Never have the political stakes attached to European construction been so high, surely not since the sixties of the past century. Increasingly, they are being played out in economic and social terms so people are not noticing what is going on, till events explode into political reality.

Such is the case in Malta. Till the euro issue comes to the boil here, we still need to turn another corner or two. Meanwhile, we remain allergic to any review of European topics conducted in contemporary terms and frozen in the political logic dictated by the elites who promoted Malta’s accession to the EU in 2003. Their determination is to brush aside any assessment which seems to even hint that many of the economic pluses they promoted to justify Malta’s accession to the EU have not materialised.

So today, any discussion that takes realistic stock of the options available to Malta as part of the eurozone, is dismissed as eurosceptic. Yet, I am astonished by the resigned acceptance I meet on right and left at the idea that for instance, the loans being extended to Greece will end up in smoke.

Still, one thing has become certain. The problems of the eurozone do not arise simply from Greece’s “irresponsible” financial policies. Nor do they result solely from equally improvident approaches followed in Ireland, Portugal, now Spain and who else next? (Do not exclude the possibility that post the coming election, no matter who wins, this country will be in the line of those pilloried for their lack of prudence.)

True, over the past four months, much of the financial turmoil that characterised Europe during 2010 and 2011, calmed down. This happened while awareness grew that Greece will not be able to meet the targets defined by her eurozone paymasters and the International Monetary Fund (IMF); that Portugal and Ireland will also be having problems to satisfy the short term targets set to reduce their budget deficits; that Italy will encounter difficulties to streamline its debt overhang; and that Spain’s problems, consistently underestimated, are reaching flash point.

Analysts reacted to the day-to-day movements of stock and bond markets by proclaiming that the euro crisis was over or close to. Government leaders and eurogroup spokespersons encouraged this feeling – which is what they are paid to do. However, what counts is the underlying trend regarding how economies and government budgets shape up... even if one puts between brackets, the effects of such events as the French presidential elections, among others.

Basically, there were two causes for the easing of concern about the eurozone. First, the European Central Bank pumped funds at extremely low interest rates into European banks, for well over a trillion euros. Bending its own rules, the bank successfully quashed fears that the European banking system would collapse under the stiff write down decreed by German Chancellor Merkel – and endorsed by eurozone leaders – of the loans made to Greece by the private sector.

Secondly, there was the swift progress (two months) in implementing another decree set by Chancellor Merkel: that all eurozone members and those other EU member states that were prepared to join in, would adopt a fiscal pact. Under it, all signatories pledge to keep their budget in balance or surplus, according to common rules, while submitting themselves to budgetary oversight and control from Brussels. They will write consequent financial rules into their Constitution or pass legislation having equivalent effect.

That the sovereignty of member states will be seriously breached is evident. How member states will deal with the tensions that will follow could become another European soap opera in the coming years. However, just as significant will be the economic impact of what is being proposed.

A curious consequence of the fiscal pact will be to subject economic and financial performance under a free market system to legislation. Such a coupling of economic management and legislative decree has never succeeded. Perhaps the eurozone will succeed. I am doubtful.

However, there is a more serious problem. The different economies within the eurozone are inherently mismatched. By way of structure, performance, level of development, governmental outreach and social policy commitments, they continue to follow diverging paths. Yet they will be subjected to uniform guidelines regarding how they will be managed. No mechanisms are being envisaged to ensure that financial transfers will apply to support states/regions that are trailing as they implement the inflexible rules of the pact.

Under such conditions, the fixed exchange rate operative through the eurozone and the absence of a central, “federal” budget of any significance mean that states/regions which fail to cope will have to adjust in one of two ways: either they will be obligated to leave the zone; or they will have to undergo – which is what is happening at present – some form of “internal” devaluation.

How does the latter happen? By straight reduction in wage levels, in social security pay outs, in pensions, in the level by which government “subsidizes” health care and education provision, and so on. There can hardly be a more painful process, politically and socially.

In its most recent assessment of the Greek situation, prior to extending further loans to Greece, the IMF considered the impact of the two scenarios: exiting the eurozone and “internal” devaluation. Of that report, Box 2 “Greece: Potential Economic Impact of Euro Exit” and Box 3 “International Experience with Internal Devaluation” should be made obligatory reading.

There can be no doubt that “internal” devaluation has horrendous consequences for the population involved. The IMF observes that, “Internal devaluations are almost inevitably associated with deep and drawn out recessions, because fixed exchange rate regimes put the brunt of adjustment on growth, income and employment... Restoring competitiveness by way of internal devaluation has proved to be a difficult undertaking with very few successes.” No wonder the suicide rate in Greece has ballooned.

Nor does the IMF report gloss over the impact of Greece leaving the eurozone. It claims that “post-exit, Greece’s external debt burden would soar, making a default inevitable”.

For political reasons, Europe has been loaded with a deficient economic and financial model. Its weaknesses are magnified by the central role in economic affairs now being played by global financial markets. To counter this problem, the fiscal pact that is being bulldozed through Europe is another political straitjacket that at this moment fits the worldview and interests of Germany, and practically nobody else.

The pact is neither fish nor fowl. It does not amount to federalisation of the zone, around a central budget that could automatically transfer funds to regions that lag hard behind others. Nor does it allow for flexibility in the case of states/regions whose economic performance diverges widely from that of top performers.

While the eurozone is a political construct, a solution to its problems can only be reached by political decisions that take full account of economic logic in which globalisation now weighs in overriding way. That logic leads one to conclude that the political choice that looms is between one of two options: either the eurozone goes federal; or it is acknowledged that the political targets that have been set are counterproductive at the present stage and the eurozone is scaled down.

The first option is the one preferred by the dominant elites who have always insisted that the way forward is “more Europe”. However, all over Europe, including Malta, this has led to a situation where 20 per cent of the population reap most of the benefits while the remaining 80 per cent feel left out or squeezed. Middle- and low-income earners are carrying more and more of the burden. No wonder that this is serving to energize the extreme right.

The other option – that of downsizing the eurozone – would require a lot of courage, which is a political not an economic variable. Nobody likes to front policies that seem to reverse the “achievements” of long years. And there is the assessment made by the IMF about the disruption that would be caused by one or more of its members exiting the eurozone.

Yet, how persuasive is this point? Hardly more than two years ago, it used to be said that were Greece to default on its private sector debt, a full collapse of the European banking system could ensue. Since then, Greece has defaulted on its private sector obligations in a big way. Yet, because there was the political will, the whole process was, on the whole, admirably managed and no large-scale disruptions occurred. So it is difficult to understand how, given the political will, the same could not be organised for an exit from the eurozone by one or a number of its members.

Increasingly, it is emerging that this could be the best option, even if the dominant political elites will find it difficult to accept. They would have to downscale their designs for “more Europe” which are proving to be unstable and unwieldy. Meanwhile, beyond the cosseted world of the elites, huge masses of people are fed up with being sidelined and made to carry the burden of sacrifices. A well-managed downsizing of the eurozone would contain the advances of the extreme right in Europe by preventing it from appearing as the sole real defender of the interests of ordinary people. Moreover, it would focus political attention on the need to make European structures really fit with the continent’s deep identity.

However, as of now, the best forecast is that a truncated federalism via the imposition of “balanced” budgets will remain the main item on the agenda. It will mean the imposition of more austerity across Europe, especially in a scenario where economic growth remains problematical.

Here in Malta, we should be tooling up strategies to help us cope with these developments, which we cannot really influence. Are we doing so?

alfredsant.org