The face of Europe is now changed for ever

Monday, May 17, 2010
By Paul Martin

The financial crisis that has engulfed the EU will not be solved by any quick fix, says Jeremy Warner.

By Jeremy Warner
TelegraphUK

As if the formation of the UK’s first coalition government in 65 years wasn’t enough drama for one week, events have been unfolding on the other side of the Channel that will change Europe’s destiny, and perhaps Britain’s too, for ever.

The EU’s 750 billion euro (£644 billion) salvage package might be born of necessity rather than design. But it is nevertheless a watershed development, which places the Continent unambiguously on the path to full fiscal and political union.

I’m not saying that such a union is inevitable; the euro’s eventual disintegration is still as likely an outcome. Nor is there any certainty that the package, which still lacks salient detail, will work as prescribed.

But willingly or not, there is little doubt where the logic of events is driving European policymakers: it is towards a federal superstate, with the power to subjugate individual nations’ fiscal sovereignty if it cuts aross the needs of the whole. Never mind the challenges of deficit reduction – as this centralisation imposes itself ever more aggressively, it threatens to test the oddball mix of Britain’s coalition of Eurosceptics and Europhiles to breaking point.

Angela Merkel, the German Chancellor, has characterised the attack on the euro as a battle between markets and politicians. It was a battle, she added, which the politicians were determined to win. But in bringing out their billion-euro bazooka, they have driven a coach and horses through the existing rules, already honoured more in the breach than the observance. The result is to set Europe on a course that its citizens, and for that matter
many of its politicians, never signed up for.

Europe’s elite may have always realised that you couldn’t have monetary union without the fiscal and government kind – and that a crisis in the first would in time lead to the other two. But that is not the way the project was sold.

Let’s be in no doubt: Europe didn’t have much option this week. To have allowed Greece and other Club Med nations to have defaulted on their debts would have plunged Europe into a depression. The financial crisis would have looked like a mere squall by comparison.

But necessary though the response was, it provides no more than a sticking-plaster solution. As with the banking crisis, the eurozone’s difficulties started out as a liquidity problem. Unfortunately, there is always a reason why markets won’t lend; as with the banking crisis, an absence of liquidity reflected underlying concerns about solvency.

Ridiculously, policymakers continue to blame Anglo-Saxon speculators for their travails. On this, as with much else, they seem to have a blind spot. The markets demonised for their speculators are the very same markets the Club Med countries rely on to pay for their deficits. Even after the Greeks were found to be lying about their credit-worthiness, it was these canaries in the mineshaft, not the profligacy of the Club Med, that got the blame.

The package as announced provides only a “window of opportunity” for miscreant nations to put their affairs in order. It buys time, but not much else. In providing loan guarantees, the stronger European countries have allowed the weaker ones to continue to borrow at reasonable rates for a while longer. Yet it doesn’t address underlying concerns about their solvency.

The assistance, therefore, is being made dependent on credible plans for restoring fiscal discipline. We’ve seen some of these austerity packages unveiled this week – in Spain, Portugal, and Italy. In so doing, the Club Med countries find themselves chained to a German rack. All pretence of fiscal sovereignty has gone, as the profligates confront the dismal and painful task of ripping those burgeoning deficits out of their economies.

Even worse, there is still no certainty it will work. The problem with applying such a vicious dose of deflationary chemotherapy is that in the short term, at least, it makes the problem worse, not better. If the economy is contracting, the overall burden of debt will rise as a proportion of GDP, whatever the austerity applied. For all the medicine they are being required to take, these countries will remain fundamentally bust. How does the single currency dig itself out of that one? Any sustainable economic union must always involve a degree of money transfer between rich and poor regions, or some other form of cross-subsidisation. Even in Britain, the Union would fall apart unless supported by such transfers.

Much has been written about how the solution to Europe’s woes lies in Germany’s hands – that if only the Germans would save less and spend more, all would be well. No doubt it would be helpful if Germany did more to stimulate domestic demand, but it is also unrealistic. There will always be trade imbalances in any economic union. You cannot force a region to become less competitive so that others can be more so. However, if economic policy is centralised, you can use subsidies to help even things out.

This debate has yet to be fully confronted in Europe. The logic of the great project may be leading towards a combination of Teutonic discipline and Gallic gouvernement économique – but is this vision of ever closer union really what Europe’s people voted for? And is the UK’s semi-detached status remotely sustainable under such a regime? I suspect our new coalition is about to find out.

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