Articles

Why the EU is bound to fail ?

In Uncategorized on May 17, 2010 by Sukrit

Last week saw Crisis Management, the European Union Style . The agenda bring to prevent the Greek crisis from spreading throughout Europe. The scene was dominated by political mayhem with late night meetings, summits, conferences and political bickering. There was Barack Obama on the phone pushing the German Chanceller towards the deal, France bullying other european countries and Italy threatening to walk out of the negotiations. But all said and done at 2 in the morning we had a $1 trillion rescue package from the IMF and the European Union.

But there are a couple of points worth questioning here.On the surface, Is this last minute frantic backroom negotiations any way to run a 27 member country Union with over 500 million people and comprising the largest trading block in the world ? There is a difference between Crisis Management and doing things only in a crisis. EU is tending more and more towards the latter.

The thing is that this $1 trillion package wont exactly help Greece. Normally when a country the size of Greece is under loan and has too high a percentage of fiscal deficit, they devalue their currency, thus reducing pressure. However Greece cant undertake this devaluing, as the European Central Bank wishes to maintain the same exchange rate throughout Europe, in other words Greece cant tamper with the Euro. Well what else can it do than depend on the rescue package by other countries ?

The strategy adopted by the European Central Bank to achieve growth with a decent percentage of inflation through monitering of fiscal deficit is incorrect. This strategy implies that deflation should take place in certain parts of Europe (places like Greece and Spain) which would lead on to overall inflation. However this strategy is unworkable. Look at spain- It has about 20% unemployment, vacant residential property but still an inflation rate of 2% . Clearly the European banks thinking that Government can levy heavy control on their fiscal expenditure is incorrect. Any such measures wont be socially unacceptable and would lead to more problems. Just look at the violent protests happening in Greece. Clearly cutting down public health expenditure and government jobs wont go down well with people.

Perhaps the root cause of the problem is the nature and powers vested with the European Central Council . As far as fiscal powers go, it doesnt have much except trade taxing which isnt saying much. Any and all measure undertaken by it must be approved by the parliaments of the Constituent nations, which pretty much makes it powerless. This was apparent in the recent negotiations about the Greece bailout. Member countries were forced to agree to something which they knew pretty well to be against their national interest – all in the name of European unity. How long can this go on ?

PS:

I dont blame the european leaders to be frantic for a bailout package. If the euro fails, their economies will be in tatters. Caught in a vicious circle.Well  Life aint easy.

Britain should thank Gordon Brown. Inspite of large and widespread opposition he didnt allow Britain to join the EU. Ofcourse, Britain has its own problems.

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Sukrit

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