Ouch! This one hurts! At least for the political and economic establishment of Europe who are currently engaged in a massive PR campaign to strengthen the European union – in both monetary and political terms. Financial Times commentator Gideon Rachman, however, provides a complete different view.
“There is not a strong enough common political identity in Europe to support the single currency.”
Gideon Rachman
Well, what Rachman points out, the EconoTwist’s have been indicating since the global financial crisis started to affect Europe, late 2008. Europe is not USA, it can never be, the core of the European culture is diversity. It has always been – for good and for bad – and it will stay that way for all forseeable future.
Take a look at the history; have a German-Franco alliance ever lasted for more than a couple of months?“The European Union is the result of – in this bloggers opinion – a well-meant, but unrealistic, political idea of equality and cohesion. An ideology that in theory is a very nice thought, but in reality very hard to achieve.”
As the Greek crisis worsens, voices are being raised demanding new and more radical approaches.
Forget the sticking plaster bailouts and slice-by-slice austerity packages. The ultimate solution to the euro zone debt crisis is a political union!
Okay. Enough of my self-righteous I-told-you-so remarks – here’s Gideon Rachman:
Last week Nout Wellink, the Dutch central bank governor, became the latest senior figure to float this idea, when he argued that the euro zone needs “an institutional set-up that has characteristics of a political union”.
According to Mr Wellink, “a European finance ministry would be an important step in the right direction.”
Jean-Claude Trichet, the head of the European Central Bank, has also backed the creation of a European finance ministry – which in turn implies a much larger central budget and more decisions on spending and taxation taken in Brussels, rather than in national capitals.
Those who argue that “political union” is the solution to the current crisis seem to believe that Europe’s problem is institutional.
Unlike the US, the euro zone does not have the political institutions to back up a common currency.
But if Europe was just equipped with a finance ministry or the facility to issue euro zone bonds or to tax citizens directly, everything could be fixed.
This is a profound misdiagnosis of the crisis. The real problem is political and cultural.
There is not a strong enough common political identity in Europe to support the single currency.
That is why German, Dutch and Finnish voters are revolting against the idea of bailing out Greece again – while Greeks riot against what they see as a new colonialism imposed from Brussels and Frankfurt.
To argue that even deeper political integration is the solution to this mess, is like recommending that a man with alcohol poisoning should treat himself with a more powerful brand of vodka.
It is important to understand that the origins of the current crisis lie precisely in the dream of political union in Europe.
For the true believers, currency union was always just a means to that greater end.
It was a way of “building Europe.”
If bits of the construction were missing – such as a European finance ministry – they could be added later.
Helmut Kohl, the chancellor of Germany in the early 1990’s, was so convinced of the need to bind a united Germany into the European Union that he was prepared to press ahead with the euro, in the face of 80 per cent opposition from the German public.
At a seminar in London last week, Joschka Fischer, a former German foreign minister, who is one of the boldest advocates of deeper European unity, was unrepentant in defending this elitist model of politics. He insisted that most important foreign policy decisions in postwar Germany had been made in the teeth of public opposition.
“It’s called leadership,” he explained.
Such leadership is all very well, if it is vindicated by events.
However, if elite decisions go wrong, they create a backlash – which is exactly what is happening in Europe now.
German voters were told repeatedly that the euro would be a stable currency and that they would not have to bail out southern Europe. They now feel betrayed and angry.
Greek, Irish, Spanish and Portuguese voters were told repeatedly that the euro was the route to wealth on a par with that of northern Europe.
They now associate the single currency with lost jobs, falling wages and slashed pensions. They too feel betrayed and angry.
As a result, the space for political manoeuvre is narrowing on either side of Europe’s creditor-debtor divide.
The Greek government can barely muster a majority to force through its latest austerity package.
The German government of Angela Merkel is losing support and is facing an increasingly Eurosceptic public.
Meanwhile, radical anti-European parties are on the rise in other creditor nations, such as Finland and the Netherlands.
