Euro rescue mechanism is a phantom giant … One of the unforgettable characters in a famous German children's book is a phantom giant. Seen from afar, he looks like a giant. But the closer you get, the smaller he becomes. In Michael Ende's Jim Knopf, the phantom giant turned out to be an old man of average height with a long beard. Whenever I hear about European Council resolutions, I am reminded of that poor old man. Each of the council's crisis resolution strategies has looked impressive. The agreement reached on March 11 not only appeared comprehensive, it also came as a surprise. Unfortunately, when you look from closer up, as I did last week, the agreement begins to look smaller. By the end of the week, it had crumbled. – Business Day/Financial Times
Dominant Social Theme: The EU must do better. Holding together 20-plus countries in an economic pact is difficult but the alternative (the inevitable, worrisome "anarchy" of separate nation-states) is worse.
Free-Market Analysis: Financial Times columnist Wolfgang Münchau (see excerpt above) has published a provocative editorial claiming that the European Union still hasn't been able to come up with a financial or political formula to alleviate the stresses caused by the unfolding sovereign debt crisis of the EU's Southern PIGS. While we try to track dominant social themes, we are not averse to analyzing articles that provide "pushback" as regards these same themes. They can certainly illuminate the underlying dialogue and provide further insights. Münchau makes some good points about the EU's ongoing difficulties.
According to his biography, Wolfgang Münchau is co-founder and president of Eurointelligence ASBL and an associate editor of the Financial Times, where he writes a weekly column about European economics. In 1989 he was a recipient of the Wincott Young Financial Journalist of the Year award. He holds the degrees of Diplom-Mathematiker (Hagen), Diplom-Betriebswirt (Reutlingen) and M.A. in International Journalism (City University, London).
Münchau begins his article – basically a debunking of EU power-politics – by pointing out that the European stability mechanism (ESM) allowing the ECB to buy bonds in primary markets is much less effective than it seemed initially. Münchau admits he himself had been "fooled" and goes on to call the ESM a "scam." He uses this harsh language because the ESM is not after all going to be able to help Portugal with its upcoming debt rollover.
Münchau sees the result of ESM's inaction as giving rise to a situation where Portugal's leaders will have no choice but to accept the loan package that they emphatically wish to revise – and have discussed revising with EU leadership. The ESM facility WILL be able to support Portugal, but only "when a lean and transformed Portugal emerges from austerity" – in other words only when Portugal no longer needs help.
The news of a revised EU bailout agreement last week also focused on an expanded bailout fund. But here again, Münchau finds flaws. Since the ESM is considerably constrained in terms of what it can accomplish in the larger marketplace, raising the ceiling has little impact. Münchau all-but-accuses Eurocrats of engineering an agreement that sounds bigger than it actually is.
Having made his disappointment clear regarding the ESM, Münchau now proceeds to an even larger issue, the ongoing revision of the EU political process itself, designed to give the EU more power over the budgets and expenditures of nation states. We recently discussed these moves in an article entitled, "Silent Coup: EU Takes Over Europe?"
Münchau is surprisingly disdainful of this latest EU power grab. "It took only a few days for this promise to be exposed," he comments acerbically. The evidence? Chancellor Angela Merkel decided unilaterally to shut down a number of German nuclear reactors after the advent of the radiation leak at the Fukushima plant. Münchau points out that Merkel might have been better advised to "coordinate" such a significant action with Brussels, given the just-announced expansion of EU authority. The lack of coordination was so profound that one "smaller" EU country learned about Merkel's actions from media reports, he claims. Maybe more than one.
There is still another phantom giant in Münchau's view: the EU's "reinvigorated stability and growth pact," (actually the third one in about a decade). We mentioned in our previous reporting on the issue that the pact actually reversed the normal political process: Punitive fines would go into effect once a country breached EU fiscal discipline unless Eurocrats actually voted to suspend the process. Münchau believes the only way to implement meaningful reform is to make the penalties automatic, as Jean-Claude Trichet, president of the European Central Bank, has suggested.
