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


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".


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