Monday, July 16, 2012

The Fate of the EU

Europe is on the edge of economic disaster due to the EU experiment.  Most of the media chooses to believe that the problem will be eventually fixed, but I believe the EU will fall.  It's nice to see a writer acknowledging that it can happen. (Original post here. My comments in red).

Europe is in more danger than at any time since the 1930s. One nationalist demagogue could cause an earthquake

By Thomas Pascoe July 13 3012

Ours is a complacent continent. Despite impending events that would have precipitated a revolution in almost any other place at almost any other time in history – either a collapse of the currency or the complete secession of budgetary control to a supra-natural body in the EU – we expect the fabric of European society to endure without major changes. I think we are wrong. (This is a fact many will not admit:  Europe is complacent and refuses to see the proverbial writing on the wall.)

There is a presumption of perpetual peace in Europe which rests in turn on a presumption of the perpetuity of our existing capital structures. Once the latter are undermined, the former is called into question. (Europeans think that with the creation of the EU war is a thing of the past in Europe--I think otherwise due to man's fallen human nature.)

The great wars of the secular age have all been fought between ideologies which seek to restructure the relationship between capital and the people. As popular support grows for such plans, Western Europe is entering its most dangerous phase since the 1930s.

As in the early 1930s, the decision on the fate of financial order on the continent rests with debtor countries who admit no guilt for their debt. And, once again, faith is being placed in the treaty system to maintain order. To push the analogy further, I believe that the dominant form of political organisation over the next decade will be nationalism. We are one charismatic leader away from a complete re-ordering of the continent. (Think of what a monarch or exiled royal could do to bring back monarchy to his people or strengthen the monarch.)

The problem with reparations, halted under the Nazi Party in 1933, was not that the Germans were unable to pay a debt which amounted to 83pc of GDP in 1923: on the contrary, they were (I recommend AJP Taylor’s Origins of the Second World War on this point). Instead, it was that neither Germany nor pre-Anschluss Austria recognised the "war guilt" clause in the Treaty of Versailles which justified such payments.

Not only did the debtors believe the debts unjust, so did the creditors. Sophisticated opinion in Britain, shared by Cabinet ministers and Keynes, held that the peace terms were unduly harsh on the Germans and would cause unnecessary deprivation. This combination of stubbornness and sympathy ensured that when debts eventually went unpaid, no nation intervened to support the existing financial system.

There is a parallel here with the contemporary debts of the Club Med states, although their debts are higher – and headed to 170pc of GDP, according to Fitch.
he striking feature of almost every dispatch from Greece, Italy (downgraded today by Moody’s), Spain and Portugal is that, irrespective of the commitments of the political class, the population at large feel no culpability for the debts their leaders have amassed. They are willing to endorse plans to pay these debts back only to the extent that such plans extend further credit and allow public sector wages to be paid.

There are two broad routes Europe can take from here.

Firstly, the nations of the eurozone agree to full fiscal union. “The train is on the tracks,” one senior European diplomat told me this week. “It cannot be stopped.” Under such a deal, the south would be bribed into swapping debt sharing for its fiscal autonomy. The electorates of the north would be railroaded by their politicians into accepting responsibility for debts they did not incur and peoples they do not share a deep bond with. (This would be the worst thing the Europeans could choose:  further relinquishment of national sovereignty.)

The second is that the eurozone falls apart under the weight of its internal contradictions. Individual sovereigns would now seek to redenominate eurozone paper into local currency but, even allowing for inflation and devaluation, the burden would still be onerous, particularly as new sources of credit would effectively be cut off once the ECB ceased to be. (A good reason to bring back the gold standard?)

In both circumstances, the obvious political development would appear to be the rise of nationalism, with its face set against the European project and international debt obligations.

Politicians in the modern era have sought to divide and rule. Because of the lack of an external enemy, appeals are made to sectional groups in the electorate at home – ethnic, sexual, religious or economic communities who are then set against other groups in their own nation.

This crisis will produce a window for a skilled politician to unite the entire country against its debt obligations, against international finance, just as the Fascist parties did in the 1930s. No matter which path the EU chooses, the loss of either national sovereignty or proper enforcement mechanisms through the EU gives rise to an opportunity for a nationalist politician willing to repudiate his nation’s debts and start again. (Perhaps the reader can interpret "nationalist" here to be a leader to puts the interests of his own nation first over that of other nations and leave behind the usual racist connotations ascribed to the term "nationalist.")

Ending reparations in 1933 did not cause a crisis in global finance. Germany defaulted on its payments to Britain, which in turn ceased to honour its debts to the United States. Each creditor was large enough to take the hit. Government debt in the modern era is different. The leverage used by banks trading secondary and derivative products means that for every €1 which, say, Greece owes, €100 is set to be lost if she were to default completely.

With leverage on such an irresponsible scale, all nations would be forced to re-examine the relationship between capital and individuals in the event of default, with all of the conflict and strife that would entail.

Europe is one demagogue away from causing an earthquake in global finance such that the current problems seem a tremor in comparison. If Silvio Berlusconi – the only truly populist politician the continent has produced in the last half a century – were 20 years younger, I fancy it would have been him. As it is, a great deal now depends on whether a man will emerge somewhere in Europe capable of pushing nervous and resentful electorates over the precipice to outright default.

I would not bet against it.

(Think of the possibilities if a royal were to stand against the economic integration and lead his people to national sovereignty!  We could just see the return of monarchies across Europe.  These leaders need not be demogogues, just charismatic and passionate leaders.  Is it likely?  I don't know, but I wouldn't rule it out.)

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