Europe’s Inevitable Plight
May 1, 2010 · Posted in Foreign Policy
Europe vs America
The failing and fundamentally flawed project called the European Union continues its slow, yet unstoppable, slide toward mad grandeur, imperialism, tyranny, collectivism, and fiscal chaos.
It is now coming to a minor clash between citizens within the individual European countries, and the governments who exploit them on behalf of the EU.
I do not believe that the European Union will get that same kind of free ride that the the growing central US government has enjoyed over the past two centuries. On the contrary, I expect opposition and healthy cynicism toward this ongoing centralization to grow incrementally. In particular the Eastern European nations have had their instructive lessons when it comes to becoming protectorates of an imperialistic and tyrannical force.
The US has had, over the centuries, the advantage of having a large part of public opinion behind the idea of a close union of American states (finding symbolic manifestation and direction in the War of Northern Aggression), an important factor when it came to enabling its central government to grow without major limitations in its way ever since.
This is not so much the case with Europe, at least not yet.
Many people in European countries are rather reluctantly moving along with the developments toward a more centralized union. I remember, growing up in Berlin, when politicians aspiring offices within the European government started the first campaigns for European parliament. People had no way of assigning any relevance to these efforts. What did we care for some guy asking us for his vote so he can pursue a career in Brussels? The detachment of European citizens from the European political process is completely justified.
So long as it didn’t affect Europeans fundamentally in their lives, they sort of acquiesced with this process. Now this is changing. People are beginning to notice that their own hard earned money is on the line to subsidize corruption in other member countries. This sentiment did flare up several times over the past decades, but never came to a culmination in the way that it is now. Populist right wing parties, whom I obviously have no sympathy for in general, have really been the only ones consistently pointing out these problems. So long as mainstream parties don’t pick up on this, I expect the popularity of such extremists to grow over the next 5-10 years.
It is also noteworthy that in the US, individual states (except Vermont) are, by and large, required to balance their budgets:
All the states except Vermont have a legal requirement of a balanced budget. Some are constitutional, some are statutory, and some have been derived by judicial decision from constitutional provisions about state indebtedness that do not, on their face, call for a balanced budget. The General Accounting Office has commented that “some balanced budget requirements are based on interpretations of state constitutions and statutes rather than on an explicit statement that the state must have a balanced budget.”
I would be the last to claim that the US states are a beacon of fiscal responsibility. Many deficits are hidden in the form of substantial public sector pension plans. But as a tendency, existing restrictions provide for fewer frictions between member states.
Such provisions don’t exist in European countries. What does exist is a completely clawless tiger called the “Stability Treaty”. What it basically says is this: “It would be nice if you governments could try not to exceed a budget deficit of 3% of GDP. If you do, we’ll give you a big and instructive wag of the finger!”
This treaty is now, more than ever, null and void, but nobody likes to talk about it. The fact of the matter is that if you violate the treaty you won’t even get a wag of the finger, but you’ll be rewarded with more money! As I said over a year ago:
The 3% ceiling won’t matter anymore from hereon. Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. The Euro will keep taking its beating for it.
And it is precisely this which is currently stirring up the debate within Europe.
Why Do We Have to Pay?
European Central Bank President Jean-Claude Trichet is on a diplomatic mission to Berlin as Germany’s reluctance to bail out Greece helps fan a fiscal crisis now burning around the euro region’s periphery.
Trichet and International Monetary Fund Managing Director Dominique Strauss-Kahn will brief German parliamentary leaders in Berlin around noon today about the $60 billion aid package for Greece, which has met with opposition in Europe’s biggest economy. The joint European Union-IMF package would require Germany to stump up the biggest individual loan to Greece.
“It’s a sales pitch in front of an audience that needs it,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The lawmakers probably need it spelled out that this is not about financing luxury pensions in Greece. Not helping Greece will unfortunately have a direct impact on the euro-area economy and German jobs.”
Standard & Poor’s yesterday cut Greece’s credit rating to junk status and slashed Portugal’s two notches, intensifying a bond market sell-off across the southern euro region amid concern that debt-ridden countries will struggle to refinance their loans. The crisis has highlighted the absence of a common fiscal policy to cement Europe’s monetary union, frustrating Trichet’s efforts to promote a “common destiny” for its 16 members.
‘Why do we have to pay?’
“Why do we have to pay for Greece’s luxury pensions?” Germany’s biggest-selling tabloid newspaper, Bild Zeitung, asked on its front page yesterday. Almost 60 percent of Germans don’t want to help Greece, Die Welt newspaper reported, citing a survey of 1,009 people.
German Finance Minister Wolfgang Schaeuble asked Trichet and Strauss-Kahn to speak with lawmakers to “facilitate direct insight into the actions as they stand.”
Trichet, Strauss-Kahn and Schaeuble will brief reporters on the talks at 2:30 p.m. in Berlin, a finance ministry spokeswoman said. Trichet declined to comment on the S&P downgrades yesterday.
In Greece, Prime Minister George Papandreou will speak around 8 p.m. local time at a conference entitled “Shaping the Agenda: In the face of a crisis for Greece and the EU.”
Trichet, who once called himself “Mr. Euro,” has been powerless to stop the currency’s 12 percent slide against the dollar in the past five months as politicians haggle over aid for Greece. While he presides over interest rates for the region, he has no say over how taxpayers’ money is spent.
