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The New European Federalism - Joost de Jong

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    The New European Federalism

    The Greek debt crisis bears an unexpected gift

    by Joost de Jong

    It is Sunday in Europe, and our politicians are at work. This is quite worrisome, as these are the same people who have enshrined the half day Friday and the work-free weekend as sacrosanct in the halls of public employment. So, something is up, and indeed there is. Urgent negotiations are underway to extend and enlarge Greece’s bailout to ensure the Euro’s survival. Reports say that bets against the Euro have increased to over $16 billion, and urgent measures are required.

    Okay, let’s step back for a second. For one, a $16 billion short position is not a huge weight against the $16 trillion EU economy, so I don’t think we are facing an imminent collapse here. Meanwhile, let’s not exaggerate the importance of the Greek economy. The nation’s 11 million citizens clear barely 2 percent of the more than 500 million that make up the European Union’s population. Sure, their position is precarious, but we should keep things in perspective.

    There is something much more important in the works. The key weakness of the EU is that it is a voluntary association of independent states. Hence, it has always been difficult to enforce rules or standards on the member countries. This has been a problem since the inception of the “club” and has only become worse with the rapid inclusion of Southern and Eastern European countries these last two decades. When the Euro was introduced at the end of 2001, one would think that some mechanism had been introduced to resolve this, but, alas, the political will simply was not there.

    The rejection of the Lisbon Treaty in 2005 by France and the Netherlands certainly did not help. Only with the backdoor update to the treaty ratified in 2009 did more power devolve to the “center” of the European Union. In the US, it took a civil war to clarify the balance of state’s rights versus federal power. Well, Europe does not really have the option to engage in a civil war to ensure the compliance of a member state. A good crisis will have to do.

    Well, here we have one, packaged as a Greek debt crisis. Whereas Greece was able to devalue its currency in the past, surreptitiously taxing its population via inflation rather than by direct means, it no longer has the ability to do so. In the past, it would have devalued the currency, and pushed the problem into the future. Now, it has to make the hard choices that would return the nation to some level of fiscal responsibility. Not a bad thing, really, and something that should pay off for the nation handsomely if they garner the political will to set a realistic budget. The international crisis, falling stock markets, riots, and drop in the Euro value have done much to convince the Greek parliament to accept measures that would have been politically unthinkable at any other time.

    More importantly, however, is the significant shift of power to the EU’s center. Whereas the prevailing rules of the EU severely limit the ability to provide aid to member nations, this crisis is changing the interpretation of these limits. “Emergency” exceptions to such provisions are being used to establish mechanisms to provide funding to financially troubled member states while at the same time greatly expanding the EU’s ability to demand and enforce fiscal responsibility in return.

    The conversations among our politicians this weekend will surely expand the financial resources behind Greece’s bailout. However, the real debate is about the shift of power to the “Federal” side of the EU. The lack of constitutional and enforceable power is something that had always been thought of as a weakness to this currency since its inception. Greece’s crisis may well be the crisis that had been needed to finally convince all participants to the currency of the necessity to increase centralized control. Think of this crisis as kind of Europe’s “Fort Sumter,” and thereby, perhaps the beginning of a new recognition of the balance of power between Europe’s member states its federal administration.

    Joost de Jong writes for iTulip from Punta Chullera in southern Spain. Joost earned his MBA at Harvard and holds a degree in economics, but don't hold that against him. His opinions are his own.

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    Last edited by FRED; 05-25-10, 05:57 PM. Reason: Fix the image.
    Ed.

  • #2
    Re: The New European Federalism - Joost de Jong

    not sure if you should call it unexpected. this is starting to create one half of a pair of two huge central governments that will be very intertwined.

    Comment


    • #3
      Re: The New European Federalism - Joost de Jong

      Should we be surprised? Arguably speaking, they've been riding the United States' coattails since the end of WWII. Now in a crisis up to their neck, they opt for a USA solution.

      In a related matter, the FIRE economy has resisted drug testing. Though formally they refuse to explain why, it's believed analysis will divulge record amounts of steriods, HGH, anabolic plasma & DNA mutagens, not to mention crack, LSD, meth, etc. It's believed an overheard comment of "More, more, more!!!!" is attributable to the FIRE economy. When asked, the FIRE economy refused comment.

