Free Markets, Free People

Saving the Euro

There is, according to the New York Times, a tentative plan afoot put together by European leaders, to save the Euro and end the crisis there.  Here’s how Stephan Erlanger describes it:

In the process, European leaders will begin to change the fundamental structure of the union, creating a form of centralized oversight of national budgets, with sanctions for the profligate, to reassure investors that this kind of sovereign-debt crisis is finally being managed and should not happen again.

The immediate focus of worry is on Italy and Spain, which have been buffeted by market speculation even as they move to fix their economies. That process took an important step on Sunday, as Italy’s cabinet agreed to a package of austerity measures to put the country in line for aid that would improve its financial stability.

The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.

Emphasis mine.  In other words these disparate countries linked only by a common currency are now going to give up their national sovereignty (i.e. their budgets)  to ensure its stability?  Really?

Well someone believes that’s going to do the trick because after the outline was announced, Italian bond yields “collapsed”.  From a high of 7.4% before Thanksgiving, they’re now down to around 6.15%.  While that’s a huge move, it still spells a country in trouble.   Now, of course, they’re going to give up having the final say on their budgets?

I wonder how that’s going to play in Greece.

The problem, of course, is the usual one:

So Mr. Sarkozy and other European leaders are working on a less elegant and more phased way to create a pool of bailout money that is large enough to convince the markets there is little chance of a default on Italian and Spanish bonds, which should drive down rates to sustainable levels, European and American officials say.

Mrs. Merkel says it is time to get the euro’s fundamentals right. She is insisting on treaty changes to promote more fiscal discipline, including a limit on budget deficits, with outside supervision and surveillance of national budgets before they become dangerous, and clear sanctions for countries that fail to adhere to the firmer rules. Berlin wants the new standards backed up by the European Court of Justice or perhaps the European Commission, with the power to reject budgets that break the rules and return them for revision.

She would like the treaty changes to be accepted by all 27 members of the European Union, but failing that, she said she would accept treaty changes within the euro zone, with other countries who want to join in the future, like Poland, free to commit to the tougher rules now. Many countries, and not only Britain, are opposed to institutionalizing a two- or even three-tier European Union, fearing that their interests will be sacrificed and their voices diminished.

Mr. Sarkozy, as the political inheritor of Gaullism, disagrees about the reach and nature of European supervision of national budgets and about the role of European institutions in overseeing the fiscal affairs of sovereign states. The French are more jealous of their sovereignty and more skeptical of European courts, not wishing to give them — let alone the bureaucratic European Commission — more sway over national budgets and policies.

“Europe must be refounded and rethought,” Mr. Sarkozy said last week. “But the reform of Europe is not a march toward supranationality.”

But in reality, “supranationality”, while possibly the needed solution, is very unlikely to come about.  And then there is enforcement of sanctions by some entity outside of a national one.  National politicians would only have a preliminary say in national budgets.

We’ve seen how the Greeks react to their own government attempting to enforce austerity measures.  Imagine an outside body like the European Commission forcing the Greek government to revise its budget.  Its also very clear the French want no part of it either.  The emphasized sentence is how it has always been, i.e. distrust and fear about being sacrificed and diminished.  That’s no way to hold a “union” together and it speaks volumes about the less than latent nationalism still in existence in all those disparate countries (and cultures).  It all comes down to trust and it appears they really don’t trust each other.

So while the tentative deal may seem to be workable there have to be serious doubts about whether, even if finally agreed too, it can work.  It just doesn’t factor in the national paranoia among most members about being subsumed by a “supranational” entity.  Their identity, which most have guarded jealously, has always been a problem and, given the financial mess in the south, likely to intensify vs. lessening.

Is there a solution to save the Euro?  Perhaps.  But is giving up national sovereignty on budgets and allowing a “supranational” entity to overrule them and enforce sanctions going to actually come to pass?  And if it does, will those who agree in a time of crisis actually do what they promise now if the crisis lessens?

I’m betting “no”.