Trichet’s appearance with Strauss-Kahn to promote the joint package comes less than two months after he dismissed the IMF’s financial involvement in a rescue package as inappropriate. Trichet argued that money from the fund would show Europe is incapable of solving its own crises.
“Trichet can only give his opinion,” said David Milleker, chief economist at Union Investment in Frankfurt. “The ECB can’t do anything else. It’s up to the politicians now.”
German Chancellor Angela Merkel is facing a crucial state election on May 9, which could explain some of her reluctance to write a check for Athens, said Juergen Michels, chief euro-area economist at Citigroup Inc. in London.
“We’ve never been in a situation like this before so it’s not that unusual to have national interests supersede those of the euro area,” he said.
Merkel drew applause from an audience in North Rhine- Westphalia this week when she said that “Greece must do its homework” before getting any aid.
The problem is the crisis is now rapidly spreading, undermining confidence in the euro and even fueling speculation it could splinter.
“The most frustrating point in all of this is that those who followed the rules must now help out those who didn’t,” Cailloux said.
Portugal, Ireland and Spain are “conspicuously vulnerable” and may need funding, former IMF chief economist and Harvard Professor Kenneth Rogoff said in an interview this week.
Euro-region members are considering holding a summit to discuss releasing aid to Greece, an official from the Spanish EU presidency, who declined to be named in line with policy, said yesterday.
In the meantime, “it’s crucial for Trichet to regain his stature by reminding lawmakers that they are all in the one boat,” said Michels.
Trichet on April 12 said the ECB wants “the governments of the euro area to live up to their responsibility.”
“Their countries share a common destiny,” he said.
Brain bending and fuzzy conceptual nonsense such as the statement from Jacques Callioux is of course completely inevitable. He is doing his job, that’s all and that’s OK. But I hope he doesn’t expect rational individuals to listen to him for a second. There is absolutely no justification for bailouts whatsoever, be it a corporation or, worse yet, a gang of people controlling police, army, and prisons, a.k.a the government.
The German government also held a special session on Greece:
Chancellor Angela Merkel’s Cabinet met to debate help for Greece as Europe’s growing debt crisis tests her refusal to rush German approval of aid.
Key ministers stayed on after the weekly Cabinet session in Berlin today to discuss disbursing Germany’s 8.4 billion euro ($11 million) share of a European Union-International Monetary Fund bailout. A government spokesman declined to provide further details.
Merkel is insisting Greece commit to several years of deficit reduction as a cut in the nation’s debt rating to junk yesterday drove up borrowing costs from Italy to Portugal and Ireland and boosted indicators of corporate credit risk around the world.
Action “has to be done now, has to be done very fast,” Organization for Economic Cooperation and Development Secretary General Angel Gurria said in an interview today with Bloomberg television in Berlin before he was due to meet Merkel. “It’s not a question of the danger of contagion. Contagion has already happened. This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.”
European stocks slid for a second day and the cost to insure against bond losses rose. Greek two-year note yields soared to 21.4 percent. The euro traded near a one-year low against the dollar.
To counter with yet another (German) limb-metaphor (since this seems to be the intellectual level of this debate): When you extend your small finger, people will want your whole arm. This is precisely what we’ll see. Once German taxpayers are on the hook for a Greek bailout, pension recipients in Spain, Portugal, and Italy are going to get in line and we will have the same debates. This is completely inevitable.
How much is needed for Greece?
The IMF says this:
International Monetary Fund Managing Director Dominique Strauss-Kahn told German lawmakers in Berlin today that Greece may need as much as 120 billion euros ($159 billion) in aid, Green Party parliamentary spokesman Michael Schroeren said by phone today.
Our dear friends the bankers are saying this:
European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.
European policy makers continue to play down speculation of contagion, with ECB Executive Board member Juergen Stark saying yesterday that Greece should be seen as a “unique case.” Leaders will wait until around May 10 before meeting again to discuss Greece, EU President Herman Van Rompuy said yesterday in Tokyo. He also said there was “no question” of Greece restructuring its debt.
Some economists are optimistic that market turmoil will ultimately force politicians and central bankers to do what’s necessary to rescue the euro region.
Eric Kraus, a strategist at Otkritie Financial Co. in Moscow, said he’s buying Greek bonds on the bet policy makers will eventually strike back.
“Sooner or later those morons in Brussels and Berlin will realize that they are playing with fire, have already been burned, and will have to stop feeding the flames,” said Kraus, who works at a brokerage part-owned by Russia’s second-biggest bank. “Then we should see a very nice bounce.”
Of course the ECB will say there is no contagion. And of course they are as always 100% wrong. Contagion will spread rapidly.
Irony and hypocrisy will always we so rampant and staggering in disasters such as the one above. Thus Kraus is almost right when he makes a statement like the one above. Only that the morons he is referring to are not playing with fire by not bailing out Greece, but rather by considering that very option. Also, the morons don’t only sit in Brussles and Berlin, they also sit in offices in banks in Moscow and have signs on their desks saying “Eric Kraus”.
Merkel’s language already makes it obvious: Germany will go along with the package to bailout Greece, one way or another. She will sell it as a victory to have put strict requirements on the Greek bureaucrats to pursue fiscal discipline once they have been rewarded for their past indiscipline. This is of course how incentives work in the fantasy land of government officials. On the other hand, every sane individual sees it how it is: as sheer and utter madness.