A deal was reached late last week to resolve the financial crisis for the European Monetary Union, which is the single currency (euro) zone of the European Union (EU).
The key provisions included a large-scale increase of the funds for the Monetary Union's rescue fund and further measures to encourage the purchases of sovereign debt in order to keep interest rates from increasing to unmanageable levels and to recapitalize banks.
In exchange for the latest tranche of bailout funds for Greece, which has undertaken a severe austerity program coupled with higher taxes that have weakened its economy, Greece will essentially execute a partial default. Private bondholders of sovereign Greek debt will only receive 50% of their investment.
Because much of the funds for the bailout come from the strongest economy in the Eurozone, Germany, the negotiations over the bailout stirred up more popular resentment between the Germans and Greeks, an issue I had raised in earlier updates. There has even been discussion that the failure of the EU, which was intended to be modelled after the United States of America, could result in conflict that threatens the peace of Europe.
Spain was praised by the EU for its austerity program to reduce its debt. The Monetary Union demanded Italy present a satisfactory plan to increase its meager economic growth, which it did after Prime Minister Silvio Berlusconi worked out a deal with his junior coalition partner to increase the retirement age from 65 to 67 by 2026, make it easier for employers to fire workers and privatize state assets, among other reforms. It will also support infrastructure projects, but the long-planned bridge from Italy to Sicily is now in doubt. Italians felt humiliated by the demands from the Germans and French and noted that the economy of France was barely better than Italy's. As noted previously, Italy is the third largest in the EU and the eighth largest in the world, which makes it even more of a firewall for the Eurozone than Spain. Like many members of the EU, it is undertaking an austerity program. Italy's deficit will be eliminated by 2013, at which point it will begin to pay down its debt that is 120% of its GDP. Only Greece's 150% is higher. Greece's target is 120% over the next several years.
The United Kingdom, which is a member of the EU, but does not use the euro, is attempting to use the crisis as an opportunity to claw back some of its sovereign powers it had surrendered to the EU. Its demands that a deal be struck urgently and its advice on how to strike one were met with resentment from the French Prime Minister, but the Monetary Union crisis could affect the UK significantly.
As I have previously warned, the crisis has encouraged its supporters to insist upon further European integration, which means an even more centralized European superstate that reduces the sovereignty of its members instead of an orderly breakup of the grand folly and a restoration of state sovereignty.
There are doubts about the effectiveness of the deal as a solution to the euro crisis. The Greek economy is weak and the Greeks violently oppose even modest sacrifices, such as not retiring until after their mid-50s. Italy's governing coalition is teetering on the brink of collapse with snap elections early in 2012 likely. Reforms are difficult to enact there with its fractious parliamentary system, but while the coalition government has successfully enacted a series of significant reforms, it has lost much of the margin of its governing majority to a faction led by the Speaker of Parliament and confidence in the Prime Minister amidst his personal scandals has decreased. Thus, there are doubts about its ability to enact the ambitious reforms it has proposed. Meanwhile, there have been fresh concerns about Portugal's ability to avoid a default.
Even if the latest deal represents a comprehensive solution to the euro crisis, as opposed to a continuation of the muddling through the European Monetary Union has undertaken heretofore, the crisis is exposing the euro project's flaws even more than I have posted about before. The diversity of Europe, which is arguably the most culturally diverse continent on Earth, is not a basis for unity, especially without Christianity. Europe could be united to a significant degree in Christendom by a universal Church, but a shared secular commitment to peace, liberty and representative government is not enough to unite a continent around a vague concept of Europeaness. The particular differences between Northern and Southern Europeans have clearly been identified as the cause of the crisis. Because of the warmer climate in the Mediterranean, Southern Europeans do not work as hard as their Northern European neighbors, a fact that is reflected in their strikingly different cultures.
It is no surprise, for example, that the Germans expect the Greeks to work harder and sacrifice more to pay for their overspending and that the Greeks resent being made to make such sacrifices by foreigners. Both are feeling the loss of sovereignty that is keeping them bound in an unhappy marriage from which neither can separate. In short, the European Monetary Union has not only failed to unite Europeans, it has increased their divisions.
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