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Eurasia Review
March 22 2014
The Betrayal Of Europe - OpEd
By Benjamin Fricke
For seven years now the European elite has been occupied with saving
banks, indebted states and the Euro, yet nothing seems to have
changed.
I have begun to ponder why political efforts have been unable to solve
these problems and hold the responsible actors accountable for their
mismanagement of banks, and states or to change their economic policy
in Europe.
History once again must teach us a lesson of why nothing has worked to
solve the problem. The three crises are to some extent independent
from another but yet have amplified their impacts on each other. The
real estate bubble in the U.S. has been a trigger for Europe's
dysfunctional system to become apparent. Yet, to blame speculating
banks and U.S. housing policy solely for the economic disaster in
Europe and the Euro crisis is incorrect.
When the Euro was officially announced, the interest rates for loans
dropped for southern European countries to de facto German levels.
This period between 1995 -1998 was called the "convergence period."
During that time cheap credit was made possible for countries, such as
Greece, Italy and Spain. Prior to 1995 Greece, Spain and Italy paid
double digit interest rates for their loans and were far away from a
debt problem. That changed dramatically after 1995 because standards
of living were boosted with cheap credit. The loans primarily served
consumers and not investors. The debt burden did not have an
equivalent rise in productivity to pay off the debt. A functioning
economy is always based on investment, innovation and productivity.
The introduction of the Euro has from the very start been an effort to
create a European central state. The Euro therefore is a political
unifier that forces 18 countries into a single currency. This feature
of the Euro is the single largest drawback for the individual
countries. A currency after all is a custom tailored entity that must
fit the economy of each country and its strengths. A currency also is
a display of how well or poorly an economy has been managed. For
example, a Euro today is about 50% overvalued for the Greek economy
and 30% undervalued for the German economy.
Right from the beginning German Finance Minister Theo Waigel told the
Greeks they would never be part of the Euro because they did not meet
the criteria. However, questionable statistics and some help from
Goldman Sachs eventually helped Greece to become a member of the
single currency.
On the one hand undervalued German Euro led to a boost in German
exports and on the other a collapse of exports of southern European
goods. The statistics of German exports lead to the mistaken
assumption that Germany is the benefactor from the Euro. This is not
the case. German goods are sold 30% under value, which is a loss in
revenue and income. Moreover, if a strong Deutsche Mark were to
appreciate by 30%, German industry and the people could buy more raw
materials and products from abroad for less.
In the past decades before the Euro was introduced the Deutsche Mark
consistently appreciated throughout the years and German exports never
decreased. Additionally, Germany had undergone severe structural
reforms under the Schröder government, known as Agenda 2010. The
Agenda 2010 reform package lead to increasing numbers of low paid jobs
and stagnating wages throughout the past years.
While German exports are undervalued, southern European exports are
overvalued because their currency cannot depreciate. What is happening
now is the attempt to forcefully lower wages, prices and costs. Milton
Friedman once said that "it is easier to change one price (exchange
rate) than millions of individual prices."
History should teach us a lesson. When the Weimar Republic had trouble
paying off its war debt imposed by the Versailles Treaty, Chancellor
Brüning introduced the same type of policy to make Germany more
competitive. These policies led to poverty, high unemployment,
hyperinflation and ultimately a devastating political change in
Germany.
Since the Euro was a political project from the beginning it
contradicts the European idea of freedom and democracy. The rescue
packages which have been implemented such as the European Financial
Stability Facility (EFSF) and the European Stability Mechanism (ESM)
are against the no bail out clause and therefore illegal. The clause
essentially states that no country is ever to pay for another
country's debt, just like no U.S. state would pay for another's state
debt. This principal has been abolished. The ESM would have no
accountability to any government and is immune to checks and balances.
The only decision making body would be the Board of Governors. This
kind of politics that insists on stabilizing the periphery at all
costs is damaging in two ways. First, it drains resources from the
strong center of the E.U. and makes countries like Greece, Portugal,
Spain and Italy dependent on technocrats. Second, a loss of
self-determination and democracy becomes apparent.
The concept of democracy in the EU has already become absurd. For
example, a Silesian crumb cake can only be called such in the Polish
part of Silesia, but not in the Czech or German parts because EU
bureaucrats approved that it is a protected product only in Poland.
Has the E.U. redefined the borders and people's identity of historic
Silesia?
One must never forget that it will ultimately be up to the people if
they wish to support a political and social identity. The E.U. apart
from its desperate policies to save the Euro has done a poor job at
permitting free trade and democracy.
