John Bruton

Opinions & Ideas

Category: Germany (Page 1 of 2)

SYRIAN AND IRAQI CHRISTIANS BEING VICTIMISED EVEN IN EUROPE

It is disturbing to read of attacks on Syrian Christian asylum seekers, by Muslim fellow asylum seekers in reception centres in Germany. I am sure the blame for these outbreaks is shared.

There is a bitter civil war in Syria and it would not be surprising that some of  those fleeing the war would have had hard feelings towards some of their fellow countrymen and women.  But  if they are seeking asylum, these feelings should be left behind in Syria.

Some of the attacks on Syrian Christians are apparently being made by people who are not from Syria at all.

The chairman of the governing CDU parliamentary group, Volker Kauder, called on Muslim authorities in Germany to “clearly renounce attacks on Christians in the asylum homes”.

The call came after recorded incidents of anti-Christian attacks in a number of shelters.

In one case, reported by the German daily Die Welt newspaper, Muslim Chechens, who have nothing to do with Syria, assaulted Syrian Christians in a camp near Berlin.

The newspaper quotes a spokesperson for the country’s Central Council for Oriental Christians, Jakob Simon, who says that discrimination and blackmail against Christian refugees is now widespread.

“I’ve heard so many reports from Christian refugees who were attacked by conservative Muslims,” said Jacob, who added that recorded incidents were not the full story. “The number of unreported cases is much higher,” he insisted.

Perhaps he is exaggerating.  But if asylum seekers are bringing these attitudes with them to Europe, they have a distance to go, to become fully integrated into modern European society.

It also raises the pragmatic, but difficult, question of whether some religious groups will find it easier than others to integrate into European society. Refugee law, quite properly, takes no account of this, but it could become a pragmatic challenge in the years ahead.

There has been a recommendation by the deputy head of Germany’s police union, Jorg Radek to house refugees separately.

“I think housing, separated according to religion makes perfect sense,” said Radek, who added that Germany’s police are now stretched to the limits of their capabilities by duties in registering the vast numbers of refugees together with ending disputes between those now residing in holding centres.
The call has been echoed at the political level, with Germany’s former interior minister, Hans-Peter Friedrich stating: “It is sad, but obviously necessary, that we require the separation of asylum seekers according to religion.”

This issue may also be faced by the Irish authorities when we receive asylum seekers.

HOW COULD THE CIVIL WARS BE ENDED?

The ideal solution is an end to the civil wars in both Syria and Iraq, which feed off one another. 
Both Syria and Iraq have artificial boundaries, drawn for the convenience of France and Britain during the First World War, without regard to local preferences. Now that settlement has come apart. In fact it never worked  very well because one group always dominated the others in both artificial countries.

A comprehensive agreed boundary revision, and the creation de facto of several new states may not be ideal, but it may be what is happening anyway .

How many more people will have to die before something along those lines if formally recognised? 
The answer to that question is to be found in Teheran and Riyadh, rather than in Iraq or Syria.

ANGELA MERKEL

“Angela Merkel” by Alan Crawford and Tony Czuczka is not a conventional biography of the leading political figure in Europe. Rather it is an exploration of her approach to politics around different themes…..her approach to the United States, her response to the Greek crisis, to the nuclear question, and the future of the European Union.

Her style is different from her predecessors Helmut Kohl, and Gerhard Schroeder.
She would never have taken Schroeder’s strong stand against the Iraq War because of her emotional pro Americanism, something that flows from having dreamed of America while growing up in Communist East Germany.

She does not have Kohl’s emotional commitment to European political Union. Kohl, whose life was seared by the effects of family losses in the two World Wars, wants to merge Germany into a united Europe to prevent future wars. It is something about which he is deeply emotional. 

Merkel’s approach is more practical, and more in tune with the feelings of ordinary debt averse Germans. She will pay a price to keep Europe together, but not any price. She is not as committed to common European Institutions, like the sole right of legislative initiative of the European Commission, as Kohl was, and is more likely to make deal with a small number of other heads of government of bigger states, bypassing the Commission. This is risky for smaller EU nations. But small nations, by insisting on one Commissioner per member state , have contributed to a weakening of the Commission.

