Europe Cannot Take Bold Steps To Either Seriously Integrate Or Force the Weak Out – It Will Continue With Small Steps That Will Ensure A Perennially Smoldering Crisis

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By Paolo von Schirach

June 7, 2012

WASHINGTON – Mario Draghi, the President of the European Central Bank, has been pushing the EU institutions to confront the smoldering debt crisis by taking bold actions that will result in a real European fiscal union and a lot more. And he rejects pressures to take actions that would provide short term relief. Any of this would simply mask EU inaction.

Not for the monetary authority

Indeed, on June 6 Draghi justified the ECB decision to hold interest rates steady at 1% by stating that: “I don’t think it would be right for monetary policy to fill [in for] other institutions lack of action”. He added that the EU serious problems have “nothing to do with monetary policy“. The message from the head of the Central bank is clear: Europe’s problems are mostly rooted in an incomplete Union. This is about politics, not monetary issues.

But Europe will not follow Draghi’s advice. Europe moves along slowly, following a tried script of endless negotiations that usually yield modest results. Each crisis is dealt with piecemeal, one by one. Yesterday it was Greece, today it is Spain.

Weak countries in debt

Europe’s crisis originates in the structural weakness of some of its Southern members, large ans small. Italy, Spain, Portugal and Greece are saddled with unproductive economies coupled with bloated and unaffordable public sectors, while the people expect welfare programs not paid for. The outcome is what we all know: the unsustainable debt levels that triggered the crisis.

A truly “European” solution

Confronted with this crisis, Europe has choices. A truly “European solution” would be to “take over” the laggards and teach them about modernity, responsible government and productive economic practices. This would be done in return for aid and subsidies. In other words, “We take care of you, but in return you go to our school and learn how to do things properly, so that you get out of this mess once and for all“. If a true “European Spirit” existed, this is what Europe should do: take care of its own with a sense of collective responsibility.

But the problem is that there is no such “European Spirit”. Ask the Danes or the Dutch how would they like to care of Greece or Italy for at least a decade, so that they will be properly reformed. By the same token, the laggards would never accept to be labeled as semi-failed states in need of crash programs. So, forget about the radical solution that would be based on a real and truly shared integration project.

Force the weak countries out

At the opposite end of the spectrum, Europe would tell the laggards to get out of the Euro and possibly downgrade other forms of association with the larger EU. This would mean that the project of a Big Europe, with everybody in, failed. The discrepancies between North and South are simply too large and therefore a real Union is not possible.

Of course, getting rid of the laggards would be complicated, not to mention costly. But, to the extent that everybody agreed, a piloted, orderly exit from the Euro is not an impossible, crazy idea. But you can bet what you want that this will not be done. It may be the solution for impossibly immature and potentially ungovernable Greece. But in the case of bigger economies such as Spain or Italy, this will not be done. And yet these two countries are terminally ill. By no means not near death, but taken over by chronic fatigue.

Forget about radical solutions

So, forget about real integration as a cure. And forget also about a refined Eurozone where only the big boys belong. Both solutions appear too complicated. Too much effort. Too costly. Too many variables. Too many unknown consequences.

Greece will be in a perpetual crisis

This being the case, we are left with the current European approach. Big talk and little action. Incremental steps that should do the trick and generally do not. Just think of this. Greece is a small country, with a small economy. You would think that a European Union with 27 members and a Eurozone with 17 should have been able to take care of a smallish country, whatever its conditions. Well, no. The Greek debt crisis exploded in the Fall of 2009. Now we are in the middle of 2012 and we are far from a settlement that can give anybody confidence that the worst is behind us and that now we are on path of healing and recovery. Rescue plans notwithstanding, Greece is virtually bankrupt, while its economy has lost any vitality. The people are angry and despondent. Until new elections, there is no government and any future coalition is likely to be weak and fractious.

Spain and Italy in trouble

Spain is in big trouble. The banking system is shot. The regional governments are bankrupt. The economy is in bad shape with a gigantic 24.4% unemployment, while youth unemployment is a stunning 50%.

Italy is doing much better in terms of its current fiscal outlook. But the country would need dramatic public administration reforms, coupled with the creation of a truly pro-business environment that would encourage innovation and enterprise. None of this is happening. Meanwhile unemployment is at 10.2% while the economy is back in a recession.

No political will

In the end, Mario Draghi is right. It is both wrong and stupid to expect the European monetary authorities to perform miracles. The issues are political. But, sadly, the European leaders are not even remotely capable of addressing them.

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