Euro Area's Deepening Political Divide

Authored by Ashoka Mody via VoxEU.org,

Two European elections – in Germany on 24 September 2017 and Italy on 4 March 2018 – warn that the peoples of Europe are drifting apart. Much of the recent deepening of these divisions can be traced to Europe’s single currency, the euro. This column argues that the political divide in Europe may now be hard to roll back absent a shift in focus to national priorities that pay urgent attention to the needs of those being left behind.

The University of Cambridge economist Nicholas Kaldor was first to warn that the euro would divide Europe (reprinted in Kaldor 1978). His critique came in March 1971 as a response to the Werner Commission Report, which presented the original blueprint of what would eventually be the euro area’s architecture (Werner 1970). Kaldor wrote that a single monetary policy (and the accompanying one-size-fits-all fiscal policy framework), when applied to diverse European countries, would cause their economies to diverge from one another. The logic was simple: a monetary policy that is too tight for one country can be too loose for another. The economic divergence, Kaldor said, would cause a political rift. Such warnings continued. The University of Chicago economist and Nobel laureate Milton Friedman (1997) predicted that the euro’s flawed economics would “exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues”.

European leaders dismissed such naysayers. They insisted that the single currency would bring Europeans closer into a political union (Sutherland 1997).

A permissive consensus?

The discourse on the possibility of political union in Europe was conducted mainly within a group of so-called elites. These elites – political leaders and bureaucrats – had little basis to presume that national interests could be reconciled to unify Europe. But they made the further assumption that they had a “permissive consensus” from the public to make far-reaching decisions on European matters (Mair 2013). As I argue in a forthcoming book (Mody 2018), the permissive consensus began to break down about the time the single European currency became a political reality. Following the signing of the Maastricht Treaty in February 1992, the Danish public rejected the single currency in a referendum held in June 1992. And in September 1992, the French public came within a whisker of rejecting the single currency.

The voting pattern in the French referendum eerily foreshadowed recent political protests. Those who voted against the single currency tended to have low incomes and limited education, they lived in areas that were turning into industrial wastelands, they worked in insecure jobs, and, for all these reasons, they were deeply worried about the future (Mody 2018: 101–103). By voting against the Maastricht Treaty, they were not necessarily expressing an anti-European sentiment; rather, they were demanding that French policymakers pay more attention to domestic problems, which European institutions and policies could not solve.

Over the following years, the permissive consensus continued to fray. The popular voice against ‘more Europe’ expressed itself again in referendums on a European Constitutional Treaty in 2005. Referendums allowed focus on European issues, which were crowded out by domestic priorities in national elections. European elites found it easy to dismiss the referendums as aberrations.

A critical new phase began during the financial crises of the past decade. After the onset of the Global Crisis in 2007 and then through the protracted euro area crisis, euro area monetary and fiscal policies hurt the lives of ordinary people who felt left behind – the less educated and those living outside of metropolitan cities. Euro area policies, however, remained insulated from political accountability to those whose prospects they most severely damaged. As a consequence, domestic rebellions gathered force throughout the euro area. These rebellions originated among similar people in the various member states, but they resulted in opposing national public responses in the northern and southern countries, increasing the political divide.

The rise of Alternative für Deutschland in Germany

The most virulent form of political division emerged in the crucible of the euro area financial crisis in 2012. The permissive consensus finally broke down. In Germany, long-time members of Chancellor Angela Merkel’s Christian Democratic Union (CDU) formed a new political movement, Electoral Alternative, in September 2012. This new movement represented those who refused to accept Merkel’s claim that Germany had no alternative but to support financially troubled euro area nations. In February 2013, Electoral Alternative converted itself into a political party, Alternative für Deutschland (AfD), which called for a breakup of the euro area.

Although AfD missed the threshold of 5% of votes cast for the September 2013 election to the Bundestag, it gained political strength starting in August 2015, following Merkel’s open door to Syrian refugees. Seeing that she was losing popular support, Merkel quickly clamped down on refugee and migrant inflows, but AfD continued to gain political strength. In the September 2017 election, AfD received 12.6% of the vote. Many who voted for AfD in 2017 had not cast a vote in 2013, having lost faith that they have a voice in the democratic process. In 2017, these voters looked for solutions outside of the political mainstream. AfD voters had one very specific German feature: many were East Germans. Aside from that, however, the AfD vote manifested a pattern observed elsewhere in Europe and in the US. In East and West Germany, low-income men with only ‘basic’ school education or vocational training voted in large numbers for AfD (Roth and Wolff 2017). Most AfD voters were between the ages of 30 and 59; they worked in blue-collar jobs, often with little job security. They lived in small cities and rural areas.

