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?
SPONSORED FEATURES
iJobs Job Widget
iJobs General

Recruitment Genius: Telesales Executive - OTE £25,000

£13000 - £25000 per annum: Recruitment Genius: Would you like to be part of a ...

Recruitment Genius: 1st Line Technical Support Engineer

£19000 - £23000 per annum: Recruitment Genius: This IT and Telecoms company ar...

Recruitment Genius: Assistant Manager - Visitor Fundraising

£23000 per annum: Recruitment Genius: The Visitor Fundraising Team is responsi...

Recruitment Genius: Developer

£30000 - £35000 per annum: Recruitment Genius: This is an opportunity to join ...

Day In a Page

Read Next
An investor looks at an electronic board showing stock information at a brokerage house in Shanghai  

China has exposed the fatal flaws in our liberal economic order

Ann Pettifor
Jeremy Corbyn addresses over a thousand supporters at Middlesbrough Town Hall on August 18, 2015  

Thank God we have the right-wing press to tell us what a disaster Jeremy Corbyn as PM would be

Mark Steel
The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future