The EU’s Horrible Honeymoon

Last week, Barack Obama snubbed the Europeans by refusing to attend next May’s European Union summit in Madrid. The Europeans are very upset. But that is not the worst of their problems, and neither is the looming bankruptcy of Greece. Analysts fear that Spain might sink the euro, the EU’s common currency, and with the euro also the dreams of greater political integration.

At this point Europe is not even halfway its 100-day political “honeymoon” since the Treaty of Lisbon, which transformed the EU into a state in its own right, came into force. So far the honeymoon has been a nightmare. Since the beginning of the year, the EU’s currency, the euro, is on the brink of collapse; Greece has been placed under EU financial supervision to prevent it from going bankrupt. Now U.S. President Barack Obama has announced that he will not attend next May’s EU summit in Madrid. It was to have been Obama’s first visit to post-Lisbon Europe – the consecration of the new political order.

Washington informed Brussels last week that Obama is not coming because it is not clear who is his European counterpart. Since the Lisbon Treaty came into force on January 1st, Europe has its own President, Herman Van Rompuy. This former Belgian politician chairs the European Council, the assembly of the heads of government of the 27 EU member states. However, there is also José Manuel Barroso, a former Portuguese politician, who is the president of the European Commission, which is the EU’s executive body. And there is José Luis Rodriguez Zapatero, the Spanish Prime Minister, who is hosting the Madrid meeting and as such co-chairs the summit meeting of the EU heads of government with Mr. Van Rompuy.

Messrs. Van Rompuy, Barroso and Zapatero all want to be the first to shake Mr. Obama’s hand and receive the deep bow which the American President is in the habit of making to foreign leaders. Because of the embarrassing intra-European squabble about who should have the honor, Obama has declined the invitation until the Europeans have figured out which of them is the most important.

Obama’s decision has come as an unexpected blow to the European leadership. It has upset them so much that they are considering postponing the summit to the autumn. Meanwhile, they have begun quarreling about who is to blame for the present debacle. The Europeans generally agree that the vainglorious Zapatero is mostly to blame, but others are damaged more. “The Spanish have made a mess of the summit but Van Rompuy and the post-Lisbon EU institutions will carry the can in the long term. The squabbling has damaged the EU in the eyes of the most powerful nation in the world,” a senior EU official said.

Although Obama’s snub hurts Europe’s pride, the euro’s monetary problems are far more serious. They not only affect Europe’s finances and economy, but may also tear down the political EU framework. When the European Commission placed Athens under EU supervision last week, Greece was almost bankrupt. Brussels has forced the Greek government to present a plan to drastically reduce its budget deficit from 13% to 3% by the end of 2012. The plan will cost the Greeks blood, sweat and tears. It includes a freeze on civil service wages and the postponement of the retirement age. Brussels has invoked new EU powers under Article 121 of the Lisbon Treaty, which allow it to reshape the structure of Greece’s pensions, healthcare, labor market and private commerce.

“The envisaged correction of the deficit is feasible but subject to risks,” says EU Commission President Barroso – an understatement. The Commission fears a backlash from the Greek unions, who might organize strikes and bring down the Greek government. Trade unions in other countries are nervous, too. They warn that it is unacceptable that the European Commission intervenes in setting national wages.

The EU’s Monetary Affairs Commissioner Joaquin Almunia declared that the Greek targets will be enforced strongly and that, if necessary, even more draconian measures will be taken. “Every time we see or perceive slippages, we will ask for additional measures to correct these slippages. Never before have we established so detailed and tough a system of surveillance,” Almunia said. He has demanded quarterly updates on progress towards reduction targets, as well as a first report on 16 March. “This is the first time,” he said, “we have established such an intense and quasi-permanent system of monitoring.”

Much is at stake. In the coming weeks, the strength of the euro will depend on whether the markets believe that the government in Athens is strong enough to implement the reforms or trust that the other eurozone countries will bail out the Greeks. This year the eurozone governments have already borrowed a record €110bn from the markets, thereby forcing up the cost of borrowing for countries with the weakest public finances, such as Greece, Portugal, Spain, Ireland and Italy.

