From friend of Alhambra, Brian Cronin:
It is said that a utopian Europe is one where the police are British, the mechanics are German, the chefs are French, the lovers are Italian and the organizers are Swiss. The nightmare dystopian Europe would find that the chefs are British, the police are German, the mechanics are French, the organizers are Italian and the lovers are Swiss.
Europe, as envisioned by the “swords into plowshares” visionaries a couple of generations ago, is not quite as bad as that, but their plans for a fully functioning United Europe of States is going through a great deal of difficulty. Nations, like Greece, should never have been allowed to join in the first place and that is the root cause of a lot of the problems we currently see. By fudging the criteria, they were permitted entrance to the club where they were permitted to borrow at German interest rates, i.e. much lower than they could separately as Greece, and have run up huge debts which they haven’t been able to cover. That mentality spread to the other nations of southern Europe as well.
We are all too familiar with the mess they have gotten themselves into and are relying on the kindness of strangers to help alleviate their distress. Help comes with strings attached and some harsh words that profligate spenders should tighten their belts and live up to their commitments.
The summit that took place in Brussels last week attempted to address many of the ills that currently beset Europe and the eurozone. While many think that perhaps everyone would be better off by going their own way, the call seems to be for more integration, fiscal, banking even political and with a powerful central government in Brussels. There was talk going in of a stronger European Defense Force, a central Treasury and a directly elected presidency.
About 30 years ago, BBC television broadcast a comedy series about the inner workings of the British government and the battle the cabinet ministers had with their senior civil servants for the upper hand. Not what you might think of as must-see viewing, but I assure you it was. It was called “Yes, Minister”. It was followed by a sequel called “Yes, Prime Minister” where Jim Hacker, the hapless politician of the first series, rose to become the prime minister. It was reportedly Margaret Thatcher’s favorite show. Though each episode had to be weeks or months in the planning and production stage, it seemed to have the uncanny knack of dealing, in the week that it was shown, with a subject that was topical for that week. Even viewed today, it is remarkable how little things have changed and how equally applicable many of the problems are to the United States. Recommended viewing (and available through Netflix).
In an effort to distinguish himself, Hacker rallies his supporters with an anti-Brussels message which then was increasingly interfering in the lives of ordinary people with ridiculous directives like, for example, how many lumps a soup can have before it ceases to be a soup and becomes a vegetable. 20% of the volume can be lumpy in case you’re interested. There had been talk at one point of instituting a decibel limit for noise in the workplace which would have meant, of course, that musicians would not have able to play the EU anthem based on Beethoven’s “Ode to Joy” (unless they had earplugs!).
Inside the European Community, most things that can be handled at the local level are done so, but things that require supranational oversight are dealt with from Brussels. This is known as the principle of subsidiarity. It is akin to the powers of the federal government here in the US as opposed to powers exercised and retained by the states under the Tenth Amendment to the Constitution. The EC directive states that “in areas which do not fall within its exclusive competence, the Community shall take action … only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community”. More and more, Brussels dominated.
Britain had joined the EC in 1973, but even in the 1980s, “the faceless bureacrats in Brussels” were the object of everyone’s opprobrium. In the television series, the minister decided to champion the cause of the great British sausage, the “banger”, and resist bureaucratic incursions. Brussels had dictated that it couldn’t be called a sausage but an “emulsified high-fat offal tube”, because, according to the writers, it is more or less devoid of nutrition and didn’t qualify as a sausage. Its ingredients that might turn even the strongest stomach. It contained only about 25% meat which was mostly gristle, head meat, other off-cuts, and ‘mechanically recovered meat steamed off the carcass’. Very appetizing!
