Monday, 15 August 2011

-Coming To The End.....On The Brink Of Political Union........

  published in ' The Irish Examiner' Tuesday 16-08-2011

Today’s meeting of German Chancellor Merkel and French President Sarkozy may prove a defining moment in the evolution of the Eurozone, and the wider EU.  One way or another, this meeting has the capacity to change the trajectory not alone of the economy but of modern Irish history.

The leaders may talk of many things but the real agenda for the meeting is simple.  It has to do with two questions.  Firstly, is there anything left – anything at all – that can halt the implosion of the Euro zone. Secondly, is Political Union the only ‘solution’ left on the table.

‘Bailouts’ have not succeeded; their punitive terms, as the ‘Eurozone Authorities’ are now finding out alas too late, have made the underlying problems even more acute. The provision of unprecedented liquidity by the ECB has not worked.  Instead, it has undermined the whole architecture of monetary union; it has undermined the Treaty of the Functioning of the European Union.  It is directly contrary to Article 125 of the Treaty. It has subverted the independence of the ECB and left it hostage to developments in those same markets that can see that the ECB is no longer a ‘Bundesbank’ type institution.  New institutional structures and Stabilisation Mechanisations have not worked; they have not been thought- through and their resources are already inadequate in the face of what is threatening Italy – and perhaps even France.  The participation of the IMF in ‘adjustment’ and ‘financing’ within the Eurozone has not worked.  Neither, it need hardly be added, have the ringing declarations of supports by European political leaders.
The economic forecasts that drove these now redundant ‘policies’ are obsolete, as economic growth has faltered not alone in the peripheral economies but also in the ‘core countries’.  Markets are operating in spasms, driven by the usual daily flow of information but, also, by highly sophisticated strategies to make a buck out of the collapse of the system.  Don’t blame the markets – that’s what they do. It’s what lie beneath that are the issue.  Equities, including financial stocks, are subject to highly volatile collapses – and by ‘recoveries’ based more on brute arithmetic than on market fundamentals.  Bond markets are all over the place – and the data suggests defacto default. 
Gold, the lightening rod of investor uncertainty, has risen to extraordinary heights and authoratative analysis suggests it may rise much further.
These developments have been ongoing, more or less, for some time now and have been analysed in these pages. Markets are defined by volatility. What’s new are:
  • The ‘anomalies’ that are now showing up in the system: there are chronic shortages of liquidity in parts of the system and equally chronic shortages in other parts of the same system. 
  • Reactive bans on ‘short selling’ of stock by some central banks, that can simply cannot work but which reinforce the markets lack of confidence in the ‘authorities’ 
  • Currency interventions on the part of the Eurozone. 
  • The erosion of the reserve currency status of the dollar, following the recent downgrading of its credit rating

But the single most significant change in recent weeks is the fact that the ‘leadership’ is now being seriously questioned.  It has been questioned in these columns many times in recent years.  Once upon a time, a few short years ago, Greece did not need (and was not going to get) a bailout: nor Ireland, nor Portugal, nor Spain, nor Italy...  Once upon a time, the credit rating of the US was seemingly impregnable.  The simple fact is that the US – for a whole series of reasons – is at present insolvent but not, so long as the printing presses still function, yet illiquid. But the crisis in the Eurozone is exacerbating the underlying problems of the US fiscal policy and the Eurozone contagion which has now infected Italy, and has metastasized into a transatlantic contagion.

Last weekend, the President of the World Bank, chose to highlight the extent of the global economic crisis and, picking his words carefully, raised the issue of ‘leadership’. 
Today’s meeting of Chancellor Merkel and President Sarkozy is a meeting where ‘leadership’ and,, by extension of the policies of these leaders, are now been openly questioned.
In these circumstances, Political Union is now an issue.  There is very little left that they have not already attempted and which has not already failed.  In the short term perspective, it would mean that the Eurozone could borrow as a single entity, underwritten by the economy and people of Germany.  It would mean a single European Department of Finance.  It would mean that for all countries – even for Italy and France – fiscal policies and ‘national budgets’ would be determined by Germany.  Stripped of all the nonsense, that is what ‘Economic Governance’ is all about: Political Union.
The markets would probably respond positively – at least for the short term. The next few weeks will be significant.  Then the enormity of what was the last throw of the dice (and the original, unspoken, objective of monetary union) would be challenged.  Indeed, the process is already being challenged in the German Constitutional Court.

 It would raise the question of the implications for Germany’s hard-won global credit status; it would raise the issue of the sustainability of an enforced fiscal policy across highly divergent economies.  Smaller countries, including Ireland, who have been wholly by-passed in the sequence of events, would be in a most difficult constitutional position.  Even the most pro-EU advocates would point out that they did not elect Chancellor Merkel or President Sarkozy to take responsibility for the future, not alone of their economy but of their country; they elected a national legislature that convenes in Dail Eireann, one that is ‘in office but not in power’.
In terms of economic policy, it is already apparent  that is it is nonsense to insist that every single twist and turn of Eurozone policies; every policy denial and subsequent reversal, can all simultaneously be sold to the people as being in the ‘national interest’.  Even the ‘legislators’ heading home in the evening, understand that there is , as yet, no democratic mandate for Political Union and that the legitimacy of such a historic step would have to be put to the peoples of the Eurozone, battered and disillusioned from the consequences of the failures of policies from this same orthodoxy.  

What it boils down to is this.  The leadership of Germany and France – a leadership that will pass in a few short years to others – are being impelled down the road for which they have no mandate from the peoples of Europe.
  In the face of the collapse of the ideology of corporate capitalism in the Eurozone and in the US, the question arises as to why we are recreating at such an enormous cost a paradigm that has failed.

 In the face of the disorderly breakup of the Eurozone, the most important priority may well be the preservation of European solidarity, which is the defining political legacy of two world wars.  A disorderly collapse of the Eurozone will bring with it the threat of protectionism and capital controls – and most important of all – the undermining of European solidarity.  History may judge that the greatest contribution of an Irish government at this point – not alone to its own people but to all that has been developed in Europe – may be to leave the Eurozone.

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