One should recall the referenda about the Lisbon Treaty, in which the
Irish were made to vote until they finally said yes. In a 1999 Der
Spiegel article Jean-Claude Juncker, Prime Minister of Luxembourg,
described the policy making process in the E.U. along these lines: "We
decide on something, then put it in the room and wait to see what
happens. If there is no great uproar or uprising because most people
do not understand it anyway, we will follow through with what we
decided. Step by step until there is no more return."
How can Europe pull out of this mess? The Icelandic model has shown
the path out of the crisis. Allow a country and the banks to default
and start from the beginning. It may indeed be a tough time but at
least the people will not lose their democratic rights and will not be
dependent on international organizations such as the IMF or creditors
in general.
The Euro is a failed project. The sooner the political class will
admit to it the sooner we can go back to sound economic policy and
national currencies. A currency never created a state because there
must always be a state that needs a currency. The Latin Monetary Union
and the Scandinavian Monetary Union are just two recent examples from
the 20th century of why fiscal unions fail. Whereas Switzerland and
reunited Germany are examples where the people´s will was ready for
political union and fiscal union worked in tandem.
Like any empire Europe will fall if it loses its competitiveness and
innovation through centralization, over bureaucratization and
regulation. If it were true that in a globalized world a state must be
a giant, then Hong Kong would be poorer than China, Singapore weaker
than Indonesia and Switzerland less prosperous than France, yet this
is not the case.
Let us remember the words of the liberal economist and philosopher
Wilhelm Röpke: "To centralize Europe and melt her into one block,
would be nothing less but a betrayal of Europe and her patrimony, and
all the worse to be carried out in Europe's name." If we do not take
these words to heart then the Arab Spring or Ukraine today may be a
peek into Europe´s future.
Benjamin Fricke is an Analyst of EU Affairs and German Foreign Policy
at the Political Developments Research Center (PDRC), a think tank
based in Yerevan, Armenia.
***
Political Developments Research Centre (PDRC) is a non-profit
organization based in Armenia. The Center owes no allegiance to any
government, or to any political organization, and is strictly
independent. PDRC was founded in July, 2006 in Armenia by a number of
individuals interested in how to manage on objective and useful
researches in the politically dynamic 21st Century.
http://www.eurasiareview.com/22032014-the-betrayal-of-europe-oped/
From: Emil Lazarian | Ararat NewsPress
March 22 2014
The Betrayal Of Europe - OpEd
By Benjamin Fricke
For seven years now the European elite has been occupied with saving
banks, indebted states and the Euro, yet nothing seems to have
changed.
I have begun to ponder why political efforts have been unable to solve
these problems and hold the responsible actors accountable for their
mismanagement of banks, and states or to change their economic policy
in Europe.
History once again must teach us a lesson of why nothing has worked to
solve the problem. The three crises are to some extent independent
from another but yet have amplified their impacts on each other. The
real estate bubble in the U.S. has been a trigger for Europe's
dysfunctional system to become apparent. Yet, to blame speculating
banks and U.S. housing policy solely for the economic disaster in
Europe and the Euro crisis is incorrect.
When the Euro was officially announced, the interest rates for loans
dropped for southern European countries to de facto German levels.
This period between 1995 -1998 was called the "convergence period."
During that time cheap credit was made possible for countries, such as
Greece, Italy and Spain. Prior to 1995 Greece, Spain and Italy paid
double digit interest rates for their loans and were far away from a
debt problem. That changed dramatically after 1995 because standards
of living were boosted with cheap credit. The loans primarily served
consumers and not investors. The debt burden did not have an
equivalent rise in productivity to pay off the debt. A functioning
economy is always based on investment, innovation and productivity.
The introduction of the Euro has from the very start been an effort to
create a European central state. The Euro therefore is a political
unifier that forces 18 countries into a single currency. This feature
of the Euro is the single largest drawback for the individual
countries. A currency after all is a custom tailored entity that must
fit the economy of each country and its strengths. A currency also is
a display of how well or poorly an economy has been managed. For
example, a Euro today is about 50% overvalued for the Greek economy
and 30% undervalued for the German economy.
Right from the beginning German Finance Minister Theo Waigel told the
Greeks they would never be part of the Euro because they did not meet
the criteria. However, questionable statistics and some help from
Goldman Sachs eventually helped Greece to become a member of the
single currency.
On the one hand undervalued German Euro led to a boost in German
exports and on the other a collapse of exports of southern European
goods. The statistics of German exports lead to the mistaken
assumption that Germany is the benefactor from the Euro. This is not
the case. German goods are sold 30% under value, which is a loss in
revenue and income. Moreover, if a strong Deutsche Mark were to
appreciate by 30%, German industry and the people could buy more raw
materials and products from abroad for less.
