mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
EU: 16 Steps Forward, One Giant Leap Back?

Tick, tick, tick.

We are down to the final 12 speakers of the final parliamentary session before the (hopefully) final and (probably second to the last) vote in the last parliament on the European Financial Stability Fund (EFSF), the €440 billion bailout fund to hold the eurozone together.

The fate of the EFSF has come down to a life or death vote in Slovakia’s parliament. The Národná rada Slovenskej republiky is the last, and among the least, of the 17 Eurozone legislatures to vote on the permanent bailout fund. From the WSJ:

The government of Prime Minister Iveta Radicova is expected to lose a confidence vote she has linked to the vote on the bailout fund in an attempt to sway rebels in her four-party coalition to back the bailout fund.

However, a repeat vote on the EFSF could be held later this week and passed, if the government receives the support of opposition lawmakers from the left-of-center Smer-Social Democracy, or Smer, party. This would likely require a cabinet reshuffling. The repeat vote on the EFSF is unlikely to take place Wednesday as more time for political talks will be needed.

In the past, EU countries have used situations like this to extract big time concessions from their partners.  Threatening to veto important but unrelated issues is the classic way one EU country mugs the rest.  The Slovaks actually have a good case for not sending any money to the fund.  Slovakia is poorer than either Greece or Germany: why should Slovak euros go to a fund that will save Greece and bail out German banks?

There are good reasons for this, but not all of them are easily explained to the ordinary Slovak-in-the-street. In the end, it looks as if the Slovaks will ratify sometime in the next few days, but the possibility that last minute snags will appear is unsettlingly real.

This is what a constitutional mess looks like.  It is as if every major US law had to be ratified by both houses of every legislature in every state.  That would be fine with the rest of us except that Europe’s ability to manage its financial system affects the prosperity and perhaps the peace of people all over the world.

European political incompetence and irresponsibility caused the world untold misery in the 20th century.  After 1945, the desperate and impoverished continent got its act together and embarked on an extraordinary 50 years of cooperation.  Increasingly there are signs that the lessons of the twentieth century have worn off, and Europe’s policymakers for the last fifteen years have seemed increasingly inadequate to their tasks. (Of course in the US those fifteen years have not exactly been a new Age of Pericles, but that is a subject for another post.)

This week marks the anniversary of Hitler’s triumph in the Sudentenland after the Munich Accords when the feckless British and French lost the last real chance to nip World War Two in the bud.  What will historians be saying about this October if Europe once again fails to rise to the challenge?

Features Icon
show comments
  • Peter

    They are call them Eurotrash for nothing

  • Luke Lea

    It’s been said that the American system of government works pretty well because it was designed by geniuses to be run by idiots. In Europe it looks to be just the other way around.

  • Charles R. Williams

    There is no need for the Slovaks to bail out Greece and Germany’s banks. Why should they sign on? The right course of action is to pull the plug on Greece and for every country to bail out any of its own banks that are insolvent.

  • Otiose

    The bail-out fund they’re voting on not only won’t work – it can’t work. And, it’s not that those in opposition don’t understand what’s at stake. They understand very well that it doesn’t make any sense. There are many Europeans who simply refuse to accept that they have been living on overdrawn credit and the bill has come due together with some severe adjustments to their standard of living. It’s not a matter of contagion or confidence.

    How did matters come to this? Blame the Basel accords, which systemically globally encouraged banks to hold excessive amounts of sovereign debt. That had two effects. One was to permit countries to fund excessive growth in government and entitlements. Another was to artificially depress interest rates, which tended to encourage asset / debt bubbles whenever and wherever conditions were favorable.

    The growth in derivatives also played a major role in that they provided another avenue for bankers to gamble with public money and also hide the scope of their activities until it is too late.

    A third factor is that the Basel accords were implemented just as the Cold War ended opening up huge populations of new low cost trading partners for the developed industrial centers. The accelerated economic growth exploding out of trading activity generated a situation combining productivity deflation, low interest rates, and easy debt, which was unfamiliar to the Keynesian trained central bankers who failed to act on several fronts when the normal inflation cues didn’t appear.

    There are no easy outs/solutions at this point, but the better solution is to stop trying to save the sovereign fiscal debt structures as they are (which is really about saving European banks) and use the resources to recapitalize the banks allowing the several countries to go into default. Then the necessary adjustments to their cost structures will happen. Absent defaults the Greeks (and Italians etc) can’t politically vote the drastic cuts in spending and government necessary to set the stage for a real recovery.

    For Europe’s long term benefit let’s hope the Slovakians succeed in killing any further lending to Greece.

  • Toni

    The particulars differ, but otherwise the EU and the US are in the same fix. Leaders and citizens alike came to believe devoutly in the free lunch.

    EU banks could invest much of their capital in bonds of profligate nations. The US could become a profligate nation. To spend too much was impossible.

    Now leaders and citizens alike are staring at the bill for all those free lunches. Well, as they say, the first step to solving a problem is to admit you have one. At least we’ve reached the admission stage.

  • glenn

    For the Europeans the time to say no was a long time ago. They didn’t. Now they don’t want to recognize that they have too. See: Robert Heinlein and the natural state of mankind.

  • Independent George

    At least we’ve reached the admission stage.

    Have we really? Every time I turn on the news, I see a lot of politicians (of both parties) promising a free lunch, and now I see a bunch of college kids demanding not just a free lunch, but rainbows and unicorns, too.

    A free lunch is always in demand.

  • David

    The answer to indebtedness is more debt? I believe that Slovakia is rising to the challenge on behalf of all Europe.

  • Fred

    I’ve always had great faith in Europes ability to raise to the challenge of failing to raise to the challenge. One way or the other they ‘ll find a way to screw up. But as long as they can do so while feeling superior to Americans they ‘ll be happy.