Most European leaders still blithely assert that they will do whatever it takes to save the euro. But these leaders operate in democracies. If they take decisions that voters simply cannot accept, they will lose their jobs.
The relations between the people of the EU are cracking under the strain of the euro crisis.
In Athens, demonstrators wave EU flags with the swastika imposed upon it.
In Germany, the euro crisis has made it permissible to denounce profligate and corrupt southern Europeans.
A single currency that was meant to bring Europeans together is instead driving them apart.
The politics of fiscal transfer are tricky, even in long-established nation states.
Think of the strains between northern and southern Italy; or between Flanders and Wallonia in Belgium.
But the tensions are far worse in a newly created euro zone of 17 nations with different histories, cultures and levels of economic development.
Simply ignoring this – and trying to press ahead with a deeper political union – would invite an even more dangerous backlash in the future.
But if political union is not the answer to Europe’s problems, what is?
There are two possible solutions.
The euro zone leaders might somehow patch the current system up. Or the weaker members of the currency union – above all, Greece – could leave.
That process would be chaotic and dangerous.
But Greece, as it stands, is a demoralised country that has lost the sense that it controls its own government.
Leaving the euro might just be the beginning of a national regeneration.
(Finacial Times. June 21. 2011)
Still; 50 CEO’s of the biggest companies in Germany and France have launched their pro Euro campaign in the press of both countries.
They are placing full-page ads in German papers, under the headline “The Euro is necessary” (including a short text explaining why).
Le Monde prints the text as an Oped (free of charge, we presume) while the German papers print it as a commercial ad.
Mass circulation daily Bild has an interview with Gerhard Cromme, head of the supervisory board of ThyssenKrupp and one of the initiators of the campaign, in which he warns a failure of the euro would have “fatal consequences” for all of us.
Frankfurter Allgemeine Zeitung has a story in which companies that are owned by their bosses (not publicly traded companies) criticize the PR campaign by complaining that it encourages the German government to waste the taxpayer’s money on Greece.
….I’m trying really hard to not make any further comments…..
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- EU Can’t Even Agree On Date For Top Leader Summit
- Why The Monetary Union Is A Failure
- Time To Get Serious About A Real European Union?
- Wolfgang Munchau: This Is a Political Crisis
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Related articles:
- How the Euro Became Europe’s Greatest Threat (and what Ireland has to fix) (politics.ie)
- Can Europe rescue its single currency? (independent.co.uk)
- Sarkozy: “Without the euro there is no Europe…” (sluggerotoole.com)
EconoTwist's 
Time For Some Uncommon Sense
According to Albert Einstein insanity consists of doing the same thing over and over again and expecting different results. By that definition, the third bailout of Greece should be classified as such. Martin Wolf at the Financial Times calls for common sense when dealing with Greece in today’s column.
“One cannot make the incredible credible by endless delay. One can only make the recognition of reality more painful when it finally comes.”
Martin Wolf
The only justification for providing another bailout package for Greece is that it is needed to play for time, prominent commentator Martin Wolf at the Financial Times points out in today’s column. Adding that this is a bad strategy, and that something more radical is required.
“The question about the prospects for Greece is not whether the country will default. That is, in my view, as near to a certainty as any such thing can be. The question is whether a default would be enough to return the economy to reasonable health. I strongly doubt it,” Mr. Wolf writes.
I belive his doubt is shared by many. The country seems just too uncompetitive, the damage too severe.
“A default is a necessary, but not a sufficient, condition for a return to economic health.”
However, as Martin Wolf rightly points out, Greek‘s performance under the programme agreed with the International Monetary Fund in May 2010 has not been bad.
But it has failed to return the country to solvency.
The spread between Greek and German 10-year bonds has gone from 460 basis points (4.6 percentage points) after the programme was announced to 1,460 basis points.
And much of the same has happened to Ireland and Portugal, even Spanish spreads have reached 270 basis points.
Greece, Ireland and Portugal have no chance of being able to borrow in the markets at rates they can afford in the foreseeable future.
But what must be most frustrating for those involved is that these jumps in spreads have occurred despite reasonable performance.
In the original programme, Greek gross domestic product was forecast to fall by 4 per cent in 2010 followed by 2,6 per cent in 2011.
In the March 2011 review, this had turned out to be only a little worse, at 4,5 per cent and 3 per cent, respectively.
The general government deficit was initially forecast at 8.1 per cent of GDP for 2010 and 7.6 per cent for 2011.
This had only risen to 9,6 per cent and 7,5 per cent, respectively, in the March 2011 review.
Even on the current account deficit, the March review’s 10,5 per cent for 2010 and 8,2 per cent for 2011 was a little worse than the initial forecasts of 8,4 per cent and 7,1 per cent, respectively.
Unfortunately, this does not nearly enough.
Martin Wolf identifies four reasons:
In the March review this had already jumped to 159 per cent.
Second, the economy looks extraordinarily uncompetitive.
The most telling indicator is the combination of the still huge current account deficit with a deep recession.
This external deficit cannot now be financed in the market.
Third, prospects for the current account deficit are seen to be deteriorating sharply: initially, the IMF forecast the current account deficit at 2.8 per cent of GDP in 2014; in the March review, it forecasts this at 5.5 per cent of GDP.
Fourth, without a surge in exports, it will be impossible to return to sustainable growth. But such a surge will require a big reduction in nominal costs.
If this is feasible at all, which I doubt, this will raise the ratio of debt to GDP still more.
It rests on awareness of two facts: the massive indebtedness and the lack of competitiveness.
The fact that the Greek people are unwilling to bear the pain merely makes the already implausible quite inconceivable.
If this was the state of, say, Finland, one might just believe it.
Rightly or wrongly, few believe that today’s Greece is another Finland.
I see four arguments.
The first is that the strategy conceals the state of private lenders. It is far less embarrassing to state that one is helping Greece when one is in fact helping one’s own banks.
The second argument is that the strategy of delay allows other countries to get their houses in order before a Greek default and perhaps a disorderly exit from the euro. Should those events occur now, it is feared, there will be runs from sovereign debt and the banks in fragile countries, with devastating results.
The third argument is that it is possible that Greece will come good. Giving the country the maximum support makes that at least feasible.
The fourth argument is that Greece is forecast to run a primary fiscal deficit (before interest payments) of 0.9 per cent of GDP this year, by the IMF. Thus, the net transfer of resources is into the Greek public sector. So long as this is the case a default makes no sense.
These arguments are persuasive roughly in ascending order.
The first argument was used to justify the policies of denial that gave Latin America its “lost decade” in the 1980’s. It seemed immoral then and seems equally immoral now. Losses should be recognised and banks recapitalized.
The second argument assumes that the Greek position is still a mystery. It is clear, however, that flight is already under way from other fragile jurisdictions.
The third argument is not ridiculous, but such a happy outcome seems implausible, given the situation in which Greece finds itself.
The last argument is right. But it is one for a brief delay, not for struggling forever. When an outcome is inevitable, it is necessary to plan for it.
In this case, that outcome seems to most informed observers inevitable.
The best policy is to act pre-emptively.
One aspect of such pre-emption would consist of acting to shore up other fragile euro zone members and financial systems more strongly than now.
In at least one case, Ireland, that might require debt restructuring.
This will also surely require a further move toward a euro zone wide financial system, with matching fiscal support. Yet the principal requirement now is to recognise unpleasant reality.
(More columns at www.ft.com/martinwolf)
Straight to the point, as usual when it comes to Martin Wolf’s commentaries and analysis.
“One cannot make the incredible credible by endless delay. One can only make the recognition of reality more painful when it finally comes,” he concludes.
Point being: The time has surely come to recognise the reality of the Greek predicament and act at once on the wider ramifications for its partners.
Well, the time has not only come to realize the reality: in this bloggers opinion that time is long overdue!
“Time for Common Sense on Greece,” the Financial Times writes.
With all due respect, Mr. Wolf, that ship sailed a long time ago.
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