Global Agenda: The EU goes all in

The European Union summit was rightly billed in advance as a critical event in the history of the European project.

By PINCHAS LANDAU
Sarkozy mad 311 R (photo credit: REUTERS)
Sarkozy mad 311 R
(photo credit: REUTERS)
The European Union summit held Thursday was rightly billed in advance as a critical event in the history of the European project and, in a different sphere, for the well-being of the global economy. For once, the hype was not overdone, and it appears from initial reports that the huge expectations that built up toward this event have not been disappointed.
The immediate issue facing the European leaders was the imminent insolvency of Greece, a member of the EU and of EMU, the European Monetary Union known to the general public via its common currency, the euro.
This insolvency found fullest expression in the bond market, where the prices of Greek government bond prices have been spiraling ever lower and hence the yields on them ratcheting steadily higher, to the point where a few days ago, two-year bond yields were approaching 40 percent, and 10-year bond yields offered nearly half that level, if anyone could be found to buy them.
These extraordinarily low prices and high yields were the market’s way of telling the world what the European political and economic leadership would not openly admit: Greece could never repay the mountain of debt it had accumulated, and its bondholders could expect to lose a large chunk of their money.
However, the fact that Greece was the beneficiary of a massive bailout program as recently as May of last year, which had supposedly covered the country’s borrowing needs through 2013 – and yet it was now back demanding a second bailout at better terms than the first – was only part of the EU’s problem. In the course of these past 15 months, and especially in the last few weeks, the much-feared contagion – the spreading loss of confidence from one country to another – had occurred across Europe. Along the way, Portugal had been forced to ask for its own bailout package. But far more serious was the recent collapse in Spanish and Italian government-bond prices and the parallel jump in their yields toward and even beyond the level of 6% per annum for 10-year bonds. This signaled that the crisis was rapidly moving from the small, peripheral economies to the larger ones – and even to the heart of the euro zone, as the French markets began to be sucked into the vortex of fear.
Thus the task facing the leaders of the member countries of the EU was much greater than merely to bailout Greece again, although even this has to be done in such a way as to minimize the resultant losses to the European banking system. Their true goal was to save the entire EMU project and possibly the EU itself, at least in its current form.
The only way they could do that was to recognize that the monetary union launched in 1999 was fatally flawed by dint of its being only a monetary union and not a full economic union. If Greece was to be saved, its banking system had to be bailed out and its finances restructured, which was far more than it could manage on its own. It had to be an EU operation, backed by the full power and clout of the entire union. Only that way would the message be sent – and be believed – that the EU would give its all to protect itself and all its members.
The way this has been done is complex in its details but simple in essence. The EU will create mechanisms (or expand existing ones) to buy the debt of crisis-bound member states and will recapitalize their banks. In return, it will effectively take full control of the economies of those states and will also exert much greater control over all the economies of all its members. In other words, the EU has taken a giant step toward full economic union. As noted, the alternative to going forward was to withdraw or be forced into retreat, with potentially disastrous consequences.
However, even this belated display of political determination – while making a stark contrast to the continued partisan politics in Washington – may be insufficient. There are major financial and economic issues arising from the proposals agreed to Thursday, and these details may cause major problems. Certainly, the initial reaction of the financial markets was one of great relief, as is natural. But some analysts were quick to point out the potential pitfalls. Yet these issues are ultimately secondary. Far more important is the fact that on Thursday the leaders of the EU committed their countries and citizens to a great leap forward in the European project, without consultation or explanation; other than that, the alternative was unthinkable. Whether the peoples of Europe, including the richer countries such as Germany, Holland, Finland and Sweden, let alone the ever-recalcitrant British, are prepared to go down this path, and pay the price in terms of both money and sovereignty, is quite another matter.
Even if the markets “buy in” to the deal and give the EU time to make it work – something that will become clear within days or weeks – the true test will be political. It will be measured by how many of the leaders who made Thursday’s agreement will still be representing their countries at an EU summit next summer.
landaup@netvision.net.il