Archive for category EU

Much has been said and written on the outcome of the EU summit over the weekend in Brussels. As something of a history and politics buff, while being a macro-economist, I try to look at these meetings from as many perspectives as possible. Because those kinds of meetings are NEVER about economics alone. They are at least as much about politics (at least as I say) meaning that history plays an important role. For example, if it is about politics, foreign policy of every state plays a role and foreign policies are in general long term affairs, I.e. the ultimate goals tend not to change much over the course of decades if not centuries.

Looking at the recent summit from this point of view, I think Great Britain has suffered a rare defeat. For the first time in centuries the British have overplayed their hand or, to put it differently, the Europeans have called the British bluff.

Viewed over centuries, the British foreign policy ´s overarching goal was to make sure continental European countries do not form a united front because that could hurt Great Britain. Just look at the various wars on the European soil in the last few centuries and the British role in them, more specific the alliances the British have formed in them.

All the British wars

In the Spanish war in 1701, the British allied with Austria and Prussia to fight against France and Spain. In 1717 it was with France against Spain, somewhat later with Austria and Russia against France and Spain again, few year later with Prussia against France and Russia now. Then there is the war just before 1800, in which Britain fought with some royalist French against republican French and later on with Germans against the French. Then again, there were wars where Britain fought with the French against the Germans and the Russians and with Russians against the Germans and so on.

We could go on and on and on, the list is endless. The common theme is that Britain always formed alliances with some (great) European nations on the continent against other (great) European nations, with allies and enemies frequently switching sides in various wars (another common theme is that the French in general have been on the enemy side for the British).

With this divide-and-conquer policy, Great Britain has always tried to make sure Europe does not become a fully fledged force, capable of acting forcefully and swiftly, let alone to start resembling something of a state. In the recent, peaceful era, this foreign policy strategy was not abandoned. It was only that the tactics changed. In this sense, it is telling that the British Conservatives state in their manifesto that they ´support the further enlargement of the EU subject to all candidates meeting the strict accession criteria.´ The more member states the Union has, the less it is able to act swiftly and forcefully in any area. The British know that very well.

Spectacular failure

This strategy of playing Europeans against each other failed however spectacularly at the EU summit earlier this month. Great Britain asked for too much and all of Europe together rejected it.

Great Britain was never a member of the EU out of desire. This is the reason why London does not subscribe to the euro or the Schengen agreement, why it balks at helping Europe financially to save the euro, why it famously blackmailed Europe for its rebate, why it does not want to write a rule for balanced budget in its laws or does not take part in common social, judicial and immigration policy or in the cooperation between the police forces in the EU. Being a member of the EU was an important part of the earlier mentioned new tactics to criple Europe.

Now, this has backfired. For perhaps the first time ever, all of Europe has formed a united front, leaving Great Britain isolated. The most dramatic reminder of how things have changed was the recent call of the Polish foreign minister to Germany to act forcefully to solve the crisis, saying what will surely become historic words ´I fear Germany’s power less than her inactivity´.

It will be interesting to watch the reaction of London in the next years. Will the spectacular defeat in December 2011 lead to something that has never happened before, namely a reformulation of the British foreign policy as far as Europe, and the British place in it, is concerned?

Not far from the meeting venue lies the little Belgian town Waterloo, famous for being the place where Napoleon was defeated. Given the history of France and Great Britain, it is somewhat ironic that the places where the greatest leader of the first and the long standing foreign policy of the second are to be found so close to each other.

In the first week of November Mario Draghi, the new President of the European Central Bank (ECB), confirmed all possible prejudices about him (what with being Italian and therefore according to a widely held view seemingly genetically inclined to lower interest rates always and everywhere) when the ECB decided to lower its key interest rate during the first meeting under the new President.

Today, when European leaders gathered together for another crucial summit in Brussels, the ECB lowered its key interest rate once again, from 1,25 to 1,00%.

But still, after having watched the press conference afterwards, I feel a cheer for Draghi would not be misplaced.

Rate cut was not needed

Not because he lowered the interest rate, but because of something else. As for the rate cut, in my opinion it was not needed. When faced with a normal downturn, cutting interest rates is what a central bank is supposed to do. That way, borrowing is stimulated and saving money not so, meaning that consumption is getting a powerful boost. Savings does not pay much and borrowing to consume is cheap.

The key word here is ´normal´. The current downturn in the euro area is not normal. This is not a regular crisis but something more akin to once-in-a-century event. A central bank can make borrowing money free (like the US central bank has), heck it can even throw the money all around, it won´t help as almost nobody is in the mood of increasing his debt. And even if everybody was, banks have closed their money lending shops and are hoarding money. Consumers are looking for ways to reduce the debt burden, not increase it further. Banks are prepared to do everything to avoid increasing their risk profile.