      Comment


      • #4
        Re: The New European Federalism - Joost de Jong

        Originally posted by marvenger View Post
        not sure if you should call it unexpected. this is starting to create one half of a pair of two huge central governments that will be very intertwined.
        You are of course right imo, this is hardly unexpected, a quick perusal, of EU policy decisions, treaties and restructuring along with the "solutions" provided to date accross the member states in reaction to the financial issues make either collapse or federalism inevitiable. According to some a terrible beauty has been born.

        "that each simple substance has relations which express all the others"

        Comment


        • #5
          Re: The New European Federalism - Joost de Jong

          Originally posted by Diarmuid View Post
          You are of course right imo, this is hardly unexpected, a quick perusal, of EU policy decisions, treaties and restructuring along with the "solutions" provided to date accross the member states in reaction to the financial issues make either collapse or federalism inevitiable. According to some a terrible beauty has been born.

          The level of buffoonery this 'puppet' man emanates from his mouth is amazing. Did you notice how he had to give the 'shout out' to the 'war on terror' around the 7 minute mark. Biden is Keepn' it real.

          Comment


          • #6
            Re: The New European Federalism - Joost de Jong

            More importantly, however, is the significant shift of power to the EU’s center.
            And it worked so well for the Soviet Union.

            Is he saying the Civil War marked a dramatic improvement in US history? Us finances are so great now no one can question the benefits of strong central planning?

            Joost earned his MBA at Harvard and holds a degree in economics, but don't hold that against him.
            Is this the punch line? This story is about a month too late.

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            • #7
              Re: The New European Federalism - Joost de Jong

              So? Never waste a good crisis. Surprise! A crisis in a continental currency would lead to a more central government. Isn't stability good news?

              Comment


              • #8
                Re: The New European Federalism - Joost de Jong

                Europe does not really have the option to engage in a civil war to ensure the compliance of a member state.
                That's because they already had their civil war. It was called World Wars 1&2, or the Great German War, Parts 1&2, take your pick ;)

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                • #9
                  Re: The New European Federalism - Joost de Jong

                  It is in a way, Europe's political version of the US' civil war. That war, for a large part, was to "preserve the union". In other words, what had been confirmed through that conflict that individual states had lost the right to leave the union. Arguably, much of the US's great influence and power has been due to its united decision making and resource allocation. Imagine the influence the North American states would have if the union had broken, and two or more separate nations had emerged.

                  This is the process engaging the EU. The wars of the last century convinced Europeans that conflict led nowhere, and some level of economic union was required to forestall future wars. The original EEC as it started in the 1950s spanned only a few countries. Rich, Western European, and focused on resources and manufacturing. Kind of a "coal & steel" pact. The current EU has moved far away from the original concept. Note, the surrender of national perogatives were never contemplated in its formation. Nation states are only slowly ceding such rights, and only when there is no other alternative. Some level of concentration of power, read federal central government, is required for the EU to function.

                  A good example is the foreign policy weakness of the EU. Although among the ranking economic powers in the world, assisted by billions of foreign aid, it carries little weight in international politics. The reason is simple, the EU government has no real "teeth", and its major decisions require agreement by the member sates.

                  For similar reasons the European armies carry little international weight. Although large enough, the same administrative structures are replicated over and over again. Same for purchasing, investment, and worse, decision making.

                  Hence, Europe must move towards a stronger central government to survive. However, it can only do so with the compliance of the member states, which are only able to do so at a very slow pace, and only out of absolute necessity. This is why the current crisis is so useful.

                  Meanwhile, the 2009 update to the constitution at least achieved majority voting, where as unanimous consent was required before. (Privately one might argue that Greece's crisis came from the fact that they were no longer able to hold the EU up for ransom to reach unanimous consent). We got a Federal program, somewhat on the sly, but, it was the only way forward. It is a great pity that the symbols of political union had to be put on hold. The EU flag is kind of pretty, and Beethoven 9th with Schiller's poetry made a great national anthem. Perhaps in a few years....

