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Monday, June 18, 2012

EU leaders pretend to see the light


Special to The Japan Times

HONG KONG — The endless euro soap opera has run helter-skelter through new twists and turns: Spain accepted a €100 billion bailout package to fix its rotten banking system, while Prime Minister Mariano Rajoy pretended it was only a line of credit; Cyprus suggested it might want money; Spanish and Italian bond rates rose again; and several European leaders declared that only European integration will fix the problems.

Don't worry: The soap opera will run and run with nail-biting twists and turns over whether Greece will jump or be pushed out of the euro, whether Spain has done enough, when Italy's vulnerability will be recognized, and who will blink first, France or Germany. The show will run and drag down the rest of the world until Europe rediscovers growth, and there is no clue that anyone yet has a clue about how to accomplish this.

Renewed emphasis on European integration is interesting. It is not clear yet that the leaders have converted to the European religion or whether they are mouthing platitudes because they realize they have messed up their economy and that of the world.

"The euro has won," declared Rajoy after the bailout.

A European "political union" is needed, said Angela Merkel, Germany's chancellor.

Jose Manuel Barroso, the (unelected) president of the European Commission, predicted a banking union, including a supervisory body with powers over all European Union lenders, would be created in the next year.

Christine Lagarde, managing director of the International Monetary Fund, called for "more Europe, not less," adding that a single European financial market needs to have a more integrated framework.

So, are a European fiscal union and European banking union in prospect, and will "political union," a real united Europe, soon follow? There is a lot of St. Augustine — "Lord, make me chaste, but not yet" — in the European aspirations: No one envisages European union in their political lifetime.

Merkel backed away from any immediate union, calling for a "step by step" approach of ceding national powers to Europe, saying "I don't think there is a single summit at which the big design will appear." Therein lies danger. The EU, and more particularly the euro, already illustrates the problem of what happens when a committee of bureaucrats tries grand design.

Merkel's idea of going step by step in having countries cede powers to the eurocracy is a recipe for disaster — especially if the steps are in reaction to the twitches of the markets rather than as part of a properly considered plan of action.

The biggest single problem of Europe today is the democratic deficit. Who elects the eurocrats? Whom do they represent or speak for? Who pays for their well-meaning but often idiotic efforts to create standardized rules and regulations?

An old chestnut worth repeating is that the U.S. Declaration of Independence is 1,300 words, while EU regulations for the sale of cabbages take 26,911 words.

When push came to shove, the European leaders chose via the Treaty of Lisbon, effective 2009, to create another layer of unelected apparatchiks with a full-time president of the European Council called Herman Van Rompuy. He and Catherine Ashton, whose official gobbledygook title is High Representative of the Union for Foreign Affairs and Security Policy, have been described as "garden gnomes," because they are undistinguished and unelected. In March 2012, without fanfare and without election, European leaders gave Van Rompuy another 2½-year term.

The original European Coal and Steel Community of 1952, which led to the European Economic Community (or Common Market) of 1957, was a compact body uniting France, Germany, Italy and the Benelux countries, which was Robert Schuman and Jean Monnet's answer to the horrors of two world wars. Britain stood cheering on the sidelines at the infant development of this united states of Europe.

By the time Britain joined in 1973, after Charles de Gaulle was no longer around to cast his veto, it already occupied a semi-detached position, happy to enjoy the advantages of a common trade market, but unwilling to sacrifice political autonomy. Britain remained stubbornly semi-detached as the fall of the Berlin Wall and collapse of the Soviet empire allowed a rapid eastward expansion of the EU.

The 27-member EU and, even more so, the 17-member eurozone remain an awkward community, linked by more than a thousand years of Christian inheritance and schism, and divided by hundreds of years of warfare, and in the case of eastern Europe, decades of division by the Iron Curtain. There is a European framework with thousands of eurocrats able to set annoying eurocratic rules, but no true European political, economic, fiscal or banking union, since the real powers are still held by national governments.

It would be somewhere between impossible and economic Armageddon to dismantle the euro and go back to national currencies. Even the most skeptical economists see a hard northern euro surviving — unless of course Germany opted out first. The departure of Greece would cause chaos, and further fragmentation would shake the EU to its foundations. It is not too much of an exaggeration to see the dithering European "leaders" bringing back memories of those of 1914 who took the world to a stupid war.

The smug British should not rejoice at the discomfiture of the euro. As Will Hutton wrote, perhaps optimistically, in The Observer, "The EU that survives with the euro will be the center of the European order. It will set interest rates and fiscal policy that will be the benchmark for every other European country."

Rather than a Switzerland, Hutton predicts that a Britain outside the euro risks becoming a greater Guernsey, with the pound as a minor reserve currency subjected to systematic overvaluation, while remaining British industry flees to Europe or low-cost Asia. Japan should consider the parallels for the yen.

British euroskeptics correctly point out that the driving force and inspiration for politics is national: France, Germany, the Netherlands, the United Kingdom — even England and Scotland, but not Europe — exercise voters' imaginations. This might change if electorates had a choice, voting for a president of Europe with pan-European powers, not a cipher like Van Rompuy or Barroso.

But would the national elites of Europe be prepared to surrender their powers to the whims of a European electorate? More to the point, are Berlin, Merkel and the Bundesbank prepared to concede that they may have to give as well as to take?

Germany, with 81 million of the 500 million people in the EU, and the 317 million in the eurozone, clearly calls the economic shots, and Germans are tough negotiators unwilling to sacrifice a jot or tittle or comma of their negotiating position.

How many millions have to lose their jobs to the vicious fixation with austerity that is threatening not merely Europe but the world? Austerity without growth creates more debts and a bigger black hole.

Marshall Auerback, a portfolio strategist and hedge fund manager, pointed out the enormity of demands for a "fiscal compact." It would mean that deficit countries, which include Spain, Italy, Portugal Ireland, France as well as Germany itself, would have to move from deficit to surplus. This would lead to a deep recession of at least minus 4.5 percent in eurozone "growth."

As Auerback says: "When a banking crisis is in full swing, the periphery is in free fall, U.S. growth is teetering, China is slowing, engineering such a recession via this piece of 'legislation' is the macroeconomic equivalent of committing suicide."

Kevin Rafferty is editor in chief of PlainWords Media.


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