Ready for the new EU?

[ddstory.livejournal.com]

http://latimesblogs.latimes.com/world_now/2012/06/eu-summit-produces-surprise-action-to-bolster-the-struggling-euro.html

"Not until I'm dead", those are words of Angela Merkel in response to the proposal for new common Eurobonds. It was hardly a promising remark just before the meeting on the tops of EU. But meanwhile it was met with cheers in Berlin, and wishes for a long life to the Iron lady.

In the week when Cyprus became the fifth country to officially request fiscal aid (just when Cyprus was assuming the rotational presidency of the EU), and the credit rating of several Spanish banks was degraded, and the Spanish and Italian debt interest rates kept approaching the dangerous levels, the EU leaders convened again, probably for the 19th or 20th time. And again there was just one point on the agenda: how to save the Euro. This time what was put on the table was some proposals that had been unthinkable until very recently: like bank guarantees, the creation of common debt, and a fiscal union.

So these are roughly the outlines of the future of the Eurozone. With all the huge political obstacles on the road, especially the more and more evident French-German rift, I doubt this new Eurozone will be born any time soon. Not today, not next week and probably not by the end of the year. The problem is that while looking forward to the future, the EU still doesn't know how to deal with the present. A present where Spain and Italy are shaking dangerously, Greece remains with one foot out, there's mutual suspicion and distrust between the creditors in the north and their debtors in the south. And let's not forget the recession on top of all that. In order to see the EU reborn, at least the foundations of the old one should survive, no?

One thing I can't deny. The architects of this new Eurozone 2.0 are pretty ambitious. Maybe way too ambitious. In their 10 year plan (announced by the quartet: the EU president Van Rompuy, the ECB chairman Draghi, the EC chairman Barroso and the president of the Eurogroup Juncker), there are such nice ideas like the creation of an all-European ministry of finance, sharing debt, a common bank oversight, giving control on national budgets to Brussels, and tighter coordination of the economic policies. NWO, FTW! Well, except the only tricky detail is that none of this could happen soon, if it ever comes to that at all.

To put it mildly, no one really expects any miracles from this meeting. Realistically, it'd be considered a success if they just avoid a catastrophe. In fact, despite the words of Italian prime-minister Monti that he's ready to stay in Brussels until Sunday if possible (the forum was to end on Friday), instead of going back home with yet another half-assed solution, this time he got something remarkable. But is it a real solution? The megalomaniac ideas of the quartet were just the basis of "talks" (which they're very good at), but without too much specifics and certainly without particular deadlines. And talking and agreeing "in principle" on various issues may've seemed like a "progress", I'll grant you that - especially given the disagreements the European leaders are having these days.

Everybody came to Brussels with diametrically opposite intentions and desires. Spain and Italy for example want short-term measures that would save their asses. Desperation was well audible in the voice of the Spanish prime-minister Rajoy who admitted that the international capital markets are practically shut down in his country because of the punitive interest rates. The most urgent issue for Spain is financing the debt. But it's getting ever more expensive to do that. They can't keep serving the debt for too long at this rate. Monti also needs urgent solutions, so he could show the Italians that the sacrifices that were demanded from them are worth the pain. And so he could keep his head.

Finally, Rajoy and Monti somehow managed to squeeze some consessions out of the Iron Angie. They bargained for a direct recapitalization of the problematic banks via the EU rescue funds, and the adoption of a Growth Agreement (whatever that's supposed to mean). The former would allow them to save the banks and avoid accumulating additional public debt, and would remove some burden from the Spanish and Italian bonds. The latter is mostly a symbolic step IMO, despite the seemingly huge amount of 120 billion Euros for initiatives like increasing the capital of the European Investment Bank by 10 billion, and some infrastructure projects. This looks more like re-packaging of good old measures and re-directing funds that've already been allocated, to poorly developed sectors, with the aim to resurrect them. And it's also a victory for Hollande, the new French president, who'll be able to save face and return home and say he had won a victory in the eternal "growth vs austerity" debate.

