May 26th 2012


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Articles from this issue:

COVER STORY: Defence cuts will damage Australia's security, credibility

CANBERRA OBSERVED: Little chance of reprieve for Gillard government

NATIONAL AFFAIRS: Push for new laws to attack churches, schools

SOUTH AUSTRALIA: Politicians vote to create fatherless children

EDITORIAL: Obama, same-sex marriage and the US election

AS THE WORLD TURNS

FOREIGN AFFAIRS: Australia rolls out red carpet for China's Himmler

ECONOMIC AFFAIRS: Drastic measures needed to save European Union

MIDDLE EAST: Muslim Brotherhood to benefit as Egypt descends into chaos

SOCIETY: The shame of global sex trafficking and prostitution

UNITED NATIONS: Coming to a school near you: sexual "rights"

UNITED STATES: Verdict on Obama's presidency

CULTURE AND CIVILISATION: Resisting the call of the wild

LETTERS

CINEMA: Superb exercise in modern mythology

BOOK REVIEW Clearing away the debris of chaotic modern thinking

BOOK REVIEW Reappraisal of a much-maligned figure

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ECONOMIC AFFAIRS:
Drastic measures needed to save European Union


by Colin Teese

News Weekly, May 26, 2012

Harvard economist Dani Rodrik tells us we can have only two of the following — economic globalisation, political democracy and national sovereignty.

This “political trilemma”, Professor Rodrik believes, gives rise to much of the current stress in the global economic system. He further argues that the tensions currently existing within the European Union are similarly derived.

If we look at how the global financial crisis evolved in the United States almost five years ago today, there are indeed similarities, but also differences by comparison with Europe.

Grave instability in the US financial marketplace first occurred when Lehman Brothers, the US’s eighth largest bank, was revealed to be insolvent. The then US Secretary of the Treasury, Henry Paulson, followed his free-market instincts and allowed Lehman to collapse — to the dismay of the financial sector.

In the twilight period of the Bush presidency, when it became clear that the banking malady was not confined to Lehman, Republicans became alarmed. Failure within the market system threatened the financial system not only of the US, but of the entire world.

This led to the unprecedented spectacle, in September 2008, of the Bush Administration and the Federal Reserve under its chairman Ben Bernanke agreeing to spend US$700 billion to bail out financial firms on Wall Street.

Perhaps more should have been done, and certainly it remains unclear whether the US is yet on the path to sustainable recovery.

One thing, however, can be said. The US government did not directly cause the problem.

Bernanke’s predecessor, the long-serving Alan Greenspan (chairman of the Federal Reserve between 1987 and 2006), described himself as a “lifelong libertarian Republican”.

In keeping with his ideology, he had persuaded the Democrat administration of President Bill Clinton to dismantle long-standing regulatory controls over financial institutions, which kept bad banking practices in check — a decision he later came to regret.

In Congressional testimony on October 23, 2008, as the economic meltdown was gathering pace, Greenspan admitted that he had been “partially” wrong in opposing regulation of financial institutions. He said: “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity — myself especially — are in a state of shocked disbelief.”

In the matter of cleaning up the mess, US administrations have probably done as well as could be expected.

The same cannot be said for the European Union. Emulating the US, European banks also were allowed too much freedom; but that’s only part of the cause of the EU’s descent into chaos.

The EU’s political structure is deeply flawed. Member-states of the EU still want to behave like nation-states while the power base within the EU has shifted decisively towards the Brussels-based bureaucracy (called the European Commission). Over the years since its founding in 1956, the Commission, for a whole set of complicated reasons, has managed to get its hands on more and more real power.

Most member-states have had enough and want to shift the political and economic power-base away from the Commission, although, in the present crisis, powerful players prefer to side with the Commission for reasons of self-interest.

All of this puts the EU project under continuing stress — more so than ever since the beginning of the 21 century, when the Commission attempted to foist on the EU a new constitution which would have diminished still further the sovereignty of member-states.

The bureaucracy’s grand plan has long been the establishment of a United States of Europe — a sort of replica of the USA. The Commission’s powers would match those of the US government, and the powers of the EU member-states would be limited to the powers exercised by states of the US.

The Commission’s vast powers grew as a consequence of the push to create an ever-larger Europe.

The original six members of the EEC — West Germany, France, Italy, Belgium, the Netherlands and Luxembourg (except for Italy, all Western European-oriented) — grew to nine in 1973, with the addition of Britain, Ireland, and Demark, and to 12 when Spain, Portugal and Greece, having embraced democracy, were granted membership.

Thereafter, in ever-greater gulps, the enlargement process continued. The EU presently consists of 27 countries.

Size alone has vastly increased Brussels’ real power. The more complicated an organisation becomes, the more power tends to be concentrated at the centre — in this case, the Commission.

A more complex world has also given rise to new functions. These, in turn, gave the Commission an important coordinating role in the conduct of relations between the member-states.