Thus, economic protest and anti-immigrant sentiment overlapped in AfD voters, an overlap that Guiso et al. (2017: 5) find for several European countries. Even prosperous Germany had left behind many of its citizens. Marcel Fratzscher, president of the research institute DIW Berlin, explains in his forthcoming book that the country’s economic gains in the past few decades have not percolated to the bottom half of the German population (Fratzscher 2018). In this bottom half, real incomes have barely grown; few are able to save for a rainy day. Political alienation and conflict within society have increased.

With the CDU and the Social Democrats having experienced historic setbacks, a governing coalition proved difficult to form and Germany remained without a government for an unprecedented five months. Recently – coincidentally, on the same day as the Italian election, 4 March 2018 – the CDU and the Social Democrats finally agreed to form a ‘grand coalition’. A German government will soon be in place, but polling data show continuing decline in popular support for the CDU and especially for the Social Democrats. AfD will be the largest opposition party in the Bundestag, and, for now, its support in the polls is rising.

The anti-Europe movement in Italy

Italian developments moved in parallel. Italy’s Five Star Movement, headed by the comedian-blogger Giuseppe “Beppe” Grillo, rose from relative obscurity to prominence in the February 2013 election, garnering 25% of the vote. Italy had been in near-perpetual recession since early 2011, with mounting job losses, especially among young Italians. The Five Star Movement’s call for direct democracy resonated with voters frustrated with European monetary and fiscal policies, which profoundly affected their lives but which they felt powerless to influence. The poorer southern areas voted for Five Star candidates. But whether in the north or the south, the share of votes received by Five Star candidates was higher in regions of higher unemployment (Romei 2018).

For Italians, indignities during the crisis years had come on top of economic stagnation since Italy entered the euro area in 1999. Economic productivity – the source of higher standards of living – stopped increasing, Italian producers lost international competitiveness, and well-paying manufacturing jobs began to disappear with nothing commensurate to replace them. The financial crises – first the Global Crisis that started in July 2007 and then the continuing euro area crisis – compounded Italy’s economic and political dysfunction. Euro area authorities’ emphasis on tight monetary policy and unrelenting austerity depressed economic growth and therefore had the perverse consequence of increasing the government’s debt burden. Meanwhile, the enforced fiscal austerity crowded out the government’s ability to cushion the economic pain of vulnerable citizens. And although ECB President Mario Draghi’s announcement in July 2012 that the ECB would do “whatever it takes” to save the euro area helped bring down the nominal interest rate the Italian government paid on its debts, the ‘real’ interest rate (the nominal rate adjusted for inflation) remained high. The Italian economic squeeze continued. In early 2013, the average Italian was poorer than at the time of entry into the euro area.

In the February 2013 election, Grillo campaigned on an anti-European platform, even promising to hold a referendum on whether Italy should remain in the currency union. Mario Monti, the outgoing prime minister, appointed to head an interim ‘technocratic’ government in November 2011, campaigned as a pro-European and received an electoral drubbing. Pier Luigi Bersani, head of the center-left Partito Democratic (PD), also promised a pro-European Italian government, and his party received 29% of the votes, down from 38% in the 2008 election.

Although the PD did manage to lead a coalition government, it ran through two prime ministers – Enrico Letta and Matteo Renzi – before settling on Paolo Gentiloni. The damage was done. The jockeying for power within the PD, much of it instigated by Renzi, eroded the party’s reputation and public standing. In the March 2018 election, the PD received 19% of the votes cast. In contrast, the Five Star Movement increased its vote share to 32%. The anti-Europe parties altogether received about half the votes; if former Prime Minister Silvio Berlusconi’s Forza Italia, with its softer European-skepticism, is added, nearly two-thirds of all Italians distanced themselves from Europe in the latest election.

Thus, in Germany, AfD has attracted economically anxious Germans worried that the German government is doing too much for Europe. In Italy, the Five Star Movement has gained because anxious Italians are angry that the European governance system disadvantages, and even damages, their futures. Despite the continued decline in nominal interest rates under the ECB’s quantitative easing programme since January 2015, the real interest rate for Italians remains higher than 1%; in contrast, the real interest rate for Germans is –1%, which gives German producers and consumers greater ability to spend and grow. The single monetary policy continues to feed the economic divergence between northern and southern member states, which sustains and amplifies the political divisions.

Today many hope that, spurred by French President Emmanuel Macron’s call for euro area reform, Merkel will work on repairing the euro area’s architecture. Such a hope is illusory. Merkel is all too aware that any sign of financial generosity toward Europe will embolden the rebels within the CDU. Other northern nations have made clear that they will oppose calls on their taxpayers (Rutte 2018, Finance Ministers 2018). No euro area nation state is willing to cede its national parliament’s sovereignty on fiscal matters. Policy decisions will remain disengaged from politics. Hence, even if new financial arrangements are engineered, it will be impossible to achieve accountability in euro area governance. Political tensions will continue to build.

