Europe - the final humiliation

Last week sealed the ultimate failure of the Euro – the historic mistake of the European political leadership to create a Eurozone which was completely unsustainable and which, given the divergence at the time in public finance, was known to be unsustainable.

Set aside whether or not the latest rescue package would have succeeded or not before the immediate Italian crisis, though, since it did not restructure the Eurozone to take account of divergence in competitiveness and the solution to excessive borrowing cannot be more debt, it would have been very unlikely to do so.

Consider the implications of the head of the EFSF travelling to China to (unsuccessfully) beg the Chinese government to invest even more than they already have in European government bonds designated in Euros and to make a strategic investment in the EU.

Firstly, there was the political humiliation, secondly the still unknown political and economic price of dependence which might have been paid and thirdly the potential disruption to the U.S. – and therefore world – economy should this lead to a rebalancing of Chinese investment away from U.S. government bonds.

Those with a historical perspective remember the fate of Germany before the nineteenth century – the Holy Roman Empire was – physically and diplomatically – the battleground of the major powers on its periphery ie France, Austria and Russia.

Is the EU condemned to be the Holy Roman Empire of the twenty-first century? It competes in a world of broadly unified nation states such as the U.S., China, India, Russia, and Brazil and nations with sovereign wealth funds. Meanwhile the EU is obsessed with the defence of the Euro indefensible in its current form, unable to find purely European solutions to European challenges and propagating the dangerous and mistaken idea that any change in the membership of the Eurozone could threaten the very existence of the EU. Reculer yes, but not without hope of mieux sauter in the future.

Absence of reality has often meant short-term decisions in the EU which defer addressing serious issues. But the recent Eurozone summit and the attempt to finance the rescue package externally have moved unreality to a new level which one of my colleagues – not usually with a tendency to exaggerate – described as dangerous nonsense.