Oh no, Euro
It may not be all that surprising or irregular to follow the global financial situation. But the glee with which I follow Eurozone developments each day must be something of an oddity. Not to say I am hoping for the utter collapse of Europe’s market (especially since it does not spell good news for the US, but I tend to ignore that bit) but just the fact that the realist in me predicted it with so much force in my Politics of European Cooperation class makes me giddy at the thought I was correct (I didn’t want to be, did I?). Neither was I the only one to raise my hand high at the idea that certainly Greece would have to exit the Eurozone, if not other or all members. But I digress: I just wish I could take a follow up to that class and my professor could show me all of the French, British, Dutch, and German cartoons he has collected on this mess (he is something of an enthusiast when it comes to political cartoons, especially displaying them in their original language, which he must then translate for the class).
Then, on November 28th, the Polish Foreign Minister delivered an epic speech entitled “Poland and the future of the European Union” in Germany as the Poles began to wrap up their EU Presidency. Radek Sikorski, will you marry me? I poured over this speech the entire day: I read and reread it with rapt attention. I mean, he mentions Yugoslavia and Alexander Hamilton in the same speech and employs a sly cattiness towards Britain and Germany; he is trying to win my heart. Then I read an equally enlightening article by Paul Krugman who basically reinforced the idea that the sinking of the Eurozone ship will inevitably drag down the US as well. And the crazy IR person that lives in my brain, just went ah! Blog post. That Politics of European Cooperation class left a more lasting impression than I expected (although the need to look up the proper titles of integration theories did not speak well for my retention of the finer details).
The first argument that both Sikorski and Krugman discuss is the effects of EU enlargement.
Sikorski: The total volume of trade between EU15 and EU10 amounted to €222 bln last year, up from €51 bln in 1995. A tidy sum. I guess it sustains a job or two in Old Europe. So, enlargement – far from causing the crisis, has arguably delayed the economic turmoil. Thanks to the advantages of trading in an enlarged market, West European welfare states have been forced to face reality only now.
Krugman: In the years leading up to the 2008 crisis, Europe, like America, had a runaway banking system and a rapid buildup of debt. In Europe’s case, however, much of the lending was across borders, as funds from Germany flowed into southern Europe. This lending was perceived as low risk. Hey, the recipients were all on the euro, so what could go wrong?…During the years of easy money, wages and prices in southern Europe rose substantially faster than in northern Europe. This divergence now needs to be reversed, either through falling prices in the south or through rising prices in the north. And it matters which: If southern Europe is forced to deflate its way to competitiveness, it will both pay a heavy price in employment and worsen its debt problems. The chances of success would be much greater if the gap were closed via rising prices in the north.
Next, both Sikorski label the issue at hand as a lack of confidence.
Sikorski: The inevitable conclusion is that this crisis is not only about debt, but primarily about confidence and, more precisely, credibility. About investor perception where their funds are safe.
Krugman quotes how the ECB argued its decision on how to tackle the issue, with: “confidence-inspiring policies will foster and not hamper economic recovery.”
Krugman: But the confidence fairy was a no-show.
Super burn on the ECB!! And it just kept getting better…Sikorski:
Let us be honest with ourselves and admit that markets have every right to doubt the credibility of the Euro zone. After all, the Stability and Growth Pack has been broken 60 times! And not just by smaller countries in difficulty, but by its founders in the very core of the Euro zone.
Burn on Germany in particular!! Then Sikorski decides to criticize the EU as a whole, surprising me with a euroskepticism that I didn’t know existed in Poland at the moment:
Before I say what they are, let me say that Euro zone’s failings are not the exception but, rather, are typical of the way we have constructed the EU. We have a Europe with a dominant currency but no single Treasury to enforce it. We have joint borders without a common migration policy. We are supposed to have a common foreign policy, but it is divorced from real instruments of power and often weakened by member states cutting their own deals. I could go on.
Most of our institutions and procedures depend on the goodwill and sense of propriety of member states. It works tolerably well when the going is good. But then a wave of migrants shows up on the EU’s border, or a civil war blows up in our neighborhood, or markets panic. And then, what do we habitually do? We run for cover in the familiar framework of the nation state.
The break up would be a crisis of apocalyptic proportions beyond our financial system. Once the logic of ‘each man for himself’ takes hold, can we really trust everyone to act communitarian and resist the temptation to settle scores in other areas, such as trade?
Would you really bet the house on the proposition that if the Euro zone breaks up, the single market, the cornerstone of the European Union, will definitely survive? After all, messy divorces are more frequent than amicable ones. I have heard of a case in California in which a couple spent $100,000 disputing custody of the family cat.
Take that, EU! Wait…This is an epic speech for those fans out there of intergovernmentalism! Aka the realists of European integration theory.Founding Fathers FTW:
Americans passed the point of no return in creating the United States when the federal government assumed responsibility for debts that states incurred in the War of Independence. Solvent Virginia bargained with more indebted Massachusetts, which is why the capital was fixed on the banks of the Potomac. Alexander Hamilton fathered a compromise under which everybody’s debts were jointly guaranteed and a revenue stream created to service them.
Directed to Britain:
We would prefer you in, but if you can’t join, please allow us to forge ahead. And please start explaining to your people that European decisions are not Brussels’ diktats but results of agreements in which you freely participate.
And if you were wondering about a plan, oh boy, he has a plan. He laid out what he wanted from Germany.
Germany’s trade with Poland is bigger than with the Russian Federation, although you would not always know it from the German political discourse.
We ask, first of all, that Germany admits that she is the biggest beneficiary of the current arrangements and therefore that she has the biggest obligation to make them sustainable.
Second, as you know best, you are not an innocent victim of others’ profligacy. You, who should have known better, have also broken the Growth and Stability Pact and your banks also recklessly bought risky bonds.
Third, because investors have been selling the bonds of exposed countries and flying to safety, your borrowing costs have been lower than they would have been in normal times, so you may be benefitting in the short term, but…
Fourth, that if your neighbours’ economies stall or implode, you will suffer greatly, too. Sixth, that because of your size and your history you have a special responsibility to preserve peace and democracy on the continent. (And isn’t this much better than calling out the need for reparations from WWII, Greece?)
What, as Poland’s foreign minister, do I regard as the biggest threat to the security and prosperity of Poland today, on 28th November 2011? It’s not terrorism, it’s not the Taliban, and it’s certainly not German tanks. It’s not even Russian missiles which President Medvedev has just threatened to deploy on the EU’s border. The biggest threat to the security and prosperity of Poland would be the collapse of the Euro zone.
And I demand of Germany that, for your own sake and for ours, you help it survive and prosper. You know full well that nobody else can do it. I will probably be first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity.
Both Sikorski and Krugman end with fairly fire and brimstone-esque predictions:
Sikorski: But we are standing on the edge of a precipice. This is the scariest moment of my ministerial life but therefore also the most sublime. Future generations will judge us by what we do, or fail to do. Whether we lay the foundations for decades of greatness, or shirk our responsibility and acquiesce in decline.
Krugman: I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late. But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow them down the path to ruin.
Seems like Sarkozy and Merkel are banding together (that ol’ dream team). Stay tuned…