Hamish McRae: So who can solve the euro crisis? Not the politicians

The bluster and self-deception so characteristic of eurozone politicians is evident once again

Share

So now it is Spain that will need a sovereign bailout. In an effort to increase confidence, the government says it has enough money to get through the autumn, but of course that has quite the opposite effect in that it emphasises that it will run out of money after that.

Only a few weeks ago, the Spanish Prime Minister, Mariano Rajoy, was denying that there would be sharp tax increases and said that seeking eurozone funds to rescue the banks was not a sovereign rescue. Then VAT was put up by 3 per cent. And now is it even more evident that the country needs a full bailout.

The bluster and self-deception so characteristic of eurozone politicians is evident once again. What is so strange is that politicians feel compelled to go through the established sequence of downplaying their financial problems, then blaming foreign speculators, then conceding that they might need external help, then finally capitulating or being thrown out.

It is strange, certainly, but perhaps explicable at two levels. The first is that nothing in the experience of most politicians prepares them for leading a country through a fiscal crisis. When you were an ambitious 25-year-old deciding on a political career, you entered a trade that involved distributing public funds. True, some of those funds had to be raised in tax, but you did not emphasise that aspect of your job. And, because there was a growing population and you could borrow within reasonable limits, you did not have to raise the full amount of your spending in tax.

The other level is that the consequences of fiscal failure could be concealed by a combination of devaluation and inflation. You could devalue your way out of loss of competitiveness and inflate your way out of excessive debt.

Both these conditions have changed. Most of Continental Europe faces a falling population and rising dependency ratios, so tax revenues will be weak at just the time when demands rise. And within the eurozone at least an individual country cannot inflate or devalue.

The economics have changed but, in most of Europe, the politics haven't. So other countries attack Germany both for following a reasonably sound fiscal policy itself and for resisting pressure to take on liability for others' sovereign debts.In Britain, the experience of the 1976 bailout by the IMF and the expulsion from the European exchange rate mechanism in 1992 have meant that there is critical mass in favour of fiscal responsibility. The first kept Labour out of power for four elections, the second the Tories for three – a scarring experience for both parties. But in much of southern Europe the scars are not so deep.

None of us can hope to see the detail or the timing but the past few days have reminded us of the inevitability of some sort of break-up of the eurozone. The idea that Greece might leave is widely accepted and the debate has shifted to the advantages and disadvantages of Spain and Italy leaving too. That is quite different from what was being said 18 months ago.

But we have hardly begun to think about the impact of all this on European politics. Politicians do what voters want. But they can only do so within the framework of the possible. That framework, in or out of the euro, has become much more constrained, and politicians will have to adapt to that.

What we are seeing in the eurozone is a sudden and wrenching shift, but a similar changing awareness of what governments can and cannot do will happen more gradually throughout the developed world, including here in the UK.

If we care about happiness, we need to be flexible

It is easy to pick holes in the ONS's work in measuring wellbeing, or indeed the Government's attempt to shift emphasis from hard economic numbers such as GDP to softer ones such as life satisfaction.

Easy, but unfair. Economics has always been concerned about human welfare. Long before national accounting was developed in the 1930s, economists were trying to measure happiness.

Utility theory goes right back to Jeremy Bentham and John Stuart Mill in the early 19th century. Bentham's aim, "the greatest happiness of the greatest number" of people, is noble indeed; the problem was how to measure it. Lots of things emerge from the ONS and other work that should enable policy to be fine-tuned.

The base is that most people seem reasonably happy. But there are things that make people unhappy, such as unemployment.

Flexible labour markets should therefore help increase happiness because they help create jobs. But governments need to be careful.

Other studies show people hate government interference and they don't go a bundle on taxation. So nudge, rather than "tax 'n' spend".

h.mcrae@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Software Implementation and Support Consultant

£28000 - £35000 per annum: Recruitment Genius: A consultant is required to pro...

Recruitment Genius: Office Assistant

£12675 - £16000 per annum: Recruitment Genius: An Office Assistant is required...

Recruitment Genius: Lead Software Developer

£35000 - £40000 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Trainee Case Handler / Probate Assistant

£15000 - £18000 per annum: Recruitment Genius: A Trainee Case Handler/Probate ...

Day In a Page

Read Next
A 'match' on Tinder  

Tinder may have inadvertently hit its self-destruct button by charging older users more

Nash Riggins
A Yorkshire Terrier waits to be judged during the Toy and Utility day of the Crufts dog show at the NEC in Birmingham  

There are no winners at Crufts. Dogs deserve better than to suffer and die for a 'beauty' pageant

Mimi Bekhechi
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn