Thursday, November 27, 2014

The Erosion of Europe

BERLIN – Just weeks ago, the worst of the financial crisis in Europe seemed to be over. Stability seemed to be returning. But appearances proved to be deceptive. A minor problem (at least in scale) like Cyprus, when combined with an almost unbelievable degree of incompetence among the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund), was enough to turn a molehill into a mountainous crisis.

While markets remained calm, the Cyprus crisis revealed the full extent of the political disaster that the eurozone crisis has wrought: the European Union is disintegrating at its core. Europeans’ current crisis of confidence concerning Europe is far more dangerous than renewed market anxiety, because it cannot be overcome with another liquidity injection by the ECB.

Europe’s old political order was based on competition, mistrust, power rivalries, and, ultimately, war among sovereign states. It collapsed on May 8, 1945, and was replaced by a system based on mutual trust, solidarity, the rule of law, and compromise. But, with the crisis eroding these foundations, trust is giving way to mistrust, solidarity is succumbing to ancient prejudices (and even new hatred between the poor south and the rich north), and compromise is being overwhelmed by diktat. And Germany is once again at the center of the process of disintegration.

That is because Germany, by far the EU’s strongest economy, has enforced a strategy for overcoming the eurozone crisis that worked for Germany at the beginning of the millennium, but under completely different internal and external economic conditions. For the distressed southern European states, the German-backed mixture of austerity and structural reforms is proving fatal, because the decisive third and fourth components – debt relief and growth – are missing.

It is only a matter of time before one of the large European crisis countries elects a political leadership that no longer accepts the austerity diktats. Even now, come election time, national governments more or less openly promise to protect their citizens from Europe, because Germany has seen to it that austerity and structural reforms take pride of place in managing the crisis.

The argument that “tough love” was necessary in southern Europe, because nothing there would ever have changed otherwise, has been settled. The love has been very tough indeed, generating rapid economic contraction, massive unemployment (upwards of 50% among young people), and continued fiscal deterioration, owing to rising debt-service costs. Indeed, all eurozone members are now experiencing weak economic growth, if not recession.

What does Germany want? A German Europe would never work, and the country’s political class lacks both the courage and the determination to pursue a European Germany. So, does Germany want to hold together the monetary union and thus preserve the EU, or will it allow dithering and a lack of vision to hasten the erosion of Europe’s foundations?

In this crisis, intention takes a back seat to action (or lack thereof). The International Herald Tribunerecently quoted Winston Churchill: “It’s not enough that we do our best; sometimes we have to do what’s required.” That is precisely the order of the day in Europe and the eurozone.

What needs to be done has long been clear. The price of the monetary union’s survival, and thus that of the European project, is more community: a banking union, fiscal union, and political union. Those who oppose this because they fear common accountability, transfers from rich to poor, and a loss of national sovereignty will have to accept Europe’s re-nationalization – and thus its exit from the world stage. No alternative – and certainly not the statusquo – will work.

It has become common knowledge in Europe that the ongoing crisis will either destroy the EU or bring about a political union, and that, without a solidarity-based solution to existing debt and a partial mutualization of new debt, the euro cannot be saved. Such steps will make far-reaching transfers of sovereignty unavoidable. Is Germany – or France – willing to do that?

The real crisis of the EU and the monetary union is not financial but political – or, more precisely, it is a leadership crisis. A lack of vision, courage, and strength of purpose is on display in all European capitals, but especially so in Berlin (and on the part of government and opposition alike).

Europe’s national politicians routinely criticize the EU for its lack of democratic legitimacy, yet they bear part of the responsibility for it. Or have pro-Europeans become so faint-hearted and dejected that they prefer simply to hand over the reins to anti-European populists and nationalists? That would be a disaster, because the crisis now runs too deep to be resolved by technocratic means.

Germany is preparing for a national election in which – much like in last year’s French presidential election – the European crisis is to play no part, or at least only a minor one. Both government and opposition believe that it would be better to tell the people the truth concerning the most vital question of the day only after the election (and in measured doses).

Such an outcome would make a mockery of democracy. But things may turn out very differently if the dynamics of Europe’s crisis throw German politicians’ plans into disarray. An unpleasant surprise cannot be ruled out; at this point, it might be Europe’s greatest source of hope.

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    1. CommentedWim Roffel

      "It has become common knowledge in Europe that the ongoing crisis will either destroy the EU or bring about a political union"

      It looks like Fischer has drunk the poisoned Kool-aid of the eurocrats.

      In reality the eurocrats have gone a step too far with their implementation of the euro and need to take a step back. But having pushed through so much in an undemocratic way they are now afraid things might be turned back.

      Far from being a danger this could finally open the door to real democratic European cooperation.

    2. CommentedK Godfrey

      The problem in Germany is that the politics is somewhat trapped by the narrative that has been peddled from the start. See this for an argument as to where electorates have been misled on some key issues.

    3. CommentedCarol Maczinsky

      I strongly dispute that you can have a corrupt, bankrupted tax haven negotiating like a mad berber and still dare to blame the troika for the moderate conditions. All that seems politically convenient but its also means to be completely without backbone.

    4. CommentedAvraam Dectis

      A banking/fiscal/political union would be like getting married to your neighbor because you want to help them. It is a step too far.

      A better solution is a one time noniflationary monetization. It would work ( as briefly as possible) like this:

      1) Declare a Euro zone "Central Bank Dividend" ( CBD ). A CBD is a dividend from the Central Bank allocated to each citizen, but, in this
      case, held by the central bank for debt repayment. Yes, it is printed

      2) Amount: Greek debt is almost 200% of GDP. Per capita GDP is about $27000 so per capita debt is about $50,000. The useful CBD would be $50,000.

      3) Implementation: The ECB would open an account for each euro zone country and deposit $50,000 per citizen. To be paid out only on outstanding debt when requested by the country and only when inflation was below a specific threshold, perhaps 2.6%.

      4) Fairness : Each country in the euro zone would be treated equally because the CBD would be allocated on a per citizen basis for each citizen in the euro zone.

      5) Price: The CBD would only be in force as long as the receiving country was taking measures to ensure future budgets were not excessive.

      So it is possible to make everyone happy by paying debtors in full, avoiding inflation and stopping the Depressions. Perhaps when enough countries threaten Euro Zone secession, they will realize this.

      Avraam J. Dectis

    5. CommentedRichard Gorton

      I respond what will work and what is starting to work in the Eurozone is the diktat money system. The seigniroage, that is the moneyness, of the Milton Friedman Free To Choose Banker Regime, has been one of investment choice, supportied by the fiat money system. But now, with Libealism pivoting into Authoritarianism on May 1, 2013, the world is beginning to be based upon the seigniorage of the Angela Merkel and Olli Rehn Beast Regime, which is one of diktat, supported by the diktat money system.

      Diktat money was born out of the Cyprus Bank Deposit Bailin and issued in Authoritarianism.

      Diktat money is defined as the compliance required, as well as the trust that is engendered, the debt servitude that is enforced, and the austerity that is experienced, such as heavy losses on large bank deposits, levying additional taxes, privatizations, and sale of a country’s central bank’s gold reserves, when sovereign regional sovereign leaders such as Olli Rehn, and sovereign regional sovereign bodies such as the EU Finance Ministers or the ECB, invoke mandates for regional security stability and sustainability.

      Under Authoritarianism, ever increasing moneyness will come from the mandates of regional leaders, such as the EU Finance Ministers and regional bodies such as the ECB, underwritten by Authoritarianism schemes such as regional framework agreements, which will waive national sovereignty and pool sovereignty regionally. The Nordic Latin Divide, that is the Eurozone North South Divide, will be bridged by such agreements, establishing a One Euro Government. While Germans, cannot be Greeks, they will be one, unified as residents of a region of “true European Government” as proposed by Angela Merkel, and reported by Spiegel and others.

    6. CommentedTomas Kurian

      ...that worked for Germany at the beginning of the millennium = but planted the seeds of instability of today.

      That original German strategy was already flowed, unfair and predatory, because it aimed at achieving prosperity at home at the expense of their neighbors. They used wrong, unsustainable economic model, so bitterly similar to quest of Lebensraum.

      Which is so unfortunate and dangerous as well, because we can already see the tensions and hatred it is creating.

      But this does not have to be that way. There are economic models which cancel the need for external trade surpluses as a means of maintaining economic system.

      We can build Europe on mutual cooperation, technology sharing, passing of productivity gains towards people in the form of additional free time instead of unemployment. But politicians needs to be less selfish and more educated, especially in the way economy really works. explains ideas we could build upon transforming the Europe back to its original purpose.

      But one important question remains: Are we speaking about Europe ? ( prosperity and peace for all Europeans ?) If so,I don´t see a place for Chinese competition in it, with their wage levels. If Europe is not a club for Europeans, than it has lost its meaning for good and will disintegrate. Because we cannot compete with China and forcing the Southern states to become competitive again (to lower their wages to the level of Chinese) is not an acceptable solution.

    7. CommentedPaul A. Myers

      Political leaders need to pull together an integrated set of policy proposals that lead to convergence in the intermediate term that would sustain growth. The credibility of such a program is necessary to build the political support to embark on a program of short-term stimulus to re-start growth.

      But short-term money is not going to come unless there is a credible belief in the intermediate term plan.

    8. CommentedJoão Gonçalves

      There is there everything that has to be done.
      Hope that Mrs. Merkel and Mr. Hollande reads it and "do what is required" !

    9. CommentedFrank O'Callaghan

      So the unasked question is; Is Europe worth being part of? Worth how much and to whom?

      The answer to that is what will determine the future.