Europe reminds me, of the famous pregnancy book, “What to Expect when
you’re Expecting”. The book describes eloquently many, if not all, the
symptoms that Europe is undergoing; like waddling, drooling, vomiting,
forgetfulness, fatigue, nausea, constipation, incontinence plus many others.
How else can you describe the path that Europe has taken towards the birth of
the new Europe? European Council meetings and Eurogroup or Ecofin gatherings are
responsible for most of the credit spread basis points of Italy, Spain Greece
and the rest than any hedge fund or trader. Their inability to diagnose the
roots of the crisis is only second to their incompetence into finding a
solution. Lets look at latest decisions
taken the past couple of days by the EU Council.
- Government budgets shall be balanced or have no more than 0.5% deficit
- The rule should be incorporate at a constitutional or similar level and will contain automatic sanctions in the event of deviation. The ECJ would verify this rule.T
- The European commission would set the convergence calendar.
- The commission would monitor implementation of the measures.
- Debt Issuance would be approved ex-ante, I guess again by the commission.
- Automatic sanctions (unless voted otherwise by qualified majority) for breaching the 3% EDP (Excessive Deficit Procedure). Steps and sanctions to be recommended by the commission.
- The council and the European Parliament would swiftly examine the commission’s proposals. “If the commission identifies particularly serious non-compliance with the Stability and Growth Pact, it will request a revised draft budgetary plan.”
My
objections to the proposal can be summarised:
- Democratic accountability. In case you have not got the gist of it, the unelected commission would more or less decide the fate of the countries that break the rules. The European parliament is mentioned once only as an inspector/examiner. Thus European countries are asked to surrender their feeble fiscal autonomy and sovereignty to an appointed body. Moreover, the national governments are asked to change their constitution to accommodate this.
- Incentives are Wrong. Do not get me wrong, the principle of fiscal prudence should be paramount. But think of this. The only human tribe responsible for government fiscal profligacy are the POLITICIANS. They are the ones who vote and control the spending. Now, we have the same politicians saying that they are going to impose rules upon themselves to exorcise the behaviour that is part of their job description (some may say their nature) and the essence of their re-election prospects. How long will it take before they find some alternative way to spend and hide the borrowing? Currently, Germany is calling the shots on the debt, but few years back it was Germany that dropped the 3% deficit rule from their budgets. Europe must change the incentives (like subsidies) politicians have to overspend.
- Economic logic. Europe consists of 27 countries that have widely different economies and economic cycles. To fit a one side straightjacket to all of them is not optimal. It would cause huge problems going forward to the unity of Europe. Unity forced is only temporary and fickle, unity fostered is long term.
- Legal Precedent. The decision by the French mainly, to push for an intergovernmental solution after UK refusal sets up a very dangerous precedent. How long before we have other smaller groups going their way or choosing to interpret the treaties in some latent way. The seeds of Europe’s dissolution have been planted.
Timing:
all of these must happen by March 2012.
EFSF/ESM
The
council has reaffirmed their decision to go ahead with the two leveraging
options. We commented on these options some time ago and found them inadequate
(EFSF Leverage). Thus we believe that they may
suffer the same fate as the beleaguered Greek PSI (Abandon PSI)
The
introduction of the ESM would be accelerated to July 2012and the size of 500bil
would also be reconsidered.
European
countries would cough up another 200billion towards the IMF. This effectively
would bypass the no-bailout clause country to country.
More
importantly, private sector involvement would be dropped. In other words, no
more PSI nonsense by Germany. The PSI was an amazing bad idea. The market
punishes much better and more effectively those that break its rules. Greek
debt is now trading below 50. This is the ultimate punishment for irresponsible
lenders to the Greek state. Unfortunately they still want to continue with the
Greek PSI even though cracks appear (see Orphanides statement on the 9th
Dec). Also the decisions on the ESM would be taken by a qualified majority of
85%.
