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The EU Titanic Sails On...
By Srdja Trifkovic
Wednesday, 24 Nov 2010
The people of the Western Balkans, where the mantra of European Integration is still tirelessly parroted by the political class, should take note of the latest financial crisis to hit the EU. The Brussels-registered “Titanic” is performing, yet again, in line with the Union's incurable structural deficiences.
For the time being the crisis has been contained. A team of officials from the European Commission, the European Central Bank and the International Monetary Fund came to Dublin with an offer that could not be refused. Ireland is now a state with its sovereignty as limited as that enjoyed by the German Democratic Republic before November 1989. We are hearing many reassuring statements by various EU bureaucrats and Bundesbank officials that the Eurozone is safe and sound.
The underlying structural problems of the euro and of the European Union project itself remain unresolved, however. It was Greece yesterday, it is Ireland today, and with Spain, Portugal, and possibly even Italy, the question is “when,” rather than “if.” The Euro-IMF bailouts will be repeated, with ever greater losses to private bondholders, ever greater hardship to the inhabitants of the Eurozone PIGS (Portugal-Ireland-Greece-Spain), and ever-receding prospect of the experiment’s long-term viability.
The collapse of the single European currency was averted five months ago, following the Greek rescue operation and the establishment of the €440 billion European Financial Stabilization Facility (EFSF). The euro went up from $1.19 in June to $1.41 in late October. Yet on November 16 EU Council President Herman Van Rompuy admitted that the EU was “in a survival crisis” and its future uncertain. His words were tantamount to an SOS signal directed at Germany, and German Chancellor Angela Merkel responded reassuringly by declaring that “if the euro fails, then Europe will fail, and with it fails the idea of European values and unity.” Her words reflected the consensus in Berlin and Frankfurt that the cost to Germany of another rescue is well worth the benefit of bringing the Union ever more tightly under its fiscal, economic, and political control. In other words, the Germans remain committed to an ever-tighter Union, controlled by themselves, and they are willing to endure financial costs in achieving it.
As the Financial Times has noted, the result will “give an official EU imprimatur on Europe’s dirty secret: public treasuries will do anything to make private bank creditors whole.” Their ability to continue doing so indefinitely is far from certain, however. The following day the FT warned that the Irish crisis may herald further “contagious defaults”: there is but “little hope that the other ticking bombs with which Europe’s economies are riddled are going to be disarmed in time.”
The process will continue until the euro is taken apart, or until the four PIGS are expelled from the Eurozone. This may not happen in the next few months but it can hardly be avoided. It is noteworthy that, unlike the Greeks, the Irish had enjoyed two decades of strikingly successful growth before 2008. Its government tried to behave responsibly (unlike its counterparts in Athens) and applied painful austerity measures. As Matthew Lynn of Bloomberg’s London bureau explains, the problem wasn’t Ireland—it was the euro: “The economies are just too different to allow a single central bank to manage all of them. Interest rates are always wrong everywhere. How that expresses itself varies. In Greece, it was a fiscal crisis. In Ireland, a banking collapse. In Spain, a construction bubble that burst. In Germany, a massive trade surplus. But, like a river looking for the sea, it always comes out somewhere. This crisis will keep moving from country to country. The only permanent fix is splitting up the euro into more manageable currency areas.” Until the euro area’s leaders recognize that simple truth, Lynn concludes, every bailout they come up with is only going to shift the attacks elsewhere.
The continued will of the German political and financial establishments to continue maintaining and extending their dominance over “United Europe” as a substitute for the failed past attempts at open continental hegemony is the key. Even if the political will of the country’s elite class remains strong, Germany’s ability to underwrite the bailouts will be severely tested if Spain and Portugal join the fray some time in 2011.
Last Sunday the Spiegel magazine reported (“Can the Euro Still Be Saved?”) that Chancellor Angela Merkel is under increasing pressure from Germany’s public opinion and from the parties forming her ruling coalition to stop equating the survival of the euro with the future of the EU itself.
In addition, the Federal Constitutional Court in Karlsruhe is currently reviewing several complaints that tens of billions of euros in aid for Greece, and the subsequent establishment of the European stabilization fund, have violated Germany’s constitution. According to the Center for European Politics in Freiburg, the use of EU money to support rescue packages is also illegal under Article 122 of the Lisbon Treaty which says that “the Union shall not be liable for or assume the commitments of central governments… or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.” As Ambrose Evans Pritchard explained at the time, this does not necessarily prohibit EU states joining together voluntarily to rescue a country in trouble—but it is another matter to use EU money itself for this purpose.