Her approach to all political questions is shaped by her training as a scientist. She looks for lots of evidence before making a decision. She avoids visionary statements, but works through the evidence until she finds a basis for a decision. The weakness of this approach is that, in the absence of a grand vision into which decisions can fit, German public opinion may not be adequately prepared for the decision when it is finally taken.
She makes no effort at all to paint a picture of the future of Europe that would inspire the continent’s 500 million people to make sacrifices to build a joint future. But if the German Chancellor does not paint such a picture, who else has the stature to do so? 

Her pragmatic, cautious, and scientific approach also presumes a degree of rationality and shared interest on the part of her antagonists. Although she is a fluent Russian speaker, she does not seem to have achieved any common ground with Putin. She may be having a similar experience with Alexis Tsipras of Greece.

This is good book but I finished it, feeling that I had acquired a good knowledge of Angela Merkel’s tactical approach to politics, but no greater understanding of her deeper motivations.  

GERMANY ALSO NEEDS TO GET ITS ECONOMIC ACT TOGETHER

All citizens of the countries in the euro zone should pay especially close attention to economic policy debate in and about Germany.

Simon Tilford ,of the  London based Centre for Economic Reform, had some very critical things to say about it in a recent publication entitled ,“Germany rebalancing ; Waiting for Godot”.

He said that Germany is not serving its own economic interests by running such a large balance of payments surplus. A country with such a surplus has to reinvest the surplus abroad and he says Germans have lost almost a third of what they invested abroad since 1999. This is because they invested it in property bubbles that burst, and other bad investments.
He says Germans would have been better off investing at home.  German money has gone into ghost estates in foreign countries rather than into Rand D, roads and schools in Germany itself. That would have boosted German wages, spending and imports.

Some of those extra imports might come from other Euro area countries, who currently have deficits and this would make the euro itself more balanced and sustainable. And that would be good for Germany.

While Germany has increased employment by 1 million since 2007, many of these extra jobs are part time.

Germany is one of the worst and most difficult places in the world to try to set up a new business. It is 114th in the World Bank rankings!

Its professions are closed to competition from other EU countries and Germany has the worst record for implementing structural reforms, recommended since 2012 by the  Heads of EU Governments, including its own Chancellor!

He says German businesses are saving rather than investing, and that this should be discouraged.

He urged Germany to boost its consumer spending power by cutting VAT and financing that by higher property taxes.  He said German wages needed to rise, and Germans needed the confidence to spend more.

In contrast the Governor of the Bundesbank, Jens Weidemann has said in a speech in Switzerland, that in the last year, German wages have risen by 3%, which is a real increase, because prices have remained static. Others say that , as many Germans are approaching retirement age, it is understandable that they would want to save a bit more.

BUT ITS CENTRAL BANK HAS SENSIBLE THINGS TO SAY ABOUT HOW TO CURB FOOLISH BORROWING BY GOVERNMENTS

In a recent speech , Jens Weidemann asked the sensible question…how can we use market disciplines, rather than mere threats from Brussels, to get countries to run their fiscal policies sensibly? 

In other words, instead of the European Commission making a futile attempt to discipline France for its budget deficits, could a way not be found to get the bond markets to do the job by charging countries, like France, that are borrowing unsustainably to stop doing so, by charging such countries a significantly higher interest rate than countries that are being responsible?

That would require a change in the rules banks must follow in calculating the risks attached to different types of lending that they do. 
DO NOT TREAT GOVERNMENT BONDS AS RISK FREE
It would require, Weidemann  said, an end to the preferential regulatory treatment of government bonds, which includes banks not needing to hold capital reserves against investments in government bonds, whereas they do have to hold reserves against the possibility that other lending they do might go wrong.

This preferential treatment of sovereign debtors of banks is based on the assumption that government bonds are free of risk, an assumption that contradicts the no bail-out clause in the EU Treaties and therefore reduces its credibility.

It is also a nonsensical assumption, as we can see in the Greek case. There IS a risk that governments will not pay, and rules that assume the opposite are unrealistic.

When banks are not required to hold any capital reserves against government bonds, the result is obvious; they will hold too many government bonds, and their solvency is thus becomes directly threatened by a sovereign default. That is imprudent.

 Hence,  Weidemann argued, lending by banks to governments should be backed by adequate capital, in the same way as other lending by a bank has to be.
He said there was another special treatment that should also be ended.

