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June 12, 2012
By George Friedman
Eurozone countries on June 9 agreed to lend Spain up to 100 billion
euros ($125 billion) to stabilize the Spanish banking system. Because
the bailout dealt with Spain's financial sector directly rather than
involving the country's sovereign debt, Madrid did not face the kind of
demands for more onerous austerity measures in exchange for the loan
that have led to political instability in countries such as Greece.
There are two important aspects to this. First, yet another European
financial problem has emerged requiring concerted action. Second, unlike
previous incidents, this bailout was not accompanied by much melodrama,
infighting or politically destabilizing threats. The Europeans have not
solved the underlying problems that have led to these periodic crises,
but they have now calibrated their management of the situation to
minimize drama and thereby limit political fallout. The Spanish request
for help without conditions, and the willingness of the Europeans to
provide it, moves the European process to a new level. In a sense, it is
a capitulation to the crisis.
This is a shift in the position of Europe's creditor nations,
particularly Germany. Berlin has realized that it has no choice but to
fund this and other bailouts. As an export-dependent country, Germany
needs the eurozone to be able to buy German products. Moreover, Berlin
cannot allow internal political pressures to destabilize the European
Union as a whole. For all the German bravado about expelling countries,
the preservation and even expansion of the existing system remains a
fundamental German interest. The cycle of threats, capitulation by
creditors, political unrest and then German accommodation had to be
broken. It was not only failing to solve the crisis but also
contributing to the eurozone's instability. In Spain, the Germans
shifted their approach, resolving the temporary problem without a fight
over more austerity.
The problem with the solution is that it does nothing to deal with
the larger dilemma of European sovereignty and debt. Germany is taking
responsibility for solving Spain's banking problem without having any
control over the Spanish banking system. If this becomes the norm in
Europe, then Germany has moved from the untenable threat of expelling
countries to the untenable promise of underwriting them. Europe, in
other words, has accommodated itself to the perpetual crises without
solving them.
In our view, the root of the problem is the struggle to align the
world's second-largest exporter with a bloc of nations that ought to be
enjoying positive trade balances but are instead experiencing trade
deficits. Germany, however, views the root of the problem as
undisciplined entitlement and social program spending that leads to
irresponsible borrowing practices. Thus the Europhiles, led by Germany,
don't look for solutions by redefining the European trading system, but
rather by disciplining countries, particularly within the eurozone, on
their spending and borrowing practices.
According to a report in German magazine Der Spiegel, European
Central Bank President Mario Draghi, Eurogroup President Jean-Claude
Juncker, European Council President Herman Van Rompuy and European
Commission President Jose Manuel Barroso are drafting a plan to
stabilize the system. Under the purported plan, all eurozone members
would be required to balance their budgets. Borrowing would be permitted
only if approved by a Europe-wide finance minister, a position that
would have to be created and supported by a select group of eurozone
finance ministers. If approved, money could be borrowed by issuing
eurobonds.
The report appears to be well grounded, with European leaders
confirming that the four individuals are working on a plan (though they
did not confirm the plan's details). The approach outlined in the report
would attempt to resolve Europe's problems by increasing the
Continent's political integration -- a concept that has been discussed
extensively, particularly by the Germans and Europhiles. Given the
circumstances, this would seem to be a reasonable position. If all of
Europe is going to be responsible for sovereign debt issued by member
countries, then the stakeholders who have the most invested in the
European project must have control over borrowing. The moral hazard of
de facto guarantees on borrowing without such controls is enormous.
There are two problems inherent in this approach. The first, as we
have said, is the assumption that Europe's core problem is irresponsible
borrowing and that if borrowing were controlled, the European problem
would be solved. Irresponsible borrowing is certainly part of the
problem, but the deeper issue is trade.
The European Union is built around Germany and therefore the sort of
economic dynamism that Germany enjoyed in the 1950s and 1960s, when the
country benefited from access to the U.S. market while retaining some
protection for its own emerging industries. Eurozone countries'
inability to cover debt payments stems in part from their inability to
compete with Germany. Under normal circumstances, the economies of
developing countries grow through exports driven by lower wage rates,
but the shared currency prevents developing European countries from
taking advantage of low wages. Borrowing may be too high, but Germany's
dependence on exports makes it impossible for Berlin to allow a Greece
or a Spain the time and space to develop critical economic sectors in
the way that the United States allowed Germany to develop after World
War II.
