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The EU and Its Likely Breakup

Posted by paulipoldie on June 3, 2010

May 24, 2010 4:30 AM
by Herbert I. London

The EU and Its Likely Breakup

Euro skeptics knew what few would admit about the European Union: the fractures in the union now apparent were there all along merely waiting for one crisis to make them evident.

With demonstrations over tough austerity measures in Greece, the E.U. is experiencing the first of what could be a host of violent reactions across the continent. In a sense, Greece is the canary in the mineshaft, foreshadowing what might occur in Spain, Portugal, Italy, and Ireland.

In recent conversations in Austria, the typical response is “Why should we bail out the Greeks for their profligacy?” And this is the typical German response as well. The Germans were willing to be an underwriter of the Greek bailout, as long as the IMF was a major partner. But borrowing costs for Europe’s most vulnerable countries are soaring and the euro’s value is plummeting. E.U. officials warn of “high uncertainty” surrounding the region’s economic recovery. Despite a $141 billion rescue package offered to the Greek government, it is not clear this sum will cauterize the problem or stop its spread elsewhere.

It is instructive that pensioners took to the Athenian streets in protest against financial retrenchment. In news interviews, the point was often made that these aging citizens saved for retirement and counted on a pension during retirement. Now they find themselves in a financial quagmire they did not create.

Should Spain, with an economy considerably larger than Greece, face similar economic pressure – a condition that seems inevitable – Europe could face an unprecedented banking crisis. While the bailout could help Greece and might be needed for Spain, it is already widening the divide between Europe’s southern area where the financial problems are concentrated, and the northern tier, which contains most of the industrial exporters best positioned to take advantage of a weak euro.

Some European economists contend that devaluation will serve as a spur for exports, growth and a return to balance-of payments equilibrium. But this scenario overlooks the fact that 27 euro-zone countries are inextricably linked to the euro, which militates against individual trade strategies. What might be desirable for Sweden could be undesirable for Spain. This is the E.U. dilemma.

Bailouts come with prescriptions, specifically deep austerity cuts to compensate for generous government hand-outs. However, this measure has sparked, and probably will spark, social anger wherever it is applied. While Greece has been in the forefront of this financial crisis, the IMF has raised the possibility that Spain could be next on the path to insolvency. It is estimated that a bailout for Spain could cost five times the sum allocated for Greece. According to Mark Kirk, a U.S. congressman on the committee that oversees financing for the IMF, “that amount of money is far more than is available to lend.”

One Vienna merchant described the crisis personally and poignantly: “I do not feel any responsibility to assist a welfare recipient in Barcelona or Lisbon.” Whether he feels responsibility or not, the E.U. locks him into a confederation that imposes a level of responsibility. That union cannot continue if the taxes in industrial areas rise to assist nations that are, or soon may be, insolvent. The complication of regional multiplication is that it penalizes the strong members of the union so that they can assist weak members. By any political calculation this is an unsustainable arrangement.

When the E.U. falls victim to these centrifugal forces is difficult to say; in my judgment, it will happen, and with it, the euro will be a casualty as well, returning Western Europe to its traditional status as a continent with individual states, languages, histories and economic conditions.

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