Twitter: @McQandO

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37 Responses to Saving the Euro

  • The history of the EU is one of a movement away from absolute sovereignty towards ‘pooled sovereignty’ or as the EU puts it, subsidiarity. Globalization is a threat to sovereignty as the standard of the international system, in practical terms many states have already ceded sovereignty to big financial and corporate interests due to economic pressure. The thing about how European states have been sacrificing sovereignty in bits and pieces for decades is that it is in their self-interest. Moreover, the groups who want to save the Euro are the wealthiest businesses and banks in Europe — and in politics, money is a powerful influence. The Eurozone is also voluntary — states can be in the EU and outside the Eurozone. They only join if they find it in their interest. States faced with the choice of joining a Eurozone with more fiscal unity or leaving would have to weigh the real consequences of each choice. For now it’s a dance between French and German visions, with the agreement probably ending up somewhere between the two (if Germany is willing to pay more, it will get more).

    Leaving the Eurozone would be very costly and adversely affect the business and financial communities the most — and they have real clout. Finally, monetary union was always seen as a step towards more fiscal unity. It was not an end in and of itself. Recall that once governments were sovereign to create whatever monetary policies they wanted, and in the mid-seventies anyone calling for monetary union would be met by the same reply you give — states will never give up sovereign control of their ability to manipulate monetary policy for political means. Yet they did, in large part because globalization forced them too (capital could more easily cross borders). It’ll be messy. Like monetary union the first treaty might falter and they’ll renegotiate. Some states might hold out. But they’ll continue to move forward. I recall at taking a class on European integration at Johns Hopkins SAIS’ Bologna Center with Dr. Gianni Bonvicini. This was 1982 and the British budget crisis and “eurosclerosis” were causing skeptics to gleefully announce that the EC had gone as far as possible. Dr. Bonvicini told us that he thought monetary union was inevitable, and most dismissed the prediction as one of a true Europhile. He said Europe progresses by fits and starts, with crisis preceding progress. He was right.

    • @scotterb The whole problem with this from a classical liberal position is that collective self interest is undefinable. It is the core lie behind left wing central planning. It eventually devolves into, “I know what is best for you and I’m willing to use force to prove it.” The most ruthless will win.

      • @tkc As noted above, the self-interest is really defined from the perspective of big banks and big business. They also have immense power in every government. In the EU and increasingly the US this creates a gulf between popular opinion and elite/government opinion from all parties. Government responds to big money, and then parties manipulate public opinion with propaganda. In the US the left points the finger and says “it’s big money that’s the problem, big government is good,” the right points the finger and says “big government is the problem, big money is good.” Each side gets it half right.

        • @scotterb Correct. Yet neither side, the big government nor the crony capitalists have my (or your) self interest at heart. Thus the problem of self interest being defined on a collective basis. It has to be decided on an individual basis that defies what is going on now in the halls of government and fat cat banks.
          Right versus left is meaningless in this contest. It is better defined by liberty versus authority. The authoritarians are winning.

        • @tkc @scotterb If you call TAKING vast power, which is then used to crash an entire global economy “winning”.

          Than, yah.

        • @tkc That’s too extreme a dichotomy for me. I think there are collective interests and the founders recognized that in the Constitution. I don’t think you can have a system without governance and thus there will always be politics. To me the question comes down to what kind of process can mediate these disputes without centralizing power in special interests. I think with the technology/communications revolution there can be a real decentralizing of power and increase in transparency, but that will require a rethinking of politics as usual. I touch on this in a blog post I did awhile back:

        • @scotterb @tkc (Chuckle) The Northern Star of self-parody….!!!!

        • @scotterb I’m talking about the classical liberal idea of limited government. The Constitution, to an extent, was founded on this idea. It was abandoned quite some time ago. The trick is to convince the people bent on centralizing power to decentralize it. I don’t see that happening short of some sort of tragedy.

        • @scotterb @tkc Link-whoring yet again. Would you like to borrow my Tintin collection?

        • @DocD @tkc Link whoring? I don’t advertise or make any money, so it’s really just to show where I’ve developed the idea in more detail.

        • @scotterb @tkc Hmmm, apparently unaware of definitions of link-whore as well.