We're about to have a Growth v Austerity Month here, from what I see. How very timely.

So in practice it was Everybody vs Merkel. The relations in the new tandem Merkollande (which substituted Merkozy) are one of the things everybody will be watching very cautiously. The times when the German and French leaders would make prior arrangements before a meeting and just go to Brussels to announce their shared decisions to everybody else, are gone. Now Hollande is shaping himself as the leader of Club Med, the southern camp of the Mediterranean debtors. And they're ready for a battle against the stubborn Queen in the North. ;)

And now she's more isolated and alone than ever. Pressed into a corner from all sides, and demands from all sides that Germany should open up its purse even wider, if it desires to save Europe so much. And the gulf between Paris and Berlin doesn't promise anything good. If France and Germany don't reach some "big deal" between themselves soon, a catastrophe could follow. If they continue to work together, the Euro has a chance to survive. Simple as that.

But for the time being, I fail to see indications for a consensus any time soon. Merkel's constant mantra is that the shared guarantees on the debt are a dangerous and useless exercise if the Eurozone countries don't show that they could keep their expenses under control. From a German POV, the Eurobonds don't come for free. For instance, could France be allowed to have a nuclear bomb worth several hundred million Euros, while having a budget deficite? Stupid example, I know, but think about it. It's a matter of priorities, and many of these countries are having their priorities messed up. So the price of the shared debt would be the deterioration of the economic union, the loss of national sovereignty and handing budget oversight over to Brussels. And this is causing lots of concerns, and quite understandably. Meanwhile, France is of a different opinion. Hollande insists for "solidarité" now, and a "more Europe" a bit later.

It's a battle between long-term vision and short-term fear. It's the general sense from all statements of the Euro politicians after this meeting. This battle will dominate the European landscape in the weeks and months to come. The direction is clearly set now: a tighter financial, economic and political union. No crisis should go to waste, eh, my dear conspiracy theorists? But fine, if that's what we want. What's left now is that the European leaders should find the guts to make the big leap and convince their constituents that this is the best option, and persuade them to approve it. Because if they fail to do that, it'll inevitably backfire. And also they shouldn't forget for a minute that while they're thinking of how Europe should be looking like tomorrow, first they'll have to find a way for it to survive the crisis today.

Ps. Meanwhile, tonight's European Cup final between Spain and Italy is a small distraction from these troubles. Ironically, the teams of two failed countries will fight to bring some pride and consolation home to their troubled fans. So there's a lot at stake even in soccer! ;)

Comments

[underlankers.livejournal.com]

If the Eurozone was ever going to work, a full-scale political union of this sort had to happen. It never pays to gamble that tens of separate governments will all see their common interests in common policies where economics is concerned. Reality has shown over and over again that it never works.

[mahnmut.livejournal.com]

Napoleon would've been extremely happy with this development.

[peamasii.livejournal.com]

Political union is irrelevant to the debt crisis in Europe today. Granted, fiscal union might bring the countries closer together politically. But regardless of how much politics are aligned, the current crisis is made of many governments' debt, and that will not be resolved by more politics, in fact it cannot be resolved at all. Furthermore political union would be undesirable for many nations within the EU who are long-time entrenched democracies, and it would mean a weaker EU overall. What is needed is not political union but a longer-term recovery plan which will allow weak economies to run alongside strong economies without inflicting too much pain through austerity.

[mikeyxw.livejournal.com]

The current crisis is a big mix of stuff, not just debt. Greece certainly kicked things off with a debt crisis, but that shouldn't hide the other problems.

Spain's debt is isn't that high as a percent of GDP, they did have a severe property bust that put their banks in jeapardy however (in addition to having rather unprofessional banks). Italy needs to recover from years of stagnation under Berlusconi. Germany needs to spend more.