  • Andrew Lale

    It is uncertain what kind of Union Greece and Germany could belong to which would not create the current rediculous situation. Certainly a fiscal and monetary union for both is nonsensical. Even a political union, given the heavy dominance of socialist/communist thinking in Greece, seems misguided. A no-tariff zone would be good, but why stop with Europe? Why not have a world-wide no-tariff zone?
    Unfortunately, because the Progressive mindset which created the Common Market/EEC/EU is still deeply entrenched in Europe, the EU will not change and neither will the Euro, until they collapse from their own internal contradictions, irrevocably.

  • Doubting Rich

    Sorry, you seem to be assuming that a Slovakian “yes” vote is a good thing. It would be terrible, for the Slovaks, for the Germans (or those who are neither bankers nor politicians) and most of all for the Greeks (who are not politicians or bankers).

    I wish our government (UK) had the courage to intervene in this ridiculous mess, and stop the bailouts, would have preffered that to happen before the Irish suffered that fate.

  • Lee Moore

    The EU needs 16 more giant leaps back. It worked fine as little more than a free trade zone up until the mid 1980s. The acceleration of the drive for political union since then has added nothing to economic performance. If they got rid of all the treaties since 1980 the EU would work just fine. Every time you hear that the EU is disfunctional and needs to be made more “efficient”, you need to step back and recollect what the EU is, in its essence. It is a regulation factory. More efficiency is not a step in the right direction. What is required is less efficiency, and if possible, no activity at all.

  • ras

    “This would likely require a cabinet reshuffling.”

    Votes for sale! Votes for sale! Get yer stability right here, folks, get one fer the missus, too!

  • Joseph Somsel

    One could offer that Slovenia needs to make an installment on their financial insurance policy. They in turn receive some backstopping from the greater EU and they benefit from their own sovereign debt having lower interest.

    Still, the injustice of letting free riders like Greece suck resources from more provident countries could be the fatal flaw in the Eurozone.

    The US federal system allows some minor variations of this like deductions for state income taxes which means states without state income taxes subsidize to some degree states with the tax. However, we’ve been able to keep such injustices to a tolerable level – so far.

  • hurumph

    It is curious that you equate the constitutionally created national states of the EU exercising their legal duties with a “constitutional mess” ad use the American States as a metaphor for the EU ad its member states. You seem to assume that the EU is a nation and has a actual constitution voted into the law of the land by the citizens of the member state. ether are true.

    The EUocrats always told member states and their electorates that their national sovereignty was not to be breached. They lied. In fact the “architects” of the EMU knew that eventually there would be a crisis and that it could be used to press for an undemocratic “superstate” ruling away from the confines of the member state’s democratic processes. The result: a new and tyrannical “Acien Regime”, a sort of corporatist EUSSR.

    It would be as though the US states had had their statewide governments completely overthrown by The Federal government, or, perhaps better, that the USA would all of a sudden directly rule America.

    No, the tyranny of the EU will end badly for the people of the Europe. national states must be strengthened in Europe and the trend toward centralization reversed.

    Beyond the current crisis, the attempt to print the EU out of its problems will not work.

    The EU is not “taking 16 steps forward”, it is what some have called a 1970’s solution to a 1950’s problem. In reality, it s a late 19th century solution to a 1950’s political power lust.

  • Perry

    Yes to Toni and Otiose (By the way, it’s not futile.)

    Ys, America has admitted a spending problem and is looking for the easiest way out. “Occupation” is a side street.

    The fundamental, and maybe fatal, difference between the USA and the EU is that the citizens of the USA came in willingly, whereas few Europeans were granted a vote on membership in the EU, and where they were, they denied it, and were ultimately overruled by elites who knew better. I have to wonder sometimes what percentage of the people given the chance would go back to the old system.

    Yes, it probably is too late for that, but where grass root support for a government is withheld, how much foot-dragging can Main Street do to monkey things up? I don’t know. But force-feeding an idea as big as the EU into being would have caused lots of gagging on this side of the pond.

    We know that elites think they know better than everyone else, but they essentially shoplifted a way of life away from a very wary populace.

    I can’t say that’s what happening in Euroville, but Americans don’t feel that way about their federal government, even still today. We get mad at it, but everyone knows they have a voice and that their vote counts.

    Looking back, it almost appears as though the EU authorities knew what the bailouts would balloon to, but went incrementally, like a drug seller gives the first crack away to a new customer.

    Even if that didn’t happen, the footprints leading here have brought them to a place where that scenario has the same effect. The leaders are incompetent and willfully blind, or ideological and Machiavellian or softball authoritarian.

    On “Law and Order” McCoy might assert, “It goes to motive, your honor.” The patient refuses the medicine.

  • Katherine

    This is why we still teach children the game of musical chairs.

    “Hello, Europe? The music has stopped.” – your friends in Slovakia.

  • Walter Sobchak

    Personally, I think it is 16 steps backward and one step forward.

    As near as I can tell, the EU is a bloated, socialist, bureaucratic mess. The sooner it dries up and blows away, the better off they will be.

  • David Merrell

    There were many errors made leading into this the Great Reccession, but it does not happen without the Basel accounting rules. When commercial loan have a 50% risk rating, but mortgage backed securities and nations debt have risk free ratings I can double the leverage of my capital by buying the latter two. A bubble base was started and blown up to catastrophic levels.
    Which will you buy with your last unallocated capital? 1 million in commercial lending or 2 million in “risk free” MBS/government debt. And the MBS/Gov securities do not require adding to the reserve for loan loss and can be used as collateral for borrowing. Thanks Basel.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service