Tuesday, April 24, 2012

Euro crisis moves into a new phase

The likely change of President in Paris is now coupled with severe tension in the government in the Netherlands. As in 2005, these two founder members are questioning the long standing consensus in the European Union.

Usually, when asked about the future of the Euro, the response from officials and from many national governments is that the solution is "more Europe". This is short hand for creating the common institutions, such as a treasury and a system of fiscal transfers, that were not created when the single currency was first established.

The problem about creating such powerful new institutions is that they lack democratic political legitimacy. They may be the most obvious and practical solutions to the crisis, but they are not sufficiently supported in most countries to allow them to happen. The political problems in France and the Netherlands only underlines the difficulties in gaining democratic support for the necessary policies to allow the Euro to survive.

The probable election of Francois Hollande as President of the French Republic will not only bring to an end the remarkable cooperation between Nicolas Sarkozy and German Chancellor, Angela Merkel, it will also mark a huge change in French attitudes and expectations with regard to the policies to address the crisis. In short, the process of short term coordination and longer term integration will, as a minimum, slow down. This parting of the ways between Paris and Berlin will not reassure those in Germany who have been seeking to resist integration. Either Germany may reduce its commitment to the Euro, potentially leading to a German exit, or the pressure on France grows to danger levels and thus support for Greece, Italy, Portugal and Spain can not be maintained.

Clearly President Ilves believes that the probability of an exit from the Euro zone of one or more countries has grown to the level where Estonia should be making contingency plans

Actually I think it could be a more complete breakdown than simply one or two countries leaving the single currency. If the "Franco-German motor" starts to splutter, then I think that the currency bloc as a whole would break up.

Yet that is not to say that all countries will simply revert to their previous currency arrangements. The clear signal from both Helsinki and Tallinn is that the currency union between Finland and Estonia will be maintained, and as far as possible, both countries will align their policies as closely as possible with Germany. The question in the aftermath of the deluge though, will be whether Berlin would wish to maintain a currency union with any other state, with the possible exceptions of Austria, Slovenia, Slovakia, Luxembourg and the Netherlands. If they do not, then these smaller economies may try to work together: certainly from the point of view of Bratislava and Vienna, two cities less than 40 minutes drive from each other, recreating currency barriers would be at least as inconvenient as recreating separate currencies for Finland and Estonia.

So, as the Euro crisis bursts into flame once more, it is increasingly clear that far from there being "no plan B", in fact the chancelleries of Europe are actually actively considering several plans. Although it may be several months before the reality of these plans is tested, the fact is that as the growth/debt/stability conundrum of the Euro continues to remain intractable, the attractions of ending the single currency experiment will grow- in Berlin and Paris as much as in Madrid or Athens.

The question then, will not be "more Europe", but whether "any kind of Europe" can long survive the wreckage of policies that were so incomplete as to be completely ill conceived, and which were maintained for so long in the face of overwhelming evidence of all the problems and dangers, and at a cost in human misery that has become truly shocking.

I do not think that Mrs. Merkel would long survive the demise of her partner in crime, Nicolas Sarkozy. 

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