The end of the European dream

8 05 2011

The European project to bring all the states of Europe, big and small, into a mutually beneficial co-operative system was one of the political triumphs of the 20th century. It sought to end the hostility neighboring countries felt towards each other both economically and culturally. It did this by removing barriers to trade and ushered in an era of free movement of people, goods and capital.

It worked. An inter dependance grew up between nations who bought and sold commodities between them without tariffs. The original idea was that if countries were economically dependent of each other, the need to wage war would diminish. Later this grew into a belief that if Europe stood together economically, they could then collectively punch their weight on the world stage.

The Wonder Years: The Treaty of Rome, back when the European member states were all pulling in one direction.

The largest step towards this was the single European currency. In the early days the advantages of the Euro seemed obvious. A Spanish company could accurately price the cost of a good in Germany without the hidden charges of exchange rates. It made sense, but the disadvantage came in the surrender of individual countries ability to pull various economic levers in times of woe. In the late 1990’s this seemed like nitpicking, why would you need those levers when all the economies of Europe are performing and growing?

Fast forward ten years and some of those Eurozone economies are in dire straights. The collective economies never were in perfect sync requiring a one size fits all economic policy. In 2008 the music stopped and most notably Greece, Portugal and Ireland were left without even a fig leaf to cover up their problems up.

All these countries have very different issues, mostly of their own making. The economic downturn in Greece showed up the deep structural problems in the Greek economy and successive governments attempts to cook the books. In Ireland a massive Ponzi scheme collapsed but not before almost every bank and individual became exposed in one way or another. Property prices plummeted and took the economy with them once somebody pointed out the Emperor was naked.

One of Ireland’s ghost estates, the property bubble meant houses could be built anywhere and they would sell for a massively inflated price. When it burst property like this became a liability to the bank and therefore the state.

Usually these countries could take their own actions to deal with the crisis, but remember they packaged up those economic levers and sent them to Brussels. Before the Euro the economic collapse of Ireland would not have much effect on Germany, but Europe’s project to interconnect their fates now pulls Ireland into their orbit of worries. The trouble is, the financial elite in the European Central Bank (ECB) are exposed. All the economies of Europe must be healthy and operating for the Euro to be a strong currency. If one nation defaults on its debt, the gods (in this case the markets) become angry and threaten all kinds of terrible things.

The original spirit of the European project was we all stand together or fall together. For the European project to work, Ireland’s debts have to be shared between those who are liable, this is bog standard capitalism. That achieved the economy has to become more competitive and economic activity has to encouraged by investment, first public then private as things impove. This is bog standard economic theory, and in turn Germany helps Ireland get back on its feet and a contributing member of the family again.

This is where the original ideas of economic co-operation in Europe wither and die, without it Europe is at war again, albeit economically at war. The serious men (serious because we are supposed to believe they cannot be wrong) at the European Central Bank impose bailouts on its delinquent members. However, the aim is not to reform these economies and get them growing again, it is to apply a massive band aid that will keep the markets happy and the save the Euro from the embarrassment of a departing member state.

The thinking behind this follows what the ECB believes to be its most pressing priorities, they go something like this. Top of the list are the big French and German banks, their trouble is they got their hands dirty when they happily moved capital into countries like Ireland and then got burned when the investment went sour. The prevailing wind says these debts are paid by the Irish not by those stupid enough to make the investment in the first place. Second is the need to always present the Euro as a strong currency, dismiss any talk of its faults and certainly quash any talk of leaving the eurozone. This is the equivalent of a family attending a social occasion with the main aim being to deny the extra marital affair that took place or the love child that resulted. Thirdly or maybe further down the list comes actually fixing the broken economies of the European family.

The European Central Bank, the fate of the European project now rests with the bankers who occupy this building.

The problem with this is it won’t work. Ireland will default, its private banking debts are huge, and now saddled on the Irish taxpayer, who cannot pay because he lost his job. Greece is on the verge of leaving the Euro as its only way out is to devalue its new currency and work from the ground up. Europe is now a two speed economic zone, France and Germany with their balanced economies wag their finger at those on the periphery and offer punishment but no solution. Eventually the figures in the bailouts won’t add up, just like the same bankers figures did not add up in 2008.

Before we even get to that point the other unthinkable scenario may come to pass, the Spanish economy could implode. Much like Ireland, Spain had a property boom that the banks reveled in. If those banking debts get the better of the Spanish governments ability to cover them, the fifth largest economy in the EU could also need a bailout. This would be a bridge too far. The bankers in Brussels may be able to convince the markets that punitive bailouts in the small economies will keep them in line but a Spanish bailout of private banking debt would make even the most delusional neoliberal scratch his head and ask, ‘Do those numbers add up?’

From here on in, its every European government for themselves.

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