If lowering interest rates was the way to go, then surely the euro area should have been in an borrowing orgy already, not to mention the US and the UK (neither of them are by the way). The Fed has slashed its interest rate to almost 0 % and the Bank of England has reduced its key interest rate to 0,5%. Consumer borrowing however, keeps hibernating.

Cheer nonetheless

Given the fact that lowering interest rates could lead to high inflation down the road and also reduces the buffer central banks might need in the near future if things get worse, the most prudent thing the ECB could have done was leaving the key interest rate unchanged.

But let us put that aside. How about that cheer for Draghi?

In the press conference after the meeting, there were questions on the euro crisis and the EU summit in Brussels obviously. More specific, there were questions on the role of the ECB. According to many, the ECB can and should play a larger role.

Germany has, rightfully so, blocked the direct route, I.e. ECB buying bonds of the weak member states without limit. This would amount to monetary financing of deficits and that is frowned upon in the euro area.

Immediately, various proposals have been put forward how to circumvent the ECB´s rules and, as they are part of the Treaty on the European Union, the Treaty itself.

One of the ideas was to make the emergency fund, the EFSF, a bank so that the ECB could lend it vast amounts of money the EFSF would then use to buy debt of distressed euro area nations. Another proposal was that the ECB could lend money to the International Monetary Fund and it then would use those funds to buy Italian and Spanish debt.

This is where Draghi has earned the cheers today. Loud and clear, the new President of the ECB said that those ideas might be legally kind of ok, I.e. they could be said not to violate the letter of the Treaty, but they would violate the spirit of the Treaty. Compare this for example to the proposal by the EU President Herman van Rompuy, that the EU could use a clever legal trick to change the Treaty without following the proper procedure for it, namely seeking ratification in the parliaments of all member states.

For this, Draghi is the hero of the day. It remains to be seen whether he will keep putting the spirit of the Treaty above the letter of it, of course. Let us hope he will. The Treaty is the foundation of the European Union. Violating it is akin to deliberately destroying the foundation the EU is built upon. Are you listening Mr. Van Rompuy? Or do I have to write a haiku to get your attention?

Robert Frost is my favorite poet. His poem ‘The road not taken’ is one of my favorite poems.  In that poem, Frost writes about two roads that diverged in a yellow wood and the choice of taking one of them, as one can not travel both. The traveller from the poem stood long, contemplating which road to take. The poem ends with ‘I  shall be telling this with a sigh/ Somewhere ages and ages hence:/ Two roads diverged in a wood, and I–/ I took the one less traveled by,/ And that has made all the  difference. Almost a century later, Europe is the traveller from ‘The road not taken’.

Between all the debris flying around as the consequence of the worst economic, financial and political crisis in almost a century, one can see some contours of how the EU will work and look like in the new era, i.e. after the current crisis.

The rulebook on how Europe works is in the process of being rewritten as we speak. I have written here earlier on power struggle within the EU, EU member states and between and within EU institutions.

What are those contours of the future EU? For some time now, there is a debate going on whether the ECB should act as a back-stop for troubled euro area nations. This has already caused problems within the central bank and is now driving a wedge between  Germany and France (with the former wanting the ECB to stay as far away from  government debt as possible and the latter urging the bank to become more involved).

Yes, the ECB is, reluctantly that must be said, buying government bonds of Italy, Spain, Greece, Portugal and Ireland. But remember that the ECB is also the guardian of the euro. If the bank does not get involved more, it will risk the euro breaking apart and hence, driving itself out of business. I am quite confident that, at the end of the  day, the ECB will let the German objections be what they are and step onto the plate.

To try to get the German support for something that is in no way compatible with the German view of what a central bank should do, I think the recently launched proposal by the CDU (party of Angela Merkel) with regard to the ECB will be adopted. The CDU wants to get rid of the ‘one man/woman, one vote’- rule within the ECB. The head of  the central bank of Malta or Greece now has the same say as the head of the Bundesbank. What the CDU wants is to align the ECB with the principle used in almost all other European institutions, where the number of votes a country has, depends on the size of its economy and the number of people living in it.

Another change that is likely, in my view, is that the euro area Triple A countries will have more say at the expense of the lower rated ones. Just a few days ago the Finnish prime minister made a case for such a rule.

As not all euro area Triple A countries are equal, Germany will get more influence than before (being the largest and the strongest). A dominant position of Germany in Europe would not be strange and would in fact just reflect the fact that it is the largest European country, it has the  strongest economy and the deepest pockets, supplemented with the fact that it is situated very strategically in the middle of Europe.

