€urosclerosis: The structural realities have caught up

From The New York Times:

In Rejecting Treaty, Cameron Is Isolated

By Sarah Lyall and Julia Werdigier
Published: December 9, 2011

LONDON — When he rejected a new European accord on Friday that would bind the continent ever closer, Prime Minister David Cameron seemingly sacrificed Britain’s place in Europe to preserve the pre-eminence of the City, London’s financial district. The question now is whether his stance will someday seem justified, even prescient.

Mr. Cameron refused to go along with the new European plan of stricter fiscal oversight and discipline hammered out in Brussels this week, in great part because of fears that the City would be strangled by regulations emanating from Brussels. He evidently felt he had little choice, and given the virulence of the anti-Europe sentiment in his own Conservative Party, few were inclined to argue that point.

“I said if I couldn’t get adequate safeguards for Britain in a new European treaty, I wouldn’t agree to it,” Mr. Cameron said in a news conference. “What is on offer isn’t in Britain’s interests, so I didn’t agree to it.”

Much more at the link. The story continues to note that Prime Minister Cameron is concerned that, if the changes were passed, London would lose its preeminence in financial transactions in Europe. The Prime Minister had noted, last October:

London is the center of financial services in Europe. It’s under constant attack through Brussels directives. It’s an area of concern; it’s a key national interest that we need to defend.

The United Kingdom did not choose to join the common currency, the euro, when that currency was created, negotiating an “opt-out” of the Treaty on European Union (the Maastricht Treaty); polls of the British people consistently reveal public opposition to abandonment of the pound Sterling in favor of the euro.

Mr Cameron put it very bluntly:

We’re not in the euro and I’m glad we’re not in the euro. We’re never going to join the euro and we’re never going to give up this kind of sovereignty that these countries are having to give up.

That ought to be the major stumbling block. Business Week described the treaty modifications succinctly:

The governments signing onto the new treaty will have to agree to allow unprecedented intervention in national budgets by EU-wide bodies.

According to a statement issued after the meeting broke up, governments participating in the agreement will need to have balanced budgets — which is counted as a structural deficit no greater than 0.5% of gross domestic product — and will have to amend their constitutions to include such a requirement.

The treaty will include an unspecified “automatic correction mechanism” for countries that break the rules, the statement said.

In addition, countries that run deficits larger than 3 percent will face sanctions.

To prevent such deficits, countries will have to submit their national budgets to the European Commission, which will have the authority to request that they be revised. Countries will also have to report in advance how much they plan to borrow.

Apparently Bundeskanzlerin Merkel is on the road to achieving, by peaceful means, what Reichskanzler Hitler was unable to do through war: subject the governments of the other European nations to the suzerainty of Deutschland. The world’s fifth largest economy, le République française, and the eighth largest, la Repubblica italiana, have, in effect, given over much of their sovereignty to the fourth largest, Der Bundesrepublik Deutschland. Reino de España (12th) and Ελληνική Δημοκρατία (32nd) and República Portuguesa (38th) and Poblacht na hÉireann (42nd) all appear to be surrendering as well, though the United Kingdom of Great Britain and Northern Ireland (6th), Konungariket Sverige (22nd), Česká republika (46th) and Magyar Köztársaság (55th) have resisted.

Was the previous paragraph overblown? Perhaps, but not really by much. Germany and France have dominated the eurozone bailout discussions, and essentially imposed their will on Portugal, Greece, Spain and Italy, because those countries need the bailouts. But it isn’t an equal partnership between Germany and France: Germany’s economy is nearly 30% larger than that of France, and the French are on a shakier economic footing than the Germans. Germany dominated Europe, due to her size and economic and military strength following the Franco-Prussian War of 1871 and the subsequent German unification under Kaiser Wilhelm I and his Chancellor, Otto von Bismarck, and while the German defeats in the two World Wars cost the country enormous amounts of prestige, manpower, treasure and respect, the physical existence of Germany, and the resourcefulness of her people, her culture and her industry remained undeniable forces which once again grew Germany to continental predominance, despite the devastation and partition of the country in 1945. The Soviet-controlled state command economy of the former Deutsche Demokratische Republik suppressed German economic development in a third of the country, and that cost the far more prosperous Bundesrepublik Deutschland a great deal after the 1990 reunification to bring the old East Germany up to a Western capitalist economy standard, but German industriousness was up to the task. No political or economic or social integration of Europe can fail to be German-dominated, because Germany is simply dominant on the continent in all of the measures which translate into power.

