The Horrible Truth Starts to Dawn on Europe's Leaders

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The entire
European Project is now at risk of disintegration, with strategic
and economic consequences that are very hard to predict.

In a speech
this morning, EU President Herman Van Rompuy (poet, and writer of
Japanese and Latin verse) warned that if Europe’s leaders mishandle
the current crisis and allow the eurozone to break up, they will
destroy the European Union itself.

“We’re
in a survival crisis. We all have to work together in order to survive
with the euro zone, because if we don’t survive with the euro
zone we will not survive with the European Union,” he said.

Well, well.
This theme is all too familiar to readers of The Daily Telegraph,
but it comes as something of a shock to hear such a confession after
all these years from Europe’s president.

He is admitting
that the gamble of launching a premature and dysfunctional currency
without a central treasury, or debt union, or economic government,
to back it up – and before the economies, legal systems, wage
bargaining practices, productivity growth, and interest rate sensitivity,
of North and South Europe had come anywhere near sustainable convergence
– may now backfire horribly.

Jacques Delors
and fellow fathers of EMU were told by Commission economists in
the early 1990s that this reckless adventure could not work as constructed,
and would lead to a traumatic crisis. They shrugged off the warnings.

They were told
too that currency unions do not eliminate risk: they merely switch
it from currency risk to default risk. For that reason it was all
the more important to have a workable mechanism for sovereign defaults
and bondholder haircuts in place from the beginning, with clear
rules to establish the proper pricing of that risk.

But no, the
EU masters would hear none of it. There could be no defaults, and
no preparations were made or even permitted for such an entirely
predictable outcome. Political faith alone was enough. Investors
who should have known better walked straight into the trap, buying
Greek, Portuguese, and Irish debt at 25–35 basis points over
Bunds. At the top of boom funds were buying Spanish bonds at a spread
of 4 basis points. Now we are seeing what happens when you build
such moral hazard into the system, and shut down the warning thermostat.

Mr Delors told
colleagues that any crisis would be a “beneficial crisis”,
allowing the EU to break down resistance to fiscal federalism, and
to accumulate fresh power. The purpose of EMU was political, not
economic, so the objections of economists could happily be disregarded.
Once the currency was in existence, EU states would have give up
national sovereignty to make it work over time. It would lead ineluctably
to the Monnet dream of a fully-fledged EU state. Bring the crisis
on.

Read
the rest of the article

November
18, 2010

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