Spendthrift Europe’s week of reckoning.
For months the European Union has tottered from bailout to bailout. After agreement was reached on the latest aid package for Greece, Italy fell into investors’ crosshairs, Portugal’s credit rating fell, France risked losing its triple A rating, and even Germany had trouble selling bonds.
Worldwide investors are backing away from European sovereign debt, creating “a pretty terrible spiral,” observed Peter R. Fisher of asset manager BlackRock. Yet the Eurozone nations must refinance nearly $900 billion worth of debt next year. European leaders are set to meet later this week in a desperate attempt to save their “project.”
Just two years ago a Eurocratic elite made up of politicians, bureaucrats, academics, journalists, and businessmen pushed the so-called Lisbon Treaty into effect. The objective was to turn the continent into a Weltmacht able to compete with America and China. Today the 27-member European Union is besieged economically and fractured politically.
The vision of a united Europe goes back decades, even centuries. Pressure to weld the European nations together accelerated after World War II. However, political unification remained a distant goal. Some Eurocrats chose the indirect approach. Give the single market a single currency and united politics will follow. Thus was born the Euro, which has been adopted by 17 of the EU’s 27 members.
The challenge of unifying monetary policy without unifying budget policy was recognized at the time. Recently German Chancellor Angela Merkel argued: “We must overcome the architectural flaws that worked their way into the economic and monetary union during its formation.”
But political unification remained at a standstill while the Euro seemed to thrive. The continent’s elite proposed a new constitution to strengthen Brussels’ authority, reduce national control, and create the equivalent of a president and foreign minister. But in 2005 Dutch and French voters said no, killing the effort.
The Eurocrats relaunched the constitution as a treaty, which required only parliamentary approval in every member state other than Ireland (its constitution mandates a popular vote). Even here the bandwagon almost foundered. But two years ago the Eurocrats celebrated their victory.
That, however, was the high point of European political unity. Already the Eurozone was suffering significant economic stress. Weaker European countries borrowed promiscuously even as they lost international competitiveness by tying themselves to a stronger continental currency.
Once investors looked beyond the Eurozone connection they began demanding higher interest rates. Greece was the first to face enhanced scrutiny. Athens had lied about its finances for years. It could have been left to reschedule its debts, but that would have devalued the Eurozone seal of approval. If Greece could default, so could other members. Equally serious, European banks that only narrowly survived the 2008 financial crisis might again be at risk.
So the parade of bailouts began, despite contrary treaty guarantees and political promises. Greece, Ireland, and Portugal, and then Greece again. What if each preceding round wasn’t enough? European Council President Herman Van Rompuy announced: “my answer is simple: in this case, we’ll do more.”
European politicians raged against the markets. Germany’s Finance Minister Wolfgang Schaeuble complained that “The international markets do not really understand the very specific construction of the Euro.” In fact, the markets understood all too well — especially how the feckless spendthrifts in power across Europe were desperate to avoid making tough decisions.
In October European leaders agreed to expand the bailout fund to one trillion Euros, around $1.4 trillion. No wonder the group Open Europe called the EU “a de facto debt union.” But the EU had become a de facto transfer union as well. Every country, even the newer, poorer members from Eastern Europe, was expected to underwrite their better off spendthrift neighbors.
Europe’s problem was too much government burdening too little economy, yet the EU members were creating more government. Observed Daniel Hannan, an outspoken British Member of the European Parliament: “It doesn’t strike [EU leaders] as eccentric to address a debt crisis with more debt.” Every new round increased the indebtedness of highly indebted nations. Warned Gideon Rachman of the Financial Times: “one unpleasant consequence of successive rescue packages in Europe is that they impose a financial strain on countries that fund the emergency loans but are themselves heavily indebted — such as Italy and Belgium.”
The Europeans have yet to figure out how to fund their one trillion Euro fund. Neither the Chinese nor private investors indicated much interest in “investing” in the improvident Europeans. “It will be very difficult to reach something in the region of a trillion,” admitted Dutch Finance Minister Jan Kees de Jager. “Maybe half of that,” he suggested. But even the larger bailout pool could not handle a potential default by the largest European economies, such as Italy. Yet Rome’s borrowing costs have topped seven percent, causing barely disguised panic in European capitals.
Today everything depends on Germany’s willingness to continue tossing away its citizens’ money. Berlin has much at stake. The Eurozone aids German exports; German banks have bought much sovereign European debt. There also is the sacred European Project. Said Chancellor Angela Merkel: “If the Euro fails it’s not just the currency that fails, but Europe and the idea of European unification.”
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H/T to National Review Online