Debt Crisis, Banking Crisis, Constitutional Crisis

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I'm wondering how far the EU's collective idiocy can go. First, turn a resolvable sovereign debt crisis into an impending catastrophic banking crisis. Not enough? Then toss a constitutional crisis into the mix. But whatever you do, leave the forces driving the Union to disaster--right now, not ten years from now--unaddressed.

While I am trying to get my mind round that, I am also trying to make sense of the way this proliferating avoidable calamity is being reported.

I admire The Economist, my home for many years, but I am utterly bewildered by the line its main British and EU political commentators have taken over the summit. Here's Charlemagne:

Confronted by the financial crisis, the euro zone is having to integrate more deeply, with a consequent loss of national sovereignty to the EU (or some other central co-ordinating body); Britain, which had secured a formal opt-out from the euro, has decided to let them go their way.

Whether the agreement does anything to stabilize the euro is moot. The agreement is heavily tilted towards budget discipline and austerity. It does little to generate money in the short term to arrest the run on sovereigns, nor does it provide a longer-term perspective of jointly-issued bonds. Much will depend on how the European Central Bank responds in the coming days and weeks...

But especially for France, on the brink of losing its AAA credit rating and now the junior partner to Germany, this is a famous political victory. President Nicolas Sarkozy had long favored the creation of a smaller, "core" euro zone, without the awkward British, Scandinavians and eastern Europeans that generally pursue more liberal, market-oriented policies. And he has wanted the core run on an inter-governmental basis, i.e. by leaders rather than by supranational European institutions. This would allow France, and Mr Sarkozy in particular, to maximize its impact.

"Whether the agreement does anything to stabilize the euro is moot." Moot? What is the point of this entire exercise if not to stabilize the eurozone? Its success or failure in that regard is not moot, it is all that counts. Charlemagne tells us, quite rightly, what's wrong with the deal--namely, it's mostly beside the point (failing to address collective backing for debt and other pressing questions; apparently that's on the schedule for the next summit in March) and where it manages to notice what's going on it is dangerously wrong (all we need is austerity). But so what if the plan is no good? What counts is that Britain is isolated and this is quite a triumph for Sarko.

The president tried not to gloat when he emerged at 5am to explain that an agreement endorsed by all 27 members of the EU had proved impossible because of British obstruction.

I can imagine. Let the eurozone burn: the sweet smell of success.

With the entry next year of Croatia, which will sign its accession treaty today, the EU is still growing, said Mr Sarkozy. "The bigger Europe is, the less integrated it can be. That is an obvious truth."

Now I'm more bewildered. That is a misquotation or a non sequitur--or am I missing something? If it's what Sarko said, he's right--but he'd be conceding Britain's point. I suppose what Sarko meant to say or perhaps did say was, "The bigger Europe is, the more integrated it has to be. That is an obvious truth." Except it's far from obvious. The bigger the union, the more sensitive it has to be to fears about the distance between EU HQ and voters who still think of themselves as French or German or Spanish or Croatian first and European second.

Let's refresh our memories a moment. The political constraint on effective joint action to resolve the crisis is the reluctance of voters in Germany to bail out citizens in undisciplined nations such as Greece and Portugal. Germany wants to lessen that reluctance by imposing permanent too-rigorous fiscal discipline on the defaulters. This will maybe reduce German voters' alienation from the EU project, but at the significant risk of increasing everybody else's either now or in future. Meanwhile, if Germany's demands aren't met, it threatens to let the crisis worsen, because some people need to be taught a lesson.

And Britain is being anti-communautaire?


Germany's demands are bad finance, bad fiscal policy, and bad constitutional design. You don't fix this mess by ruling out forceful action until closer integration has been achieved. You don't repair Europe's underlying political dysfunction by increasing the distance between government and governed.

Turning to Britain's narrower concerns, it apparently refused to agree to a treaty revision unless it got a promise that London rather than Brussels would continue to regulate the City. I haven't read the protocol yet so I'll reserve judgment on the merits. I agree that EU-wide financial regulation makes sense in principle, and that better coordination is vital. Still, given the extraordinary importance of the City to the UK economy, and given the stunning performance of EU policymaking during this crisis, it doesn't seem unreasonable for Britain to ask for a veto in this area. (Remember, rule-by-unanimity was where this project started out; in some areas, there is still something to be said for it.)

Charlemagne wonders what Britain expects to get out of this obstinacy--apart, presumably, from the small matter of retaining control of regulation of the City.

Britain may assume it will benefit from extra business for the City, should the euro zone ever pass a financial-transaction tax. But what if the new club starts imposing financial regulations among the 17 euro-zone members, or the 23 members of the euro-plus pact? That could begin to force euro-denominated transactions into the euro zone, say Paris or Frankfurt.

Which way euro-denominated business moves would depend on what the euro-area regulations say, and how British regulation responds. But at least Britain would be able to make its own calculation.

Britain would, surely, have had more influence had the countries of the euro zone remained under an EU-wide system.

The influence you are entitled to expect with one vote (albeit weighted) inside a 27-member federation would seem to be limited. The idea that Britain could direct the EU if it would only commit itself heart and soul to the project is the favorite delusion of British Europhiles. It's British arrogance recast as internationalism: "Come on, we can run this thing." No you can't. Also, by the way, you aren't supposed to want to.

Meanwhile, the limited influence you get with your vote and your dedication to the project comes at a price. I think it's obvious that Britain is better off inside the EU as presently constituted than it would be outside, but surrendering some sovereignty is the cost of membership, and loss of sovereignty in the first analysis is loss of power. The clever idea that giving up sovereignty is the way to gain power is something I've never understood.

In matters of cross-border trade and finance, would Canada have more influence over the outcomes it cares about as part of the United States than it does as an independent nation? (You shouldn't need to think about this too long.)

I note Bagehot agrees with Charlemagne about the quality of the EU proposals:

[T]he EU is proposing quite a range of damaging and stupid new rules for financial markets.

He also agrees with Charlemagne that this is moot. Even though Britain might now be able to avoid damaging the City with stupid new rules, he thinks it will regret its stand-offishness--much, I imagine, as it must regret failing to join the euro when it had the chance. What a colossal error that was. Think of the influence London could have exercised during this crisis as part of the euro system. Sarko would have been livid, just livid.

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Clive Crook is a senior editor of The Atlantic and a columnist for Bloomberg View. He was the Washington columnist for the Financial Times, and before that worked at The Economist for more than 20 years, including 11 years as deputy editor. Crook writes about the intersection of politics and economics. More

Crook writes about the intersection of politics and economics.

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