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Delusions of the Euro Zone: The Lies that Europe's Politicians Tell Themselves

A Commentary by Armin Mahler

Part 2: A Bailout Based on an Illusion

A ceremony to mark the launch of the euro coins in Frankfurt in December 2001: The euro was always built on delusions. Zoom
REUTERS

A ceremony to mark the launch of the euro coins in Frankfurt in December 2001: The euro was always built on delusions.

Just as the euro's introduction was based on a mistake, the effort to rescue the euro began with another instance of "political delusion," to use Steinbrück's phrase.

With debts amounting to 150 percent of GNP, Greece is de facto bankrupt. Over the course of 2011, even the leading representatives of the euro zone finally accepted this fact -- after having claimed its opposite a year previously.

This explains why the first bailout package for Greece was, to put it mildly, based on an illusion. Possibly against their better judgment, countries putting money into the package assumed that Greece would be able to solve its debt problems by implementing a stringent belt-tightening regime.

The so-called troika, made up of representatives of the International Monetary Fund (IMF), the ECB and the European Commission, was tasked with evaluating the success of these measures.

But they were not successful. Instead of getting better, things only got worse for the country. The austerity measures caused the economy to stall, hoped-for increases in state revenues never materialized, and the country started sinking deeper into debt rather than climbing out of it. But the financial assistance kept coming nevertheless.

Learning a Bitter Lesson

This year, the would-be euro saviors have had to learn a bitter lesson: If they assume that the collapse of a single euro-zone country would bring with it incalculable risks, comparable to the 2008 collapse of the American investment bank Lehman Brothers, then they have no credible power to exert pressure on deficit offenders. Instead, they just have to keep paying. And then the euro zone will have to subsidize countries like Greece for the long term -- just like the rest of Germany has been supporting the chronically cash-strapped northern city-state of Bremen for decades under the country's federal financial equalization system.

The only question is whether ordinary people will play along -- both in the donor countries, who are meant to keep paying, as well as those in the recipient countries, who will have to suffer mightily under stringent austerity measures.

In September, the Bundestag voted to approve the expansion of the euro bailout fund, the European Financial Stability Facility (EFSF). But there is growing resistance to additional maneuvers of this sort -- and not only in Germany.

The currency union has already started subtly transforming itself into a debt union. If the ECB -- and soon the EFSF too -- purchase sovereign bonds that might never be paid back, or at least not in full, the stronger countries will be liable for the weaker ones.

Of course, politicians don't like to use phrases like liability union or transfer union. But what these phrases describe became reality long ago -- which also numbers among the truths they prefer not to mention.

Bottomless Pit

Yet another inconvenient truth is that not all countries will be able to reduce their debt levels by themselves and boost their competitiveness. The currency union can only survive as a transfer union, and if it doesn't want to become a bottomless pit, it also needs to become a fiscal union -- one with strict rules and independent institutions capable of enforcing them.

For these reasons, the euro states have to cede a major part of their sovereignty to Brussels. Whether or not one wants to call the result the United States of Europe is a matter of taste.

Proponents of this kind of union fantasize that the crisis will give rise to an opportunity. They believe that now, in the hour of need, the pressure to act is big enough to push through the integration of Europe that has previously always failed because of national self-interest.

But they might be deceiving themselves once again. The parliaments of the EU member states would have to approve any far-reaching amendments to the union's treaties. What's more, in many cases, this would also involve changing national constitutions and holding referendums. Such a process is protracted, and its outcome is anyone's guess.

The alternative would be returning to how things were originally, meaning at the birth of the currency union. As happened then, euro-zone members would pledge to maintain stability (which admittedly already failed once before, because the rules were overridden when push came to shove). In this case, there would be no permanent transfers and also no collectivization of debts.

Inevitable Shrinkage

In the end, the currency union will shrink. Greece and possibly even other countries will have to abandon the euro in order to be able to get back on their feet with the help of their own, significantly devalued, currency.

The euro saviors and their citizens must finally face the uncomfortable truth. Under current conditions, the euro will fail economically because the differences between euro-zone countries are too great.

But new conditions that would give the euro a firm economic foundation are almost impossible to implement due to political factors. In any case, they can definitely not be put in place quickly enough to combat the current crisis.

Indeed, the would-be euro saviors are suffering from yet another delusion: that they are able to buy all the time they need, without any limits.