More power to the strong member states means two things. First, there will be less power to share among the weak member states. To compensate for that, the share of the power-cake so to speak, that will be divided among EU member states, will become larger. So, and this is the second consequence, European institutions such as the European Commission will more and more become executive branchish, with member states deciding what it should do, how to do it and when.

To soften the blow – and make it possible for the European Commission to argue that it has become more powerful – the Commission will get new responsibilities, but now within the new framework of member states calling the shots.

All of this will need a new Treaty obviously. This new rule book will contain rules such as that in case of troubles and/or if a country does not play by the rules, it could be put under supervision, temporarily lose its voting rights, stripped of EU cash and in extremis, expelled from the monetary union.

To avoid alienating the EU member states outside the monetary union, such as the UK and a number of countries in East Europe, the new Treaty will make a two-speed EU more of a fact than it now already is. For example, it is likely that the clause making it mandatory to introduce the euro once a set of criteria are met, will be dropped, as countries such as Poland and Czech Republic have recently clearly demonstrated that they do not want to introduce the euro any time soon, if ever.

So, who will be the losers and who the winners in this new European Union? Large member states, especially Germany, will be the winner. Smaller countries that are Triple A rated will likely see their influence enhanced as will the UK, that will most likely demand (and get) quite a lot in order to refrain from useing its veto.

On the losing side we find large countries such as France, Italy and Spain and smaller EU member states that are not Triple A rated. European institutions are likely to have less influence than before the crisis.

Now, there is one caveat. This would all be the case, at least in my opinion, assuming that the euro area does not unravel (with the most likely scenario being that the strong members will be leaving) . Unraveling of the euro area could easily cause the EU to unravel as well or at the very least blow some serious damage to the EU.

The key question for the solution to the current crisis and the future of the monetary union and the European Union then will be: when faced with the choice between inflationary policies and the current monetary union, a choice that has become unavoidable I would say, what will Germany go for?

If Germany is not compensated a lot, my answer is that Germany will choose to leave the monetary union and form a new common currency with less but stronger countries. By ‘a lot’ I mean so much that many other European countries will find that Germany will become too powerful. All minds of historical elements will then be dragged into the debate, taking the soured relationships within Europe on a whole new, and much dangerous, level.

Whether all these changes, if they indeed take place, are beneficial or not, is another discussion. It is highly possible that, given the fact that we are talking about major changes here, they will be put to some kind of plebiscite, either direct or indirect, through regular elections in member states with anti-Europe parties on the ballot lists. It is far, far from certain that the people of Europe will give their go ahead for this new Europe.

In that case, we’ll however also have another new Europe at our hands, so one way or the other, Europe will embark on a new road. Whether that will be the road more or less travelled by, will indeed make all the difference.

It seems that whatever Europe does, the euro crisis just gets worse after a short while. Europe, or more correctly , the member states of the European Monetary Union (EMU), have helped Greece only to find out that they have to help it again and put much more money on the table. Portugal and Ireland have gotten the helping hand as well, but their troubles are still far from over. Now, there is increasing talk of Italy and Spain being the next in line, with Belgium and even France (it still has the highest rating score, Triple A, but could loose it in the not so far future) not far behind.

There are many things that Europe has done wrong since the beginning of the crisis. But nobody can really blame Europe for making mistakes. This is a unique crisis and European countries have zero experience with such a crisis. Moreover, they can not borrow a manual on how to solve a currency crisis is a monetary union that is not a fiscal union from the rest of the world, as it too has no experience with such a crisis. However, there are two issues one can blame Europe.

The first is that being more realistic about the crisis could have helped a bit. I have written about that part in an earlier blog, so I won´t repeat that here.

Prevention beats curing

I will focus on the second issue. Every MD knows that preventing an illness is much better that having to cure it. It is cheaper and it involves much less effort. So it is all about being able and willing to act pre-emptive in stead of reacting to developments. Europe has done just that, which by default (no pun intended) means Europe is always behind the curve.

Every new loan, new bail-out package (let us not debate on whether or not Europe has breached its once holy ´no bail-out´ clause from the Treaty on the European Union and just call a spade a spade) and every new mechanism (the crisis has given us many an abbreviation such as ESM and EFSF) has been a reaction to an escalation of problems.

The same applies to the last round of decisions, from July this year. Already a large group of economists and some politicians are saying that the EFSF needs to be beefed up. No prize for guessing when (because it will happen) that will happen: when once again the euro crisis takes a turn for the worse.