And power it is. Chancellor Merkel and President Nicolas Sarkozy of France essentially told Greece what it must do to be bailed out economically, and despite the opposition of the Greek public, the Greek parliament passed the strict austerity budget 258-42, because they had no other choice. The Italian government fell, and was replaced by a “technocratic” leadership under new Prime Minister Marco Monti, an economist and former European Union bureaucrat, because Italy had no choice.

The United Kingdom, however, has a choice, because while the British overspent just as freely as the other European democracies — and the United States — the British declined to join the eurozone, and retained its own currency. The British have a choice precisely because they took measures which, whether so intended or not, preserved more independence for the UK than those actions of economic convenience which bound up the eurozone countries.

Now, the European Union wants London to agree to measures which would reduce British independence and the UK’s financial advantages. Had the United Kingdom joined the common currency union, Her Majesty’s Government might not have had any choice in the matter. Germany and France have assumed big risks in bailing out the weaker European countries, because Germany and France have little choice themselves. By joining the common currency, they tied their economic futures to the success of the euro, and are now seeing that the success of the euro depends more than they anticipated on the weakest members of the eurozone being financially strong and responsible. Stephen Castle, writing in The New York Times, said:

In the fiscal accord reached here on Friday by members of the European Union, the nations that use the euro essentially agreed to go back to Plan A — that is, the principles and rules with which they created their common currency two decades ago. Only this time, they said, they mean it.

The central aim of the deal is to make it harder for the 17 members of the bloc that use the euro to ignore stringent rules that they had pledged to follow long ago. And to make that outcome more likely this time, the accord creates a center of coordination and decision-making in Europe. . . . .

At the heart of the accord are the fiscal requirements that were laid down in the treaty that led to the creation of the euro as a common currency 20 years ago; it called for the euro zone countries to limit budget deficits to no more than 3 percent of gross domestic product and to restrain overall debt so that it remains below 60 percent of annual economic output. Originally, there were sanctions for exceeding these limits, but when Germany and France found themselves doing so the idea of punishments was scrapped.

More at the link. But it is, in the end, fairly simple: the eurozone countries will have to submit their national government budgets to the European Commission for review, at which point the Commission “will be able to request revisions if it thinks a budget could lead a country to break the euro zone’s rules.” If the country then declines to make the changes requested by the Commission, the Commission could impose sanctions on that country, which that country could avoid only be getting a weighted majority — meaning: the wealthier, more populous countries like Germany have a bigger vote — of the eurozone nations.

Or, they could simply thumb their figurative noses at the Commission.

In one way, the eurozone countries are very much like the United States, under the Articles of Confederation. The eurozone members are, like the thirteen states were, independently sovereign, and cannot be compelled to take any actions without their own consent. Under the Article of Confederation, the United States could not tax either the states or citizens, but only request support from the state legislatures, support which was rarely forthcoming. The Congress of the Confederation had no power to regulate interstate commerce, nor to control state budgets, nor to impose any laws or sanctions upon a state to which that state did not agree.

The United States is not the only country which uses the US dollar as its official currency:

    Countries using the U.S. dollar exclusively

But those countries using the dollar as their official currency don’t have any control over the dollar, or over the monetary and fiscal policies of the United States government which backs the dollar; they simply consent to using the dollar as their currencies because they trust that the dollar will remain stronger and more reliable than any currency that they can create for themselves, and thus it is more valuable and more convenient for them to use the dollar. In reality, however, they have surrendered part of their own sovereignty to do so.

And the Europeans are finding out the same thing. In agreeing to the common currency, they have surrendered part of their own sovereignty, but they have, in effect, surrendered it not to any true supranational government, but to supranational organizations which have no power beyond what the sovereignties purportedly beneath them agree that they can exercise. The leading nations of the eurozone, France and Germany, violated the founding norms of the euro early on, by running larger deficits than allowed by the Maastricht Treaty, and promptly decided that they were not going to be subject to the treaty’s restrictions or sanctions.

In the end, the eurozone countries are struggling mightily to preserve something which, in the end, cannot work under the current structure of independent countries. Either they can unite in one transnational country, a real United States of Europe, or they can revert back to their own currencies, as messy as that would be. But the current structure really cannot work.

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