Translated from the German by Josh Ward

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1. Deja vu
riskmanager 12/30/2011
Reading todays article about delusions and lies I was taken back to UK papers in the early 1990's. How odd. And how does this Damascene conversion sit with recent Der Speigel articles about the UK, the country that tried to tell you this Euro would cause massive harm to European people and refused to go along with what even Der Spiegel now describes as lies and pay our money to ineffectively bail out your deliberate mistakes. Who were the good Europeans? Who had the best interests of Europe at heart? Would the UK have helped by going along with the latest deception, just allowing things to get even worse before reality is finally faced? And its simply no good blaming the economic weather (Lehmans crisis etc) for the fact that you built a house of straw that has been falling down for a decade and would continue doing so. There are 30% plus differences in competitiveness and a balance of payments crisis as a direct result of the Euro's design, and nothing else. The rest of the world would be recovering now but for the solution-less Euro disaster. Europe, will it ever understand cricket? Well you better start facing reality, and this article is a good start. And don't forget, if the USA or UK had done something really stupid that harmed your economy you would hate them for it and behave badly. It is what you did in 2008, only 3 years ago. Who will come to EUropes aid? No one. You have to do it. Get on with it! Pay up.
2.
donlast 12/31/2011
So, the notion of having a single currency without first having a single political union has failed, as it was bound to fail. Never in history has such a construct been tried and why? Because it does not make sense. But the authors of the Eurozone were neither fools nor were they deluded. They knew exactly what they were doing: that a single currency would lead to precisely what we now - a monetary construct in crisis - which would then provide the impetus for true political union under the dire threat of economic and financial mayhem. Now where is there any endeavour to lay out in plain language, so that voters can understand what they may expect , any, but any, explanation of what it means to give up national sovereignty. To renounce the country's identity and subsume its executive, legislatures and judiciary under one. single common set of institutions. Where is the informed adult debate? Where the analysis? Are all political pundits smoking weed? Gone on vacation? Is the general media sleep-walking towards political disaster? And we Europeans are suppose to be so sophisticated, so wise. Well, there is a road map if you are looking for one, it is American, or one should say old American. It is the Federalist. The writings and speeches of those men who formulated the American Constitution. If Europe thinks it can do it, go to it, but in my book I find the whole idea that the individual countries of Europe will unite to form a United States of Europe irrational and absurd. It is inconceivable. The pre-conditions simply do not exist.
3.
harmk 12/31/2011
In the early stages of the European Union I got into trouble with friends for raising questions and reservations about the workings and possibilities for the project. It seemed to me that it was a rather frantic gathering of nations into one United European entity similar to the USA and the common currency "Euro" was a draw card because of its convenience for tourism. The idea of No Borders, one happy family of nations was irresistible. At the time I argued for a common currency to be adopted which would be valid in any of the countries participating BUT the individual country currency would co-exist. This I argued would create benefits for trade between the countries and bolster their individual market value for international trade. It would give opportunity to help each other out because each country could adjust their currency relative to the euro. The political union could have grown into a whole, rather than being imposed and administered by a european parliament which as it turns out, many countries can not readily accept because they feel their autonomy threatened. In good time the Community might have developed into a cooperating body. I now expect that the current position will prevail and likely worsen, in part also because individual countries cannot work out their credit problems in their own way. For instance they likely cannot bypass the bail-out to the banks by making direct loans available to small businesses which then pass the money to the bank after they have made use of it, which is now not possible because the banks use this bail-out money to settle their problems first.
4. Only themselves?
BillCA 12/31/2011
This is a good thumbnail sketch of what went wrong and why. I would simply add that the European politicians lie(d) not only to themselves, but also to everyone else. If the EU is to win any kind of democratic legitimacy (a prerequisite for its continued survival), the political con-men who sold this Brooklyn Bridge of a common currency must be replaced ASAP by representatives who tell their electorates the truth. The bond markets already understand the truth, so I don't think that acknowledging it will cause much more damage than the lies that have been propagated so far. I exclude Ms. Merkel from this criticism. She is doing her best to clean up the mess created by Kohl. Cheers, Bill
5. Prosecute the Eurozone leaders
pmoseley 12/31/2011
At last we have the German press inferring that the Brits must have been right about the Euro, both at its inception and when the UK recently refused treaty change, even if they don’t have the sense or courage to even mention that fact in this article. The UK has been heavily criticized by virtually all Eurozone members for not joining the Euro club of lemmings who seem oblivious to the need for both fiscal and political union before the Euro has any hope in hell of surviving. And the chance of political union amongst 27 nations is zero. At least Britain will never join a political union with the rest of Europe and I am writing this as a committed European! Result? The EU will break up if they continue with this nonsensical financial support for the Euro. And when it happens, all the EU lemmings will blame the UK and the international finance sector. And as far as the lies mentioned in this article are concerned, the Eurozone leaders involved in setting up and running this Euro façade should be prosecuted by the European Court for economic sabotage and distress in the name of egoism and pandering to domestic politics. Without such accountability there will be no justice.
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Graphic: Capital requirements of European banks Zoom
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Graphic: Capital requirements of European banks


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