Handicap

The main obstacle preventing Europe from dealing with the euro-problem swiftly and forcefully is the fact that Europe is not able to act pre-emptively. Every increase in the firing power of the bail-out weapon has come after the euro crisis had gotten worse, never before that was the case. This is turn is caused by the fact that Europe has no fiscal or political union. Being a European leader does not mean one is automatically leader of Europe like Helmut Kohl or Francois Mitterand have been. Out there on the frontline, this means that national interests trump the European ones in a time when European interest should matter.

But that, sadly, is not the whole story. Behind the scenes, there is another fight going on, between European institutions. It is a good-old fight for power. The European Commission, the new European President, the European Central Bank, the European Parliament, the newly established EFSB (European Financial Stability Board), they all know perfectly well that this is the time when not only the crisis could be solved but also when it is determined where and how much power will be concentrated in the future. They are all fighting each other for a share of that power. And together they are fighting against the member states, because the more the member states get to say, the less is left over for European institutions. Just to complicate the things even further, there is also great deal of disagreement between the member states themselves.

The European Commission for example has really seen its say diminish. It attends the meetings of the European heads of State or Finance ministers, but its role has been confined to – I am exaggerating here – that of note taker. It is the national capitals that take decisions. Increasingly it is also the member states that implement the decisions and have the final say. The EFSF is a good example: the member states are providing the money and they decide when, how and how much a member state in trouble can draw the money. ´Brussels´ has no say.

Roadblock

The disagreement between the member states has also led to great divisions within the Board of the European Central Bank, which simultaneously is fighting fiercely to preserve its independence (or what is left of it) and prevent that Europeans lose their confidence in the ECB. Without their confidence that the ECB will keep the inflation low now and in the future, the ECB could as well shut its doors. Now, when the ECB needs to demonstrate unity, it does not. Instead, verbal fighting between its Board members has been a rule rather than a exception.

All of this is the reason why Europe cannot force a break-through on major issues such as whether or not to form a fiscal and/or political union or whether to improve the firing power of the EFSF. Put differently, the constant infighting between

European institutions among themselves and

together against the member states and

between the member states and

within the institutions (think ECB) and

within the member states themselves,

is why Europe cannot act before the euro crisis takes a turn for the worse and thus get in the drivers seat. As long as that roadblock is not towed away, I fear the euro crisis will just muddle through until either the crisis becomes too much for Europe or European economies start to grow like it were the nineties all over again.

We must not make the mistake and think that countries cannot go belly up. Why? Well, frankly because they can.

Argentina (2001) may be the best-known recent example, but it sure is not the only example. Russia (1998), Ecuador (1999), Ukraine (1998 and 2000) and Indonesia and Pakistan (both in 1999) are just a few others.

True, those are all non-Western countries. But again, this does not mean the Western world is somehow immune to the bankruptcy virus. Why? Again, because frankly it is not. It is just that in our lifetime no Western country has defaulted on its debt. But look beyond the last three decades or so and it immediately becomes crystal clear that the Western world is just as prone to default as any other part of the world.

Italy, Poland and Rumania – all three EU member states nowadays and even euro area members (Italy) – have defaulted on their debt. Italy did that in 1940, so one could relate that to the onset of the Second World War, but Poland and Rumania both defaulted in 1981. Even Germany has defaulted, in the first part of the last century, via hyperinflation in that country.

The Greek way

Greece itself – the reason for me writing this column is of course the euro crisis – is also a good example. The Hellenic Republic has been in default for a large part of its modern history as an independent country. If it was not for the EU, other euro area member states, the European Central Bank and the International Monetary Funds, Greece would have defaulted once again months if not years ago.

Admittedly, that was Greece from before the European monetary union not the new Greece. But let us take a look at that modern Greece.

On every measure and even working with the uber-optimistic assumptions about economic growth in the years to come, the Greek national debt is not sustainable. The debt is increasing further because Athens in not able to balance its budget. Yawning deficits are forecasted for a long time.

The country cannot export its way out of these dire straits as a decade of too fast wage increases without accompanying productivity leaps has left the country’s companies uncompetitive. It will take just as long, in the best case, to solve that problem. Sadly, time is not a luxury Greece has.

Fighting

The average Greek meanwhile is not working but demonstrating and fighting in the streets and when they are not on the streets, the Greeks are moving their savings out of their own country and into the Swiss franc, gold, basically everything non-Greek.

The country’s economy shows closer resemblance with an ever-larger number of third world countries than with its euro partners. There is not much hope (or should I say none whatsoever) that the economy will surprise us all in a positive way any time soon.

