Eurocrash: royal road to new Europe

04/06/2012

Reuters has now picked up the Welt treaty story, with a lengthy report of its own, headed: "Europe mulls major step toward 'fiscal union'"

It starts by reminding us that last June, Jean-Claude Trichet – then still ECB president – was arguing for "giving euro area authorities a much deeper and authoritative say" in the formation of economic policies. He was also suggesting a central finance ministry to fit with the existing single market, single currency and a single central bank.

Then, say Reuters authors Noah Barkin and Daniel Flynn, "the idea seemed fanciful, a distant dream that would take years or even decades to realise, if it ever came to be". And they are not wrong. At the time it seemed yet another ritual call for "more Europe" from an ardent integrationist, for which there seemed little appetite.

But now, one year later, we are told that Germany is pushing its partners for precisely the kind of giant leap forward in fiscal integration that the now-departed European Central Bank president had in mind.

After falling short with her "fiscal compact" on budget discipline Merkel, we are told, is pressing for much more ambitious measures, including a central authority to manage eurozone finances, and major new powers for the European Commission, European Parliament and European Court of Justice.

This is the thrust of the Welt story which we reviewed yesterday and what could be spin is already being locked in, as we see Germany centre stage.

You would expect a Berlin-centric story from a German newspaper, just as you see British papers seek to plant a Union Jack on EU stories, so a note of caution is warranted. The idea of these "more ambitious measures" took shape at the Brussels dining club (aka European Council) last month and are being worked upon by senior EU officials.

This is very much in character for the modern, post-war Germany, which is still diffident about asserting its own power and seeks solutions within a European context. And, within that context, we don't yet know the true position of France, without which nothing can happen.

The Reuters Barkin and Flynn duo are nevertheless playing to the gallery, telling us that until [eurozone] states agree to the steps mooted, and the unprecedented loss of sovereignty they involve, the officials say Berlin will refuse to consider other initiatives like eurobonds or a "banking union" with cross-border deposit guarantees.

It's how you tell 'em that makes the difference, for the same thing could be put slightly differently. Essentially, Berlin cannot agree to the steps mooted and the unprecedented loss of sovereignty they involve, until or unless there is a treaty change, which is what I was saying in May, prior to the informal dinner in Brussels.

"Of much more interest is the dark game being played by the EU Commission", I wrote at the time, observing that we could see the commission going for the main chance – the economic governance that it had always hankered after.

Whatever the media are saying, therefore, it is vital to keep in mind that this is primarily an EU initiative. Brussels, not Berlin, is in the driving seat (even if it is there under license from Berlin)  and the proposals are coming for senior EU officials. Germany has ceded the ground to them.

Anyhow, we learn that the goal is for EU leaders to agree to develop a road map to "fiscal union" at the European Council on 28-29 June (which we knew already from Welt). But we also learn that member states will then "put the meat on the bones of the plan in the second half of 2012".

This is new information, with several European sources having told Reuters that this will include a timetable for overhauling EU treaties, "a step Berlin sees as vital for setting closer integration in stone". Reuters cites a government official in Berlin saying: "The fundamental question is relatively simple. Do our partners really want more Europe, or do they just want more German money?"

We now get a classic example of why one should not go to financial commentators for views about the EU, as we get Erik Neilsen, chief economist at Unicredit telling us, "The world is not coming to an end; rather, it feels as if we are on the doorstep to another major European integration move". So far so good, but he then asks: "But why do these initiatives only come when we are on the edge of the cliff where the risk of an accident is so much higher?"

There speaks ignorance writ large. That, Mr Neilsen, is the way the European Union works. That is the doctrine of beneficial crisis, used as a mechanism for facilitating change when the political will is absent, and there is no popular assent. It is only because we are "on the edge of a cliff" that the moves can even be considered.

What we have to be conscious of is that the political geography of the EU is now being re-written under our very noses, with incredible rapidity. From the look of it, the "colleagues" are not going to let Greece go without a fight.

In order to keep the eurozone intact, we may well see a variation on the plan which was emerging in February, with massive financial transfers being made, initially in the form of a new Marshall Plan, in exchange for fiscal sovereignty – effectively creating the Socialist Republic of Europe.

Everything will, of course, depend on France. Hollande is not Jacques Chirac, and he is known to have worries about ceding so much sovereignty. "It's a big challenge for Hollande," says a senior French official. "I think that he is ready for (closer fiscal integration) but I think the rest of the French political class - both on the left and right - is not".

The EU, thus, is on the cusp. The "colleagues" are going for broke, risking everything for one huge lunge towards the final goal. If they succeed, they will get their country called "Europe" – smaller than intended – but a single state nonetheless. If they fail, the likelihood is that the European Union will collapse. Everything is to play for.

And, for all the drama, while the story is on the Welt front page, which is talking in terms of "the royal road to the new Europe", the British media and political establishment – as always – have dropped the ball. The "pop royalty" is getting its outing and the collective brain is on hold.

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