NURTURING THE ELEPHANT 1106 XXVIII

NURTURING THE ELEPHANT

Of all the misleading balderdash written about the European Union, pride of place must go to the claim that the Union brought peace to the European continent for fifty plus years after World War Two. It did NOT. After 1945 and until 1989 the military borders in Europe calcified into political borders separating the two competing superpowers and their allies. The leading Western Europe states were very much second division and would not have been permitted to fight each other, even had the desire or the means been there.  As time passed economic reconstruction and cooperation ushered in an era of prosperity out of which the European Union developed.

This is not to deny the many achievements in Europe since 1945. The European Union and its earlier versions have contributed a great deal to the peaceful and prosperous Europe we have today. Ireland has benefitted enormously from membership and continues to do so; indeed the EU is currently supplying us with economic life support. But now, as the EU faces perhaps its greatest challenge there is a need for cold dispassionate analysis of where we are at and where we are going. Any “Post hoc ergo propter hoc” line of reasoning and the mind-set that encourages it should be avoided.

I wrote last July, in the context of the developing crisis in the Eurozone, of the gradual emergence of a European super state built around Germany. This entity was still in embryonic form, its institutions and even its borders were evolving; it had taken a particularly significant leap forward in 2001 with the launch of a common currency – the Euro. All this happened over time and on an ad hoc basis rather than as part of a master plan. Certainly people from Schuman on down had had dreams of a united Europe but no one had any idea how it would pan out in reality. What we have now is a peculiar institution. And, as the Eurozone crisis has deepened, this institution is entering uncharted territory.

The crisis has exposed a weakness at the heart of the European project. You can have a customs union. You can have a free trade area. You can have a common travel area.  You can even legislate Europe- wide across a broad range of social and environmental issues under powers delegated by the member states. But you cannot have genuine economic and monetary union, embracing a common currency, without a supranational  political and fiscal authority with comprehensive powers to discipline and override individual member states. To date member states have been loath to give up this fundamental facet of sovereignty. There is, frankly, little sign of this situation changing.

The immediate major practical issue is whether the bailouts provided to date to Greece, Ireland and Portugal will enable the three countries concerned to meet their financial obligations without wrecking their economies in the process. The ECB and the heavy hitters of Germany and France remain firmly opposed to any restructuring of debt through altering the calendar or through writing off some of the amount owing. Whether that resolve will survive for much longer is for debate. Last year’s sticking plaster solution for Greece has proved inadequate and the Greek situation needs to be addressed urgently and definitively. This may not be possible without a fundamental restructuring of the Euro project.

The Euro was launched in 2002 on a wing and a prayer, with much pious waffle and fiscal and administrative controls that proved to be aspirational rather than binding when the going got tough. The first countries to breach the 3% deficit guidelines (albeit mildly) were Germany and France; they got away with it, something which did not go unnoticed. And, (shades of Ireland’s situation writ large) as long as the world economy was doing well, the growing imbalances and contradictions in the system could be glossed over. With recession all this changed and the weaker economies found themselves beached and exposed with large borrowings and rising debt.

Whither now? The usual European muddle through may not work this time. Policy is in flux and is being  made largely on the hoof. The European banks which provided the easy credit are exposed and would lose out in any debt restructuring or write-off. However, default by one or more countries could collapse the whole house of cards with consequences even more dire. Europe has a habit of doing too little too late when faced with a problem until at the eleventh hour some solution, usually temporary, is found and the system staggers on. What will emerge and will it work this time?

Ireland waits with interest. Emotions are rising here as the message sinks in that even a change of government has not altered the fundamental economic reality. The gathering head of steam in Ireland is focussed firmly on the ECB and (largely) Germany as being to blame for not reining us in during the Years of the Tiger, with our own tiger excesses being ignored or dismissed. There is talk of restructuring or even reneging on some of our debt though there is enough cautionary evidence and opinion around to counsel against this. Our immediate concern is to secure some relief on the interest rate we are paying on our bailout..

Some have suggested even deeper budgetary cuts here, to bridge the fiscal gap at one or two fell swoops. (This would be the de facto consequence of any reneging on debt, since we would immediately have to live within our fiscal means.) Yes,  an immediate 25% cut in government spending, including all public sector wages and welfare payments, combined with some sharp increases in taxes, could, by eliminating our current budget deficit more rapidly, give us the leeway to thumb our nose at the ECB, the IMF et al. Given that politics in a democracy is very much the art of the possible, the chances of this happening must be remote.  The government has little option but to soldier on and see what Europe can do.

In fairness, the task facing Europe’s leaders is colossal. Consider the much less complicated situation in the United States in 1790. The new country had no money and faced a huge debt from the revolutionary war. Some of the states had paid off their debt, others had not. Alexander Hamilton, First Secretary of the Treasury, proposed that the new nation assume all state debts and fund them by issuing new bonds. There was a North – South division, with up to 80% of the debt owed to Northern bondholders, many of whom had bought the debt at 10 or 15 cents to the dollar. Congress was deadlocked for six months with sectional animosities mounting. Eventually a compromise was hammered out with Hamilton’s plan being adopted at the behest of Jefferson and Madison.  To put it mildly, the plan worked.

The question is not whether Europe today needs a Hamilton but whether there is a spirit of compromise and statesmanship around sufficient to enable Europe’s leaders to agree on a fair and equitable solution for all its citizens. Without such a solution the EU’S future does not look great.

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