……..AND DO NOT ALLOW BANKS TO BUY TOO MANY BONDS OF ANY ONE GOVERNMENT

As a general rule, to avoid concentration risks, bank loans to a single private-sector borrower may not exceed 25% of the bank’s liable capital
But that does not apply to a bank holding of its own governments bonds.

That is a mistake.

In future, large exposure limits should also apply to sovereign debtors too. For example, Greek banks should be prevented from buying too many Greek government bonds. That would break the doom loop between banks and governments, whereby fiscal difficulty for a government endangers its banks as well.

From a financial stability perspective, particular problems are posed by the fact that banks often only have government bonds issued by a single country in their portfolio – those of their home country.

Not only do the euro-area banks hold more government bonds on their books than ever before (€1.9 trillion), the home bias has actually become even stronger in the crisis countries in recent years.

In Italy’s case, for instance, 97% of the euro-denominated government bonds held by the country’s banks were issued by the Italian government!  That is really unhealthy and has been brought about by bad policy in the supervision of banks.

FRANCE….SOLVING THE PROBLEMS OF THE EUROZONE’S SECOND BIGGEST ECONOMY

I attended a conference last week that looked at France’s domestic economic situation and at the impact that has on France’s global and European role.

According to budgets they published this month, France and Italy are failing to meet the Euro area requirements for reducing Government debts and deficits to sustainable levels.

If France, as a big country making up 20% of the Euro area’s  GDP, were to be exempted from the EU debt and deficit rules, in ways that were not open to smaller  euro area countries, this would do great damage to the credibility of the euro, and potentially this could drive up to the interest rate euro area governments must pay to borrow. It is thus very important to Ireland that France overcome it’s problems.
In recent years, France has lost competitiveness, and it is consequently running a balance of payments deficit. In other words its people are spending more abroad, that than they are earning from abroad.
The French economy is projected to grow by only 1% in 2015, as against a projected growth of 2% in Germany and Spain, 2.7% in the UK, and almost 3% in Greece and Sweden.
The loss of competitiveness of France is due to several factors

+  Fewer people  are working fewer hours. For example, of people between 55 and 64 years of age, only 44% are working in France, as against 73% in Sweden, 65% in Japan, 60% in the US and  58% in the UK.

+  There is substantial youth unemployment, because young people find it hard to get on the career ladder because of an over regulated labour market that protects existing jobs at the cost of discouraging the creation of new ones. Last year 80% of all new jobs created in France were on temporary contracts.

+ The bigger a company grows, the more rigid are the rules that apply to it in terms of the right to hire and fire.  So, while France has some of the most successful big companies in the world, it lacks a large corps of middle sized export oriented companies, like Germany has.  90% of all French companies have fewer than 10 employees and they have strong incentives to stay small.

+ Monopolistic practices exist in a number of sectors controlled by the state and in some private professions. The vested interests protecting these monopolistic practices are very strong. These inefficiencies contribute to the loss of exports by French companies.


There was a strong sense among the participants at the conference that the current Socialist Government of Manuel Valls was making a serious effort to tackle these underlying weaknesses, but that the dividends of some the reforms, while very substantial, would be slow in coming, perhaps not in time for the 2017 elections.

There is a risk Prime Minister Valls will lose his majority because of defections in his own party. Meanwhile the opposition UMP is split on personality questions. The Front National is making huge strides in the polls, but its economic policy would break up the EU and introduce heavy state controls which would be incompatible with France’s global economic success.

Faster growth is crucial, and the margin between success and disaster is very narrow.  If the French economy grows at only 1% per annum over coming years, France could be on the road to default and a social crisis, but if it can manage a growth rate of 1.6% or better, it will work its way out of its difficulties. 

The stimulus for French growth will have to come to come both from inside and  outside France. French people save a lot, and if they could get the confidence to spend a little more of their savings, that would help. Likewise if Germany, which has been neglecting its infrastructure, stated to invest more that would help French exports.

The trouble is that French and Germany economists and politicians have very different intellectual assumptions, and dialogue between them can become a dialogue of the deaf.