The final phantom giant has to do with the "banking resolution." Münchau is disdainful of ongoing bank stress testing, reporting that the current exercise is likely no more effective or credible than the discredited testing that took place last year. Germany, he notes, hasn't even bothered to recapitalize its ailing banks. In refusing to take action, Germany is actually ignoring the new capital adequacy rules of "Basel 3." Thus, Münchau's article, when taken in its totality, is a stinging rebuke to the EU. Münchau's verdict: "I am skeptical about the pledge that they will do ‘whatever it takes' to save the euro. That may turn out to be the ultimate phantom giant."
Münchau's disconsolate conclusions, it should be noted, have increased resonance because of Portugal's rapidly deteriorating financial and political situation. We learn yesterday from the Wall Street Journal that the "the future of Portuguese Prime Minister José Socrates hangs in the balance" depending on today's Parliamentary "austerity vote." If the opposition – with a majority of votes – opposes austerity, Prime Minister Socrates has said he will resign. Portugal may after all need an EU financial bailout similar to Ireland's. Here's more:
Legislators will vote [today] on a series of new austerity measures unveiled earlier this month by the government, which it claims are needed to cut the budget deficit and regain the confidence of bond investors. The main opposition parties plan to vote against those measures. Mr. Socrates, in turn, has said he will quit if that happens. Should Mr. Socrates step down, it would take at least two months for elections to be held. Opinion polls indicate that the leader of the main opposition party, the center-right Social Democrats, may emerge as winner. The political crisis comes at a delicate time. Portugal faces repayments of €4.23 billion ($6.02 billion) in debt next month. Uncertainty about the future course of economic policy ahead of an election would likely increase Portugal's already high borrowing costs and make it more difficult to avoid a bailout. (- WSJournal)
It may be that a political consensus can be achieved in Portugal, but the larger issue for the EU and its struggling PIGS – as Münchau notes – is that the financial crisis is now entering its third year. The ever-expanding regulatory brief of the EU has been intended to combat the crisis but in the final analysis lacks the requisite authority. Germany's blithe flouting of such agreed-to resolutions only shows how impractical such grand sounding resolutions really are.
There is surely some truth to this. Backers of the "grand" EU experiment tend to ignore how the great federal union in America was actually achieved – after a bloody civil war that cost literally millions of lives. Even today, there is much resentment in the South over what is perceived as US federal heavy-handedness when it comes to taxes, monetary policy and regulatory oversight. Absent significant military action – or the legitimate threat thereof – it certainly seems at least questionable as to whether the EU and its centralizing leadership can actually create a "more perfect union."
Germany is the largest and most powerful EU state, but the German leadership seems unwilling to subordinate German self-interest to the larger dictates of the Eurozone. Unless Germany agrees to be treated like all the rest (especially the smaller states) – and unless its elites are willing to accept significant subordination to the EU in practice as well as rhetoric – the union must almost inevitably continue to be troubled.
It is difficult to perceive how Germany can be reined in, given that the German constitution itself militates against the kind of centralization that the EU has in mind. These troublesome issues have never been dealt with but merely pushed off in the hope that the evolution of the union and its economic troubles would generate the requisite centralization. Instead the reverse seems true. The more pressure that is applied, the more various EU states seem to resist. Münchau's perceptions therefore as regards the EU – that many of its reforms are less-than-serious or at least unenforceable – is probably astute.
Editor's Note: An article in Business Day misidentified the author of the above column; we have corrected the error and attributed it to the proper author Wolfgang Münchau.
Of course, he apparently considers it something of a tragic farce that the EU cannot impose its will on member states. This is where some would part company. Münchau decries EU efforts as unworkable. Others, opposed to the growth of the EU Leviathan, would applaud such ineffectiveness. Is Brussels willing to invade Germany?