March 20th 2010

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Articles from this issue:

EDITORIAL: Rudd's hospital scheme: spin before substance

CANBERRA OBSERVED: Rudd lays groundwork for health referendum

NATIONAL AFFAIRS: Tony Abbott's faux pas alienates allies

SOUTH AUSTRALIA: Can SA's Liberals topple Labor's Mike Rann?

FOREIGN TRADE: Australian shareholders suspicious of China's motives

GLOBAL FINANCIAL CRISIS: Gathering crisis engulfs the European Union

FOREIGN AFFAIRS: Australian force in East Timor reduced

OPINION: Labor unconcerned about Australia's debt explosion

DIVORCE LAW: Family Law's unending war on fatherhood

MEDICAL RESEARCH: Cannabis causes psychotic disorders in young users

UNITED NATIONS: Aid for Haiti delayed by condom shipments

OPINION: Eight arguments for school voucher funding

CIVILISATION: The politicisation of modern education

AS THE WORLD TURNS: Couple nurture virtual child as real daughter starves to death; Staring into the chasm; French intellectual victim of hoax

CINEMA: Suspense-filled American war thriller - The Hurt Locker, rated MA15+ (for war violence and language)

BOOK REVIEW: GOING ROGUE: An American Life, by Sarah Palin

BOOK REVIEW: WEDNESDAY WARRIORS: Doing it for the Jumper, by James Gilchrist

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Gathering crisis engulfs the European Union

by Colin Teese

News Weekly, March 20, 2010
The global financial crisis threatens to disturb the stability of the European Union. Some are hinting at the possibility of the EU coming apart. Its currency unit, the Euro, could be under threat.

These are genuine possibilities, but they aren't the real issue.

European integration has been a central pillar of European security since the experiment got under way nearly 60 years ago; indeed, it has been an integral part of Western security.

From the very beginning the aims of integration were strategic and political. Two disastrous wars in 25 years convinced Europeans - initially in the west and south - that fighting each other wasn't the solution to their problems.

The first cooperative efforts concentrated on the coal and steel industries and matters atomic. In 1951, the European Coal and Steel Community was established. In 1957, the European Atomic Energy Community (Euratom) was created to coordinate atomic energy policy.

The European Economic Community (EEC) followed in 1958. Membership initially comprised six European nations: Germany, France, Italy, Belgium, the Netherlands and Luxembourg. The founding member-states initially ceded power over trade policy to the community's bureaucracy, established in Brussels and called the European Commission.

The EEC's trade dealings with the rest of the world and with the various United Nations agencies were co-ordinated and conducted by the European Commission on behalf of the member-states.

Policy approaches on specific issues were developed in Brussels under the chairmanship of the EEC. Once member-states had agreed on a common position on a particular issue, the commission would speak on their behalf with the member-states quite literally looking over the commission's bureaucratic shoulder.

In practice, and over time, this process gave the EEC enormous power over the shaping of a common policy. Eventually, as the number of member-states increased, the commission emerged as a dominating force.

The power and influence of the commission over policy has been, and continues to be, a source of tension between the commission and the member-states; but it has been a binding element for European unity. The commission has acted as a kind of umpire as member-states strove to reach common positions on difficult issues.

What is today called the European Union is a bureaucratic nightmare to administer. Its problems have increased in direct proportion to the increase in the number of member-states. Remember, it has gone up in regular jumps from the original six. Today the EU is made up of 21 member-states scattered across western, southern and eastern Europe.

The bureaucratic power of Brussels has been the driving force behind the EU's expansion. Brussels has also constantly pressed for greater national powers to be ceded to the EU - in effect, to the Brussels bureaucracy.

Starting originally with little more than trade policy, the EU, through Brussels, now administers policy on behalf of member-states, covering such things as competition and budgetary policy.

It has not, thus far, succeeded in getting control of foreign policy - though not for want of trying. But it has managed to establish a common currency (the Euro) - though, for the moment, not all member-states have committed to the Euro. Britain is the most influential member-state standing aside from the common currency. It remains committed to its own currency - the British pound - mainly because of London's position as a financial centre.

When the global financial crisis hit Europe, some of the shortcomings of the financial arrangements made over the last decades have been exposed, most notably those relating to budgetary policy.

EU member-states are committed by treaty to maintain balanced budgets. Not all have managed, or even tried, to do so. Greece is not alone among those countries which have manipulated figures to create the illusion of budgetary balance.