The second problem is the more serious one. The ability to manage a
national budget, including the right to borrow, is a central element of
national sovereignty. If the right to borrow is transferred from
national governments to unelected functionaries appointed by a
multinational entity, a profound transformation of democracy in Europe
will take place. The European Union has seen transfers of sovereign
rights from national governments and their electorates before, but none
as profound as this one. Elected governments will not be able to
stimulate their economies without approval of this as-yet-unnamed board,
nor will they be able to undertake long-term capital expenditures based
on the issuance of bonds. This board thus will have enormous power
within individual countries.
This prospective solution involves more than simply an attempt to
solve banking and debt problems. It reflects a fundamental principle of
European political philosophy: the belief that disinterested officials
are likely to render better decisions than interested politicians. This
idea derives from deep in European intellectual history. Georg Hegel, a
German philosopher, made the argument that the end of history was its
full rationalization, represented by the rational and disinterested
civil servant. Jean-Jacques Rousseau distinguished between the general
will and the popular will. He argued that the latter did not represent
the interests of the people but that the general will, the source of
which was not altogether clear, did.
There is a strand of thought in Europe that regards the disinterested
professional as both safer and likely to make better decisions than the
popular will and its politicians. This is not an altogether
anti-democratic view, but it is a view that says that politics must be
moderated by disinterested experts. This idea heavily influenced the
structure that was created to manage the European Union and is clearly
behind the idea of a European budget board.
The question of the budget is central to a democracy and a highly
politicized process. It is one of the places in which the public and its
representatives can debate the direction in which the nation should go.
The argument has been made that the public and its politicians cannot
be trusted with absolute power in this area and that power should be
limited to unelected people. In a sense, it is the same argument that
has been made for central banks, with even greater power.
The problem, of course, is that the decisions made by this board will
be highly political. First, the board must be appointed. The selection
of the chief eurozone finance minister and the finance ministers
represented on the board will be determined in some process that likely
will not take the views of average European citizens into account.
Second, the board will make decisions that will determine how the
citizens of individual nations live. The board derives from a political
process and shapes national life. It is apolitical only in the sense
that its members don't stand for election by the populations they
oversee and thus are not answerable to them.
There was a similar agreement before the current crisis called the
Stability and Growth Pact, which said that the national deficit of a
European nation could not exceed a certain percentage. If the deficit
did, the nation would pay massive fines. The French (and even the
Germans) consistently exceeded these limits but did not pay fines. They
were too powerful to be sanctioned, so the system broke down.
Today, we see a concept that goes far beyond the Stability and Growth
Pact. The idea is that nations will have no deficits without the
permission of an appointed board and that any debt they do take on will
be issued through an EU mechanism. That mechanism will eliminate the
option of cheating. It may be possible to issue unauthorized bonds, but
without a European guarantee, the market would charge a country like
Greece prohibitively high interest rates.
But the core problem is the decision about who will and will not be
allowed to borrow. Ideally, this decision would be completely
transparent and predictable. In practice, the differences and needs of
different countries will be so vast that the board will have to make
some decisions. Given that the board will be composed of the finance
ministers of some eurozone countries -- and that they will have to go
home after a decision -- the question of who will be denied permission
will be perceived as highly political and, in some cases, as extremely
unfair. In some cases, both will be true.
The ultimate issue has nothing to do with economics, save for the
trade issue. It is a question of the extent to which European publics
are prepared to cede significant elements of national sovereignty in
exchange for secured lines of credit, subject to the authority of people
they never elected. For EU supporters, the notion that political
leaders must be selected by the people they govern is not an absolute.
Rational governance by disinterested leaders is an alternative and, at
times, a preferred alternative. This is not entirely alien to the
European tradition. In practice, however, it could create an explosive
situation. The board will determine its willingness to grant deficits
based on its own values. It may not permit deficits to fund hospitals
for the poor. It may allow borrowing to fund bank bailouts. Or the
reverse.
In any event, by taking power from the electorate, it risks a crisis of legitimacy.
The system has evolved to a point where, to some Europeans, this
crisis of legitimacy may be preferable to the current cycle of endless
crises. It may work for a time. But the first time a nation's government
is thwarted from borrowing to fund a project while another nation is
allowed to borrow for its project, a new crisis will emerge. Who in the
end will determine which deficit is permitted and which is denied? It
will not always be the representatives of the country denied. And that
will create a crisis.
During the U.S. Civil War, the future of the Union was challenged by
the secession of the South. The decisions were made on the battlefields
where men were willing to die either for the Union or to break away from
it. Who will die for the European Union? And what will hold it together
when its decisions are unpopular? The concept of extended integration
can work, but not without the passion that moves a Greek or a German to
protect his and his country's interest. Without that, the glue that
holds nations together is missing in the European Union. The greater the
integration, the more this will reveal itself.
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