Some political unity will probably be necessary if the Euro is going to survive. In order to get any reasonable rate on loans, which will be required to recapitalize Spain's banks, get Italy's economy going, and let Greece hobble along a few more years before they implode, there will need to be a tighter political and fiscal union. The political part will be needed as the EU will start having a say in taxes, health care spending, education spending, and pensions, the things that comprise a national budget and that people care about. This is a big change from the technical details they used to look after and is going to need some political buy in.

[peamasii.livejournal.com]

There are going to be some very quickly growing rifts in european countries if the political decisions are to be made centrally. The nations might want it now but later it will become an untenable arrangement. Better split up the eurozone and allow the noncompetitive countries to set inflationary policies and their institutions to fail when they are not properly managed.

http://blogs.euobserver.com/harding/2012/06/21/the-perils-of-political-union/
http://www.acus.org/new_atlanticist/european-political-union-what-would-it-look

[mikeyxw.livejournal.com]

Well, this is the other option. There are some serious problems in the short term. Leaving aside the poor Greeks decent into third world nationhood, there would be quite a bit of Europe that could find itself unable to function. I'm not sure there are some good examples to draw from.

[peamasii.livejournal.com]

The national governments need to make their own decisions, that can't be centralized to a brussels bureaucracy. You can't expect a country like Finland to adopt the same education policies as Portugal might. I certainly don't see giving up the liberties and prosperity of 12 eurozone countries so that the remaining marginal 5 countries can be pulled out of their debt mess.

[policraticus.livejournal.com]

When you are going the wrong way, or better yet over a cliff, stopping, turning around and going back is not a bad thing to do. Moving forward, on the other hand....

[ddstory.livejournal.com]

Those are the only two options? Forward/backward is the only direction you use? What about making a sharp turn to either side? ;)

[policraticus.livejournal.com]

That really depends on the destination, doesn't it? Right turn toward monarchy, Left turn toward fascism? The way I see the EU, as a practical matter, is that they can stand pat, move to full political union, or dissolve back into something more like the old Common Market. I'm sure there are a ton of caveats, gradations, quibbles and compromises you can imagine but in broad strokes, there it is.

[the-rukh.livejournal.com]

Strange, and here i was going to put go to tea on the right and have a fig newton on the left turn.

[policraticus.livejournal.com]

Choosing is hard.

[the-rukh.livejournal.com]

We could compromise and have one side good and the other side bad. One side could be cake and the other side could be OR DEATH.

[policraticus.livejournal.com]

There is rarely a good choice and a bad choice.

The choice is generally between death and taxes.

[the-rukh.livejournal.com]

You're such a negative nancy.

[policraticus.livejournal.com]

I prefer to think of myself as a realistic richard.

[the-rukh.livejournal.com]

Not to get too philosophicles on you but a person can be a realist without only focusing on the negatives. Look at death for instance. No more taxes, yay! Its not all bad.

[policraticus.livejournal.com]

I think if you are being realistic, you have to look at both negatives and positives and weigh the benefits and the costs. A realist who focuses only on the negatives is a pessimist.

That being said, the EU is fucked beyond all recall.

[policraticus.livejournal.com]

[peamasii.livejournal.com]

Stopping and turning around would mean relinquishing the euro, which TBH a lot of europeans think is a better solution at this point than further integration. The risks of forced political and fiscal integration are too complex to even be properly estimated.

[policraticus.livejournal.com]

I agree with those lot of Europeans. Sadly for them, there are also a lot of Europeans who cannot imagine that the entire 50 year project of creating a "United States of Europe," has been a complete boondoggle. And they, not the skeptics, are in charge of the ship of state.

[peamasii.livejournal.com]

Bureaucracy can be a very lucrative business (while it doesn't actually produce anything of value).

[policraticus.livejournal.com]

Are you saying red tape has no value?!

Heresy!!

[mikeyxw.livejournal.com]

It goes further.