In short, bar some deus et machina event (like the rest of the euro area giving Greece an gift of some 300 odd billion euro to pay off its debts, something that is even less likely to happen than the French government holding a meeting in English for example) Greece, and maybe Portugal as well, will default sooner or later.

The sooner the other European political decision makers acknowledge that, the better. Because only when they do so, they could be ´accused of´ being realistic and only then one would have reason to be optimistic about euro area surviving in the medium and long term.

Answer around the corner (sometimes literally)

European political decision makers need not look far for an answer to the question what to do. Every town, city or sometimes even a village in Europe has the answer as every town, city and sometimes even a village in Europe has its own fire department.

Fire department? Yes, indeed. What do the firemen do when they arrive at, let us say, burning house that is beyond saving? They pour millions of liters of water, sometimes for hours and hours, on neighboring properties in order to save them.

This is what Europe needs to do:

First, accept the fact that Greece and probably Portugal as well, is too big a mess to save.

Second, expand your emergency fund and use the money to pre-emptively save Spain and Italy (ok perhaps you can try to keep Portugal from falling into the abyss also) thereby saving Europe’s banks as well. Sure, they will feel the pain from Greece going into default, but let us not forget two things that are relevant in this matter.

The first one is that banks, up to a certain point, have gotten themselves into problems. They should have paid more attention to the real situation on the ground in Greece and assessed the possible risks involved when buying Greek bonds instead of treating the Greek bonds as Bunds with funny looking letters on them.

Second, Europe has been saving Greece for over a year now. The ECB has been buying Greek bonds as well. Every prudent bank has used that time to lower its exposure to Greece. Those banks that have not or even have increased their exposure (betting Europe will never let Greece fail and thus pocketing some very, very nice returns (2 year Greek bond come with almost 30 percent interest rate nowadays) well, they basically deserve to get burned.

Greece, Portugal and Ireland are – so far – the euro area member states that have not defaulted just because the strong euro area member states have provided them with emergency funding. Those strong members of the monetary union will continue to provide emergency loans for some time to come. Until 2013 this will happen in an ad hoc fashion and, starting from 2013, within the framework of the European permanent mechanism to save the euro. Nice plan (kind of), but is it viable? Forget the long run, the question is whether it is even viable in the medium term?

Everyone, from politicians to analysts and economists to the media have gotten used to talking about the weak and strong euro area members.

But how strong is strong really? Germany, Finland, France, Belgium, Austria and the Netherlands for example are only perceived strong because they get compared with the likes of Greece and Portugal. If that is the yardstick, then numerous African countries are strong as well.

So I feel one should look closer into the government finances of the strong euro area member states and then determine just how strong they are instead of comparing them with the de facto default countries within the monetary union. It is not hard to look strong standing besides crumbling Greece.

Mount Debterest

According to the Eurostat statistics, in 2010 Belgium carried national debt of 96,8% of its gdp,  which was still kind of good compared with the Italian debt of whopping 119% of its gdp. This is lower than the national debt of Portugal (93%). Mind you, these are figures for 2010. With high deficits in 2011, that debt mountain is higher now.

Looking further down the table one does not get much happier. Germany (83,2%), France (81,7%), Austria (72,3%) and the Netherlands (62,7%) all have sizeable – and increasing – debts as well.

This, sadly, is not the whole picture.

Starting from 2011 onwards, the heavy burden of ageing on government finances will start to play a role. Almost all European states are set to loose millions of inhabitants in the next decade.

Unless Europe unleashes some magical innovation-enhancing force, this will lower the economic growth and bring the government finances all over Europe into even worse shape that they are now in. It is straightforward. Economic growth depends on how many people are at work producing stuff and how efficient they are at it. Less people means those that keep working have to get more efficient just to prevent economic growth from falling.

Weak

Anno 2011, in the euro area there are two groups of countries. Either you are one of the strong ones, meaning you provide emergency funding for others, or one of the weak ones, meaning you are at the receiving end of emergency funding. There is no in-between, if you are not strong you are weak. Full stop.

For example, Spain does not need any emergency funding now (this was written on May 31^st, one needs to state the date as in Europe you never know when another country might succumb under its debts and with Spain being one of the main suspects to become the fourth euro area member to de facto default, that need is the largest). But were Spain to ask for emergency loans, it would immediately move from the strong to the weak group. Hence, with every new weak country the burden increases for the, I hope I have made that clear by now relatively strong ones.

The question how strong strong really is and will be in the future, is crucial for the future of the euro area. As long as the deep structural problems many member states have, are not addressed and solved, the heartbeat of the euro (area) will be determined by how many euro nations remain in the ‘relatively strong group’ (that is, assuming somewhat heroically that they stay willing to bail out the likes of Greece). The fact is however that that species is on its way to extinction in Europe.