Concluding remarks

There are no easy answers to Europe’s economic and political woes. For this reason, as I argue in my forthcoming book, the answers will not be found in ‘more Europe’. For too long, euro area leaders have dismissed or denigrated the domestic public rebellions. This is a terrible mistake. However inchoate, and sometimes nationalistic and xenophobic, these rebellions have been, they convey an important message. In addition to the distress the euro directly inflicts, the single currency distracts European leaders’ attention from where it ought to be directed: domestic priorities. Of special importance is strengthening human capital, a capability in which all southern euro area countries (and even some northern countries) are lagging behind world leaders. Investment in human capital is crucial to achieving greater equity and sense of fairness while helping to regain international competitiveness.

Put simply, European leaders must shift their efforts away from the ultimately impossible goal of making euro area governance more accountable and towards national domestic economic agendas that give hope to those who feel disenfranchised. If they fail to make this shift, domestic politics will continue to fragment, and as that happens, European politics will become ever more corrosive.

Comments

An Shrubbery Thu, 03/22/2018 - 03:36 Permalink

Snap! Crackle! Pop!

They knew it wouldn't work from the start. But they decided that doubling down on stupidity was the best plan, moving forward. After all, stupid is the new smart!

wildbad An Shrubbery Thu, 03/22/2018 - 03:40 Permalink

Good work Gyorgy Soros.  You broke this too.  

but Like your job in Ukraine, this will not result in the change you desired.  But you and "fuck the €U" Victoria Nuland and John Kerry and Obama did break the €U but we see this.  You no longer have sole control of the narrative and a vocal minority is publicizing your lies and deceptions and the truth is now laid bare for all to see.

Merkel, the lame duck, gave a speech yesterday, clothed in deceptive language, insinuating that the phenomena of dissenting voices had no connection to her open door policies but rather that they were some unfounded irrational groundswell seeded and grown in their own insanity.

I'm glad that €U is broken though.  Time to devolve back to nation states and even smaller political divisions.

 

In reply to by An Shrubbery

Adolph.H. wildbad Thu, 03/22/2018 - 03:43 Permalink

They forgot to mention that Europe is Israel and America's bitch. That is why the holy alliance between Europe and mother Russia is made as impossible as could be. But it will ultimately happen because such is geography. 

Can't wait to be reunited with my Russian brethren. 

In reply to by wildbad

monkeyshine COSMOS Thu, 03/22/2018 - 04:19 Permalink

The Euro currency is indeed part of the problem. But so too is this trend towards insane micromanagement of trade goods and production. There are something like 83 different rules on how to make a teapot if you want to sell it in the EU.  These kinds of regulations are tied to protectionism and the currency, and are also just the general hallmark of granting too much authority over a central government. Power expands to justify its existence and to show the need for more control, power protects itself from those abused by authority, and power attracts the corrupt into wanting positions of power. 

In reply to by COSMOS

Moving and Grooving COSMOS Thu, 03/22/2018 - 12:56 Permalink

'The common market that was before this political union was the best'

 

I agree. I lived in Germany in the early '70s, and at that point the stores would have, say, 5 kinds of canned peas, each with the 'Country Of Origin' displayed. Gee, the Irish ones are a little more expensive than the Israeli ones ...

 

And speaking of Israel, they provided a fair amount of first-class produce. I got the impression that affordable fresh lettuce, strawberries, and carrots year-round was a new and exciting change for many Germans at that time.

 

.

In reply to by COSMOS

Fireman An Shrubbery Thu, 03/22/2018 - 05:38 Permalink

The evil EUSSR at the heart of Natostan in the sewer Brussels is the enemy of all sovereign states and their citizens and must be defanged.

Globostan is the nightmare concocted by the chosenite supremacist banksters and their hatchet men, presstitutes and political whores and pedophiles.

"Count" Richard Coudenhove Kalergi’s Plan outlined by Gerd Honsik “Kalergi proclaims the abolition of the right of self-determination, ... the elimination of nations by means of ethnic separatist movements or mass allogeneic (genetically dissimilar) immigration to create a multiethnic flock without quality, easily controllable by the ruling class. Kalergi characterized the multiethnic flock as cruel and unfaithful but maintained the elite must deliberately create them in order to achieve their own superiority: ‘Then the elite will first eliminate democracy – the rule of the people. Next, the elite will eliminate the people via miscegenation, thereby replacing the ruling white race with an easily controllable mestizo race. By abolishing the principle of equality of all before the law, avoiding and punishing any criticism of minorities, and protecting minorities with special laws, the masses will be suppressed.’'