        • @tkc I’m actually convinced decentralization will happen, and it will happen even in the EU — without destroying the EU. This current crisis may be the beginning of what pushes towards that path. It’s also interesting that OWS and the Tea Party have similar concerns about centralized power. I doubt decentralization will be completely tied to an ideology like classical liberalism, and the crisis may get much worse before getting better, but unless decentralization happens we’ll get a lot more authoritarian control and less real liberty.

        • @scotterb @tkc OK, so now we are down to the attempted diversion… reference to Italian holiday jaunts in 3, 2, 1 …

        • @scotterb @tkc “It’s also interesting that OWS and the Tea Party have similar concerns about centralized power.”

          Which, of course, explains why the Revolting Eloi are endorsed by the Communists, Socialists, Nazis, unions, and Deemocrats.

          TOOOOOOooooooooo funny and stupid…!!!

  • “She is insisting on treaty changes to promote more fiscal discipline, including a limit on budget deficits”

    They already had those rules and Germany and France were the first ones to break the deficit limits with no penalty. Talk of ceding more sovereignty is not going to go down well with the average Joe European, specially those outside the Euro zone.

    When Sweden rejected joining the Euro in a public referendum it was because of a strong public sentiment that it was a bridge too far. Economists on the other hand were against it because there were no mechanisms by which the government could sufficiently keep the economy under control if it overheated, which later happened in Ireland and Spain. But the (leftist) government of the time was strongly for joining the Euro and when the referendum rejected it the Prime Minister famously declared it didn’t matter since there would be more referendums until the public got it right. They were booted out the next election. Now of course the public and those economists are still happy to be outside the Euro and there is an enormous distrust of ceding any further soveriegnty, oddly enough.

    Of course the unaccountable Eurocrats (voting in those elections is the most pointless thing one can do) will not let a crisis go to waste and will try and expand whatever powers they can anyway.

  • Actually, the collapsing yield on the Italian 10-Year should be read as good news. It means investors are less worried about the ability of Italy to pay back the debt. Less risk means less yield, so, you actually WANT Italian bond yields to collapse. It means that investors are snapping up the bonds causing the price to rise sharply, with commensurate drops in yield.

    Or, it may mean the ECB is buying them up to try and support them, and when that buying spurt ends, prices will drop like a stone, and Italian yields will shoot to the sky.

    • @DaleFranks Yeah, it is good news .. that’s why I pointed too the collapse in rates with this preface: “Well someone believes that’s going to do the trick because after the outline was announced…”

      • @Bruce McQuain I think my main point was whether it is actually good news, or just a reflection of some temporary support to fend off the collapse in prices for a while.

        • @DaleFranks @Bruce Agreed. It is certainly good news in the short term. Whether or not it remains good news is indeed dependent on whether or not something concrete and workable comes out of this meeting.

  • “There is, according to the New York Times, a plan tentative plan afoot…” this is probably a typo but ironically enough it sort of fits. There have been numerous plans to make a plan to plan to do something. Actual results have been fleeting.
    As for the four pronged plan… it is amusing.
    1) “fiscal discipline that will be embedded in amendments to European treaties”
    Really? Gather up the moon ponies for this one. There were already requirements in the Euro treaty that governments not go beyond a certain level of GDP to debt ratio. Guess what happened? Countries lied about their finances and even when they were honest and broke the ratio, nothing was done. They’ve already been down this road.
    2) “a leveraging of the current bailout fund, the European Financial Stability Facility” this plan to make a plan has already failed. Germany wants no part of monetizing debt. They’ve had a history with hyper inflation. Either way this is trying to solve a debt problem with more debt. They’d simply be making another credit card to max out.
    3) “a tranche of money from the International Monetary Fund to augment the bailout fund” Not just ‘no’ but ‘hell no’. This is the means in which the US Federal Reserve gets involved with the result of putting the US taxpayer on the hook for European debt.
    4)”quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim” Again, this is trying to solve a debt problem with more debt. See Germany and opposition to monetizing debt.

    I don’t hold out much hope for this plan to make a plan to get out of the planning phase.