One of the suits was filed by five venerable legal and financial experts, including the hugely influential former CEO of Thyssen, Dieter Spethmann. They maintain that the erosion of German state finances “strikes a blow at the constitutional foundations of our state and our society.” It is contrary to the true spirit of Europe, with its diverse roots and cultures, and “trifles with the future of our children and grandchildren.” To fight this travesty does not signal a return to outdated nationalism, they wrote; “As citizens we have a right to demand that our government abides by its sworn oath to protect the German nation against threats.”
On November 19 the five published a full-page advertisement in the Handelsblatt in the form of an open letter to the ruling Christian Democratic Union, which had just completed its annual congress. The financial burden of Germany’s own debt and that of its insolvent partners, they warned, is forcing the German economy to its knees—yet the CDU is complacently acting under the slogan “business as usual”:
The major concerns of the citizens have not been addressed: our rising debt burden, the financial obligations for insolvent member states of the Euro-zone, and the future of our currency. The government owes us an answer to the question of how they will fund our pensions, after it has been obliged to cover the debts of insolvent governments. Chancellor Merkel has stifled any debate by declaring that her policy has no alternative.
It is time that the CDU took note of our citizens’ concerns seriously, Spethmann and others went on, and listed seven fundamental falsehoods (“life lies,” Lebenslügen) perpetrated by the leadership:
First Lie: “One-time actions” (rescues) do not jeopardize the sustainability of the eurozone. In reality, the level of debt in all countries has increased significantly, in some so dramatically that they are facing bankruptcy. The Irish budget deficit in 2010 is 32% (!) of the gross domestic product. According to the IMF calculations in 2015 the Greek debt will rise to 158% of the GDP, sinking the country into the swamp of debt.
Second Lie: The euro gives an impetus to competition and accelerates the reform process. The truth: The so-called PIIGS countries—Portugal, Ireland, Italy, Greece and Spain—have taken advantage of the euro dividend in the form of low interest rates inherited by Germany, not to modernize their economies but to indulge in excessive public and private consumption. They remain internationally uncompetitive; a crack runs through the euro-zone.
Third Lie: When the euro was being introduced, the German people had been promised a stable community backed by the no-bail out clause: neither the EU nor any Member State would be liable for the debts of other Member States. The truth: The provisions in the Lisbon Treaty have been broken in Greece, are about to be violated in Ireland, with Portugal and Spain coming next, ensuring the use of public funds to cover private debts. Temporary rescues are made institutionalized.
Fourth Lie: The Chancellor is taking resolute action in dealing with government budget deficits. The truth: profligate violators will remain unpunished.
Fifth Delusion: Without monetary union the exchange rates would run amok and the European Union would be broken apart. The truth: Without monetary union we would have a better balanced exchange rate mechanism which would reflect different countries’ economic efficiencies and fiscal policies. What we have instead is the euro-zone divided into a strong and a weak bloc. The choice is clear: either the euro area will follow the economic reality and split up, or the surplus countries will have to go on funding the permanent deficits of the PIIGS.
Sixth Delusion: The German economy will profit from the euro, because our export-led growth had been slowed down by Deutschmark appreciation. In reality, the more often this delusion is repeated, the louder is the response from the deficit countries: “If the Germans benefit from the euro, then they should also pay accordingly!” The strength of our currency had always been an expression of our economic power and a major source of our prosperity. We are now burdened by the currency union, and this source of strength has dried up.
Seventh Delusion: We must save the euro so that the European Union survives, and this policy of the Federal Government has no alternative. In reality, however, no currency reflects Europe’s highest values: freedom, justice, democracy, civil society, monetary stability and social market economy. Europe lives by these values, the five signatories concluded, and the goal of European integration should be to preserve and enhance them—a task no longer compatible with the maintenance of the euro-zone.
This is the clearest statement to date of a rising sentiment within Germany. More than half of its people want the Deutsche Mark back. It was a real currency, like the Swiss franc still is today, and unlike the fiat currencies controlled by the Federal government here and the Federalists across the Atlantic.