March 23, 2014

The Betrayal Of Europe

By Benjamin Fricke

For seven years now the European elite has been occupied with saving banks, indebted states and the Euro, yet nothing seems to have changed.

I have begun to ponder why political efforts have been unable to solve these problems and hold the responsible actors accountable for their mismanagement of banks, and states or to change their economic policy in Europe.

History once again must teach us a lesson of why nothing has worked to solve the problem. The three crises are to some extent independent from another but yet have amplified their impacts on each other. The real estate bubble in the U.S. has been a trigger for Europe’s dysfunctional system to become apparent. Yet, to blame speculating banks and U.S. housing policy solely for the economic disaster in Europe and the Euro crisis is incorrect.

When the Euro was officially announced, the interest rates for loans dropped for southern European countries to de facto German levels. This period between 1995 -1998 was called the “convergence period.” During that time cheap credit was made possible for countries, such as Greece, Italy and Spain. Prior to 1995 Greece, Spain and Italy paid double digit interest rates for their loans and were far away from a debt problem. That changed dramatically after 1995 because standards of living were boosted with cheap credit. The loans primarily served consumers and not investors. The debt burden did not have an equivalent rise in productivity to pay off the debt. A functioning economy is always based on investment, innovation and productivity.
The introduction of the Euro has from the very start been an effort to create a European central state. The Euro therefore is a political unifier that forces 18 countries into a single currency. This feature of the Euro is the single largest drawback for the individual countries. A currency after all is a custom tailored entity that must fit the economy of each country and its strengths. A currency also is a display of how well or poorly an economy has been managed. For example, a Euro today is about 50% overvalued for the Greek economy and 30% undervalued for the German economy.

Right from the beginning German Finance Minister Theo Waigel told the Greeks they would never be part of the Euro because they did not meet the criteria. However, questionable statistics and some help from Goldman Sachs eventually helped Greece to become a member of the single currency.

On the one hand undervalued German Euro led to a boost in German exports and on the other a collapse of exports of southern European goods. The statistics of German exports lead to the mistaken assumption that Germany is the benefactor from the Euro. This is not the case. German goods are sold 30% under value, which is a loss in revenue and income. Moreover, if a strong Deutsche Mark were to appreciate by 30%, German industry and the people could buy more raw materials and products from abroad for less.

In the past decades before the Euro was introduced the Deutsche Mark consistently appreciated throughout the years and German exports never decreased. Additionally, Germany had undergone severe structural reforms under the Schröder government, known as Agenda 2010. The Agenda 2010 reform package lead to increasing numbers of low paid jobs and stagnating wages throughout the past years.

While German exports are undervalued, southern European exports are overvalued because their currency cannot depreciate. What is happening now is the attempt to forcefully lower wages, prices and costs. Milton Friedman once said that “it is easier to change one price (exchange rate) than millions of individual prices.”

History should teach us a lesson. When the Weimar Republic had trouble paying off its war debt imposed by the Versailles Treaty, Chancellor Brüning introduced the same type of policy to make Germany more competitive. These policies led to poverty, high unemployment, hyperinflation and ultimately a devastating political change in Germany.

Since the Euro was a political project from the beginning it contradicts the European idea of freedom and democracy. The rescue packages which have been implemented such as the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) are against the no bail out clause and therefore illegal. The clause essentially states that no country is ever to pay for another country’s debt, just like no U.S. state would pay for another’s state debt. This principal has been abolished. The ESM would have no accountability to any government and is immune to checks and balances. The only decision making body would be the Board of Governors. This kind of politics that insists on stabilizing the periphery at all costs is damaging in two ways. First, it drains resources from the strong center of the E.U. and makes countries like Greece, Portugal, Spain and Italy dependent on technocrats. Second, a loss of self-determination and democracy becomes apparent.

The concept of democracy in the EU has already become absurd. For example, a Silesian crumb cake can only be called such in the Polish part of Silesia, but not in the Czech or German parts because EU bureaucrats approved that it is a protected product only in Poland. Has the E.U. redefined the borders and people’s identity of historic Silesia?

One must never forget that it will ultimately be up to the people if they wish to support a political and social identity. The E.U. apart from its desperate policies to save the Euro has done a poor job at permitting free trade and democracy.

One should recall the referenda about the Lisbon Treaty, in which the Irish were made to vote until they finally said yes. In a 1999 Der Spiegel article Jean-Claude Juncker, Prime Minister of Luxembourg, described the policy making process in the E.U. along these lines: “We decide on something, then put it in the room and wait to see what happens. If there is no great uproar or uprising because most people do not understand it anyway, we will follow through with what we decided. Step by step until there is no more return.”

How can Europe pull out of this mess? The Icelandic model has shown the path out of the crisis. Allow a country and the banks to default and start from the beginning. It may indeed be a tough time but at least the people will not lose their democratic rights and will not be dependent on international organizations such as the IMF or creditors in general.

The Euro is a failed project. The sooner the political class will admit to it the sooner we can go back to sound economic policy and national currencies. A currency never created a state because there must always be a state that needs a currency. The Latin Monetary Union and the Scandinavian Monetary Union are just two recent examples from the 20th century of why fiscal unions fail. 

Whereas Switzerland and reunited Germany are examples where the people´s will was ready for political union and fiscal union worked in tandem.

Like any empire Europe will fall if it loses its competitiveness and innovation through centralization, over bureaucratization and regulation. If it were true that in a globalized world a state must be a giant, then Hong Kong would be poorer than China, Singapore weaker than Indonesia and Switzerland less prosperous than France, yet this is not the case.

Let us remember the words of the liberal economist and philosopher Wilhelm Röpke: “To centralize Europe and melt her into one block, would be nothing less but a betrayal of Europe and her patrimony, and all the worse to be carried out in Europe’s name.” If we do not take these words to heart then the Arab Spring or Ukraine today may be a peek into Europe´s future.

Benjamin Fricke is an Analyst of EU Affairs and German Foreign Policy at the Political Developments Research Center (PDRC), a think tank based in Yerevan, Armenia.

Political Developments Research Centre (PDRC) is a non-profit organization based in Armenia. The Center owes no allegiance to any government, or to any political organization, and is strictly independent. PDRC was founded in July, 2006 in Armenia by a number of individuals interested in how to manage on objective and useful researches in the politically dynamic 21st Century.

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