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And the Devil take the hindmost! - By Kitty Miv, Editor

Kitty Miv, Editor
24 November, 2011

It's Thanksgiving today in the USA, but in Europe no-one is in a celebratory mood, and it's difficult to believe that the clouds will have cleared enough by Christmas to permit unbridled rejoicing. On the contrary, things may have gotten worse.

In Greece, the professional politicians who have been ousted by technocrats are just waiting for the opportunity to upset the apple-cart, and it may not be long in coming. Much the same in Italy, where Il Cavaliere is smarting big-time at the manner of his ousting, and presumably can't wait to trip up super-Mario, whose honeymoon may be measured in days.

Meanwhile, in another part of the forest, once the media dust had settled after Messrs Cameron and Merkel had agreed to disagree over a Tobin tax, it became clear that the northern European nations whose debt is 'only' double what is permitted by Maastricht are close to suggesting that Eurobonds should be issued under a regime of financial rigour that would give Brussels effective sovereignty over national budgets.

Indeed, that is the only obvious solution to Europe's debt problem, and the markets (who have the real sovereignty!) won't let European leaders off the hook until they agree some such scheme.

But they are dreaming. The fiscal responsibility rules have already existed for 20 years (called Maastricht, complete with sanctions, fines and the rest) but they have been comprehensively ignored by virtually every nation state in the Union. What should now be different? Fiscal union, which is the only way in which errant nation states can be brought to heel, involves political union, the creation of a centralized European (or euro-zone) treasury, and direct control of cash-flow.

Let's, like Alice, believe three impossible things before breakfast, and imagine that there comes to be political agreement between all 27 member states to create such a fiscal union. The process of rewriting the EU's treaties in order to achieve that result is almost inconceivably difficult and time-consuming, involving referenda in some if not all member states. Three years is a minimum estimate for that process, and ten is more likely based on past form. The markets won't wait that long.

So what is actually going to happen?

There are only two realistic scenarios:

the first is a two-speed Europe, with a fiscally disciplined core made up of Germany, the Netherlands, Austria, France (maybe) and a few other northern members of the euro-zone, and an intensive care ward including at least Greece, Italy and Spain, after an orderly dismantling of the eurozone and substantial devaluation of their euros - this is often referred to as euro 1 and euro 2;

the second is very disorderly, although there is still a disciplined core, and results from the successive failure of those three key Mediterranean countries, and their return to legacy currencies, probably implying a complete insolvency in each case on the Argentinian model.

In both cases, of course, there is a gaggle of other member states outside the euro-zone, including the UK, which will end up semi-detached from the EU, having extracted major concessions on labour law and financial markets as the price of its agreement to the treaty changes necessary to create the 'northern core'.

Returning to the politicians we started with, and acknowledging that as individuals their futures are bound up with electoral approval in their own countries, which will not readily be forthcoming for major losses of sovereignty, it is sadly very likely that the second scenario will come about.

I say 'sadly', but I am speaking as from Brussels, unavoidably having to accept the unsustainability of the euro-zone. In truth, I am not sad about it at all: Europe is not ready to be the United States of Europe, and may never be in our lifetimes. The best result for the citizens of the countries which have been ruined by their spendthrift politicians is indeed for those countries to shed their debts and have a clean start.

What the conseqences will be for their banks is another matter. But hey, what the markets want is stability, and in the real world they can get it only through the creation of an insulated zone of fiscal probity. And the devil take the hindmost! Someone has to get hurt.

Ciao, Kitty


About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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