Belfast Telegraph

Europe’s building an empire — by accident, not design

By Brendan Keenan

A Victorian historian famously commented that the British Empire was created ‘in a fit of absence of mind’.

Apparently he meant that through multiple disjointed ventures, such as looking for a place to send convicts, or attempting to find gold, the British one day awoke to discover they ruled over 20% of the world.

It sounds a bit like recent developments in Europe. There have certainly been multiple disjoined ventures. The resulting developments are indeed remarkable, although they come, not so much from absence of mind, but from having the mind on other things.

The other things, of course, are how to prevent a series of government defaults across the eurozone. Greece seemed a certainty, Ireland a probability, Portugal a clear possibility and Spain a terrifying prospect. Something had to be done, and there wasn't really much time to think what it might be.

What has emerged is close enough to the ‘economic union’ contained in the original title for the euro project — the Economic and Monetary Union (EMU).

The fact that this title fell into disuse is instructive. It soon became clear that the euro was purely a monetary union, and there were always those who recognised that this was dangerous.

They did not include the financial markets, which are now betting so heavily on fractures in the monetary union. Not enough was made of the curious fact that, during the mid-2000s, the interest rate spread between Germany and Greece was smaller than that between the lowest and highest rated states of the USA.

This despite the fact that there is no central authority in the eurozone, and its treaties specifically rule out the bailout of one state by the others. Since every third word written or spoken about the euro these day is ‘bailout', this may come as a surprise. In this case, the European authorities are as guilty as any hip commentator for the resulting confusion.

If ‘bailout' means anything, it means helping to pay the debts of a member state. It does not mean seeking cheaper loans from the likes of the International Monetary Fund (IMF) if a country finds its borrowing costs on the market have become unaffordable.

Any such suggestion would mean that a country's public services were at risk of overnight collapse for want of funds. Unthinkable, surely? But eurozone countries, it seems,

have already abjured their rights as members of the IMF to seek funds from that organisation. It may be that the available IMF funds would be inadequate, but I am still not sure how, where and when, such a momentous decision was taken.

A lot of things seem to be happening like that, and more will follow. For the moment, the bailout mechanism is getting most attention — because bailouts, in the real sense of the word, if not exactly banned, will still be limited. Other governments may lend to a troubled member, but they won't cover its debts — or at least not all of them.

That is as it should be. Obvious as this may seem, though, the suggestion of such a scheme from German Chancellor Angela Merkel has thrown bond markets, the European Central Bank (ECB) and other governments into a fit of the vapours.

It is dangerous to ascribe rationality to something as amorphous as financial markets. If there is any, it must mean the bond traders who once thought that lending risks in Germany and Greece were almost the same, thought until recently the treaties would be circumvented and eurozone debts could not be welshed upon.

It seems a great pity that these discussions have often taken the form of the need to punish bondholders — ie the lenders to governments and banks. The popular phrase is ‘burning the bondholders’. Punishment has nothing to do with it.

As the mafia hitmen are tempted to say to their victims: ‘It's nothing personal, just business.’ Lend too much, too cheaply, and you may not get it all back.

The timing of the ‘hit’ is unfortunate, when the ECB is writing huge cheques to cover the inability of Irish banks to tap the markets, and all the governments under pressure are insisting their plans will turn bond market sentiment.

But time is so short that it is hard to see how the issue could have been avoided.

It is a sign of how serious things are that the EU has been moving with, for it, bewildering speed.

Heads of government are supposed to take decisions on the shape of the new mechanism next month. It is planned to have it ready for approval by the European Parliament by next summer.

One significant point is that officials fear that parliament may prove difficult. Its powers now approach those of the US Congress — at least in its ability to thwart the desires of the administration, and perhaps more.

It is another example of the institutions of the EU growing in importance, while the politics do not develop at all.

This is where the aphorism about the British Empire applies. Not because the EU is a putative empire, as its more excitable opponents say, but because mighty things are being done with no accompanying political, still less democratic, structures. Of these mighty things, the scrutiny procedure proposed for the European Commission seems more important than the rescue mechanism.

The former represents a temporary loss of sovereignty for those who land themselves in the soup. The latter will be permanent and apply to all.

Economics Commissioner Olli Rehn gave a fine impersonation of a patient listener, as Brian Lenihan told him what would be in the Budget. But we know that was just an act. Mr Rehn has been deeply involved all along, although, remarkably, there is still no final detail for him to sign off on.

The secretary general of the commission, Irishwoman Catherine Day, was quite clear. There would be a big step upwards in Brussels’ scrutiny of national budgets, she said bluntly. The thing was to see the commission as helpful, not intrusive.

Even if that is true, it is not enough. The Irish budgetary process is far too secretive, but at least it requires subsequent approval from the Dail. Occasionally, like now, that actually means something.

If budgets are going to require prior approval from the commission, then they must also have prior scrutiny and approval from national parliaments. Better fiscal surveillance is clearly necessary, but it is also a central aspect of democratic politics.

Europe has already stretched the lines between its activities and its political structures as far, and perhaps further, than they should go. Its leaders should recognise that things built in fits of distraction tend not to last.

Belfast Telegraph

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