Meanwhile, partly because it was wise enough to stay out of the Iraq debacle in 2003, France alone of the western powers, has the confidence to intervene directly in places like Mali, Libya and the Central African Republic.
France retains a strong nuclear deterrent and a civil nuclear industry that does not do the sort of climate damage that other  EU countries’ energy industries do.

Politics are important. Its Presidential system enables France to be strong and decisive in international affairs.
But that strength does not extend to domestic economic policymaking, where factionalism and introspective thinking are preventing the creation of any kind of “Grand Coalition for Reform”, of the kind that has enabled countries like Germany and Mexico to deal decisively with long standing blockages to growth.

ARE EUROPES LEADERS REALLY SERIOUS ABOUT PROMOTING GROWTH FRIENDLY REFORMS?

IS GERMANY PRACTISING WHAT IT PREACHES?

In June 2011, the European Commission published detailed “country specific” recommendations for structural reforms by member states to help them boost economic growth.  Similar recommendations were made in 2012, and they were stated to be designed to be implemented “within 12 to 18 months”.

The recommendations covered three areas

1.Fiscal policies,
2.Reforms to reduce imbalances between  exports and imports (macro economic imbalances) and
3.Other growth friendly reforms in labour markets, product markets etc

These recommendations were subsequently examined, and endorsed, by the 27 Heads of Government of the EU

The services of the European Parliament have just released a detailed analysis of how well European leaders and their governments have done in implementing their own recommendations . The analysis does not cover countries that were under Economic Adjustment programmes in the period (ie. Ireland, Portugal and Greece).

The findings show that EU leaders are not taking their own declarations seriously.

Of the 2011 and 2012 recommendations, only 18% have been fully implemented, 39% are being “seriously worked on”, and a very large proportion…. 43% have not been acted upon at all!

The worst performers are Slovenia and Belgium where 64%, and 63%, respectively of the recommendations have been ignored.

The best performer , by this measure ,is Italy, where only 17% of the recommendations addressed to it have not been acted upon. 

In terms of getting the job done completely, the best performer is Denmark which has fully implemented 30% of the recommendations addressed to it, as against an average of 18% for the rest of the EU countries surveyed.

Germany, which regularly preaches structural reform to other countries in the EU, has a bad record in implementing the recommendations addressed to it, and which Chancellor Merkel would have endorsed at the 2011 and 2012 EU Summits.

Nothing has been done so far on 53% of the recommendations addressed to Germany in 2011 and 2012.

For example, the survey by the secretariat of the European Parliament shows that, Germany has failed to do anything on recommendations addressed to it on

  1. Ensuring that the Lander implement EU budget rules
  2. Improving the cost effectiveness of long term care restructuring the Landesbanken
  3. Removing tax wedges that discourage work
  4. Removing entry barriers to professions and crafts (surprising given Germany’s looming labour shortage)
  5. Stimulating competition in the service sector
  6. Promoting cross border energy supply networks( a vital issue now that Russian supplies are so unreliable)


These failures must prompt fairly profound questions.

Are the Commission recommendations the right ones, and if not, why did the Heads of Government endorse them?

If the Heads of Government believe these are the right recommendations, why are they failing so miserably to get their own Ministers (who they can hire and fire) to implement them?

Given that economic growth is so important, and that Europe’s best brains have  been applied to producing these recommendations, huge gaps like this, between what its leaders do, and what they say, brings them, and EU itself, into disrepute. 

THE GERMAN ELECTION OF 2013……..DID ANGELA MERKEL GET TOO MANY VOTES?

I am in Germany this week, in the immediate aftermath of the General Election, in which Chancellor Merkel’s CDU/CSU alliance emerged as the largest party in almost every state in Germany.

But, although her own party’s vote is up more than 7 percentage points, her favoured coalition partner, the FPD, is out of the Bundestag altogether, because it did not get the minimum of 5% of the vote in Germany as a whole. They missed the threshold by just 0.2%!
In the last election, in 2009, the FDP got 14.6% % and 90 seats, and Angela Merkel’s CDU/CSU got only 33  %. This time, Angela Merkel wanted her party to be the one to make the big gains, and she succeeded…too well. Her vote jumped from 33% to 41%.
Under the German system of proportional representation, each voter casts two votes, one for the representatives in her/his own district and another for the national lists of one of the parties.

