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Alin Voicu

The ECB and the European Commission are starting a wave, probably influenced by the Euro 2012 festivities, by making concerted noises on the desirability, nay, the inevitability of a banking union among the countries in the EU. They are not even limiting themselves to the countries in the Monetary Union–there shall be a pan-European banking union, they pontificate.

Qui bono? Who will benefit from the further erosion of the sovereignty of the member states? More importantly, how did the governments of these countries not see this when they joined the EU, signed the Masstricht and Lisbon treaties, and mulishly maintained that they are benefiting their countries? Now he who has the “gold” makes the rules–Draghi, Barrosso, etc. How is the EU project different from the project of building an empire–political and economic?

The project has almost everything backwards, beginning with its operating premise: they would rather change everything for the abstact project than have an economic union based on actual personalities of the member countries. Clearly the rationale, like the currency, is political, the economic aspects being a consequence and a disguise. Yes, there is life outside the euro and even outside the EU for European countries–the problem is, with the EU “you can check in any time [they condescend to deem you worthy], but you can never leave”: while the EU treaties do have exit clauses,[1] the invisible financial bonds are made to look indestructible.

Specifically on the current crisis, if banks buy their government’s debt issues to finance deficits based on the “full faith and credit” of the government’s power to tax the country’s citizens, then the banks’ other side of the house, making loans to the “private sector” businesses and consumers, goes sour due to the banks’ miscalculations of its private business risks, why would they be entitled to the government’s guarantee for their liabilities, a.k.a., bail-outs? Yet governments all over Europe took on the banks’ liabilities on their own balance sheet and placed them, thus, on the shoulders of the taxpayers which are now in double trouble (at least): shortage of loans because the banks are hurting on their private sector lending arm; and swallowing all the “toxic” assets of the same banks now assumed by their government. Again, qui bono?

Draghi states that there are thee pillars upon which to build a banking union: a EU-wide deposit guarantee mechanism, a resolution fund (a.k.a., bank bail-out fund) and centralized banking supervision.[2]

If the proposal becomes law it would also “introduce an insolvency regime for banks in the European Union. It would instruct countries to prepare for a bank collapse, collecting money through an annual levy on banks that would be used to provide emergency loans or guarantees.”[3] It is entertaining that the Brussels blew its top when Hungary did exactly this and in much better terms–the levy was temporary; it did not react in the same way when the UK did it, however. Hungary didn’t get just funds, thereby–it also gained a bargaining chip in dealing with “business leaders”[4] anywhere in Europe: rescinding the tax early or late makes just as good an argument as enacting it, early or late. Even the very much vaunted “critical” election in Greece on June 17 can be viewed in this manner–it is not altogether set that one party or another will annul the EU engineered bail-out as EU politicians and media would have everyone believe. Once in power, opinions can change, of course. Exacerbating and, possibly exaggerating, the impact of the Greek election sets up a situation to be easily exploited to those politicians’ (and bankers’) advantage, in many ways quite regardless of the outcome. Moreover, the linking up of the euro-membership question with obedience to “austerity measures” is actually a tactical maneuver that may potentially benefit Germany and some of the banks–none of the main players in the election, New Democracy, PASOK or Syriza want to exit the euro. Therefore, in effect, Greece is not contemplating leaving the euro-zone–it is very much confronting being kicked-out!

But how does this solve the problem of the government-bank relationship–well, it doesn’t: so we must get rid of these governments or at least of their governmental prerogatives. This seems to be the thrust of the banking union project. A fellow at the Cato Institute states that “the banks, not fiscal deficits, will be the undoing of the euro;”[5] in Draghi’s view, there is an alternative: keep the banks, undo the governments.

But even this shade of duplicity pales before the bigger issue: this is a simple tactical move that is being thrown into the mix just because the financial crisis increases its odds of becoming law. The pressure upon Southern European governments to roll over and agree is not only political but also financial and urgent. Spain’s Prime Minister is rolling over in advance and, in the midst of a bail-out from the EU to his own government, calls for a new euro-zone fiscal authority because “the European Union needs to reinforce its architecture”, [6] he said. But it does not solve the problem of failing banks nor would a “more perfect union”[7] bring about the “United States of Europe.”

