An Update on the State of the EU and the Euro
On July 12th, I wrote about some of the difficulties being faced by the European Union, and I predicted the inevitable collapse of the Euro unless drastic reforms were undertaken. The reforms that are necessary to save the Euro are far-reaching and less than palatable for all but the staunchest supporters of austerity.
Recently, the next phase of the collapse of the Euro Zone has been reached with Ireland requesting and receiving a bailout of $113 Billion. What this means is that, while Greece was bailed out and confidence was restored in the immediate term, contagion has not been eliminated and now threatens to spread to the other members of the PIIGS group, likely in the following order: Portugal, Spain, and Italy.
Germany has taken a tough stance, both at home and abroad. Having cut back domestic welfare and ushered in an era of austerity at home, German contributions to the EU bailout mechanism funds have not come with no strings attached. If Merkel would promise German funds to bailout Germany’s more irresponsible neighbors without ensuring some fundamental changes occur to prevent similar situations from arising in the future, she would likely be savaged by an already skeptical and agitated German public.
Reasonable German demands, however, have been met by foreign accusations of neo-colonialism, and predictable characterizations of Germans as ugly and aggressive. Irish politician Michael Noonan stated: “Can I ask whether this is what the men of 1916 died for: a bailout from the German chancellor with a few shillings of sympathy from the British chancellor on the side?” Germany has also been criticized by high-ranking EU officials for basically thinking in terms of its own best interest. Luxembourg Prime Minister Jean-Claude Junker, president of the Euro Group, expressed his concerns thusly: “That German federal and local authorities are slowly losing sight of European public good, that does worry me.”
What European politicians, particularly French politicians, did not count on when they forced Germany to agree to a common currency as a condition of its reunification, was that while the then future European currency would have strength attributable to the inclusion of stability minded Germany into the currency bloc, the German economic powerhouse would be able to essentially hold the Euro ransom and in times of crisis, which were almost inevitable considering how the currency union was organized, and demand concessions. What the European powers did not realize at the time is that in terms of the balance of power in Europe, forcing Germany into a currency union was more of a benefit to Germany than to its neighbors because the neighbors would eventually seek handouts, and at that time (read now), Germany has been able to extract concessions.
If the Euro, and indeed the EU, does not collapse, which I do expect, Germany will have been able to achieve what the Kaiser was unable to with guns, all without firing a shot: economic hegemony over Europe.
What is more likely is that contagion will spread to Portugal and then to Spain, though on the subject of a planned Portuguese bailout, European Commission President José Manuel Barroso had this to say: “It’s absolutely, completely false. It has neither been asked for and neither have we suggested it.” What Germany must consider if the threatened EU members would decide to accept its harsh terms is that borrowing money to bail out irresponsible neighbors is itself irresponsible and will ultimately affect the creditworthiness of Germany, and in the immediate term could drive up the cost of its credit default swaps. Professor Wilhelm Hankel, of Frankfurt University commented that: “Germany cannot keep paying for bailouts without going bankrupt itself”, and Germany finance minister Wolfgang Schäuble also recently commented that: “We’re not swimming in money, we’re drowning in debts.”
Ultimately both Germany and Europe have very difficult times ahead of them, as does the United States. Germany has the right idea, that austerity is the key to emerging from this crisis. What Austrian Economics teaches us is that austerity should not be a government policy in times of crisis, it should always be government policy: the more that can be cut the sooner it can be cut, the better, because market outcomes are superior to coerced outcomes, and people have a natural right to their property and to the fruits of their labor. In closing I will leave you with a speech from November 24th, 2010 from Eurosceptic MEP Nigel Farage on the arrogance of European leaders and how they have been plotting against member states to increase the central power of the EU.
Sources:
http://online.wsj.com/article/SB10001424052748704693104575638132375883318.html?mod=WSJ_hp_LEFTTopStories
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8160999/EU-rescue-costs-start-to-threaten-Germany-itself.html
http://apnews.myway.com/article/20101126/D9JNQ4880.html
http://www.bloomberg.com/news/2010-11-26/ireland-s-relief-proves-fleeting-as-day-of-reckoning-nears-euro-credit.html
http://www.cnbc.com/id/40378597
http://www.spiegel.de/international/germany/0,1518,731350,00.html