Is there then a solution for the financial troubles the Greek government is in? I am talking about the idea for Greece to step up its privatization agenda and sell more stakes in various partly of fully state-owned companies. According to the International Monetary Fund, the original plan for sale of some 50 billion euro worth of assets is only 20 percent of the value of assets the Greek government owns.

Add to that the real estate Athens owns (supposedly more than 200 billion euro worth) and a few tens of billions worth of gold in the vault of the Greek central bank and, hey presto, Greece is able to pay off all of the emergency loans it has received from its European partners ánd other loans as well ánd even keep some money after all the bills are settled. The total Greek debt amounts to little under 400 billion euro.

It’s the assets stupid 

Greece is fortunate enough, according again to the IMF, in the sense that its government ‘has an extraordinary portfolio of assets.’ That is true. The Greek government owns (wholly or partly) the nation’s banks, airports, railroads, water companies, postal services, telephone company, power company, gas company, gambling monopoly, casino’s and electric power generation and distribution company, to name a few. If not sold immediately, then it could at the very least be a very valuable collateral for new emergency loans the country is most likely to need in the future.

But will the sale of those assets really solve anything in the long run? While it could solve the financial trouble, it would most likely cause another, much deeper problem in Europe.

Cheated

Just think for a second about this privatization proposal. As an economist I support privatization of a large number of the aforementioned companies, as I think they would be more efficient in private hands. But this Greek privatization wave is c.q. would be forced upon the Greek people. Chances are that the new owners would become companies from the same sectors from other European countries. Deutsche Telecom for example already owns 30 percent of the Hellenic Telecommunications Organization and I am sure would be more than willing to expand its share.

Let us approach this subject from another angle. If you are from France, Belgium, Finland or the Netherlands, how would your feeling towards Europe and European integration change if Europe would force your government to sell the electric power giant EDF or Aeroports de Paris, the telecom company Belgacom, airline Finnair, Finland Post, or Schiphol Group (owner of airports in Amsterdam, Rotterdam/the Hague and Eindhoven)? Moreover, assume that the proceeds would fall short of the real value, because the interested parties know that they must be sold or else… (fire sale)? I would say you would be infuriated at the very least. And your support for European integration, European Union and the euro would melt faster than a snowball taken inside a warm house.

The same, of course, applies to the Greek people. They would feel cheated, to put it in neat terms.

 Internal affairs

When recently a team from the IMF and the EU criticized Greece for its slow privatization efforts and some European ministers agreed, the Greek government replied that those organizations were ‘asked for help, not to meddle in our internal affairs.’ The Greek people would, no doubt, choose other words or deeds to let Europe know how they feel.

In short, the fire sale of the Greek family silver would surely solve a large part of the Greek financial woes. But, first, given the sorry state of the Greek economy and its government, it would not take long before that country would find itself in new troubles, only now without any family silver to sell. And second, chances are that European integration, which is already under threat, would suffer even more. The chance that all over Europe border guards would return to their years ago abandoned posts – and thereby nullify some of the largest gains European integration has given us all – would increase fast.

If only European politicians would resemble Winston Churchill more.

We all know the drill by now. As soon as a euro area member state applies for emergency funding, the most probable next victim moves heaven and earth to convince the media and markets that it does not  need help.

We have seen it happen after Greece succumbed to the (financial) pressure. Ireland stated it was in good enough shape to avoid the same faith. After Ireland had to knock on the ‘emergency fund’ door, Portugal made it known that any speculation it will be the next in line was unwarranted. A few days ago, Portugal followed in the footsteps of Greece and Ireland. Surprise, surprise, Spain immediately declared that it will not have to do the same those three countries had to do.

Emergency

Apart from the fact that Spain is in a league of its own, keeping Spain afloat would most likely instantly empty the emergency fund that is now in place ánd it would send a signal that a large euro area country can also falter, this is bad as financial markets will get very unsettled, given the just described history.

This obfuscation of the truth is very damaging. First, it means that financial markets in the euro area are in continuous state of disarray. That manifests itself via ever-increasing long term interest rates for the weak members of the monetary union, which in turn makes it harder for them to solve their problems (higher interest rates mean higher expenses for those governments, something that neutralizes a great deal of cost cut-backs and tax hikes).

Second, it further undermines the confidence Europeans and investors have in European leaders. Less confidence means, again, among other things, higher interest rates. Moreover, investors and Europeans have no way of telling when, if indeed ever, to trust a European politician when he or she says something.