                  Comment


                  • #10
                    Re: The New European Federalism - Joost de Jong

                    Joost, any comment on the view expressed in the piece in this thread?

                    http://www.itulip.com/forums/showthr...60339#poststop

                    Comment


                    • #11
                      Re: The New European Federalism - Joost de Jong

                      Mr. De Jong,

                      This is a very astute observation.

                      Until now, I have been considering only the actions of Greece, France, and Germany when in reality the EU bureaucracy is also a factor.

                      I do agree there is absolutely the incentive to use this crisis in order to bolster the power of the EU as a federal government.

                      Unfortunately the counterpoint is still Germany. If Germany really wanted a large empire - literal or effective - it already had the opportunity to do so in Eastern Europe with the previous financial crisis.

                      Equally so it seems unlikely that Germany would want to become subservient to a Pan-European bureaucracy.

                      Comment


                      • #12
                        Re: The New European Federalism - Joost de Jong

                        Originally posted by joost
                        It is in a way, Europe's political version of the US' civil war.
                        A terrible and brutal war (or two), fought on the homeland, was needed in both cases. Only then would European or American states give up much of their power to a federated central government. Only then was any alternative to central control so odious as to be unthinkable.

                        People will give up their liberty for security, once the violence becomes too terrible.
                        Most folks are good; a few aren't.

                        Comment


                        • #13
                          Re: The New European Federalism - Joost de Jong

                          Dear c1ue,

                          Thank you for comments.

                          Regarding Germany, it has an entirely different concept of 'empire'. For historical reasons, they are uncomfortable with the whole notion of having a physical empire. Instead, they see the EU as the their home market, one which they can greatly influence by means of their oversize contributions. Germany benefits greatly from their open access to the 500 million consumers which make up the union. Their influence is considerably, and Germany reaps the benefits from what on the face of it appears to be a munificent policy towards the poorer countries in the "club". The Netherlands plays a similar game.

                          So, in the end, Germany does surrender some of its sovereinty to the EU. However, it fully realizes that by doing so it will have great influence over the regulations which will be applied to all member states - read: Germany's immediate and largest market. Ultimately, its gains are far larger than the cost of supporting the EU.

                          Comment


                          • #14
                            Re: The New European Federalism - Joost de Jong

                            Good point.

                            Imagine WWI had not happened, and Europe was still ruled by monarchs and an hereditary aristocracy. That war wiped all of that away.

                            Imagine WWII had not happened, and Europe was still ruled by mass social movements such as the National Socialists and Communists. Those extremes lost their charm in that war.

                            Imagine the Civil War had not a happened, and North America were home to Canada, the Union, and the Confederate states. Can you think of any of these countries rescuing civilization twice in the space of 30 years?

                            So, it seems that after 30.000 years as Homo Sapiens Sapiens, it had come to the point where we had to almost destroy ourselves in internecine conflict before we would consider negotations, cooperation, and building a democratic framework before reaching for the weaponry. I can only hope that these have been all the life's lessons our violent species will have needed.

                            I hope that we can write off the 19th and 20th Century as 200 years of social experimentation, as we travel from Napoleon's revolutionary and hereto unknown concepts of a national army and administration all the way through to the collapse of the Berlin Wall. I hope we have learned enough to muddle through from now on with our relatively open and free social democracies and be smart enough to shy away from the next great philosophy or socio-economic experiment.
                            Last edited by joost; 05-10-10, 06:49 PM.

                            Comment


                            • #15
                              Re: The New European Federalism - Joost de Jong

                              There are several aspects to this debate that I have already highlighted in The Times, London, with these two comments.

