Belmont Club

Europe Fails to Agree on Treaty Change

Something has snapped. Reuters reports that the 27 EU countries could not agree to the treaty changes deemed necessary to save the Euro. The stumbling block was Britain, according to the sources quoted. It had demands which neither France nor Germany could accomodate. Now the UK faces the prospect of being boxed out of an increasingly unitary continental system led by Germany.

While Britain could still reverse its position, such a move could expose Cameron to criticism at home, with a strong eurosceptic stream in his Conservative party determined that Britain should take a tough line with Europe and win back powers that critics say have been surrendered to Brussels.

The danger for Cameron is that if up to 25 countries do push ahead with deeper integration, it could involve discussions over changes to the single market and financial regulation, both of which could have a profound impact on the British economy.

“We’ve always said we would do it at 17 if it didn’t work at 27. That’s what happened,” one senior EU diplomat said.

On the crucial matter of money, the summit agreed to set aside a maximum of 500 billion Euros for the common bailout fund.

It was also agreed that the ESM would not be granted a banking license, as had originally been proposed by European Council President Herman Van Rompuy, the diplomat said.

The leaders also agreed to explore the idea of providing bilateral loans to the International Monetary Fund totalling 200 billion euros, with 150 billion of that coming from the euro zone, to bolster IMF resources to tackle Europe’s debt crisis.

The outcome of the summit creates two separable threads, each of which may meet its own fate. Politically, Germany is now the de facto leader of continental Europe. Insofar as the EU had hoped to permanently remove the specter of a German dominated Europe forever by diluting it in a wider Europe, that goal has now failed. The other thread is the fate of the Euro. With fiscal union now a probability, the Euro itself may be saved provided enough discipline is enforced from Berlin.

Taken together the result can be summarized as follows: the Euro may be saved, but the price paid was to effectively dismantle the political dream of a United Europe. The belief that the individual nations would agree to give up more sovereignty in exchange for the avoidance of an economic crisis which would attend the Euro’s fall proved unfounded.  Countries feared the collapse of the Euro, but the price necessary to save it proved too high to pay for some countries.

The Telegraph said that Finland, Ireland, the Netherlands and the UK held out against the demands and refused to budge. “Hours before leaders arrived in Brussels , the Finnish parliament ruled that treaty changes proposed for the European Stability Mechanism (ESM) were ‘unconstitutional’.”

Brussels will now have to redraw its final protective line around these holdouts. NPR says “the new treaty is meant to set up much tighter rules on national fiscal policy for the 17 countries that use the euro in an attempt to solve the worsening debt crisis. However, failure to get the whole EU to agree on the new rules is bound to complicate these issues.”

The worst possible outcome for the architects of the European project is now that having failed at the political goal, they also will fail in the economic one. The Montreal Gazette quoted Angela Merkel as saying that it will ‘take years’ to resolve the Eurozone crisis. Can she do it, even with years? Her basic problem is that because politics and economics have been working at cross purposes from the beginning, it proves the failure in one will cause the failure of the other.

The fundamental difficulty was that a single currency was not optimal for disparate a set of nations. Disparate not only in being separate governments but in the more fundamental sense of being different nations. One size could not easily fit all. The Euro meant the “butter people” could more easily sell to the “olive oil” folks because sales were denominated in Euros — all to the good in Berlin; but it also meant the southerners would find it difficult to compete because the same currency made their goods and services too expensive to consume — all to the bad in Athens.  These factors remain unchanged, suggesting that in the short run things are likely to get worse, rather than better.

Countries such as Spain, Portugal and Ireland are barely afloat financially. Almost every eurozone country is facing a drop in its credit rating as the contagion has spread from Greece to Italy. It is now haunting countries with much more responsible financial records, such as Finland, Austria and the Netherlands.

The continent’s economic situation has been unraveling so quickly that the European Central Bank did not even wait for the summit in Brussels to begin before lowering its lending rate Thursday to one per cent from 1.25 per cent — to avert a recession and to try help the weaker eurozone economies find easier terms for credit. It has also relaxed some of the terms for credit by extending borrowing over several years and loosening the rules regarding collateral.

The deadly spiral Berlin now faces is that it must use politics to re-engineer the national economies yet in so doing it has snapped off the political lever, which would fix the economic lever …

It is as if Merkel had decided to save the race of chickens at the expense of the store of eggs. What happens next is anybody’s guess. One possible trajectory is that, the rift having begun, it will widen. If Britain is out, then there is little point to hanging around the door at Brussels. Having been demoted in the ruling court London will be driven to repatriate its powers at the earliest. For once a divorce is fairly started, the common furniture will begin to go their separate ways. The other trajectory can be understood in the same terms. A reconciliation may be attempted once people realize what they’ve done.  “Baby, give me one more chance.” Alas, this works only sometimes.

How things will really play out, only time will tell. But if it matches the drama of the last months then it ought to be quite a show.

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