Is There Any Danger Of The EU Imploding?

Earlier this week, Jake who writes the EconomPicData blog asked for input from his readers as to whether or not one or more members of the European Union might opt out of the compact. His question was prompted by a lot of back and forth in the European press as to whether or not such an occurence was probable or possibly imminent.

Jake got a lot of input and I think it’s fair to say that most came down on the side of withdrawal being probably a remote possibility. My meager contribution to the discussion was the thought that a withdrawal by one of the smaller countries was a possibility but that it would be more likely to be caused by internal political issues as opposed to economic considerations.

An article in the Telegraph.co.uk today has me rethinking my views. Before I get to that, let me point you to an article by Willem Buiter who takes the position that withdrawal by even a small country will not occur. In typical Buiter fashion, he becomes more fascinated with his writing than succinctly stating his case but he does in the end make his point. You can work your way through all of the logic but in summary he contends that the long-term negative affects of withdrawal would far outweigh whatever short-term benefit a country might derive.

On to the Telegraph article which was written by Ambrose Evans-Pritchard, not necessarily an ardent supporter of the EU. Mr. Pritchard paints a picture of depression among many of the EU’s smaller states. Riots have been occurring in Latvia and Lithuania all week. Latvia has seen property prices fall by 56% this year and the economy contracted by around 18% over the last six months. Spain is looking at 16% unemployment and some fear it might go as high as 25%. The ring of member EU countries from the East to the South and even to Ireland are suffering mightily.

Politics, as is always the case is beginning to intrude on the crisis:

Either Mr Zapatero stops the madness, or Spanish democracy will stop him. The left wing of his PSOE party is already peeling off, just as the French left is peeling off to fight “l’euro dictature capitaliste”.

Italy’s treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome’s throat. Italian journalists have begun to talk of Europe’s “Tequila Crisis” – a new twist.

They mean that capital flight from Club Med could set off an unstoppable process.

The EU, in the end may have a fatal flaw. While it has a common currency and seeks to align member states economic policies by imposing limits on debt and other activities, it cannot issue debt itself. It has no means by which to help out its members who may find themselves in the dire straits so many do right now. Mr. Pritchard points out that in contravention of EU rules, the European Central Bank may be purchasing the debt of member nations as a means of easing the pressure:

Traders suspect that investors are dumping their Club Med and Irish debt immediately on the European Central Bank in “repo” actions.

In other words, the ECB is already providing a stealth bail-out for Europe’s governments – though secrecy veils all.

An EU debt union is being created, in breach of EU law. Liabilities are being shifted quietly on to German taxpayers. What happens when Germany’s hard-working citizens find out?

The last paragraph of the excerpt may indeed be the most critical of all. The EU could easily survive the withdrawal any one smaller country or probably even several of them. If the central members become wobbly then the future of the Union is very much in doubt.

Ultimately, the fate of the EU might well rest in the hands of the leaders of a handful of countries. History is usually written by fallible men subject to immense pressure, not the cool reasoned logic of economists. If the fires of nationalism and self-interest start burning we will soon see the mettle of the leaders of France, Germany and one or two other countries severely tested. They and their citizens will decide whether or not the EU persists.

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