                              From The Times, May 4, 2010

                              ECB in U-turn on junk bonds to save Greek banking system

                              Robert Lindsay
                              The European Central Bank executed an embarrassing U-turn on its lending rules yesterday in order to stave off the collapse of the Greek banking system.
                              The move came as a third general strike in Greece was set to begin tomorrow, bringing airlines and the economy to a standstill as the Government tries to implement the €30 billion budget cuts necessary to receive its bailout loan from the eurozone and the IMF.
                              In a statement the ECB said that it was suspending a rule preventing it accepting junk-rated government bonds in return for loans. It said that the indefinite suspension applied to Greek government debt only. ……

                              Chris Coles wrote:


                              There are a number of aspects of this Greek debt crisis that highlight the potential for a change in the way all government debt is sold. Today, a government need not turn to their population to ask for more tax to spend and instead all they need to do is sell bonds on the open market to wealthy sources of funding. Very few indeed of the general population have any idea at all of where the extra money has come from. They only experience what they believe to be additional prosperity. But selling bonds in this manner is in reality, a way of gathering additional tax income; not from the general population, but from the wider, wealthier, external population of the rest of the planet. So what we have all experienced is a rapid increase in taxation by wayward governments, but not tax imposed upon their own populations. And that in turn presents us with a way to mitigate the further expansion of such debt taxation.

                              Surely the way out of this is to now specify that any sales of such taxation bonds, (what else do you call them?), must first be sold to the general population of the nation of origin of the debt? (Not their banks, directly to the people).You will argue that the general population will not buy the taxation bonds; in turn, I will debate that that is the very best way to stop the flow of excess debt. If the long term proposals of a government are agreed by and found attractive to the general population, then they will happily buy the taxation bonds. If they are not so, they will not agree to purchase them.

                              If that simple rule were to be instigated, any further, onward, sale of the bonds, by the people of the nation of origination, to banks or the wealthy of other nations; would repay the original funds back to the general population, thus retaining local prosperity. However, in both circumstances, the potential for loss has to be carried by the purchaser; Caveat Emptor. And, you could not sell what the people will not first buy. So, why not change the international rules for borrowed tax; for such taxation bonds?

                              May 4, 2010 8:34 AM BST
                              http://business.timesonline.co.uk/tol/business/economics/article7115285.ece

                              From The Times, Leading Article, May 6, 2010

                              Greece’s Trauma, Europe’s Malaise

                              A debt crisis has been aggravated by inflexible monetary policy and the euro. Financial contagion may spread


                              When Angela Merkel urged German MPs yesterday to support a proposed EU bailout for Greece, she declared: “Quite simply, Europe’s future is at stake.” The tragedy is that, through bad European decisions and a misconceived drive for monetary union, Ms Merkel is right. A Greek debt crisis threatens financial contagion to other countries in Southern Europe and another banking crisis. Hence the urgency of her plea. ………
                              Chris Coles wrote:


                              Greece’s crisis has not been caused by the euro. The fault lies instead with domestic economic mismanagement and excessive borrowing. But euro membership encouraged those errors and now makes a resolution of the crisis more difficult. As Greece
                              entered the eurozone, its interest rates fell to the level of Germany
                              ’s. That sparked a massive boom in consumption and investment. Households, companies and the Government built up debt. Wage levels rose to uncompetitive levels.”

                              That statement is, to say the least, misleading. It takes two to Tango and Europe needs to widen the debate. Greece’s crisis has been caused by too much lending; a little like blaming the child for being sick after being overfed with ice cream by the parents.

                              What we have is a financial system that both benefits by over lending and then, again, when their own lending decisions go belly up. The mechanism in both cases is very simple; there is no free market in finance. In any other market place, when you sell, ownership passes immediately to the purchaser and the seller cannot come back to ask for more. But when a bank sells a loan, it retains the right to change the deal downstream of the sale; against the rules for a free market. When their “sale” goes belly up, they come back and change the deal, and ask for more interest. If, instead, the rules were the same for a free market and no one could change the deal downstream of the sale of the lending, then the interest cost of the existing lending would remain the same and all the new lending would be at the higher rate, thus deeply suppressing demand for loans. Stability would be easily established.

                              I have set out the debate in much greater detail in The Road Ahead from a Grass Roots Perspective, chapters 4 and 5. May I be so bold as to suggest that the Europe initiate an Action to define that the rules for a free market apply to everything traded. Upon which, if successful, Europe’s problems, will vanish into history. So, why not?

                              May 6, 2010 10:44 AM BST
                              http://www.timesonline.co.uk/tol/comment/leading_article/article7117485.ece


                              So, why not?
                              Last edited by Chris Coles; 05-10-10, 07:06 PM. Reason: Remove Word rubbish

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