Who Can Bring the E.U. To Its Senses?

Posted: March 30, 2013 by Ellion hossain in News, world
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Today’s Editorials

Cyprus finally got a revised bailout plan last week. It taxes big, uninsured bank depositors to pay part of the cost of restructuring the country’s two biggest banks while leaving the savings of smaller, insured depositors untouched. But just days before, Cyprus, with the blessings of the smartest bankers and smartest finance ministers in Europe, came within a whisker of adopting a truly reckless plan that would have taxed small savers, undermined deposit insurance and risked sparking disastrous bank runs elsewhere, notably Italy and Spain, the euro zone’s third- and fourth-largest economies.

How could sophisticated European finance ministers — along with senior officials of the European Central Bank and the International Monetary Fund — have signed off on such a counterproductive rescue plan? And if they could agree to that, what other damaging schemes might they grab for in some future crisis?

Europe urgently needs to ask itself these questions. This month’s close call was hardly its first brush with self-inflicted disaster in the three-year-old euro crisis; in 2010, loose and premature talk by French and German leaders about involuntary loan write-downs of private-sector loans needlessly scared off potential lenders. And unless some drastic, though politically difficult, changes are made in Europe’s outdated decision-making machinery, it probably won’t be the last.

The basic problem is that the E.U. is not a true union but more a collection of states that have not in any real sense ceded decision-making power to a central authority. The result is chaos fed by conflicting national objectives. In the Cyprus case, German politicians wanted to minimize bailout costs to German taxpayers in an election year. Cyprus’s president hoped to keep the island an attractive haven for foreign depositors. The I.M.F. insisted that Cyprus not be lent more than it could pay back. And the new leader of Europe’s finance ministers, a tough-talking, austerity-preaching Dutch finance minister, wanted to make a point about debtors paying for their own bailouts. All of them somehow initially settled on the lowest common denominator: a bizarre scheme pinning much of the responsibility and most of the pain on small, insured depositors in Cyprus’s banks.

Wiser heads would have squelched any such plan before it was announced. Even though the proposal was later dropped, the public — justifiably worried that its leaders could make the same dumb mistake again — quickly lost confidence in the deposit insurance every E.U. country has been required to have since 2010 as a safeguard against bank runs. That confidence will take years to rebuild.

None of these European leaders would sign off on such high-wire financial policy experiments in their home countries. Why do they do it on the wider European stage?

Part of the answer lies in the way the E.U. was put together in the 1950s and ’60s as a loose union of jealously sovereign states — somewhat like the United States under the original Articles of Confederation. That posed no insuperable problems for the six-nation coal-and-steel community and free-trade zone that the European Common Market was at the time.

But as the E.U. has grown larger (Croatia will become the 28th member state later this year) and more ambitious (17 countries now use the euro), that loose and decentralized structure has begun audibly creaking. Instead of preserving sovereignty and nurturing democracy, it has created a situation where paymaster nations like Germany seek to impose the policy preferences of German voters on other states without regard to economic circumstances. It makes no sense to raise taxes and slash jobs when economies are already in free fall. But that is what the E.U. is now demanding be done across Southern Europe, with disastrous economic and political consequences. A better governed E.U. would put more emphasis on reviving growth in the south and stimulating consumer demand in the north.

But there is not much European vision among today’s top national leaders. No Helmut Kohl or François Mitterrand sits among them to bring fellow leaders to their senses before local political motives lead them into continentwide blunders. There are plenty of smart politicians attending E.U. summit meetings and plenty of capable European commissioners keeping the Brussels bureaucracy whirring. But there are no Alexander Hamiltons or James Madisons pushing for the interests of Europe as a whole, not just the interests of Germany, France, Finland, the Netherlands or Cyprus — even as ambitious projects like the euro have increased the need for coherent and consistent rules and policies.

The European Central Bank president, Mario Draghi, has occasionally tried to step into the leadership gap but is constantly reminded that he can be only as “European” as Germany, the bank’s most important shareholder, will permit.

So while the euro will likely survive Europe’s recent stumbles on Cyprus, it will survive unnecessarily weakened by avoidable mistakes. Someday Europe may produce leaders willing to grapple with the task of building sustainable European economic institutions. Until then, the union seems doomed to lurch from one mismanaged crisis to the next.


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