However, the first big, overt grab for power came with the push for the creation of the single European currency, the euro, at the end of the last century. The Commission rationalised to itself that the management of the euro justified its taking de facto control over budget, interest rates and exchange-rate policy for all member-states within the euro zone.

In part, it was successful, even though only 17 of the 27 member-states embraced the euro. Britain, Denmark and Sweden are among the most notable member-states to have retained their own currencies.

Many defended the efforts of the Commission to create the euro on the basis that the EU needed to have its own currency to compete effectively with the US. More still believed that currency union could not succeed without the even more ambitious scheme of full-scale political integration. Perhaps, that too, was part of the Commission’s plan.

But more than political union was needed to make the euro function as its architects intended.

Countries adopting a single currency needed: 1) to be at roughly the same stage of economic development; 2) to share a common philosophical approach to economic policy, especially budgetary and monetary policies; and 3) perhaps most important of all, a good measure of cultural affinity.

Of all the member-states gathered together under the euro umbrella, only Western Europeans shared these qualities in reasonable measure. And, all of them, as independent nation-states of long standing, were deeply committed to retaining both their economic and political sovereignty.

The Commission in Brussels was not daunted by any of this. Either from ignorance, or in wilful disregard of the fact that the essential ingredients for the transition to a common currency were simply not present, it went ahead with the experiment in a single currency. Without a central EU government to collect an EU-wide tax and redistribute it to member-states according to need, the euro zone was bound to face problems in dealing with a major crisis.

In the same way, in the EU there was no central bank able and willing to act as lender of the last resort, and thereby rescue banks from the consequences of imprudent lending, as happened in the US.

That EU banks lent unwisely is beyond contradiction. Can any bank seriously claim that it lent to Greece in ignorance of its long-standing reputation for loose financial management?

The euro also created economic problems. It bestowed upon Germany, the strongest economy, all the benefit of an undervalued currency — and upon the weaker economies all the drawbacks of overvalued currencies. Competitively-priced German exports flooded into the weaker economies, financed by mainly German and French banks.

When their customers could not pay, Germany and France refused to bail out their banks. Responsibility was pushed back to the Commission. Its response was then to start the process of trying to claw back the money from the borrowing countries.

Austerity programs were devised and imposed upon them — whereby funds generated from budget savings would repay debt.

As a result, the indebted economies are now going backwards. Growth has stalled, and there has been a huge increase in unemployment — to around 24 per cent. This puts these countries into 1930s Depression territory — and less likely than ever to be able to repay their debts.

We are seeing a backlash reaction from disaffected populations. As pointed out by Ambrose Evans-Pritchard, international business editor of Britain’s conservative daily, The Telegraph, Europe itself is beginning to take on the look of the 1930s.

Former French President Nicolas Sarkozy — who, before his recent election defeat, had been pushing hard both for austerity packages and more power to the Brussels Commission — saw his support base crumble. A socialist, M. François Hollande, is now President of France.

We are seeing a similar political reaction in Greece. Following the recent Greek elections, it has so far been impossible (at the time of writing this article) to form a government.

The reaction of the German government of Chancellor Angela Merkel and the European Commission to all this is not encouraging. They are demanding that incoming governments must ignore the voice of their electors.

The reality is that the new fiscal policies agreed upon by European governments a few months ago are now in tatters.

If realistic thinking ever manages to prevail with current EU policy-makers, they need, as a matter of urgency, to:

1) recognise that absolute priority must be given to restarting Europe’s ailing economies;

2) make a realistic assessment of how that might be achieved;

3) recognise that prevailing economic policies, including the existing euro structure, are impeding progress towards point (2) above; and

4) accept that the poorer countries’ debts cannot, and will not, be paid back in full.

The fact that these self-evident truths strike an unresponsive chord in Brussels and Berlin is a major impediment to resolving Europe’s deepening crisis.

Nobody should underestimate the difficulties of reworking policy along realistic lines. Not to do so, however, will make things worse — indeed, it could bring the euro and possibly the EU itself undone.

Germany will be the big stumbling block. The current euro structure gives German exports a huge competitive advantage over its trading partners. Thereby rests its economic strength and overall prosperity.

The weaker, now indebted, EU member-states are in the opposite situation. The current euro structure makes it more difficult than ever for them to export and pay off their debts. This is the high price they are paying for having exchanged their old currencies for a single currency, the euro.

Were they to restore their own currencies again, they could devalue against the euro. This would stimulate their exports and curb their imports.

However, such an outcome would mean a weaker Germany. Its capacity to export — not merely within the EU, but to the rest of the world — would be seriously undermined.

No wonder Germany insists on upholding the single currency.

But the dangers of persisting with this strategy can no longer be ignored.

The sleeping giant of Eurosceptic extremism has been unleashed. Its followers aren’t merely content to curb Brussels’ excesses; they want to end the European Union altogether.

They don’t yet have power, and everything should be done to make sure they don’t get it.

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




























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