Nobel Prize winner Joseph Stiglitz warns that the plan to slash Greece’s budget deficit could end up stifling the country’s economic growth. He said that the whole eurozone should share responsibility for the Greek situation. This view is not shared by other economists. Otmar Issing, a German economist and a founding member of the European Central Bank (ECB), points out that successive Greek governments have falsified the Greek budget figures for years, in an attempt to deceive Brussels and the eurozone monetary authorities, such as the ECB. What is happening today is the result of “years of violating rules, cheating on figures, financing consumption, public and private by huge debts – this is a way which has to be stopped,” Issing told the BBC. “Any sign that help might come, would undermine the efforts which are needed to reform the Greek economy.”

For political reasons, too, a bailout would be counterproductive. “German and French taxpayers cannot pay for Greece,” Rainer Brüderle, Germany’s Economy Minister, said at the World Economic Forum in Davos. A bailout would mean that the taxpayers in one country are liable for the failures and mistakes of a government in another country. This will not be accepted in countries such as Germany, who will have to foot the bulk of the bill. Axel Weber, President of the German Bundesbank and a member of the ECB Executive Board, told the German financial paper Boersen Zeitung: “Politically, it would not be possible to tell voters that one country is being helped out so that it can avoid the painful savings that other countries have made.”

Bailing out the Greeks will lead to a surge of anti-EU feelings in other countries. The alternative is to allow Greece to default on its debts. This, too, would have devastating consequences for the euro and affect all the countries in the eurozone. Hence, there seems to be only one way out: Greece must leave the eurozone. Legally, however, a country cannot be thrown out of the eurozone. Nevertheless, the British economist John Kay wrote in the influential German financial newspaper Handelsblatt that “if there is political will, it [i.e. throwing the Greeks out] might happen. Bureaucrats, lawyers and bankers would solve the technical difficulties. Central bankers cannot afford not to have an emergency plan for that.”

Even if the situation in Greece can be stabilized, the EU’s nightmare is far from over. The next eurozone dominos that might fall are Portugal and Spain. Portugal’s deficit reached 9.3% of GDP last year, Spain’s 11.4%.

Greece and Portugal are small countries. No matter what happens, they will not break the euro, writes Wolfgang Münchau, the associate editor of the Financial Times. The Greek situation may even be considered as something of a joke. “European farce descends into Greek tragedy” and “Spartan solutions from Brussels will be fought by Athens” are two titles of recent articles by Münchau. However, Spain, the eurozone’s fourth-largest economy, is another kettle of fish. “The clear and present danger to the eurozone is Spain,” says Münchau. “Spain, like Greece, has suffered from an extreme loss of competitiveness during a period in which it relied on a housing bubble to generate prosperity. While the Greek government is at least beginning to recognise the need for reform, perhaps too late, Spain’s political establishment remains in denial,” he writes.

His pessimism is shared by Professor Nouriel Roubini of the Stern School of Business at New York University. He says that Spain poses a looming and serious threat to the future of the eurozone. “If Greece goes under, that’s a problem for the eurozone. If Spain goes under, it’s a disaster,” he told the World Economic Forum’s annual meeting in Davos

If Brussels puts Madrid under EU supervision or forces Spain out of the euro, the repercussions for Zapatero will be worse than missing a photo-op with his political hero, Barack Obama. However, in this matter, too, the man who is to blame most for the debacle, is not the one who will suffer most harm from it. It is unlikely that the euro can survive a Spanish catastrophe. It looks as if 2010, which should have been the year of its triumph, is going to be an annus horribilis for the EU.


"Spain might sink the euro"

Does this mean that Spain might cause a devaluation of the Euro or is this English Idiom for causing the euro to sink like a ship and therefore cause the end of the euro?

These subtleties are not always obvious for non native english readers.