He's worried about a loss of soverignty at the state level and also disgusted at seeing more and more tax dollars being taken from those earning them and given to those who are unable to. The complaint about bureaucracy is just the cherry on top.

[policraticus.livejournal.com]

He wants local control!? Personal responsibility? Liberty???

Doesn't he know that the boffins in DC know what's good for us??

[dwer.livejournal.com]

you're right. Austerity has clearly failed (in Ireland, three times)!

Time for going in the other direction.

[policraticus.livejournal.com]

Who said anything about austerity? Breaking up the Euro-zone would free countries like Spain and Italy to go full Krugman and spend, spend, spend. Then, when the south of Europe is a worker's paradise of full employment, free health care and 4 month vacations, the grim, shrunken and wasted inhabitants of poor benighted Germany will pick wistfully through the ashes of their once great economic juggernaut and think, "if only we hadn't tried to live within our means..."

[peristaltor.livejournal.com]

It's a battle between long-term vision and short-term fear.

I'm not so sure. It depends upon which vision for either long or short term fear we look at.

Germany has seemingly mis-focused the lesson of their own recent past on mere hyperinflation. There are many economic means to piss off the electorate of any given country, many ways to breed the next Hitler or Mussolini or Franco. To draw a medical analogy, Germany is so concerned with bleeding from a head trauma that they insist on choking the patient with a torniquet around the neck.

During the negotiations at the Treaty of Versailles, John Maynard Keynes warned the Allied representatives not to inflict overly punitive reparations on Germany. They didn't listen. Later, Keynes wrote in The Economic Consequences of Peace that such reparations would crush the German economy at the most basic levels, demoralize and later piss off the sufferers, which would later instill the desire to get back at the Allies. He wrote, "But who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?"

He was right. The Germans chose Hitler as their misfortune escape plan. How ironic would that be, for Germany's currency concerns to give rise to the next fascist threat outside its borders?

[peamasii.livejournal.com]

Exactly, the price for enforcing a political and fiscal union will cause many more troubles than even the current crisis can attest to.

[underlankers.livejournal.com]

And then Germany wound up divided into two satellites that were together smaller than the republic Hitler hijacked. So as an escape hatch Hitler was not a very good choice. ;P

[fierceleaf.livejournal.com]

One should blame the Eurozone. Several completely different economies and one central bank to rule them all.

[ddstory.livejournal.com]

In this game of thrones, you either win... or you die!

[mikeyxw.livejournal.com]

I'd say Monti has it right, as much as this alternative is better than limping along from summit to summit and crisis to crisis. It is really time for the EU's politicians to either step up and create a fiscal union, with the loss of sovereignty that will require, or make plans to split the Euro. Perhaps they think that if they muddle along for long enough, those alternatives will become less painful.

It is telling that Monti, the technocrat, is willing to say this but the more political minded leaders are not. I suspect this is, unfortunately for the Euro, pretty much going to define the course going forward. Germany is clear they don't want to guarantee the debt for a bunch of unreformed economies, the Southern Europeans are pretty clear they see German generosity as the way forward.

The fundamental problems still remain. A bunch of countries with different levels of competitiveness are tied to the same currency. In the past, the different currencies would adjust, sometimes painfully, to even things out. Now, a new mechanism must be found, the choices are reform, austerity, or generosity from the more competitive economies to the less competitive ones. These will be long term strategies, not quick fixes. Needless to say, I’m kinda pessimistic.

[peamasii.livejournal.com]

The politicians would be happy to do it, but the populations not so gladly! The majority of central and northern europeans does NOT want to give up national sovereignty and policies in exchange for european guarantees. In fact we are tired of guaranteeing for the countries that have uncompetitive economies and incompetent governments.

[mikeyxw.livejournal.com]

Not sure, Mrs. Merkel seems to be a bit of a sceptic. Anyhow, there probably isn't an option that the majority of central and northern Europeans would like.