EU summit: fiscal union and financial adultery

 

On Friday morning, a crucial EU summit — touted as the last opportunity to save the euro from collapse — ended in a dramatic split between the UK and the rest of Europe. As Michael White wrote for the Guardian, “it looks like the Big One, the moment when a government in London exercised the famous British veto on an important EU matter and withdraws to the margins of the European Union, thus ending 50 years of more-or-less consistent policy.”

 

The break-up marks yet another tectonic shift in European history. But it also reveals the extent to which financial interests have corrupted the minds of our leaders and soured their mutual relations. The extramarital affairs of our political elites with the banks now threaten the very survival of the European family. All of them, it seems, are willing to sacrifice not only the family business, but also their own children. No price too high for the love of gold.

 

As always, the greatest pain is quietly borne by the kids: the citizens who haven’t even been consulted by their leaders. Childhood illusions about European solidarity have been brutally uprooted. But, as if to repress the most confronting part of the drama, no one appears to be talking about the disgraceful extramarital affairs that lie at the root of it all. The truth is that both the UK and Europe have been engaging in financial adultery for decades on end.

 

 

This was never a clash over the European interest versus the British interest, as both continental cosmopolitans and British euroskeptics like to portray it. Behind the veil of ideology lurk powerful financial interests dictating the choices of our double-crossing elites. As the Guardian reported, “Cameron wielded the British veto in the early hours of the morning after France succeeded in blocking a series of safeguards demanded by Britain to protect the City of London.”

 

More specifically, Cameron demanded that: (1) “any transfer of power from a national regulator to an EU regulator on financial services would be subject to a veto”; (2) “the European Banking Authority should remain in London”; (3) “banks should face a higher capital requirement”; and (4) “the European Central Bank be rebuffed in its attempts to rule that euro-denominated transactions take place within the eurozone.” Sarkozy rejected Cameron’s demands outright.

 

The reasons for this are really quite simple: (1) Sarkozy doesn’t want UK-based banks to get a competitive advantage by dodging the European-wide financial transaction tax; (2) he wants the European Banking Authority to move to Paris; (3) he knows French banks are in a much weaker position than their UK counterparts; and (4) he wants euro-denominated transactions to take place within the eurozone so they will be routed via La Défense instead of the City.

 

The bottomline is that this is a battle of banks; a clash of capital — it has nothing to do with the general European or British interest. If the eurozone were to break up, many German and French banks would collapse, hence the Franco-German push for fiscal union. Yet such a fiscal union would impose continental-style regulations on the free-for-all City of London. Fearing its competitive position vis-à-vis New York, the UK therefore strongly opposed participation.

 

 

It is fully transparent that in splitting up, Cameron and Merkozy are really just taking the side of their lovers in the financial industry. The outcome, rather than saving the euro and bringing back some much-needed stability, actually represents the worst of all worlds. Germany, now the indisputable European hegemon, will use this fiscal union to extract full repayment for its banks, while London can freely position itself as an offshore banking paradise.

 

Wolfgang Münchau has rightly pointed out that, “contrary to what is being reported, Ms Merkel is not proposing a fiscal union. She is proposing an austerity club, a stability pact on steroids. The goal  is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution.” Martin Wolf is similarly critical and demonstrates why Merkel incorrectly perceives the crisis as a budgetary problem, as opposed to a structural problem.

 

As the Nobel Prize-winning economist Joseph Stiglitz just wrote, many peripheral countries were actually more fiscally responsible than Germany itself: “In Spain, for example, money flowed into the private sector from private banks. Should such irrational exuberance force the government, willy-nilly, to curtail public investment?” By institutionalizing ‘budgetary discipline’, Merkel’s austerity union risks locking the periphery into a permanent depression.

 

This approach will prove doubly disastrous. Apart from the fact that it will condemn millions of Europeans to decades of poverty, it will also undermine the effort to save the euro. Fiscal profligacy did not cause this crisis. It resulted from the structural imbalances between a highly productive core, benefiting from a permanently undervalued exchange rate, and a stagnant periphery suffering from the exact opposite. Merkel’s plans do nothing to solve that.

 

 

What’s even worse is that her plans completely ignore the dire state of Europe’s banks. The real profligacy was never really in the public spending of peripheral countries but in the private lending of core banks. With hundreds of billions of euros in excess liquidity sloshing around the system, French and German banks greedily bought up Greek, Portuguese and Italian bonds and pumped truckloads of foreign capital into the Irish and Spanish housing markets.

 

By 2009, with traders pulling their money out of stocks and real estate during the credit crunch, the sovereign bond sector had become “one of the main profit drivers for the large European banks.” As millions lost their jobs and homes, the top bond traders would easily make between $7.5 million and $15 million per year in bonuses alone. The perverse nature of this system incentivized bankers to disregard risk and drive the periphery ever further into debt.

 

The outcome was not only an over-indebted periphery but also a severely over-leveraged banking sector. As a result, inter-bank lending has all but frozen up, as an institutional run on the banks puts bank shares under extreme pressure. On the day of the summit, a stress test revealed that European banks are suffering a 115bn euro shortfall. Moody’s just downgraded three French banks and rumors are rife that Germany may have to nationalize the giant Commerzbank.

 

In response, banks are using complex instruments to bolster capital, but — just like Merkel’s misconceived austerity union — these accounting tricks will only delay the inevitable day of reckoning. Still, our leaders remain remarkably stubborn in the face of the dangerous games they are playing. “I have always said the 17 states of the euro zone need to win back credibility,” Merkel said. “And I think that this can happen, will happen, with today’s decisions.”

 

 

But the kids aren’t alright, and the family business is crumbling. If this painful UK-EU divorce tells us anything, it is that our leaders are sharing the bed with powerful financial interests and can no longer be entrusted with the fate of the continent. Prostituting the peoples of Europe to the banking sector is not a sustainable solution, nor is it a very humane thing to do from an ethical point of view. Good Europeans should firmly resist this disastrous fiscal union.

 

So whenever they tell you “there is no alternative”, don’t believe them — it’s a lie. As a European Central Bank official recently told Reuters, “what I think is important at the moment is not showing politicians that there might be an alternative, because in their mind that might be less costly than the options they have.” The attempt to naturalize and depoliticize this crisis is an ideological smokescreen meant to keep us firmly in a state of financial prostitution.

 

We know there are alternatives, because we have seen them work in practice. As TIME Magazine just pointed out, “since the beginning of the movement, the leaderless structure appears to be working.” To the extent that it won’t work for for large hierarchical institutions — like powerful investment banks and unresponsive national governments — those hierarchies need to be broken down, disassembled and restructured from the bottom-up.

 

Back in the real world, Argentina already demonstrated that debtor countries can challenge foreign creditors and prosper, while small cooperatively-owned credit unions have weathered the global financial storm much better than large privately-owned banks. In a 2009 report, the UN observed that “not a single credit union, anywhere in the world, has received government recapitalization as a result of the financial crisis and they remain well capitalized.”

 

So the kids aren’t alright — but there is an alternative. The task is upon us to disseminate the truth and get organized. Another Europe is possible!