A reductio ad absurdum of course, but it does show the lengths to which fears of too much integration and an overbearing bureaucracy running people’s lives with geometric precision can take hold. Over the last forty years or so, those fears have not gone away. Regulations and rules still abound that attempt to make life uniform on a continent that is anything but. In the USA, think of the EPA as an equivalent
“Brussels” is the generic shorthand for overbearing interference from a central authority, those holding the reins of power and money. Today that has morphed into frustration with the nations with the money dictating the terms to the nations who overspent and need money. Those countries now with the begging bowl wanted the benefits of the EC like the common currency, borderless travel and mobility of labor but when they were left to their own devices and got into difficulties through their lack of fiscal discipline, the bailiffs showed up and we have seen how the have-nots and the want-mores reacted.
Fast forward to this month. Ill feeling was not far beneath the surface at the recent Euro 2012 soccer match between Germany and Greece. Germany defeated an outclassed Greece 4-2 and saw Chancellor Merkel booed by Greek fans when she made an appearance. Greeks seem to feel that the Germans want to run everything their way, a sort of “Fourth Reich” as some Greeks put it. More than a little extreme. But the football boot was shortly to be on the other foot.
The grindingly slow pace of progress in sorting out these problems unnerves markets. The seemingly endless round of summits, which achieve very little except photo opportunities, saw another one in Brussels at the end of this past week, the twentieth since the crisis began in 2010.
Yet before they even got started, expectations were beginning to be lowered. Funds are not infinite and markets realize that. A week ago, the European Central Bank decided to relax its collateral requirements, said it was willing to cut its ratings requirements and accept a wider range of asset backed securities including car loans and mortgage-backed securities. The Bundesbank did not agree with this increased risk to the ECB’s balance sheet and put out a statement saying so thus blunting the effect.
Spain needs another bailout for its banks as big as the one a couple of weeks ago and Cyprus, whose banks are heavily exposed to Greece, has had its debt downgraded to junk status by Fitch. Moody’s and S&P have already marked down Cyprus’ debt to junk. So they will probably be looking for a bailout too. Whether they will get it from the eurozone with all the strings they know will be attached is not clear at this point. They have hinted they might get a loan from Russia which could be an interesting turn of events. They had better check the vig on the loan if they do.
So, lots of problems which just won’t go away. What they discussed was the same old stuff. Closer integration, a banking union with a single banking regulator, a fiscal union with veto powers over national budgets and a pan-national treasury. All of this was designed to be the dawn of “the second phase of the euro”, according to French finance minister Pierre Moscovici. It was in some respects a kind of tug of war between two competing visions: Merkel for austerity and making sure debtors pay their debts and Hollande & co. wanting more, not less “Europe”.
This time, however, there was progress and Germany gave way. By Friday, agreement had been reached though the details have yet to be worked out. What is clear is that money is going to beleaguered banks instead of to the states which Frau Merkel had previously insisted upon, in order to make the states have some skin in the game. It will also go towards buying Spanish and Italian bonds to bring down borrowing costs and prevent a formal application for a bailout. A very slippery slope. It will all come via the European Stability Mechanism which will be set up next month, a lot sooner than expected. A banking supervisory authority within the ECB will also act as watchdog over the banks. Time will tell whether that has any teeth.
Frau Merkel had to do some fancy footwork to defend her change of heart. She also had to suffer the indignity of seeing Italy beat Germany 2-1 in the semi final of the Euro 2012 soccer championship. That had to hurt.
Though markets were cheered on Friday by the summit’s outcome, I remain more sanguine. Trying to fix a problem that is unfixable and a bad idea to start with is an exercise in futility. The agreement buys time (there is yet another summit on July 9) but does nothing to correct structural problems inside the eurozone. It does nothing to reduce risk or ensure that it won’t happen again or get worse. It does little more than put a very expensive band-aid on a patient that requires some radical surgery and maybe an amputation or two. The sooner everyone realizes that the better.
I can’t help thinking of Quint, the grizzled old boat skipper played by the late Robert Shaw in Steven Spielberg’s “Jaws” (1975) gradually being consumed bite by bite by “Bruce” the shark. Whatever he tried to do to escape from its grip, it proved futile and he was slowly devoured and pulled under. Not a bad image for the euro I think.