European Union faces a battle for its very survival
November 18, 2010
The warnings about monetary union should have been heeded, writes Ambrose Evans-Pritchard.
The entire European Project is now at risk of disintegration, with strategic and economic consequences that are very hard to predict.
In a speech this week, the European Union President, Herman Van Rompuy, warned that if Europe's leaders mishandle the current crisis and allow the euro zone to break up, they will destroy the EU itself.
"We're in a survival crisis. We all have to work together in order to survive with the euro zone, because if we don't survive with the euro zone we will not survive with the European Union," he said.
Well, well. This theme is all too familiar, but it comes as something of a shock to hear such a confession after all these years from Europe's president.
He is admitting that the gamble of launching a premature and dysfunctional currency without a central treasury, or debt union, or economic government, to back it up - and before the economies, legal systems, wage bargaining practices, productivity growth, and interest rate sensitivity, of north and south Europe had come anywhere near sustainable convergence - may now backfire horribly.
Jacques Delors and fellow fathers of European monetary union were told by economists in the early 1990s that this reckless adventure could not work as constructed, and would lead to a traumatic crisis. They shrugged off the warnings.
They were told that currency unions do not eliminate risk: they merely switch it from currency risk to default risk. For that reason it was all the more important to have a workable mechanism for sovereign defaults and bondholder haircuts in place from the beginning, with clear rules that establish the proper pricing of that risk.
But no, the EU masters would hear none of it. There could be no defaults, and no preparations were made or even permitted for such a predictable outcome. Political faith alone was enough. Investors who should have known better walked straight into the trap, buying Greek, Portuguese and Irish debt at 25-35 basis points over German Bunds. At the top of the boom, funds were buying Spanish bonds at a spread of 4 basis points. Now we are seeing what happens when you build such moral hazard into the system, and shut down the warning thermostat.
Mr Delors told colleagues that any crisis would be a "beneficial crisis", allowing the EU to break down resistance to fiscal federalism, and to accumulate fresh power. The purpose of European monetary union was political, not economic, so the objections of economists could be disregarded. Once the currency was in existence, EU states would have to give up national sovereignty to make it work over time. It would lead ineluctably to Jean Monnet's dream of a fully fledged EU state. Bring the crisis on.
Behind this gamble, of course, was the assumption that any crisis could be contained at a tolerable cost once the imbalances of the one-size-fits-none monetary system had reached catastrophic levels, and once the credit bubbles of Club Med and Ireland had collapsed. It assumed, too, that Germany, the Netherlands and Finland would ultimately - under much protest - agree to foot the bill for a ''Transferunion''.
We may soon find out whether either assumption is correct. Far from binding Europe together, monetary union is leading to acrimony and recriminations. We had the first eruption this year when Greece's deputy premier accused the Germans of stealing Greek gold from the vaults of the central bank and killing 300,000 people during the Nazi occupation.
Greece is now under an EU protectorate, or the "memorandum" as it is called. Ireland and Portugal are further behind on this road to serfdom, but they are already facing policy dictates from Brussels, and will soon be under formal protectorates as well in any case. Spain has more or less been forced to cut public wages by 5 per cent to comply with EU demands. All are having to knuckle down to Europe's agenda of austerity, without the offsetting relief of devaluation and looser monetary policy.
As this continues into next year, with unemployment stuck at depression levels or even creeping higher, it starts to matter who has political "ownership" over these policies. Is there full democratic consent, or is this suffering being imposed by foreign overlords with an ideological aim? It does not take much imagination to see what this is going to do to concord in Europe.
My own view is that the EU became illegitimate when it refused to accept the rejection of the European constitution by French and Dutch voters in 2005. There can be no justification for reviving the text as the Lisbon Treaty and ramming it through by parliamentary procedure without referendums, in what amounted to an authoritarian putsch.
Ireland was the one country forced to hold a vote by its constitutional court. When this lonely electorate also voted no, the EU again disregarded the result and intimidated Ireland into voting a second time to get it "right".
This is the behaviour of a proto-fascist organisation, so if Ireland now sets off the chain-reaction that destroys the euro zone and the EU, it will be hard to resist the temptation of opening a bottle of Connemara whiskey and enjoying the moment. But resist one must. The cataclysm will not be pretty.
Telegraph, London
http://www.smh.com.au/business/european-union-faces-a-battle-for-its-very-survival-20101117-17xm1.html
Front row left to right, European Commission President Jose Manuel Barroso, French President Nicolas Sarkozy, and Lithuania's President Dalia Grybauskaite. Back row left to right, Portugal's Prime Minister Jose Socrates and German Chancellor Angela Merkel at the EU summit in Brussels Photo: AP
Germany has agreed to give the EU's €440bn (£383bn) bail-out fund permanent status rather than letting it expire in 2013 as planned, but only as part of a "Crisis Resolution Mechanism" that forces bondholders to share losses from any future bail-outs. The fund must be anchored in EU law through changes to the Treaties in order to head off legal challenges at Germany's constitutional court.
A draft proposal from Berlin – now serving as a working text for the European Commission – calls for "orderly insolvency" by eurozone countries in trouble. Details are sketchy but this "Chapter 11" for sovereign states would include an extension of debt maturities, a "holiday" on interest payments for as long as needed to let debtors recover, and a suspension of bondholder rights. The blueprint is akin to debt-restucturing schemes used by the International Monetary Fund.
Under a Finnish proposal, there are likely to be "Collective Action Clauses" in all new bond issues to prevent minority bondholders blocking a default deal.
European President Herman van Rompuy will be tasked to draw up a blueprint for the crisis mechanism. There may also be a Sovereign Debt Restructuring Mechanism (SDRM).
Berlin is determined to avoid a repeat of the €110bn bailout for Greece when banks were shielded from losses, leaving eurozone taxpayers facing the full cost.
Silvio Peruzzo, Europe economist at RBS, said talk of "haircuts" for bondholder at this delicate juncture could backfire. "The debt crisis in the eurozone periphery has not been sorted out. These countries need markets to keep buying the bonds, but investors are going to stay away if you open the door to private sector pain," he said.
It is unclear whether the latest bond jitters in Greece, Ireland, and Portugal is linked to growing awareness of the German plans. Each country has its own troubles. Yields on Ireland's 10-year bonds briefly rose to a post-EMU high above 7pc on Thursday, partly due to a stand-off between Dublin and angry funds facing losses on the junior debt of Anglo Irish Bank.
However, EU officials fear that the proposals could make it harder for high-debt states to tap debt markets, risking a self-fulfilling crisis.
Germany is likely to win backing in principle at Friday's EU summit in Brussels since it has already struck a deal with France, and Britain has dropped its opposition to treaty changes.
Brussels believes it is possible to invoke Article 48.6, which allows changes to the Lisbon Treaty without the political trauma of referenda or full ratification in all 27 states. This "simplified revision" can be used to cover matters in Part III of the Treaty, but the EU risks a political backlash if it tries to push through such a controversial plan by these means. Viviane Reding, the EU justice commissioner, said it was "suicidal" to tinker with the treaties so soon after the Lisbon storm.
German Chancellor Angela Merkel is also demanding EU powers to strip countries of their voting rights if they breach eurozone rules, but this has been dismissed by Brussels as "totally unacceptable" and will be blocked by other states.
The summit was intended to endorse plans by an EU taskforce for a beefed-up Stability Pact, but as so often at EU meetings France and Germany have run away with the agenda.
The German proposals have a logic since they let struggling states claw their way out crisis by reducing debt. Greece's rescue risks failure because it will leave the country with public debt of 150pc of GDP, near the point of no return
