EU: An “Ever Closer Union”

With a vote in the European Parliament fast approaching on the new Euro-bailout package, the increased pressure is shrouding the supranational entity of the European Union in rifts.

On the 30th of August, the European Commission’s closely watched Economic Sentiment Indicator (ESI) dropped for the sixth straight month. Falling an estimate 5 points, it was the worst month-the-month drop since December 2008.  Combined with the fall in European stocks on the 1st of September and the drop of the final manufacturing Purchasing Manager’s Index for the Euro-zone to 49, the news from Europe has been grim.  The PMI’s threshold of 50 marks the separation from growth and contraction and with the drop to 49, the contraction of the EU’s growth is statistically proven.

The head of the European Central Bank (ECB), Jean Claude Trichet, was summoned to the European Parliament (EP) to face a barrage of questions about his handling of the situation in the Euro-zone.  In turn, Trichet has laid the blame at the feet of the Member States for not keeping their finances in order.   Trichet alluded to the July conference of the 17 Euro-zone members, in which the members had promised to work as a cohesive union, as intended through the European UNION, and to increase their cash reserves.  Nevertheless, rhetoric has always been a simple way of demonstrating false promises as the markets broke out in panic only two short weeks later from political and financial indecisiveness and instability.

“This is the worst crisis since World War II and it is not over.  It is a phenomena that goes on.” – Jean Claude Trichet, head of the European Central Bank.

Recently, The ECB has come under fire for its purchasing of Italian and Spanish bonds.  Such purchasing of bonds is intended to keep in check the borrowing rates for the indebted states.  Instead, the decision by the ECB is allowing the countries to become lax in their promises for reform.  The ECB has been taking pressure off the states, rather than increasing the pressure for definite and effective reform.  Moreover, the credibility of the ECB, along with the entire EU, is being undermined the continuation of the crisis in the two states.  The purchasing of the junk bonds has also opened channels of domestic strife in some of the larger EU supporters, such as Germany.  German President Wulff, openly criticized the ECB’s decisions as being a tool for underpinning the call for spending restrictions and austerity cuts, called for by the German people.  Along with Chancellor Merkel, Germany has warned that countries that fail to make an effort to reduce sovereign debt will not be able to count on the support of fellow Euro-zone countries.

One of the trend emerging on the global scale, is the involvement of the “mega-rich” to take part in reigning in the crisis of the global financial system.  The interdependence of all states on trade leads to a common commitment to the stability of all markets.  So saying, the high earners have joined together to petition for higher taxes.  After Warren Buffet, founder of Berkshire Hathaway Inc, voiced his desire for higher taxes in the USA on the “mega-rich”, European high earners joined the bandwagon.  16 of France’s “mega-rich” have signed a petition demanding higher taxes, among them is L’Oreal heiress Lilian Bettencourt.   Howsoever, to belittle the trend, Italy has retreated from implementing such a “solidarity tax”.  After being on the verge of implementing the tax along with a larger austerity plan, the center-right coalition combated its enforcement.  Apparently, intergovernmentalism still claims a superior authority over the decisions made by Member States and those leaders, underlining the general conflict between national sovereignty and the supposed supranational authority of the EU.

Nevertheless, Prime Minister Silvio Berlusconi has illustrates a determination to reform Italy’s ailing system.  The expulsion of the tax has not impeded the implementation of the austerity plan’s overall cuts intended to save 45.5 billion euros.  The savings are intended to restore a balanced budget by 2013, stepping above the previous statement of 2014. This marks a step forward for Italy and therefore, a step away from fears that Italy will require substantial bailout packages similar to Greece.

The modest growth has not been enough to quell the pressure levied against Chancellor Merkel and President Sarkozy.  As the two countries responsible for the creation of the European Union, due to its dependence on the Franco-German Alliance, both Germany and France has staked interests in the future of the EU.  The questions about the common commitment of Euro-zone members, the need for central authority and the common rights of all Euro-zone members has led to a rift in Merkel’s CDU coalition.  For instance, the Christian Social Union of Bavaria is opposed to Merkel’s suggestions of handing national power to Brussels as part of a common economic governance.  Reluctance, skepticism and genuine anger of the crisis is widespread in Germany because of its role as the  largest “bailer” nation and with such large investments in Greece, the credibility of the AAA country  has come under fire.  This is clearly demonstrated by German economic sentiment falling from 112.7to 107.

“A Europe with a common currency requires common commitments so we can have common rights.” – Chancellor Merkel of Germany

As always, the news is not always one-sided and Merkel and the move for further supranational authority is supported by some parties.  The Green party in Germany believes that a political union requires all Member States to hand power to Brussels, not only the ones that have lived beyond their means.  The EU is a collection of states that have pooled together their sovereignty  and must follow certain guidelines implemented by the EU, but national governments do hold superior power in many fields, many of which exist in the banking regulatory system.  Evidently, the call for further EU authority demands further control of these systems.

“While special arrangements for Greece has been launched, the inflexible determination of all other Euro-area governments to fully honor their individual sovereign signatures is key in returning to sustainable and healthy public finances and contribute to stable market conditions. ” Jean Claude Trichet, head of the European Central Bank

Much of the future bailout package relies on the Greek creditor banks in Germany, such as Hypo Real Estate and WestLB which have 9 billion euros invested into Greece.  The plan for Greece is known as a bond swap.  The plan calls for invested banks to accept a 20% markdown on their holdings and in return accept new and more secure bonds with longer maturities. Greece wants to extend, or swap, 135 billion euros of bonds.  In order to do, and successfully implement a bailout package, Greece needs 90% of its creditors to partake. Many investors say that is the plan fails, the whole bailout package could unravel.  Yet, Deutschebank and Commerzbank, two large banks in Germany, have stated they would take part in the swap.

In retrospect, the Euro-zones credibility problems are attributable to individual members and are therefore slow to be dealt with due to the lack in a central authority.  Nevertheless, moves to secure a closer union have been made, the determination of Member States to partake in countless austerity cuts, bailout plans, meetings, and firm handling of domestic strife illustrates the support for the EU.  Moreover, the combined deficit of the EU is 4.5%, compared to 10% of the United States.

“The EU is a fragile craft constantly running aground on the treacherous shoals of national sovereignty and self-interest.  With teach repair and relaunch the ship gets stronger,while navigational hazards are charted and exposed.” – Desmond Dinan, Ever Closer Union: An Introduction to European Integration 

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