How the Eurozone crisis resembles "Yugoslav syndrome"

By bne IntelliNews June 3, 2011

Phil Cain in Graz, Austria -

In the year of the 20th anniversary of Slovenia's independence from the former Yugoslavia, economist Joze Mencinger, who some say laid the foundations of Slovenia's post-independence economic success, argues that the back-biting among Eurozone members is a grim reminder of the "Yugoslav syndrome" of the 1980s.

"More and more people in Germany believe they are being exploited by Greeks, while Greeks are becoming convinced they are being exploited by Germans," Mencinger says. "In the 1980s, economic stagnation led many Yugoslavs to similar conclusions, with many blaming their economic problems on exploitation by Yugoslavia's other five republics."

Of course, he acknowledges there are differences; after all, Yugoslavia was a communist dictatorship, unlike the EU, which is an association of democratic states. But the parallel still holds, Mencinger argues, because Yugoslavia's communist regime was relatively open, free-thinking and liberal, particularly in Slovenia. "One could say that Yugoslavia had a party-less democracy functioning only because of a democratic deficit." The existence of the Yugoslav central government, while undemocratic, could be justified by pointing to its success in arbitrating between republics.

The EU also only functions thanks to democratic deficit, Mencinger says. Its stability is maintained on the basis of "inertia - the ability to disregard its own rules, the constant creation of new institutions and empty talk." Negative though it sounds, these "strange pillars" are actually crucial for keeping the EU together and, even more so, for enabling enlargement. Italy and Belgium, he says, would never be part of the Eurozone if the EU had insisted on limits on the size of government debt, and the Lisbon Treaty would never have come into being had the EU paid attention to public opinion: the EU Constitution, which had much in common with the Lisbon Treaty, was rejected in referendums in France and the Netherlands in 2005, yet still the Lisbon Treaty was adopted at the end of 2007.

Don't mention it

Some of the EU's political taboos also seem oddly familiar. "In the 1980s, it was considered inappropriate to doubt the Yugoslav slogans of 'brotherhood and unity' or the 'identity of interests within socialist Yugoslavia'," Mencinger says. "Now, it seems to be thought inappropriate to doubt the euro or the 'identity of interests in Europe'."

The idea of a "Europe of two speeds" is no newfangled notion, he says. In Yugoslavia, the problem of drawing up policies to suit republics with widely differing levels of development was justified by describing the country as an "asymmetric federation." The yawning economic "asymmetry" between the relatively-wealthy Yugoslav republic of Slovenia, where Mencinger was minister of the economy in the run-up to the republic's declaration of independence in June 1991, was one of the biggest reasons for its decision to break away. And just as there are no legal mechanisms for a country to leave the Eurozone, constitutional lawyers fretted over the legality of Slovenia's withdrawal from Yugoslavia, with some saying it contradicted its decision to join Yugoslavia twice, first in 1919 and then again in 1945.

Slovenia swapped Yugoslavia for the EU and the euro, having become an EU member in 2004 and then joined the Eurozone in 2007. In doing so, he says, it handed back the economic attributes of a country, like having control of money supply, taxes and border controls. Nevertheless, he was in favour of Slovenia joining both the EU and the single currency, and is not in favour of Slovenia trying to extricate itself from either EU association now. Doing so, he believes, would result in unacceptably "high costs and uncertainty."

Beware of Greeks

Mencinger doubts, however, that the EU and Eurozone are made "not only for good, but also for bad times" and so is sceptical about their long-term future as they currently exist. He is also doubtful about the effectiveness of the EU's efforts to re-balance Greece's debt-burdened public finances, the discovery of which sparked the current euro crisis. The EU's assistance packages, he says, are only making matters worse in Greece, while the only benefits being the income accruing to the French and German banks which arranged the bailout. "The calculation is simple: if your debt is 160% of GDP and interest rates are higher than growth rate, the debt can only grow or be written off."

He cannot see an end to the EU's woes at the moment, but Mencinger does not think we are yet witnessing the EU's end times. "The EU in 2011 is where Yugoslavia was in 1983. At that time, Yugoslav politicians were desperately looking for how to rescue the system and the country." He is hopeful that EU politicians will do a better job or, if they cannot, that better times will come along before the situation becomes critical.

As a Keynesian - an economist who thinks the state needs to keep the private sector in check - he says he is not interested in the long run. When asked to predict the long-term future of the EU, he says, "The EU will certainly not last as long as Austria's Habsburg empire." So, with 66 years gone since the seeds of the EU were sown after World War II, there could still be as many as 326 more to go.

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