In the past decades before the Euro was introduced the Deutsche Mark
consistently appreciated throughout the years and German exports never
decreased. Additionally, Germany had undergone severe structural
reforms under the Schröder government, known as Agenda 2010. The
Agenda 2010 reform package lead to increasing numbers of low paid jobs
and stagnating wages throughout the past years.
While German exports are undervalued, southern European exports are
overvalued because their currency cannot depreciate. What is happening
now is the attempt to forcefully lower wages, prices and costs. Milton
Friedman once said that "it is easier to change one price (exchange
rate) than millions of individual prices."
History should teach us a lesson. When the Weimar Republic had trouble
paying off its war debt imposed by the Versailles Treaty, Chancellor
Brüning introduced the same type of policy to make Germany more
competitive. These policies led to poverty, high unemployment,
hyperinflation and ultimately a devastating political change in
Germany.
Since the Euro was a political project from the beginning it
contradicts the European idea of freedom and democracy. The rescue
packages which have been implemented such as the European Financial
Stability Facility (EFSF) and the European Stability Mechanism (ESM)
are against the no bail out clause and therefore illegal. The clause
essentially states that no country is ever to pay for another
country's debt, just like no U.S. state would pay for another's state
debt. This principal has been abolished. The ESM would have no
accountability to any government and is immune to checks and balances.
The only decision making body would be the Board of Governors. This
kind of politics that insists on stabilizing the periphery at all
costs is damaging in two ways. First, it drains resources from the
strong center of the E.U. and makes countries like Greece, Portugal,
Spain and Italy dependent on technocrats. Second, a loss of
self-determination and democracy becomes apparent.
The concept of democracy in the EU has already become absurd. For
example, a Silesian crumb cake can only be called such in the Polish
part of Silesia, but not in the Czech or German parts because EU
bureaucrats approved that it is a protected product only in Poland.
Has the E.U. redefined the borders and people's identity of historic
Silesia?
One must never forget that it will ultimately be up to the people if
they wish to support a political and social identity. The E.U. apart
from its desperate policies to save the Euro has done a poor job at
permitting free trade and democracy.
One should recall the referenda about the Lisbon Treaty, in which the
Irish were made to vote until they finally said yes. In a 1999 Der
Spiegel article Jean-Claude Juncker, Prime Minister of Luxembourg,
described the policy making process in the E.U. along these lines: "We
decide on something, then put it in the room and wait to see what
happens. If there is no great uproar or uprising because most people
do not understand it anyway, we will follow through with what we
decided. Step by step until there is no more return."
How can Europe pull out of this mess? The Icelandic model has shown
the path out of the crisis. Allow a country and the banks to default
and start from the beginning. It may indeed be a tough time but at
least the people will not lose their democratic rights and will not be
dependent on international organizations such as the IMF or creditors
in general.
The Euro is a failed project. The sooner the political class will
admit to it the sooner we can go back to sound economic policy and
national currencies. A currency never created a state because there
must always be a state that needs a currency. The Latin Monetary Union
and the Scandinavian Monetary Union are just two recent examples from
the 20th century of why fiscal unions fail. Whereas Switzerland and
reunited Germany are examples where the people´s will was ready for
political union and fiscal union worked in tandem.
Like any empire Europe will fall if it loses its competitiveness and
innovation through centralization, over bureaucratization and
regulation. If it were true that in a globalized world a state must be
a giant, then Hong Kong would be poorer than China, Singapore weaker
than Indonesia and Switzerland less prosperous than France, yet this
is not the case.
Let us remember the words of the liberal economist and philosopher
Wilhelm Röpke: "To centralize Europe and melt her into one block,
would be nothing less but a betrayal of Europe and her patrimony, and
all the worse to be carried out in Europe's name." If we do not take
these words to heart then the Arab Spring or Ukraine today may be a
peek into Europe´s future.
Benjamin Fricke is an Analyst of EU Affairs and German Foreign Policy
at the Political Developments Research Center (PDRC), a think tank
based in Yerevan, Armenia.
***
Political Developments Research Centre (PDRC) is a non-profit
organization based in Armenia. The Center owes no allegiance to any
government, or to any political organization, and is strictly
independent. PDRC was founded in July, 2006 in Armenia by a number of
individuals interested in how to manage on objective and useful
researches in the politically dynamic 21st Century.
http://www.eurasiareview.com/22032014-the-betrayal-of-europe-oped/
From: Emil Lazarian | Ararat NewsPress