Out of My Mind: European DisUnion

Last week, as the negotiations for the Greek bailout climaxed, one could say that Helmut Schmidt had failed in his gamble.

Written by Meghnad Desai | Published:July 19, 2015 12:00 am
column, express column, sunday column, greece bailout, greece EU, greece tspiras, greece syriza, greece bailout tsipras, greece news, world news, Edward Heath,Giscard d’Estaing, Helmut Schmidt, LSE, Single currency, Federal Republic of Germany, German Deutschmark, Greek bailout, Greek sovereignty, Nazism, deflation, GDP, Indian Express Alexis Tsipras, who flew home Monday from grueling night-long negotiations with European leaders, will chair an executive meeting of his Syriza party early Tuesday . (Source: AP)

Twenty odd years ago, three giants of European politics — Edward Heath, Giscard d’Estaing and Helmut Schmidt — came to address students at the LSE on the issue of a single currency for Europe. Each of them had been in charge of their respective country — the UK, France and Federal Republic of Germany. They strongly argued the case that Europe would be better united if it had a single currency. At the lunch later, I asked Helmut Schmidt why he wanted the strong German Deutschmark to be merged into a single currency which was bound to be less stable. His answer was stunning. He told me if the Deutschmark stayed as powerful as it was, Germany would be the hated country of Europe once again. It was important for Germany to bury the Deutschmark under a European currency.

Last week, as the negotiations for the Greek bailout climaxed, one could say that Helmut Schmidt had failed in his gamble. Angela Merkel was once again the target of much anger throughout Europe for what many thought was a cruel and heartless negotiating stance. People began to talk of the subjugation of Greece. Indeed the condition that Greece put 50 billion euros worth of its public assets under European control told us of the severe limitations on Greek sovereignty. Ironically, people recalled how the Treaty of Versailles had been imposed on Germany after the First World War, an unbearable burden of reparations for the guilt of having started the war and lost it.

German nation got distorted into Nazism and the Second World War was blamed on the injustice of reparations. Here there was Germany taking the lead in imposing an unbearable burden on Greece, a country it had tried to conquer during the Second World War, encountering much resistance.

This was not how the European Union was meant to be. It was built on hopes of solidarity and democratic, liberal freedoms. The point of introducing a single currency was to bring the countries together in an “ever closer union”. From a single currency was to come a single Federal Europe. It would be prosperous, and integrated. Europe would forget its violent past with nationalisms fighting each other for territory. It was to be a haven of peace.

The Euro experiment was a success to begin with while the world was flush with easy credit. But since 2008, the money has dried up. The Eurozone is modelled on the Gold Standard and nations have no control over their money supply. They also cannot run budget deficits. The exchange rate being common, no country can devalue its currency against others. If debts have to be repaid, the only answer is to squeeze the living standards or increase efficiency by cutting wages and raising productivity.

The experiment was fraught with problems as many people had warned. A monetary union without a fiscal union does not allow the transfers of income from the strong to the weak. Imagine India without the Finance Commission being able to lay down formula for transfer of revenue from the Centre to the states. How would Bihar fare while Haryana prospered? Now think of Germany and Greece.
Northern European nations have strong economies and are used to fiscal discipline. They have done well out of the Euro. Southern European nations liked their freedom to depreciate the currency to boost exports. Portugal, Italy, Ireland, Greece and Spain (PIIGS) have suffered. They got into debt when borrowing was easy but can’t pay back. Greece has suffered the most. It had a very lax
tax-collecting authority and, rather like India, a lot of transactions are in cash. Many people work in the government and retire early.

Greece can be locked up into 40 years of deflation as it pays off its debt, currently 200 per cent of its GDP. Negotiations could yet fail. Greece could exit. It could renounce its debts, re-adopt the drachma and devalue. It will not be able to borrow but it can get by printing its money. It may even exit the European Union. That will be the beginning of the end of the Union.

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  1. G
    Gopal
    Jul 19, 2015 at 4:41 am
    An interesting article. There is little doubt that Germans are being very nasty. Greece will never recover from this.
    Reply
    1. B
      BharatK
      Jul 19, 2015 at 7:53 pm
      I gave Greece the most easy solution - to few islands and get hundreds of billion dollars to end debt and regain economy. They have many islands, I am sure there will be many buyers. The path they followed now will only lead them to bigger trouble. Just wait and see the Greek Tragedy.
      Reply
      1. A
        anandap
        Jul 19, 2015 at 7:41 am
        Greece is lesson for our government which is overspending for establishment of which many activities could be reduced at digitizing the governance and also many freebies and subsidies.
        Reply
        1. R
          rohitchandavarker
          Jul 19, 2015 at 6:10 pm
          The concept of European Union seems to be unraveling, exposing the inherent flaws in its theory. The idea of integrating disparate & diverse countries into a single union was fraught with unknown risks. Each country has an ideny, an ethos, a unique culture & above all a peoples' pride for their country. National sovereignty was meant to dissolve into a love for the continent of Europe. This idea would never succeed. Hence the concept of common currency, Euro, replacing individual currencies was flawed. How could diverse GDPs, growth rates, deficits, currency risks,exchange rates & interest rates fuse together into one??? The Greek problem may be a precursor to bigger issues threatening the very existence of the European Union. The Greeks are angry but so are the Germans, albeit for different reasons. Angela Merkel might be considered by some to be a Santa Claus for Europe's misery but many consider her just the opposite including her own countrymen. What would the richer nations of Europe do if Portugal, Ireland, Italy & Spain follow Greece? The acronym 'PIIGS" may come to haunt Europe & dissolve the Union as we know it today.
          Reply
          1. S
            SK
            Jul 20, 2015 at 3:20 am
            a shallow article......first......just because you sit in India....not everything can be compared to an an Indian analogy or even remotely painted within an Indian context..... second....a squeezed Greece in EU is better than a standalone impoverished nation outside.....for even when outside it will need loans.,...and the lending sharks will squeeze Greece harder when then the benign umbrella of a EU member...and for that reason the queue is quite long of those wanting to come in to EU and waiting for years to prove their credentials and be accepted.....third......if you take money you have to pay it back or lose your ets and collateral...Greece understands that but was posturing to get away giving as little in the negotiation
            Reply
            1. V
              Vishwanath
              Jul 19, 2015 at 7:00 am
              Yes, the Grexit is inevitable. This "deal" is at best an opportunity to buy time for both parties. An impe would be created in 6 months. Indeed true that Greek cannot fulfil its debt obligations as the intent to do so is missing, just like many in India who have no intent to pay taxes therefore ensure that they dont! I feel it is too drastic to compare the imposition of conditions on Greece to the Treat of Versailles as Germany' attempt with war to expand its borders while Greek' knowingly defaulted. They had no qualms to live European Quality of Life and Euro strength to back their lackadaisical lifestyle not bothering it was funded by rest of Europe who were working on their behalf. Such kindness is never shown in perpetuity.
              Reply
            2. V
              vyjayanthi
              Jul 19, 2015 at 7:37 pm
              political system of some major European countries do want to loose their sovereign status over their tax regimes, spending and cuts, so they were wary of fiscal union. Monetary only union has showcased that strong currency can never be a subsute to bad economies.
              Reply
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