Sink 2

Pardon my pedantry, Cogito, but you raise a good point. By s.o. sinking s.t. we normally mean that he will take hostile action intending to bring about its destruction, as in the imperative "Sink the Bismarck!" "Sink the euro" is therefore ambiguous. Spain will not sink the euro by firing all its guns at it, but rather in the way a fat man will sink a swamped canoe by holding on to his baggage and refusing to bail.

I will add that I am impressed by the unusual degree of unanimity on this thread. All seem to agree that the nations should restore their independent currencies and thus their independence, but all believe that the powers are irrevocably committed to maintaining the tyranny of a centrally managed international currency in the hope of realizing a centrally managed economy.

Let'em Fail

Ladies and gentlemen, I suggest a toast to the spiritual destruction of the eurozone, which is now close at hand, for want of an utter destruction. I, for one, refuse to bail-out my own government, let alone foreign governments. If we are not able to adjust and slash spending, we will fail, and I will not be mourning a failed civilisation unworthy of my pity. If the Greeks are ready, as I fear they are, not to give their socialist (whether they be from the left or the right) politicians the sack they deserve, this is none of my concern. The Greeks have profited from lavish EU subsides at the expense of the development of my own country (France), a huge contributor to the EU (even though most of the evil CAP subsidies are directed toward us, which does us no favour as our farmers are despondently dependent on the wretched "Union" for their own subsistence). I cannot see why the Germans would think differently. Germany is far more frugal as are most northern countries in Europe, they should not be chastened because of their socialist profligate neighbours, whether they be Greeks, Portuguese or Spaniards. And I would stake anything on France, Belgium and Italy descending into the same state of affairs. However, Spain is too desperately socialist to notice the hopeless state of her finances. Let them all fail and reap the reward of their spendthrift behaviour. I do not care what happens to any of them, I was never responsible for their situation, and therefore should not bear the cost, we have got quite enough on our arms to engage into a foreign adventure rescuing a bunch of commies. We should withdraw from the eurozone and revive our vernacular currencies in order to be truly independent again, and be able to adjust to markets according to our own needs and for our own sakes, and not because Germany or any other country told us to do so. I bet we will not leave either the eurozone or the EU, nor will Germany. Greece, Spain and Portugal will be bailed-out, and the electorate will not give a fig because of sheer ignorance or carelessness, after all, they need not suffer, we will just print more money and engage into reckless quantitative easing on the downward spiral to inflation. Who cares about a possible "sovereign" default? The next generation will foot the bill, who cares as long as the elderly have their rich, state-funded pensions, the aliens their undeserved benefits and the state its grip on our daily lives? Who cares about the next generation, born in bankruptcy, bowing the head to the Moorish scimitar and carrying on their lives under foreign barbaric oppression. If we cannot elude that fate, then I would rather have our civilisation utterly destroyed than wriggling like worms under the Islamic jackboot. After all, financial bankruptcy is nothing compared with moral bankruptcy. Bring it on, let Spain and her profligate cronies fail, let us have an excellent occasion to give us Eurosceptics a chance to deal a lethal blow to the eurozone and possibly the EU. Britain is already moving a bill on an in/out referendum. I do not believe anyone will have the guts to do it, but what is left to us but hope? 

Concerning Germany

After browsing german internet news offerings and blogs alike all across the political landscape I can tell you one thing:

Germany is close to the boiling point, that is all the people who have little say in political matters. And that is about most Germans.

Haughty german  banksters and politicians might be cooking up a bailout right now, but it won't escape them for long that this could result in a domestic upsrising.

Reprise on the Eurozone Sovereign Debt Crisis

Despite my insistence on the sense of de-coupling Greece, Ireland, Portugal and Spain from the Eurozone, and the impossibility of overcoming French and German taxpayers' objections to EU aid to Greece, I fear that other factors will prevail.  David Goldman has noted not only the widely-held fear of a Greek default starting a chain reaction, but also the impact a default may have on European banks' substantial investments in the emerging economies of East-Central Europe hit hard by the global financial crisis and recession.  Unlike in the United States, European banks did not fully disclose the toxic or possible toxic assets on their books.  In order to avoid a possible European banking crisis, EU aid to Greece and other defaulting Eurozone governments may ignore taxpayer misgivings and bail Greece out in concert with an austere regime.