Honesty

Therefore, it would be a welcome change if European leaders were to turn more honest. And honesty starts with transparency. Spain but also Belgium (which is financially, economically and politically in dire straits) should start this new era, by explaining in great detail how their finances look like and what they plan to do about it.

Would that not start the very troubles those countries are afraid about? Maybe. But with Europe in turn rewarding this honesty by standing ready to help those countries even more than is now the case, this new honesty-and-transparency-thing could be a game-changer with regard to the euro crisis.

Stress

Europe has another part to play as well. Honesty and transparency about the true health of its banks – another stress test is coming soon – would be quite appreciated as well. This means taking into account probable, although unwanted, scenarios such as debt restructuring in one or more euro area members states.

One question remains though: what has Winston Churchill to do with all this? Back in 1940, when he became prime minister, he gave a speech in the UK Parliament. It was probably not only the shortest but also the most blunt and honest speech any UK prime minister has given to this day.

Suffering

It was his first entrance into the lower House of British Parliament. He was not very welcomed by the Members of Parliament, while the departing prime minister Neville Chamberlain got a standing ovation.

That all changed after Churchill spoke. ”I would say to the House, as I said to those who have joined the government: I have nothing to offer but blood, toil, tears and sweat. We have before us an ordeal of the most grievous kind. We have before us many, many long months of struggle and of suffering.” And some moments later he added: ”At this time I feel entitled to claim the aid of all, and I say, Come then, let us go forward together with our united strength.”

Which European politician will utter the same words anno 2011?

Since 1957, European integration has always moved forward. Sometimes faster, at other moments slower, but it was always moving forwards.

Two powerful forces pushed this integration forward: European leaders who shared the same ideal, namely an ever-closer Union in Europe and European population, that was fed up with regular fighting on the continent. In the centuries, if not millennia before, 20 odd years of peace were an exception, not the rule in Europe.

Nowadays, one cannot help but feel that European integration process is stagnating, if not reversing in some areas. There are many causes for this, such as that Europeans tend to take peace in Europe as a given (the number of those that have witnessed European war-time horrors is rapidly declining).

Still, that need not be a bad development. If stagnation is caused because the integration has come a long way in the last half a century, then stagnation is only natural. Compare it with a rocket launch if you like: when the engines are ignited; there is a powerful liftoff. After some time, the fuel tanks get more and more empty and the speed falls. Then after a while the earth gravity takes over. In the Netherlands we have a name for this phenomenon, the Law of the handicap of a head start.

Stagnation

Stagnation of the integration process therefore in itself would not be cause for alarm. But it is (at least I think so) and I will try to explain why.

First, as already stated, stagnation of the integration process need not be alarming. However, this applies only to a European Union without a monetary union. As we all know, Europe does have a monetary union. Why is that so important?

Because a monetary union in Europe was put in place before a political or fiscal union. If the monetary union is to survive in the long term, it must be complemented by some kind of a fiscal/political union. Given the fact that Europe is neither a political nor a fiscal union, it can only get there by integrating further and thereby accelerating the speed of integration. Clearly, stagnation is quite the opposite. And as the European monetary union is such an important part of European economic and political landscape, that failure of the euro could lead to disintegration of the European Union itself.

Second, stagnation of European integration is not caused so much because it came a long way already but has its root much more in a worrying development seen throughout Europe: hostility towards everything European

Anti-Europe popular

In many member states anti-Europe political parties are gaining ground. Where just some years ago it was virtually unthinkable that such a party could win many votes, now it is a common feature that such parties have gained so much support, that they enter (implicitly or explicitly) many ruling coalitions in European states.

That, in part, is due to another worrying development, namely the fact that European leaders with European ideals, such as Helmut Kohl or Francois Mitterand for example, are nowhere to be seen. Whether one likes it or not, the fact is that national interest trump European ones.

Europe stagnating is not observable in some policy areas far away from our day-to-day activities but is to be found at the core of the European dream.

Anybody who has ever read even the thinnest brochure on ‘Europe’ knows that the idea of the European Union rest on four pillars: free movement of capital, people, goods and services. Those pillars are the very heart of the European Union with the monetary union as the icing on the cake.

Tour d’horizon

Let’s take a brief tour d’horizon of the aforementioned pillars.

Free movement of capital is coming under pressure. Sure, euro area member states have set up a temporary and a permanent emergency facility to supper each other when needed, but free movement of capital means that if for example some Dutch or French company wants to buy a Spanish or Italian counterpart, it is not hampered by doing so by politicians. The example of the Dutch ABN Amro bank trying to take over the Italian bank Antonveneta some years ago, clearly showed that politicians do hamper these kind of processes. Just recently, the Italian government has passed a law aimed at shielding many sectors from foreign takeovers. It also passed the decree to create an sovereign fund to invest in strategic companies such as dairy firm Parmalat

and by doing so shield them from hostile foreign takeovers. ‘Hostile’ here is a synonym for ‘foreign’. Why? Because ‘foreign’ is not limited to the Chinese, but encompasses the French, the Spanish and the German companies. Basically, foreign means ‘non-Italian’.