But the fact is that countries within the EU have economies at different stages of development, and with widely differing cultures, attitudes and capacities when it comes to financial management. Some member-states were always going to find it difficult to live up to their treaty obligations, if the financial going got tough. And so it turned out.

In recent months, Greece has been exposed as struggling to meet its day-to-day obligations to foreign creditors. It is considered to be in imminent danger of reneging on its debts.

Conceivably, such an event could have serious consequences for the European Union.

First, there could be a domino effect. Other member-states, notably Spain, Italy, Ireland and some of the eastern European countries could follow. If this were to happen, more than mere prestige for the EU could be at stake.

A common currency is making things more difficult. Member-states in trouble with debt cannot tackle the problem by devaluing in order to make their exports cheaper and their imports dearer. They are locked into a common currency, the Euro, which can only be devalued across the entire EU. Nor, as current arrangements stand, can the EU bureaucracy bail them out.

Given both treaty commitments, as well as sheer practicalities, there seems not to be any realistic basis for a member-state, once inside, to leave the European Union.

Greece, along with others, is clearly in breach of its EU treaty obligations concerning financial management. How then can such countries remain in the union? Equally, though, there seems to be no basis on which they could leave.

At the time of writing, rumours are flying about relating to the plight of Greece; but the basic question is, what could conceivably work? Greece owes about €400 billion in total. It needs €30-odd billion immediately (which it does not have) to roll over its existing obligations. Germany and France are being fingered to advance the rollover funds needed - subject to conditions.

If that happens, Greece must undertake to bring its budget into balance. Among its other tasks, it will be required to collect tax from its citizens, which traditionally Greek governments have been unable and/or unwilling to do. That being so, it is reasonable to question whether Greece's budget can or will ever be brought into balance.

Greece must also cut wages and public spending, including welfare, in ways that are already leading to widespread unrest. If these measures are resolutely pursued and intensified, the medicine could prove to be worse than the disease. The result might induce a level of civil disorder sufficient to plunge the country into revolution.

It is hard to imagine how the European Union could watch passively as a member-state collapsed into anarchy.

Against that, in the case of Greece, what, realistically, are its prospects of economic rehabilitation? Regardless of any immediate Franco/German band-aid, does anybody really believe that Greece can trade its way out of its €400 billion worth of debt?

Much the same may well be true for the other seriously disabled EU economies, especially as it seems that they too would find unpalatable the harsh medicine associated with rehabilitation. If so, what then?

The answer isn't clear. The EU could disintegrate, though that seems unlikely. As with much of the remainder of the West, a good many EU member-states have been living, not so much on borrowed time, but on borrowed money. Most perceptive financial observers are warning that these loans won't easily be paid back.

The EU's debt has been accumulated in an attempt to pursue a better standard of living for its poorer member-states without detriment to the rest. The outcome has been to create no more than an illusionary interval of prosperity.

Now the time for pay-back has arrived, and, as a consequence, a new era of austerity will be imposed. It is unlikely that the lower standard of living imposed on EU member-states, by the need to repay imprudent borrowing, will be accepted as readily as was the prosperity that followed the spate of borrowing.

That being so, the commitment to European unity will be tested to the full, and much will depend on how well the Brussels bureaucracy manages it. Especially will this be so if the poorer member-states are expected to shoulder most of the downward adjustment. The bureaucracy will have to find a way to spread the burden of adjustment across the entire EU - though not necessarily in equal measure.

Will this threaten the stability of the EU? You can be certain of that.

But, for the moment, the big question is not whether or not the EU breaks up. The more perceptive commentators are suggesting that much of the West - not necessarily excluding the United States - is in the same precarious position, and for pretty much the same reasons.

In the wash-up of all this, large parcels of debt which can't be repaid may have to be written off - though how this might play out in practice is not easy to imagine.

But, whatever happens, world power and influence spheres will be redefined. It is already happening. We appear to be witnessing, as a consequence of this development, a shift in the centre of economic gravity. Standards of living in the West are declining, while those in East Asia are rising, perhaps as a reward for saving.

The malaise so clearly evident in the European Union may well be on its way to infecting much of the West.

It is truly breathtaking that, while this is happening, groups of Western academics prattle on about whether or not the global financial crisis is over - or, worse still, whether or not the severity of it was (or is) worse than that of the post-1929 Great Depression.

Few governments seem prepared to face the realities of what the current financial crisis has brought in its wake.

Colin Teese is a former deputy secretary of the Department of Trade.

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