Europe's soap opera persists

PUBLISHED : Friday, 15 June, 2012, 12:00am
UPDATED : Friday, 15 June, 2012, 12:00am


The endless euro soap opera has run helter-skelter through new twists and turns: Spain accepted a Euro100 billion (HK$972.11 billion) bailout package to fix its rotten banking system, although Prime Minister Mariano Rajoy pretended it was only a line of credit; Cyprus suggested it might want money; Spanish and Italian bond rates rose again; and several European leaders declared that only European integration would fix the problems.

Don't worry: the soap opera will run and run, with nail-biting twists and turns over whether Greece will jump or be pushed out of the euro zone, whether Spain has done enough, when Italy's vulnerability will be recognised, who will blink first - France or Germany?

The show will fascinate and drag down the rest of the world until Europe rediscovers growth, and there is no clue yet that anyone has a clue about how to accomplish this.

Renewed calls for European integration are interesting, but it is unclear whether it is a genuine religious conversion or whether leaders are mouthing platitudes, realising they have messed up their economy and that of the world.

'The euro has won,' Rajoy declared after Spain's deal. A European 'political union' was needed, Angela Merkel, Germany's chancellor, said. Jose Manuel Barroso, the (unelected) president of the European Commission, predicted a banking union, including a supervisory body with powers over all European Union banks, would be created within a year. Christine Lagarde, managing director of the International Monetary Fund, called for 'more Europe, not less', adding that a single European financial market needed to have a more integrated framework.

There is a lot of St Augustine - 'Lord, make me chaste, but not yet' - in the European aspirations of leaders: no one envisages European union in their political lifetime. Merkel backed away from any immediate union, calling for a 'step by step' approach of ceding national powers to Europe, and saying: 'I don't think there is a single summit at which the big design will appear.'

Therein lies danger. The EU, and more particularly the euro, already illustrate the problem of what happens when a committee of bureaucrats tries grand design. It has been said that a camel is a horse designed by a committee. But who in their wildest nightmares would have imagined such an awkward hybrid product as the euro?

Merkel's idea of going step by step and countries ceding powers to the eurocracy is a recipe for disaster - especially if the steps are taken in reaction to crisis or the twitches of the markets rather than as part of a properly considered plan of action.

The biggest single problem of Europe today is the democratic deficit. Who elects the eurocrats? Whom do they represent or speak for? Who pays for their well-meaning but often ultimately idiotic efforts to create standardised rules and regulations?

When push came to shove, the European leaders chose via the Treaty of Lisbon, effective 2009, to create another layer of unelected apparatchiks with a full-time president of the European Council called Herman van Rompuy. He and Catherine Ashton, whose gobbledygook title is High Representative of the Union for Foreign Affairs and Security Policy, have been described as 'garden gnomes', because they are undistinguished and unelected.

The 27-member EU, and more so the 17-member euro zone, remains an awkward community, linked by more than 1,000 years of Christian inheritance and schism and divided by hundreds of years of warfare and, in the case of Eastern Europe, decades of division by the Iron Curtain. There is a framework, with thousands of eurocrats able to set annoying eurocratic rules, but no true European political, economic, fiscal or banking union, since the real power is still held by national governments.

It would be somewhere between impossible and economic Armageddon to dismantle the euro and go back to national currencies. Even the most sceptical economists see a hard northern euro surviving - unless of course Germany opted out first. The departure of Greece would cause chaos; further fragmentation would shake the EU to its foundations.

The smug British should not rejoice at the discomfiture of the euro. As Will Hutton wrote, perhaps optimistically, in the British newspaper The Observer, 'The EU that survives with the euro will be the centre of the European order. It will set interest rates and fiscal policy that will be the benchmark for every other European country.'

Rather than a Switzerland, Hutton predicts Britain outside the euro risks becoming a greater Guernsey, with the pound as a minor reserve currency subjected to systematic overvaluation, while remaining British industry flees to Europe or low-cost Asia.

British eurosceptics correctly point out that the driving force for politics is national: France, Germany, the Netherlands, Britain - and even England and Scotland - not Europe, capture voters' imaginations. This might change if electorates had a choice, voting for a president of Europe with pan-European powers, not a cipher like Van Rompuy or Barroso. But would the national elites be prepared to surrender their powers to the whims of a European electorate?

More to the point, are Berlin, Merkel and the Bundesbank prepared to concede that they may have to give as well as take? Germany, with 81 million of the 500 million people in the EU and 317 million in the euro zone, clearly calls the economic shots, and Germans are tough negotiators unwilling to sacrifice a jot or tittle or comma of their negotiating position.

Fixation with austerity is threatening not merely Europe but the world. Marshall Auerback, a portfolio strategist and hedge fund manager, pointed out the enormity of the demands for a 'fiscal compact'. It would mean the deficit countries, which include Spain, Italy, Portugal Ireland, France and Germany itself, would have to move from deficit to surplus, and this would lead to a deep recession of at least a 4.5 per cent contraction in the euro zone.

As he says: 'In a period when a banking crisis is in full swing, the Periphery is in free fall, US growth is teetering, China is slowing, engineering such a recession via this piece of 'legislation' is the macroeconomic equivalent of committing suicide.'