The markets were upbeat today as announcements came from Europe that a summit meeting Friday will bring a concrete plan for avoiding the collapse of the Euro. Given a choice between integrating more tightly and letting the Euro unravel, it appears tighter integration will be the cards.
This was good enough to bring Italian bonds down from their dangerously overheated 7% high, as reported by the Associated Press:
European stocks were up again following last week’s big gains, while bond yields fell, suggesting investors were more confident of being repaid. Italy’s 10-year yield dropped 0.4 of a percentage point to 6.17 percent after the new government agreed a package of austerity and growth measures.
“Christmas may well come early for global markets after this week’s meetings,” said Shavaz Dhalla, a financial trader at Spreadex.
EU spokesman Amadeu Altafaj Tardio, however, downplayed the expectations, arguing that any market euphoria was premature. “We are not in a position to say that the crisis is over, far from that,” he said.
While the leaders of the Eurozone are striving to present an image of cooperation and genteel debate, the great crisis in the heart of integrated Europe remains.
Ahead of Friday’s summit, leaders seemed to be zeroing in on building around tighter integration among the 17 euro countries — a crucial first step toward a solution that could trigger emergency aid from the European Central Bank, the International Monetary Fund or some combination, analysts say.
Merkel and Sarkozy agree overall on the need for tougher, enforceable rules that would prevent governments from spending or borrowing too much — and on certain penalties for persistent violators.
However, there appears to be a difference of view on how they should move forward. Merkel wants to change the basic EU treaty to reflect the tougher rules on euro countries and make them enforceable; Sarkozy is not opposed to a treaty change but is resisting giving up more powers to Brussels, especially in the run-up to what is likely to be a difficult election in April.
(Emphases mine.) So Europe’s current aspiration is to embrace enough discipline to prove itself worthy of a bailout. (The United States provides about 16% of the IMF’s funding, incidentally.) That’s really what this has been all about, all along: the sacrifice of sovereignty in exchange for central control, as the price of enduring financial support. It’s a debate that rages right down to street corners throughout Europe – and “rages” is often the clinically accurate term.
For example, Portugal is in bad shape – they’re looking at a 3% economic contraction and 13.4% unemployment next year, coupled with the usual unsustainable government spending that Western populations have grown accustomed to. Austerity measures were proposed, and they went over about as well as they have in Greece and Italy, according to an AAP report from December 1st:
Just days after thousands of workers descended onto Lisbon’s streets to join a protest strike, MPs passed the unpopular budget package that cuts salaries, raises taxes and increases working hours for vast numbers of workers already squeezed by recession.
“This is doubtless the toughest budget since Portugal became a democracy” in 1974, Finance Minister Vitor Gaspar told MPs during the budget session on Wednesday.
“This budget is necessary to renew the confidence of the Portuguese people, of the markets and of our international partners,” he added.
The bill was backed by the centre-right majority in parliament but triggered bitter opposition from the unions and the socialist opposition who boycotted the vote.
“It is a bad budget … that contributes nothing to the economy and nothing to growth,” said socialist leader Antonio Jose Seguro.
A general strike ensued, and the austerity measures grew less austere:
Faced with massive popular discontent, the centre-right coalition opted to ease some measures after the budget bill passed a first reading in parliament on November 11. Thus the suspension of 13th and 14th month salary payments for civil servants will now affect only those earning more than 1,100 euros a month rather than 1,000 euros.
That concession will cost state coffers 130 million euros, which will be covered by higher taxes on capital revenues.
So the civil servants keep getting paid in the 13th and 14th months of every year, and the government will suck away a bit more blood from capital revenues to pay for it. You can replace “Lisbon” with the name of pretty much any European capital and write the same story. In a few years, you’ll be able to plug the names of American state capitals into the same template.
Here’s the problem: when European citizens from Greece to Portugal complain about the loss of sovereignty to Brussels, they have an entirely understandable point. When they wail about the burden of austerity measures that cut deep into their salaries, pensions, and benefits, they’re exhibiting a normal human response to a reduction in their standards of living. If you were getting fourteen monthly salary checks per year, you’d be plenty angry about getting cut back to twelve. Likewise, the removal of power over their lives to increasingly distant capitals is guaranteed to make any population angry. Tea has been thrown into harbors over that sort of thing.
But these two understandable reactions are completely impossible to reconcile. Benefits provided by the State must come with State control, sooner or later. When the benefits are coming from the Eurozone, the control will eventually end up coming from Brussels, rather than your national capital or friendly local administrators. Individual desires naturally become less of a factor, and opportunities to control individual economic destiny become increasingly attenuated.
Naturally many citizens of the individual countries involved rebel against this state of affairs. When former Greek prime minister George Papandreou threw Europe into a panic with his proposed referendum on his nation’s bailout deal, he said “the Greek people are wise, and capable of making the right decisions.” A fine sentiment, but it comes decades too late. The dependency of the Greek people upon their state, and of the Greek state upon Europe, reached the point where questions of “self-determination” are moot… unless everyone is willing to take the bold and terrifying step of letting the whole system unravel.
There comes a point where that step is so bold and terrifying that it’s unthinkable on a practical level. The market euphoria over what amounts to the announcement of a Very Important Meeting reflects this. The known and immediate consequences of Euro collapse loom so large that even a few modest steps upon a different path are cause for celebration. The shockwaves from that collapse would be strongly felt on American soil, even if we didn’t go on the hook for a nickel of bailout money, because our own shaky economy is heavily plugged into Europe. We couldn’t just laugh off a massive collapse on the part of such a major vendor, consumer, and partner.
And yet… here are Merkel and Sarkozy having essentially the same argument that has been heard across Europe for years, and it’s not really any closer to resolution. Market enthusiasm today might be setting the stage for crushing disappointment tomorrow. Those general strikes and austerity riots are a rather powerful demonstration of popular discontent. The imperatives they’re rioting against won’t sound any sweeter on the streets of Athens, Rome, Lisbon, or Madrid when they’re delivered long-distance from Brussels. If a people wish to choose self-determination over central control, they would be wise to make that choice long before the government can’t pay its bills, bond rates explode, austerity is rejected with fire and broken glass, and liberty really isn’t an option any more.