Rather than seeing only the more perfect union aspect, governments in Europe should also take heed of what one of the people how had “pledged his life, fortune and sacred honor” in signing that document said in his inauguration speech as the third President that the United States should pursue

peace, commerce and honest friendship with all nations–entangling alliances with none, I deem the essential principles of our government, and consequently those which ought to shape its administration.[8, emph. added]

The time pressure (they want to be able to vote on it when they meet in 2 weeks) also discourages a level-headed evaluation of the situation which would suggest that the countries that are recovering from the financial crisis in Europe are those that bucked the EU trend. Even the Wall Steet Journal, usually so prissy about people paying back what they owe, had to run an article and admit the dramatic turnaround of “deadbeat” Iceland.[9] Tellingly, one of the reasons given for this extraordinary performance is that “Iceland has a significant advantage over stressed euro-zone countries–a currency that could be devalued.” Exactly, we thought so too.[10]

Returning to the drachma would give Greece the same tools and flexibility Iceland has. Note also that, unlike Ireland, Iceland let its banks fail and their investors to take the losses. Capital controls as well, “anathema to the European Union’s doctrine of open financial borders” may be put in place to stem the capital flight already occurring to the tune of 700 million euros per…Monday.[11] Not to mention the benefit uttered by a very insightful member of the Icelandic Parliament which obviously is no fan of Romneyan economics:

We are seeing in Greece and in Southern Europe how painful it is to adjust through the labor market. To adjust through the currency is so much less painful.

Apparently, you can’t snow the…snowmen. This insight can help handle the looming austerity-growth dilemma, not to mention preserve peoples’ control over their own countries.

With the latest scurrying about to keep Greece in the euro-zone one would be led to think that the EU is afraid not so much of the cost of Greece’s exit as of its potential flourishing! Which may give others ideas…

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  1. Treaty on European Union, Article 50: “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.”
  2. Ben Rooney, “Draghi says euro is ‘unsustainable’ without action”, CNN,  31 May 2012, http://money.cnn.com/2012/05/31/investing/ecb-draghi/index.htm
  3.  “European Commission plan to deal with failing banks”, The Telegraph, 6 June 2012, http://www.telegraph.co.uk/finance/financialcrisis/9313013/European-Commission-plan-to-deal-with-failing-banks.html
  4. Marton Eder, “Hungary courts Lenders with Offer to lift Tax”, The Wall Street Journal, http://blogs.wsj.com/emergingeurope/2012/06/13/hungary-courts-lenders-with-offer-to-lift-tax/?mod=WSJBlog&mod=emergingeurope
  5. Gerald Driscoll, “How the Euro will End”, The Wall Street Journal, 12 June 2012, http://online.wsj.com/article/SB10001424052702303768104577458301368089854.html
  6. Julien Toyer, “Spain calls for new euro fiscal authority”, Reuters, 2 June 2012, http://www.reuters.com/article/2012/06/02/us-spain-economy-europe-idUSBRE85107V20120602?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28Business+News%29
  7. “The Constitution of the United States”, Preamble, http://www.archives.gov/exhibits/charters/constitution_transcript.html
  8. Thomas Jefferson, “First Inaugural Address,” 1801. ME: 3:321
  9. Charles Forelle, “In European Crisis, Iceland Emerges as an Island of Recovery”, The Wall Street Journal, 21 May 2012, http://online.wsj.com/article/SB10001424052702304203604577396171007652042.html
  10. Alin Voicu, “Invatamintele crizei financiare – Moneda calpa?”,  1 July 2011, https://socot.wordpress.com/2011/01/07/invatamintele-crizei-financiare-moneda-calpa/
  11. “’Capital flight’ causing trouble in Greece”, BBC Radio, 21 May 2012, http://news.bbc.co.uk/today/hi/today/newsid_9722000/9722409.stm
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