People in Europe are still not allowed to move freely across the continent, in the sense that they can settle down in any other EU member state. This does work in the ‘old’ EU nations, but the ‘new’ EU member states from Central and Eastern Europe are excluded.

‘Goods’ is one area where Europe has managed to create a truly integrated single market.

It is however the services sector that is most important for economic growth. And in that area, no such thing as a European single market exists. That would have been the case if Europe had implemented the services directive proposed by the European Commission some years ago. It was the overwhelming resistance from almost every European nation that has put that directive to death.

So, three out of four pillars European Union rests on, are damaged. The icing on the cake, the euro, is melting down. The euro and the European Union are like Siamese twins: they cannot be separated. According to many, the euro can only be saved by forging some political/fiscal union in Europe. If the European Union is to survive then, it must keep on integrating, including in areas that have been off limits because they are at heart of sovereignty of its member states (think economic and fiscal policy for example).

Not doing so is legitimate choice European nations can take. But before making that choice, they should consider the collateral damage associated with such a choice.

The Germans and/or the Dutch. Those were, according to many observers, the Europeans that stood most likely to rock and probably capsize the euro rescue boat. The former guilder and mark owners would balk at paying tens of billions of euros in order to save the profligate European nations from a default. A default which many Dutch and Germans view as caused by the reckless economic policy in countries such as Greece and Portugal.

In the end, it were neither the Dutch not the Germans that have rocked the boat (which does not mean they are indifferent, it only means they and their politicians did not follow those feelings through) but the Finnish. The Finnish? Yes, indeed. Who would have guessed that?

It was the Finnish anger and the increasing popularity of an anti-euro party that caused the European summit to deliver much less than was promised and expected.

The what is called a ‘comprehensive package’ to save the euro will be approved in June instead of March, as was hoped. The European leaders have agreed in principle, but to put that in writing was a step too far. They fear that would lead to a victory for the anti-euro Finnish movement in the forthcoming elections in the Scandinavian country.

Anti-euro movement

Assuming that the Finnish people are not stupid, chances that the anti-euro party in Finland will gain a lot of ground in the Finnish political landscape are at best unchanged from a couple of weeks ago. The chances have certainly not decreased after the summit.

The Finnish voters are having a hard time with 1,4 billion euro they would have to put up front for the new stability facility for the euro, that will be put in place in 2013. Compare that to 4,5 billion the Dutch have to fork over and the 22 billion the Germans have to part with. Money that those countries do not have by the way, meaning that they will have to borrow it (this applies to all other euro countries as well).

Which in turn means an additional interest rate burden of some ‘measly’ 100 million euro a year for the Dutch and 500 to 600 million for the Germans (assuming the interest rates stay at the current level the rest of this decade, a heroic assumption given the likelihood of prolonged and deepening sovereign crisis in Europe and higher inflation down the road).

European leaders are partly to blame for the way things are working out. For years they have engaged in Europe-bashing. It all boiled down to the message ‘all the measures that hurt you, the citizen, the voter or the entrepreneur, are due to demands from Brussels’. No wonder that it is now almost impossible for European leaders to go on national television or into the cities and towns and try to explain why we must try to save the euro.

Peace and stability (and welfare)

A case that by the way is not hard to make. Economic, social and political advantages are obvious. European integration has delivered more, not less welfare to us all, not to mention long lasting peace on the blood-drenched continent. The last time our part of the continent basked in 50-some years of peace was centuries and centuries ago. 

Our economies are so intertwined that disentangling them from each other quite frankly cannot be done. And our voice in the world, even for such a big country as Germany, would hardly be heard, because no one would care. Only Europe will have a place behind important international tables, not various European nations.

Moreover, there are advantages that would be new to us if we were to save the euro. Most likely for example, that by doing that we would create the next world currency, given the dire straits the US dollar is in.

But if the current European leaders try to emphasize that, they get laughed at. People tend to remember what you have been saying for years, you know, certainly if that was something completely different than what they hear you say now. Recent outcomes of the German regional elections are a case in point.

Finland is hardy unique with regard to the increasing popularity of anti-euro if not anti-Europe parties. All over Europe this movement is gaining ground. Thát could turn out to be a greater danger for the euro in the future than financial troubles in the south.