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The ‘Beneficial Crisis’

On the road to the European superstate.

May 31, 2010, Vol. 15, No. 35 • By ANDREW STUTTAFORD
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The next stage of this drama ought to have been something of an anticlimax as nerves were soothed by that calming trillion. Instead, Merkel sent markets sliding by imposing, amongst other measures, a “temporary” ban in Germany on “naked” short selling (selling securities that you do not own and have not made arrangements to borrow) of eurozone government bonds and the stocks of some of her country’s leading financial institutions. This was accompanied by promises of further regulation and yet more railing against speculators, “out-of-control” markets, and banks.  

The message sent by the new rules was grim. And it was received. By playing the populist card, Merkel had highlighted the extent of the political problems she faces back home. That’s not what investors wanted to hear. Some also fretted that the new restrictions were a hint that the finances of Germany’s banking sector were even worse than feared.  

So, what’s next? Predicting short-term currency movements at a time like this is a mug’s game. I’ll just stick with the word “choppy” and the belief that a trillion dollars ought to buy the euro some time. It won’t be a huge surprise if some of that time—and some of that money—is eventually used to smooth the increasingly inevitable “restructuring” of Greek, and possibly Portuguese, sovereign debt. Nevertheless that will not be the end of the matter. A trillion dollar band-aid is still a band-aid. This spring’s crisis has demonstrated that the existing system cannot survive as it stands. 

To succeed, a monetary union the size of the eurozone needs a high degree of central control, consistent and enforceable budgetary discipline, and spending (and thus taxing) powers sufficient to ensure that the cyclical imbalances in its constituent parts can be evened out. That reality has now essentially been accepted by the German and the French governments. Although negotiating the details of common economic governance will drag on for years, in the end the French and the Germans will, despite some truly fundamental differences, get there—and they won’t be alone. Faced with the prospect of being excluded from the EU’s tightening core, more countries than might now be imagined will choose to jump in notwithstanding its tougher disciplinary regime. While today’s “two-speed” union will continue to exist, the division will deepen, and on one side of it there will be something that looks suspiciously like a European superstate. 

The financial markets could still disrupt this transition, which is one reason that the EU’s leadership is so keen to rein them in. Trouble may also come from a group often ignored in the saga of “ever closer” union—the electorates of Europe. 

One of the more telling characteristics of the EU’s progress is the way it has been forced through regardless of the wishes of ordinary voters. The “reuniting” of Europe has been a project of the elites, the fruit of mandarin cabal and backroom deal. Voters have rarely been given much of an opportunity to demur. And when they have been asked their opinion and called for a halt to further integration, the results have been ignored or subjected to do-over until the “right” result came through.

That’s not to claim that Europe’s mainland is seething with euroskepticism. It’s not. There is, however, widespread apathy and a profound alienation. As the voters of North Rhine-Westphalia have just reminded us, there’s not a lot of fellow-feeling in that imaginary European family. 

This might have mattered less in economically more comfortable times, or in the times when Brussels was not stretching so far, blithe times when voters (foolishly) and Eurocrats (realistically) could, for the most part, pretend that the other did not exist. That’s over now. Building an economic union is messy and intrusive. It’ll be hard to slip it through on the quiet. The PIIGS are being ordered to take a long hard road. The peoples of Northern Europe will be told to pay for its paving. 

What if either says no?

Andrew Stuttaford, who writes frequently about cultural and political issues, works in the international financial markets.

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