Putting
the ESM forward may become a double edge sword since the solvency and
sustainability of countries like Ireland, Spain, Portugal, Belgium would be
examined in detail at exactly the wrong time. It seems highly likely that we
are entering a recession period in the periphery of Europe. Of course, ESM may
need to change again. Changing the rules when they do not suit you is a very
Euro-politician trait.
Power Shifts- Vorsprung
durch technik
The last
European council was a disappointing revelation. Despite some concessions by
the German side, Germany has become the undisputed leader of Europe. If there
are any silver bullets to be fired it is Germany that has the silver gun.
France moved from the co-driver seat to a backseat driver and now is firmly in
the boot of the “vorsprung durch technic”
vehicle driven by Germany. After all Germany stands to lose the most if any of
the solutions currently on offer are taken. Unfortunately, no Eurozone
politician was brave enough to raise objections to a fiscal union implemented
by unelected officials and dictated mainly by Germany.
This is a
coalition fostered by fear not by consent or some higher principle.
UK. Two Speed Europe
The UK
alone chose to opt out of this accord. PM Cameron did the right thing for the
wrong reasons, however. The UK government is perfectly able to cause more damage
to the City of London than any Eurocrat has ever dreamt off. The City is losing
ground to other financial centres because of UK legislation and tax not because
of EU initiatives. It is true that many Eurozone countries do not share the
same free market principles and this causes huge problems. Britain’s power is
mainly derived from trade and free market principles whereas Germany’s is
derived from manufacturing and the power to control the state. These different
points of view are now clashing.
It is thus
left for the 26 to move with an intergovernmental agreement rather than a full
change of the treaties binding everyone. The 2-speed Europe is slowly becoming
a reality. I do not share the view that Britain would be sorry if it is left
out. It really depends on the path of Europe the next few years. The current
omens are not very positive for the Eurozone members. Despite the desperate
measures taken by the ECB (3Y LTRO, relaxing collateral rules, 1% regulatory
reserves) the politicians do not seem to understand that we are starring the
Eurozone breakup on the face. They continue to believe that they can produce a
smokescreen large enough to hide the trillions of debt and their incompetence
in coming up with a solution two years after the crisis erupted.
Europe
needs to tackle the reasons the debt was created and not just increase taxes to
collect more money or enforce fiscal punishments by unelected officials. There
are fundamental flaws in the structure of the Union which have not been
addressed. For example, they need to challenge the incentives politicians have
to spend money or the European subsidy policy. Europe should seriously consider
a version of the Brazilian Fiscal responsibility law, which
effectively bans politicians (or sends to jail) from re-election if they break
the fiscal rules.
Fake Fiscal Union
There is
only one way to proceed with a fiscal union and that is through a sound
democratic process. The current proposals impose fiscal austerity to the
peoples of Europe without any democratic accountability or endorsement. This,
as I said many times, points towards a feudalistic Europe and is not one that
was envisaged by the founders of EU. The principle of “No taxation without
representation” is grossly violated. It is a matter of time before the astute
people of Europe see through it and reject it. I therefore expect these
measures to give only a temporary relief to Europe’s woes.
Yet, the
solution couldn’t have been easier. The European leaders could have allowed for
the creation of a treasury minister appointed by the European parliament with
well-defined and limited taxing powers. For example, this treasury could raise
funds from tobacco, alcohol and possibly speculative financial transaction
(Tobin tax). The money raised could support a real Eurobond with the money controlled by the
parliament. Furthermore, the budgets of its country could be scrutinised before
and after to see if the country fulfils the criteria for further funding. This
of course means passing some of the power from the commission to the
parliament.
Conclusion
One can
view the latest attempt by politicians to save Europe as one more symptom in
the Pregnancy towards the birth of a new Europe. We had the waddling and nausea
and possibly some of the other symptoms but now we moved to forgetfulness. We
forget that Europe is supposed to be a democratic Union. European politicians
should not abort their attempts to find a solution. They just need to be a bit
more daring and look at the history that shaped the continent in order to avoid
simulating past errors.