"Count" Richard Coudenhove von Kalergi's genocidal screed "Practical Idealism" 1923 in PDF format (link below) is the original Austrian NAZI and his vile tome makes Onkel Adolf's "Mein Kampf" look like a bedtime story. This mutt laid the foundations for the abomination known as the EUSSR with its capital in the sewer Brussels, seat of the totalitarian Pedophile Politburo that runs the EUSSR for the banksters and satanists.
http://www.mediafire.com/file/vcpu7j7hakukmde/Coudenhove-Kalergi-Practic...

In reply to by An Shrubbery

j0nx An Shrubbery Thu, 03/22/2018 - 07:02 Permalink

Like us here in America they are outnumbered 60-40. It is just a matter of time before libs here outlaw what they consider as 'hate speech' - which basically is anything that offends them and what they say it is and will most likely only affect conservatives. Your choices are to fight or submit pretty much.

In reply to by An Shrubbery

Sandmann Thu, 03/22/2018 - 03:46 Permalink

It was always a political venture just as when Kohl imposed the Deutsche Mark on the GDR at 1:1 and wiped out East German industry which had depended on Transfer Ruble trading with USSR and lost all its markets overnight.

That was a good warning for Ukraine. Without someone funding an LBO as West Germany did to the GDR using FICA taxes to pay the bills and making German labour costs the highest in the world, there is no way you can ignore your biggest export market (take note UK)

Teja Sandmann Thu, 03/22/2018 - 09:30 Permalink

Kohl "imposed the Deutsche Mark"?? Bullshit. At the time, the East Germans had the parole "if the Deutsche Mark does not come to us, we come to it". 15 million refugees West Germany could not keep out due to their constitutional rights as Germans? No way. Kohl had not much of an alternative here.

Anyway, the Russian market had gone up in smoke at the time. For their oil and gas dollars, the Russians preferred real cars and foodstuff to cardboard cars and fake coffee from the GDR.

In reply to by Sandmann

ElTerco Thu, 03/22/2018 - 04:14 Permalink

Cultures and work ethics in different Eurozone countries have been mismatched all along. The Euro was headed for failure from the start, with a temporary boost from ECB "free" money being the true underlying driver for the unholy union.

monkeyshine ElTerco Thu, 03/22/2018 - 04:28 Permalink

"European leaders must shift their efforts away from the ultimately impossible goal of making euro area governance more accountable and towards national domestic economic agendas that give hope to those who feel disenfranchised."

Shifting towards national domestic economic agendas will achieve the goal of making euro area government more accountable. But the EU government needs to be dramatically scaled back as well.  

There is just so much irony in this that you have to wonder how they didn't notice - they wanted to give the individual people and member countries more freedom to trade within the eurozone, but decided that the way to create more freedom was to create another 7 branches of super-government, only one of which is accountable to the will of the citizens, to regulate how freedom should be allowed to operate.

Reminds me of Reagan quote:  "If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it."   

In reply to by ElTerco

NACHTJAGD GreatUncle Thu, 03/22/2018 - 07:52 Permalink

Correct, the Article also does not mention the 2 referendums that were held in France and then in The Netherlands in 2005 in regards to adopting a Constitution for the European Union. They tested it in these countries where the people were most likely to favor their despot Super Union. France rejected it with 54% and then The Netherlands by 61%. They canceled the remaining other planned referendums and simply changed the title from 'the constitution' to 'the treaty of lisbon' and went right along with their nonsense. The people of Europe were never asked nor agreed to it. The EU is a unelected and undemocratic institution. The commission is not elected and the parliament is a farce as they can not introduce legislation.

In reply to by GreatUncle

BritBob Thu, 03/22/2018 - 06:00 Permalink

Even the people of Gibraltar have had enough of the EU -

 

Sir Joe Bossano, former Chief Minister of Gibraltar , says the European Union’s negotiating guidelines for Brexit are enough to convert him, from a supporter of the EU, into a Brexiteer.

Speaking to GBC, Sir Joe said it was disgraceful that the EU has effectively given Spain a veto over the application to Gibraltar of any Brexit deals made with the UK. He said it was a complete betrayal of the trust that the people of Gibraltar had in the EU. (Gib Chronicle 31st Jan 18).

Even after effectively giving the territory away on 3 separate occasions Spain persists!

Gibraltar – Spanish Myths and Agreements (single page):

https://www.academia.edu/34608739/Gibraltar_Spanish_Myths_and_Agreements

 

kellys_eye Thu, 03/22/2018 - 06:07 Permalink

People are seeing through the elitist controls and are fighting back.  The only way the elitists can keep control is to eliminate the opposition hence the efforts to create massive conflict that could potentially result in WW3.

It's now down to a 'them and us' scenario.

GreatUncle Thu, 03/22/2018 - 06:59 Permalink

Ya think ... when they decided to favour migrants over their own populations the writing was on the wall.

Funny part is those migrants, now native are equally as fucked as more and more migrants arrive.