    • @tkc Germany will negotiate and compromise – Merkel isn’t Helmut Kohl, but she is committed to the EU. The US will be involved because globalization makes this crisis a potential threat to the US economy. While many people think in terms of separate independent sovereign states, the reality is that globalization and the internationalization of capital (and massive increases in global debt, public and private) mean that destinies are now linked. The US and the IMF will be involved out of self-interest (especially by big banks and big business interests — the so called ‘1%’).

      • @scotterb What you’re describing will be disastrous for the US taxpayer. We already have our own horrific debt problems thanks to our corporatist government. This is not a globalization problem. It is a cronyism problem.

      • @scotterb @tkc Again proving you have NO sense of history. Look at the Great Depression. Boob.

        • @Ragspierre @tkc Tkc, it’ll hurt the US taxpayer if the economy collapses and there is a major credit crunch. Rags, you have no sense of history if you make a comment like that!

        • @scotterb Of course it will. The matter right now is that the government, in a CYA move, is making the problem bigger and worse.
          There will be a recession. It is only a matter of how big and how long. The government, much like in the Great Depression, is in the business of going bigger and longer.

        • @tkc @scotterb And, obviously, the world was nicely sequestered during the Great Depression…

          if you’re an historical idiot like Erp.

        • @Ragspierre @tkc Rags, if you don’t know the difference between globalization now and globalization in the 1920s, you really need to take a basic course in IPE.

        • @scotterb @tkc Again, demonstrating that you cannot tell incremental change from revolutionary change.

          But thanks for playing…!!!

      • @scotterb @tkc Pretty much exactly what was said before the war to end all wars… no one could possibly break the international order and first round of globalization because there was too much to lose. There won’t be a world war this time, since no one is armed enough to fight one, but populist governments will make a comeback in the smaller European states (e.g. Slovenia this week) and it’ll slowly recede into irrelevance. As you’re so fond of saying about Egypt, it’s us Europeans who get to decide and at the moment it is a good time to be thinking about stirring the popular kettle.

        • @DocD @tkc OK, you’re predicting the EU will recede and apparently that the Eurozone will go away. I predict the EU will survive and the Eurozone will continue (probably with all current states, though perhaps a few will leave for awhile), and eventually more states will join. We’ll see in time who’s right. Glib comparisons to history are usually wrong because it’s easy to see general similarities but to miss real, profound differences.

        • @scotterb @tkc “Glib comparisons to history are usually wrong because it’s easy to see general similarities but to miss real, profound differences.”

          Bwa ha ha ha, from Doctor Glib himself, even! We’ll see, maybe your manifest destiny jag will pan out and your “great men of history” will come through. But, based on what plain old everyday Europeans say, I’m not giving it more than a 50-50 chance for the next decade at the moment.

        • @scotterb @DocD
          Remember the break up of the Soviet Union? A lot of people missed that one coming too.

        • @DocD @tkc The Eurozone, or the whole EU?

        • @tkc @scotterb Don’t forget the sun will never set on the British Empire, the most globalized, technologically advancing and ethnically/racially/religiously diverse entity that has ever existed.

  • “Berlin wants the new standards backed up by the European Court of Justice or perhaps the European Commission, with the power to reject budgets that break the rules and return them for revision.”

    Seriously, this will last until (a) France and Germany break the limits with impunity again within 5 years or (b) the first leftist government in some smaller state runs up against the wall on domestic spending and resorts to a bit of dog-whistle populism to stick it to the weenies in Brussels so as to keep their power at home. What’s going to happen then, send in the Gendarmerie or maybe a panzer brigade??

    Nope, transferring yet more power to the Court or the Commission, out of the reach of voters or even national legislators is going to cause one of the smaller states to pack up and leave the Euro pretty soon. Even now Finland must be jealously looking sideways at Sweden and Denmark and wondering just why they deserve this shit.

  • I caught most of Sakozy’s speec the other day where he rejected the spend and create even more debt ideas (often put forward by Nobel Prize winning a-hole Paul Krugman). He even got a standing ovation when he recommited the French nation to nuclear power.