The European nations desperately try to stave off disaster.
Europe’s common currency, the euro, is in danger of losing its already shaky value by being weakened further by potential bankruptcies in debt-laden governments.
In an atmosphere of discord and hesitation, among members of the European Union, leaders convened a summit Dec. 16 and 17 to deal with the vexing financial troubles. But all that came out of the meeting was a hazy agreement to establish a permanent European rescue account at such time that the current $975 billion emergency fund is exhausted. That rescue entity will occur in 2013.
Prime Minister Jean-Claude Juncker of Luxembourg had proposed issuing “euro bonds” as a way to raise capital for those deeply indebted economies of Europe, according to The Washington Post.
Although the Italian foreign minister, Franco Fratini, agreed, fiscally hard-nosed German Chancellor Angela Merkel reacted negatively, expressing that it was a bad idea. Germany is one country that has come to its senses and has rejected the wrong-headed Keynesian notion that the road to prosperity is: Let’s get on the superhighway of government spending.
But the European leaders meeting to address their financial woes did issue another pledge to do whatever is required in the months lying ahead to keep the euro from being cheapened by bankruptcies among the European Union governments that have embraced the common currency.
So, the Europeans, in their Brussels confab, agreed, as a first step, to calm market jitters at least for the moment. As Michel Goldfarb of the Global Post writes: “Between 1871 and 1945, France and Germany went to war three times. How many times have they gone to war since? None. The story of the euro and its current crisis begins with that fact.” The idea of what today is the European Union can be traced to the 70 years of war and uneasy peace. Out of that came the EU. Europe’s collective economies grew.
“The logic of economic integration,” writes Goldfarb, “led inevitably to the creation of a single currency.” The treaty in 1999 set the EU on the path toward the euro, used today by 16 of the EU’s 27 members. “Today the EU accounts for between 27 percent and 28 percent of world GDP—a larger share than either the U.S. or China.” he said.
But now there is crisis. The global economic downturn caught the over-leveraged economies with their financial pants down. Particularly those that were, like the United States, so hugely dependent on a supposedly never ending property boom to maintain prosperity. In the U.S., the irresponsible action Congress took to prod Fannie Mae and Freddie Mac to lend mortgage money to those without a snowball’s chance in July of paying it off were at the root of our financial breakdown.
Like America’s dream of unending boom and the reckless creation of an entitlement society, Ireland, Greece, Portugal, and Spain have been seeing their economies totter. Greece suffered riots again. And Ireland this month finally was forced to accept an EU-IMF (International Monetary Fund) bailout for its banking industry. Moody’s investment Service cautioned Dec. 15 that it is reviewing Spain’s economy with the prospect of downgrading its bond rating again.
At the summit in Brussels, a closing communiqué said:
The heads of state or government of the euro area and the European Union institutions have made it clear that they stand ready to do whatever is required to ensure the stability of the euro area as a whole. The euro is and will remain a central part of European integration.
Junker’s e-bonds idea was shoved down the road of the future. But, according to The Washington Post story, he “insisted it would return to the fore later.” Also put off was a suggestion from the International Monetary Fund’s managing director, Dominique Strauss-Kahn, to stop dealing with the crisis county by country” and inject more money into the emergency fund to bolster confidence until the permanent fund, the European Stability Mechanism, can be set up in two years.
The European Council president, Herman Van Rompuy, said the European Union was making itself “crisis proof" and, the Post story reported, “there was said to be no need for an increase” in resources for the emergency fund, the European Financial Stability Facility. Van Rompuy maintained that only 4 percent of the fund had been used, so plenty of money remains if another country gets caught in a financial vice. He said if the problem arises, “we will do whatever is necessary.” With Greece, Portugal and Spain under financial stress, his words had the ring of bravado.
The permanent rescue fund has been agreed upon in principal. But there’s no decision as to how much each country will put up or the conditions for loan granting. Germany’s Merkel pushed for tough criteria, arguing that Germans are sick of paying for fiscal legerdemain in other EU countries.
Long negotiations still loom over the questions over how much funding and the conditions under which loans will be granted. Nicola Vernon, an economic analyst with the Bruegel research institute in Brussells, commented “I think it’s normal that the euro crisis is difficult to deal with. The European Union has always put the cart before the horse.”
Because there is no federal European government, there is no way for the EU to create an overall tax policy or budget. Each EU nation is sovereign and stuck with its own political dynamics. Therein surely lies the EU impotence and today’s euro’s crisis.