How the EU could end up breaking what it was supposed to unite

, by Joan Marc Simon

How the EU could end up breaking what it was supposed to unite

Unless the macroeconomic diet imposed to southern countries it is complemented with fiscal transfers, it will asphyxiate economic recovery which in turn is going to break-up the already unstable countries. A new European Convention is necessary to build the new European fiscal Union.

As new governments take the reigns of battered countries in the European periphery a new wave of inconditional expense cuts is on the move. Countries such as Italy, Spain, Greece or Portugal will continue cutting expenses whereas former “safe havens” such as France or Austria are starting to consider haircuts. Many predicted the domino effect that would unleash unless a European fire cut was put into place.Few opposed the validity of this domino scenario but nobody acted in a manner sufficient to stop it. Pretending to have financial discipline and fiscal rectitude and at the same time expect economic recovery at national level was as naive as expecting that IMF macroeconomic adjustments will start working after 40 years of failures.

However it is true that those highly indebted countries whose costs to finance their debts are skyrocketing and who at the same time find themselves in the corset of the monetary Union have only two ways to cut the deficit; cutting public expenditure or generating economic growth. Economic growth cannot spontaneously happen by itself in countries with cronical innefiencies and bad economic habits; it requires investment and good governance. Hence, the only option left is cutting expenditure knowing that this will only depress internal demand and increase unemployment, a recipe incompatible with economic recovery. The only way to keep the diet from killing the pacient is by pumping fiscal transfers from the rest of the EU to guarantee some economic recovery whilst cutting expenditure and restructuring the economy at national level. Alternatively in an integrated European economy once the domino starts falling it can endanger the big pieces of the model; the requalification of the debt of France is a clear example of the contagion.

The potential effect of all this is that the EU might end up breaking what was supposed to unite. The European Union was to unite the European citizens and the European states whereas the European reaction to the crisis so far is pushing the countries out of the union; for only outside the union they can –albeit at very high price- regain monetary policy and devaluate their currencies. But the insufficient European reaction is not only endangering the union, it is also endangering internal stability of countries such as Spain where the severe cuts in public expenditure are putting into question the internal organisation of the state; requiring a re-centralisation of competences in order to reduce the indebted and indebting regions. For regions such as Catalonia this loss of autonomy can trigger further reclaims outside the current institutional framework. The same argument can be made for those countries that some don’t see fitting in the EU as for those regions that don’t fit inside current states. The disintegration of the EU and of some of its member states will then be served.

Centripetal forces are working in the EU. To stop them it is necessary that financial and fiscal solidarity mechanisms are established at European level with a proper EU treasury in charge of economic policy and capable of issuing EU project bonds and raising EU taxes. So far, well-off countries have been opposing –and profiting (!) from- such a move; but the domino effect is now close to hitting them too. It is reasonable that countries such as Germany or the Netherlands ask for guaranties before taking this federative step forward but there is not much time left before the destructive inertia makes current changes irreversible.

If the EU is to continue uniting our diversities a new European convention should be called at the earliest convenience in order to democratically organise the treaty changes necessary to move into the fiscal and financial union. Any alternative scenario will be self-defeating.

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