La Faucheuse Image by David_Reverchon via FlickrThis is going to be a crucial week for the Euro and the media and blogosphere are already heating up. Strong words are bandied about: that the creators of the Euro were dishonest, imprudent, dumb, naive, liars. The Euro is close to collapse announces Chapman in the Market Oracle. "The Euro doesn’t deserve to survive" writes with finality Tim Hedges on his blog.
Sure, much of the arguments are convincing: the Euro shouldn't have been launched with just monetary policy (courtesy the European Central Bank) to defend it; it needed an equally harmonized fiscal policy or the equivalent of a federal treasury. I've said that before when explaining that the Euro hobbles along on one leg only.
But I don't think the Euro was conceived in "dishonesty": that's a very strong word and not fair to the ideals of Europeans. It was imprudent, yes, but in line with the way the United Europe dream has been constructed so far: bit by bit, always taking a step forward, forcing the other leg to follow suit.
Now the other leg MUST follow if the Euro is to be saved. No matter how you call it, what is needed is an institutional equivalent of a centralized treasury. Euro-partners will simply have to relinquish some (at first) of their fiscal sovereignty, and then (later) all of it. That is the only way forward. Anything pulling away from fiscal harmonization is detrimental. And, inter alia, that is the case with the Irish corporate taxes at 12.5%. I, for one, am committed to the construction of a United Europe and I am incensed at the Irish for having succeeded in maintaining their low corporate taxes through the bailout negotiations! I've said it before: such low rates are a Trojan Horse into the Euro-zone, giving an unfair advantage to multinationals who choose to have their headquarters in Dublin. Of course, such low rates benefit Ireland and create jobs there, but at the expense of Ireland's Euro-partners and that's not acceptable. Yet, it has been accepted by all partners in the Irish bailout, both the IMF and all European countries involved, UK included.
Why? It only goes to show that our political class has no guts...I agree with those who say that our politicians are the puppets of big banks and institutional bonholders and merely act in their interest. If Greece and Ireland were saved, it's only because the major holders of Greek and Irish bonds were big banks in the Euro-zone, and the average European citizen be damned! Or rather, the poor guy (the Greek and the Irish, you and me) should pull in his belt in and get ready for a long, drawn-out period of austerity and economic recession.
Europeans need to give up their so-called "sovereignty" on fiscal matters and move towards a real union. There is in fact no other way out and the bond market is reminding the European political class that they are in this TOGETHER. Indeed, German bonds, long thought to be the safest, are coming into harder times: all of a sudden, interests threaten to rise and demand at the latest bund auction turned weak. Experts say the German bonds are merely following the example of US Treasury bonds that are hitting rough waters, but nothing is less certain. Germany is not the US: it has its deficit under control, unemployment is down and exports are up. In fact, everybody knows the Germans will pay for whatever is needed to save the Euro. I grant you, it will happen at the last moment when they are cornered and no other move will be allowed, but it will happen. That's what the market is already discounting. For once, it would seem that bondholders have a clearer vision of the future than the European political class!
But it wouldn't be the first time bondholders were right. It really is very simple: the Germans cannot afford to let the Euro collapse. It would be too expensive for them. Imagine what it would do to their economy if major European partners defaulted around them: not just Greece and Ireland or Portugal (they're peanuts) but Spain and Italy! How quickly do you think they could move back to the Deutsche Mark without incurring disruption and fantastic losses in their export markets? Forget it! In the meantime, they are enjoying the ride: the Euro's value, with all this on-going sovereign debt crisis and hullaballoo, has gone down, and that helps their exports!
How close we are to saving the Euro is anyone's guess. Not close judging from the recent negative reaction of both Germany and France to the Italian proposal of floating "euro-bonds" (btw, another back door to fiscal harmonization). They rejected it without even taking the time to consider the idea, going so far as to express strong displeasure at Jean Claude Juncker, President of the Eurogroup, for supporting it. But Germany and France have "pledged to better align" their tax and labour policies and according to German finance Minister Wolfgang Schaeuble those who bet against the Euro's survival are "making a mistake", echoing similar statements from Mario Draghi, the Italian Central Banker.
A lot of good words that no one believes in. What the bond market wants is facts...And so do we, the bedraggled Euro-zone citizens!
Post-scriptum: I don't have a crystal ball and the horror scenario of a Euro collapse is always possible. "In the ensuing chaos and recrimination," writes the Economist, "the survival of the EU and its single market would be in jeopardy. But by believing that a break-up cannot happen, the euro zone’s authorities will always tend to stop short of the radical measures needed to hold the project together. Given the likely and devastating chaos, it would be a mistake for a country to choose to leave. But mistakes occur in times of stress. That is why some are beginning to contemplate the unthinkable."
Let's hope it doesn't happen. Because if the Euro collapses, you can kiss good-bye to the dream of a United Europe - and along with its disappearance, Europe will have to bow out of the world scene. And the whole world will be the poorer for it. Not just because it means less aid to developing countries (remember, the Euro-zone countries are the biggest global provider of aid), but because it would mean humanitarian values and human rights would lose their greatest champions. Surely, on this score, China is not poised to replace Europe and America of late has shown a dismal record, with its healthcare reform law battered by the Republicans and already showing signs of imploding...
Being poor is no fun anywhere but it is less bad in Europe - for the time being and as long as the EU and the Euro last.
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