Goldman has noted how the subprime mortgage crisis spurred the transfer of volatility and risk from the private sector to the public.  Perhaps the European bankers will follow suit.

The EU is to Greece as Belgium is to Wallonia

The question I have is whether the stark failure of Greece's socialist policies has made it easier for Flemish politicians to explain the stark failure of Wallonia's socialist policies to other European leaders? Better put, are the conclusions being drawn from this lesson a benefit to Flemish hopes for greater autonomy/independence or are they likely to ricochet in the opposite direction?

de bende van

Greek bailout

Bailing out small countries like Iceland, Greece or Portugal are peanuts compared what taxpayer put involuntarily in the big banking bailouts. Anyway, there is no mathematical model worth to be investigated when it comes to billion-input-decisions. There are even experts proclaiming that the banks have LEARNED something after the crash. Monetary lapse of reason?

If need be, Greece will be bailed out

I don't think Greece will be kicked out of the euro. I find it difficult to imagine how the EU would be able to force Greece to reinstitute the drachme (or whatever) if Greece doesn't want to. Basically, Greece can do what some other countries have done too: simply continue to use the euro, even if it's not allowed to do so.

Furthermore, I don't think that the EU cares that much about its popularity. The bureaucrats couldn't care less about the taxpayers' feelings when they have to pay to bail out another country. It's not like they're going to organize a referendum about it, so it really doesn't matter to them. As long as the bureaucrats can keep their wages and feel important, everything will do. The only thing they will care about, is that they want to make sure this isn't an easy solution for the Greek political establishment. Otherwise Portugal could want to opt for the same solution. They will therefore want to set an example in Greece, so that Portugal (and other countries) will want to get their act together as soon as possible. And again, if this results in anti-EU-feelings in Greece, then so be it.

RE: Obama's "snub" and the PIGS

Firstly, Obama’s decision should not have come as a surprise.  Not unlike Moscow, Washington prefers bilateral relationships with select European states, including non-EU states, than with the European Union in the aggregate.  It is highly unlikely that Washington would forgo established trans-Atlantic alliances and relationships for the sake of Brussels. 


Secondly, despite any legal difficulties, Spain must be extricated from the Eurozone.  As I noted in prior comments, the economies of southern Europe would benefit from reviving their defunct national currencies and from freely exercising monetary policy.  Moreover, the stronger economies of the EU would appreciate the lifted burden and the measurable rise in value of and confidence in the euro.


The Ongoing Tragedy

I remember when I was in Paris in 1990, there was an article in Le Monde how the French, German, and British governments were exasperated with the Greeks. For over 10 years, the EC had pumped billions and billions of dollars into Greece so it may upgrade its infra-structure to prepare it for economic competition in the coming union. By 1990, most of the money had disappeared and there was hardly any infra-structure to show for it. All that money wasted. Evidently, the socialist Dream will always trump reality.

Too big to fail

I bet the euro survives and the EU, EC, and the central banks agree to bail out the weak economies and manage them like bankrupt businesses.  That counts as "success" in the socialist's playbook, and centrists will go along with that.

Inferiority complex

EU-ers  showing their provincional mentality. Regional Soviet party officials had more dignity in front of Stalin. 

No exit plan

I am as curious as you to see what will happen next. There is no exit plan. In a worst case scenario, i.e. if Spain collapses just like Greece, the other eurozone countries (read Germany) will have to bail Spain out. Will the Germans be prepared to do that, or will they either (a) force the insolvent members out of the eurozone or (b) leave the eurozone themselves and return to the mark? Thinking ahead has never been on the agenda of the politicians who imposed the euro on us.

What happens then?

What exactly does it mean that "Spain might sink the Euro"?  Is there an exit plan from this currency?  Did anyone think that far ahead?