12 October, 2011

More trouble for the Eurozone

Slovakia has voted down the proposal to increase the size and powers of the European Financial Stability Fund. Just to recap on the history here, this increase is part of the 'agreement'  of 21st July. In this case 'agreement' means that it had been agreed by France and Germany. The other Eurozone states have since ratified it, as they were told to.

Of course the world has moved on since 21st July and no one is now pretending that the amount of the proposed increase (to €440bn) is enough: consensus is that to work it needs to be €2 or perhaps even €3 trillion. But now even the €440bn has been voted down.

This whole sorry story is illustrative of the structural problems of the Eurozone. When it was formed many of us warned that as well as being unable to weather a crisis for financial reasons, the decision making procedure was too unwieldy. As a result the Eurozone moved towards an oligarchy of People Who Matter (France and Germany with occasional references to their mates like Holland and Luxembourg), and when these two brought the tablets down from the mountain the others would be expected to toe the line.

Three problems here: one is that you could hardly pick a worse pair of ditherers than Angela Merkel and Nicolas Sarkozy. Second, the twin Moses figures do not have corresponding interests and rarely agree, the latest sticking point being that France wants to be bailed out by the EFSF while Germany says it is for crisis-hit nations only.

The last point is that this bullying is genuinely resented by the smaller nations. Franco Frattini, the excellent foreign minister of Italy, has recently voiced his disapproval. Smaller nations, like Slovakia, scarcely dare do that. Instead, the European ship, as it so often has, founders on the rock of democracy. The Euro-elite hate democracy but they are stuck with it, and countries like Slovakia, which only achieved democracy after the collapse of the Soviet Union, are some of the keenest exponents.

The principal mover of this Slovakian démarche is Richard Sulik, head of the Freedom and Solidarity Party, and a member of the Government. Here is what he said:

'A few years back, we survived an economic crisis. With great effort and tough reforms, we put it behind us. Today, Slovakia has the lowest average salaries in the euro zone. How am I supposed to explain to people that they are going to have to pay a higher value-added tax (VAT) so that Greeks can get pensions three times as high as the ones in Slovakia?'

Seems fairly sensible. Greece is richer per capita than Slovakia, with the Slovakian average wage being roughly equivalent to the Greek minimum wage.

Sulik also pointed out that to meet their obligations under the EFSF the average German would have to work 120 hours more, whereas to meet their obligations the average Slovak would have to work another 300 hours. That's more than an extra hour per working day to help out people richer than them.

Take a step back and think what the average person would have done to mitigate such a disaster. It's insurance, no? You insure your house so that when the roof falls off the money is ready to rebuild it. The EFSF might have worked as an insurance policy, set up from the start. But they couldn't do that because it would have looked as if there was the possibility of failure.

Now, failure is upon them.

What will happen? I would guess the Slovaks will be told to vote again until they get the right answer, but it will cause delays - the government seems to have fallen - and even then it is to approve something everyone knows is insufficient to do the job it was designed to do.

It is not impossible that the incompetence and wilful blindness of the Euro-elite, its insistence on a political dream which was obviously impossible, will now bring the entire world financial system crashing down. As a monument to stubbornness, stupidity and blind obedience to the diktats of an unelected elite, the Euro will be looked on by later generations as ours looked on the memorials to the fallen in the First World War: with shuddering incomprehension.

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