Sunday Is “D Day” For The European Union

Well, the Economist have finally scrambled out of their dugout and have now joined the fray. Welcome!

Today they have a leader entitled “The bill that could break up Europe“, with the sub heading “If eastern Europe goes down, it may take the European Union with it”, so I think we can all get the message easily enough.

Many west Europeans, faced with severe recession at home, will see this [an Eastern European “bail out” – Edward] as outrageously unfair. The east Europeans have been on a binge fuelled by foreign investment, the desire for western living standards and the hope that most would soon be able to adopt Europe’s single currency, the euro. Critics argue, with some justice, that some east European countries were ill-prepared for EU membership; that they have botched or sidestepped reforms; and that they have wasted their borrowed billions on construction and consumption booms. Surely they should pay the price for their own folly?

Yet if a country such as Hungary or one of the Baltic three went under, west Europeans would be among the first to suffer (see article). Banks from Austria, Italy and Sweden, which have invested and lent heavily in eastern Europe, would see catastrophic losses if the value of their assets shrivelled. The strain of default, combined with atavistic protectionist instincts coming to the fore all over Europe, could easily unravel the EU’s proudest achievement, its single market.

Indeed, collapse in the east would quickly raise questions about the future of the EU itself. It would destabilise the euro—for some euro members, such as Ireland and Greece, are not in much better shape than eastern Europe. And it would spell doom for any chance of further enlarging the EU, raising new doubts about the future prospects of the western Balkans, Turkey and several countries from the former Soviet Union.

The thing is, all of this is much more complicated than it seems at first glance. Surely local policies by individual governments and decisions by householders have been partly to blame for the mess. But so have lending decisions by Western banks, and the national central banks who supervise them. And then we have the policy decisions (or the lack of them) taken in Brussels or at the ECB in Frankfurt. We are singularly lacking in any form of self cricisism here, and yet, paraphrasing Oscar Wilde just one more time, losing one child may be put down to an accident, but losing all your children, all at the same time, surely that must be negligence. When you are up before the judge it just doesn’t wash to say that they were all very badly behaved, and you couldn’t control them. Whatever happened to our sense of parental responsibility?

Put another way, if you are a teacher and 10% of your students fail then that is their problem, but if 90% fail, then it is your problem, or it should be.

So Sunday is D Day, the day when we finally have nowhere to hide, and we need to take real decisions. Obviously this situation needs more than simply “tweaking”, it needs confronting head on. There is a gap in EU and Eurozone architecture and this lack now needs to be addressed. Short of this the markets, which already have woken up to the problem, will not settle and will not be convinced.

There is no longer a middle road, as I have argued here we need EU Bonds, and we need to clear the pathway for euro membership for those Eastern states who want it (see this post). Talk of beefing up the balance sheet of the European Investment Bank simply won’t wash at this point – we can see what is already happening to the spreads as the rumor mill goes to work. (Borrowing costs for the EIB’s 10-year bonds has already risen to 90 basis points above the benchmark German Bunds, a yield which is drawing ever closer to the borrowing costs of countries like Spain and Austria).

What we need are full blown EU bonds (ie backed by the Union and not by individual member states or subordinate entities), and we also need a fiscal component (ie simply making loans cheaper to obtain won’t work). Of course, in the short term our leaders may need some sort of dual discourse, one for the markets and one for the voters (who have hardly been prepared for all of this), but this is for the politicians to sort out, since they dug themselves into the mess in the first place, so over to you Angela and Nicolas. You go live in 48 hours.

Bailing out the same mythical Polish plumbers who just stole everybody’s jobs will be hard for Europe’s leaders to sell on the doorsteps of Berlin, Bradford and Bordeaux, especially with the xenophobic right in full cry. German taxpayers are already worried that others are after their hard-earned cash (see article). The bill will indeed be huge, but in truth western Europe cannot afford not to pay it. The meltdown of any EU country in the region, let alone the break-up of the euro or the single market, would be catastrophic for all of Europe; and on this issue there is little prospect of much help from America, China or elsewhere. It is certainly not too late to rescue the east; but politicians need to start making the case for it now.

This entry was posted in A Fistful Of Euros, Economics and demography by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

12 thoughts on “Sunday Is “D Day” For The European Union

  1. Pingback: Sunday Is “D Day” For The European Union | Expat Life Spain

  2. Who is going to want to invest in this “family”? You have the “Euroweenies” on the left and the “xenophobic” on the right? Who’s in the middle, the French & German taxpayer?

    Politically, you expect this arrangement to last? I suspect you will see an exodus of investment capital from Europe.

    A reasonable response to this arrangement from the weaker countries is to tell the EU to butt out of their culture/society and give them their entitlements… stop being so xenophobic and bigoted.

    … What’s in your wallet?

  3. What you cannot do is expecting the western taxpayers to subsidize exporting jobs. If this is to happen those benefiting will have to accept that those paying the bill will tell them how to set their tax rates and how to make spend their tax revenues. This is not going to be received well anywhere.

  4. This is just all so depressing. It now turns out that we just sank hundreds of billions of Euros in the last decades in the East in an unsustainable model of growth. Bascially, a model without any meaningful fundament. And the cure? Sinking even more money. Great!

    Wonderful, this mess brings us all down. The idea of a Eurobond makes me want to vomit. Just let us keep on promoting economic and fiscal irresponsibility and blatant free riding. How do we make a currency area work when we now provide even more incentives to ignore budget deficits because everyone can really on a few strong and disciplined countries, when countries with (comparably) solid public finances pay carry more and more of the burden? This is the point where you’re asking just too much.

    I can only hope for drastic political consequences after this has been cleaned up. Those who pay must get to call the shots. That is, if we survive this at all.

  5. Hi Edward

    I would like to translate this post into Hungarian and post it on my blog. Would you give me permission to do it? I would of course credit you and AFOE.



  6. Hello Hettie,

    “I would like to translate this post into Hungarian and post it on my blog. Would you give me permission to do it? I would of course credit you and AFOE.”

    Of course Hettie, go right ahead. And good luck.


  7. Pingback: Will it be a different world on the Ides of March? | afoe | A Fistful of Euros | European Opinion

  8. Hi, Edward:

    I would like to note that public debt of East European countries is quite minuscule, usually 10-20 billion per country. For single EU bailout of major banks (20-30 B Euro per event) EU could easily refinance maturing bonds of whole E. Europe for probably two years. It would be much cheaper than deal with consequences of CDS payments in case of their default.

  9. Will Irish banks or Italy be cheap? Although in the case of banks the saviors can take ownership of the banks.

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