ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintSite TitleTitle ChevronIcon Twitter
Economy

Twilight of the technocrats settles on eurozone

Greece's slow-motion economic train wreck is not just eroding the eurozone's flawed monetary union. Regardless of the outcome of this week's crisis meetings between European leaders in Brussels, permanent damage has already been done  to the prestige of two entities that are key elements of the post-World War II settlement: the International Monetary Fund and the European Union itself.

     Rarely have the leaders and institutions of the Western world looked so strategically inept as they have in their panicky and vindictive responses to the Greek crisis. The prospect of Greece being ejected from the EU, bankrupted and left to the tender mercies of opportunistic Russians, human traffickers and Middle East extremists should be beyond the realm of possibility. The fact it is not speaks volumes about the vacuum of responsibility at the heart of Europe.

     Put that together with American wavering that very nearly derailed its own proposed Trans-Pacific Partnership scheme. Now add China's growing assertiveness in the South China Sea, its successful launch of the Asian Infrastructure Investment Bank and Western mishandling of the Ukrainian crisis that has driven Russia into China's arms, and you can almost hear the rumbling of the tectonic plates of global power.

On life support

The Greek philosopher Heraclitus said that "character is destiny" -- and the Greeks are far from blameless in the making of their own disaster. That much was true not just for Greece, but also for many other European countries, including the U.K., which overspent and overindulged in the heady mid-2000s.

     What is so unusual about the Greek situation is not the unsustainability of that earlier boom, but the length and depth of the bust. The resulting decline in economic activity of about one-third has not been seen in a wealthy country since the 1930s, and five years on from the first EU-led bailout package, the Greek banking system remains on life support.

     By contrast, the Asian crisis of 1997-98 was less severe and much shorter-lived. Even Iceland, the recent poster child for financial excess, is almost back to peak economic activity and boasts an unemployment rate of just 4.5%. In all these cases, substantial currency depreciation and default or debt forgiveness were crucial factors in the healing process. In contrast, the distressed countries of the eurozone were locked in the lethal embrace of "an ever closer union" that robbed them of control over the main economic levers: monetary policy, the exchange rate and, ultimately, fiscal policy.

     The hubris of the creators of the euro was to assume that they could graft northern European economic cultures onto southern European countries without any such compensating mechanisms. Their insouciance about the consequent economic mess has made euro-skepticism a vote-winner in the U.K., France and, most recently, Denmark.

     Even now, the overriding priority among the Euro-elite -- the German-led "old Europe" club -- appears to be to maintain the euro currency in its present form, no matter what the cost in terms of unemployment and social collapse in southern Europe. The common-sense alternative, allowing a country to make a managed exit from the euro and restructure its debts while remaining a member of the EU, is too taboo to be even discussed.

"Saving the world"

The IMF has been involved in the Greek debacle from an early stage and forms one pillar of the "troika," alongside the European Central Bank and the European Commission, that has taken such a harsh line with Greece.

     The IMF's reputation has been under fire since the Asian crisis of the late 1990s, when its demand for deep fiscal retrenchment regardless of the state of public finances appears to have intensified the troubles of countries such as Indonesia. Since the collapse of Lehman Brothers in 2008, the organization has suffered a deeper credibility crisis. Its economic forecasts have consistently proved too optimistic and, not coincidentally, its favored policy of tax hikes and spending cuts has been criticized as totally inappropriate for the "new normal" world of low growth.

     The IMF's own research department eventually admitted that the economic models used to justify fiscal retrenchment were flawed. Even so, that did not stop IMF chief Christine Lagarde from being the most aggressive proponent of Greek tax hikes in recent emergency meetings. Last November, Lagarde gave the same advice to Prime Minister Shinzo Abe, even as the Japanese economy was still reeling from a previous hike. Fortunately, he ignored her, a path of action that Greek Finance Minister Yani Varoufakis probably envies.

     Both the EU and the IMF date back to the immediate postwar period and were conceived to be technocrat-run supranational institutions that would act as regulators and coordinators of the liberal capitalist order as it faced off against communism. Both have expanded their remit significantly as they have become increasingly remote from ordinary citizens -- and indeed remote from common sense -- while hubris has become ingrained. All too symbolic here were the Nero-like antics of the disgraced former IMF chief Dominique Strauss-Kahn, who claimed he was too busy "saving the world" to attend more than four sex parties a year.

Message for Asia

From this fiasco there are three clear messages for Asian countries. First, supranational institutions are inherently political and should be subject to as much accountability and media scrutiny as possible. Second, control over monetary policy, fiscal policy and currency is a vital asset that should never be discarded. And thirdly, if any large country comes up with a scheme for an "ever closer union," make sure you are not on the invitation list.

     Can such institutions reform themselves and restore credibility while Greece is imploding, or even if Greece works its way through and stays in the EU? Theoretically, it is possible. But doing so would require deep cultural change, which rarely occurs without outside pressure. Companies operating in competitive markets have to restructure and downsize to survive. Supranational institutions experience no such pressure. Accountability and transparency are often nonexistent. Such was the case with soccer's governing body, FIFA, and that is merely the most egregious example of what can happen in a governance vacuum.

     Ultimately, the only discipline that can curb the hubris of the technocrats comes from politics, currently meaning the populist parties of the left and right, and the financial markets, with their tendency to "rebel" explosively against an unsustainable status quo. It makes for an unsettling outlook.

Peter Tasker is an analyst with Tokyo-based Arcus Research.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Try 1 month for $0.99

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends July 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media