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Can the European Union survive the debt crisis?

LONDON — Its origin is rooted in the idea of building a Europe that wouldn’t go to war with itself — of easing French fears of German troops storming across the Rhine and, later, of preventing Soviet tanks from rolling into West Berlin. More recently, the organization that became the European Union (EU) overcame national differences to create one of the world’s most potent economic blocs.

Now, as the debt crisis gnaws at Europe’s balance sheets, the EU faces another test of its cohesiveness: stabilize the Continent’s economies and prevent the disintegration of the 11-year-old euro currency — perhaps the Union’s crowning achievement.

By all accounts, Europe today stands at a crossroads. The enduring fragility of several nations’ treasuries could end up pulling members of the EU closer together. But if the fiscal problems continue to require bailouts and major economic reforms — as experts say they will — it will more likely lead to a fracturing of one of Europe’s boldest attempts at unity.

“Essentially, you can’t have a single currency without a single economy,” says Simon Tilford, chief economist at the Centre for European Reform, a London-based think tank. “For it to work, there needs to be much greater political and economic integration.”

The hope of the unifiers is that crisis breeds comity. Inside the 27-country EU, some believe the need to surmount a debt problem that threatens not only the survival of 16 members of the eurozone, but also the social-welfare model that has been an integral part of Europe’s economic identity, will draw the disparate states together.

Reluctantly, they took common action to rescue Greece and contain the crisis with a 750 billion euro fund, though that was as much out of necessity as choice. The fear was, and still is, that a default by Athens could topple the other debt-laden members of the eurozone “Piigs” club — Portugal, Ireland, Italy, and Spain.

In the wake of the Greek crisis, European governments have been taking action to live within their means. Spain and Portugal, for instance, have cut public-sector wages and welfare subsidies, setting up the next battles with labor unions.

Where the EU goes from here will be crucial for Europe’s future. One option is for increased fiscal discipline among eurozone members and tighter economic unity. Greater coordination is backed by France and EU technocrats. Yet it won’t be an easy sell. Listen to what Sweden’s prime minister, Fredrik Reinfeldt, said the day after an EU executive suggested that union members could coordinate national budgets.

“We are a shining exception with good public finances and don’t even come close to the limits [under eurozone rules] one is not permitted to surpass,” he said. “It is not fair to treat us the same way [as some other countries].”

Under one scenario, more coordination would mean granting one state the right to have oversight of another state’s budget to deter supposedly profligate spenders like Greece. But among sovereign nations that would be like letting your friends see your bank account on Facebook.

“It would mean two things,” says Robert Hancke, a Belgian expert on the European economy at the London School of Economics. “The government of Country A would have the right to check the books of Country B, despite the fact that it is not elected by the citizens of Country B. Equally, the logic is that taxes from Country A could be used for [some] purpose in Country B. That is not going to happen anytime soon.”

Alternatively, Europe could continue to move forward as it is, with each nation trying to balance its own finances and the community coming together when calamity arises. Yet no state wants to bail out another that it doesn’t think is fiscally responsible. Witness the rising resistance in Germany — a pivotal player in the Greek bailout plan.

It doesn’t help that the debt crisis in Greece has triggered a reflowering of national self-interest in a number of European nations. In simplified terms, richer and supposedly more fiscally prudent northern states are reluctant to surrender sovereignty because of the perceived spendthrift ways of their southern neighbors. In response, more dispassionate observers point out that the frugal north is prospering largely because its exported goods are flooding south.

The yawning differences help explain why the eurozone could be headed for a permanent divide. In order to detach the debt-stricken south, momentum is building for mainly northern states to form a smaller currency union around Germany. The idea is for two zones, each with its own currency, which wags jokingly say could be the northern “neuro” and the southern “pseudo.”

As many experts point out, however, the consequences of such a split would be huge: By one estimate, the living standards of inhabitants of the poorer zone would drop by 30 to 45 percent.

Still, the EU is not going to vanish anytime soon. “It will survive for quite a long time on the great force of inertia,” predicted Timothy Garton Ash, a British historian, in a recent BBC Radio discussion. “Remember that the Holy Roman Empire lasted as a framework, as a shell, until Napoleon delivered the deathblow. The EU is not going to end tomorrow.”

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Comments (1)

  1. Submitted by Richard Schulze on 05/27/2010 - 05:08 pm.

    When Goldman Sachs was on the congressional hot seat, grilled for fraud in its sale of complicated financial products called “synthetic CDOs.” This week the heat was off, as all eyes turned to the attack of the shorts on Greek sovereign debt and the dire threat of a sovereign Greek default. By Thursday, Goldman’s fraud had slipped from the headlines and Congress had been cowed into throwing in the towel on its campaign to break up the too-big-to-fail banks.

    Goldman and Wall Street reign. Congress appears helpless to discipline the big banks, just as the European Central Bank appears helpless to prevent the collapse of the European Union. . . . Or are they?

    The shorts circled like sharks in the Greek bond market, following a highly suspicious downgrade of Greek debt by Moody’s. Ratings by private ratings agencies, long suspected of being in the pocket of Wall Street, often seem to be timed to cause stocks or bonds to jump or tumble, causing extreme reactions in the market. The Greek downgrade was suspicious and unexpected because the European Central Bank and International Monetary Fund had just pledged 120 billion Euros to avoid a debt default in Greece.

    Markets were roiled further, when the U.S. stock market suddenly lost 999 points, and just as suddenly recovered two-thirds of that loss. It appeared to be such a clear case of tampering that Maria Bartiromo blurted out on CNBC, “That is ridiculous. This really sounds like market manipulation to me.”

    Manipulation by whom? Markets can be rigged with computers using high-frequency trading programs (HFT), which now compose 70% of market trading; and Goldman Sachs is the undisputed leader in this new gaming technique. Matt Taibbi maintains that Goldman Sachs has been “engineering every market manipulation since the Great Depression.” When Goldman does not get its way, it is in a position to throw a tantrum and crash the market. It can do this with automated market making technologies like the one invented by Max Keiser, which he claims is now being used to turbocharge market manipulation.

    Goldman was an investment firm until September 2008, when it became a “bank holding company” overnight in order to capitalize on the bank bailout, including borrowing virtually interest-free from the Federal Reserve and other banks. In January, when President Obama backed Paul Volcker in his plan to reinstate a form of the Glass-Steagall Act that would separate investment banking from commercial banking, the market collapsed on cue, and the Volcker Rule faded from the headlines.

    When Goldman got dragged before Congress and the SEC in April, the Greek crisis arose as a “counterpoint,” diverting attention to that growing conflagration. Greece appears to be the sacrificial play in the EU just as Lehman Brothers was in the U.S., “the hostage the kidnappers shoot to prove they mean business.”

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