A practice had grown up of some CDU/CSU voters voting for their own party in their own district, but giving their second vote to the national list of the FDP, so they would get over the 5% threshold and be available as the preferred coalition partner for CDU/CSU. 
This time Angela Merkel made it clear she wanted every vote to come to her own party. As a result the  proportion of the CDU.CSU electorate” lending” their vote to the FDP fell from 5 % to 2%. 

As a result the FDP are out, and Mrs Merkel has to look for a coalition with less amenable partners, either the SPD, or the Greens. Her situation is not unlike an Irish politician who headed the poll, but failed to bring in his/her running mate. 
Coalition negotiations will be prolonged and difficult, and all that could have been avoided if just 1% more CDU voters had given their second vote to the FDP, and enabled them to survive!
Given that the SPD lost 11% of the vote in 2009, after their previous coalition with Mrs Merkel from 2005 to 2009, they will not be keen to repeat the experience. Prior to the 2009 election, the CDU/CSU were the biggest party only in four big states in  Southern Germany,-Bavaria, Baden Wurtemburg, Rhineland Pfalz, and Saxony, and the SPD got the most votes in every other German state.

Now, after the 2013 election, the SPD are the biggest party only in their strongholds in Hamburg and Bremen, and in pockets in the Ruhr, Dortmund and Kiel.

The SPD will also look at the more recent experience of the FDP, who went from 14.6% down to 4.8% as the outcome of their coalition with Mrs Merkel, and they will hope  to pass the responsibility over to the Greens. 

The SPD base never fully accepted the 2004 labour market reforms of the last SPD led government, which did so much to improve German competitiveness, and it was the subsequent Merkel led governments, not the SPD, got the credit for the resultant economic growth.

This is important because Germany has some more tough reforms to undertake, if it is improve the productivity of its domestic economy. The OECD has said that Germany’s domestic service economy has low productivity, entry to professions is too tight, and fees and prices are too high as a result. A major overhaul of energy policy is needed too, if Germany is to survive without nuclear power.
A CDU/CSU deal with the Greens would be another way to provide a majority. The social bases of the two parties are similar. Since Merkel agreed to abandon nuclear power, the policy divide is not as wide as it was.  Fewer CDU/CSU Ministers would have to lose their jobs to accommodate the Greens, than would have to step down in a coalition with the SPD. But some Greens would find a coalition with Mrs Merkel to be anathema, and she is cautious and may not want to try such a novel coalition either. 
If no deal with either the SPD or the Greens is reached, a second election is possible, which might favour Chancellor Merkel and allow the FDP to get above 5% and thus to restore the old coalition.

But the prolonged instability involved in a second election would be dangerous for the global economy and for Europe, and that is why it will not happen.

The Birth of the Nazis

I was in Berlin when I read “The Birth of the Nazis, How the Freikorps blazed a trail for Hitler” by Nigel Jones (Robinson Press).
Order had collapsed in Germany in 1919, after the end on the First World War. 
Imperial Germany had financed the Bolshevik take over in Russia in 1917, to get Russia out of the war, so Germany could concentrate on defeating the British and the French before the American troops arrived on the Western Front in large numbers. It had then imposed a humiliating peace on Russia, depriving it of a third of its territory.
Now, in 1919, the boot was on the other foot. 
Germany itself had been defeated, forced to accept humiliating peace terms, and there was a real possibility of a Communist takeover in Germany itself. Germany had a proportionately much larger industrial working class than Russia and was therefore at a more suitable development stage for Communism, according to the Marxist dialectic.
The German Army had lost the war, but it wanted the blame for the resultant peace terms to fall on civilian politicians. A Social Democrat led coalition government was formed which had the unenviable task of agreeing the Allied terms. The country was broke, and many people were starving.
The Army tried to have it both ways.  In the event of refusal to accept the Allied terms an Allied invasion was in immediate prospect.
General Hindenburg advised the Government “We cannot count on repelling a determined attack by our enemies” but avoided the responsibility himself by saying.  “ As a soldier, I would perish with honour rather than sign a humiliating peace”. 
This responsibility shifting technique of blaming politicians, while not facing up to military and fiscal realities, was common among many demobilised and underemployed soldiers, who were to form the nucleus of the Freikorps. It is a well developed technique for  reality avoidance that we even see in our own enlightened times, on lesser issues!
The Social Democrat led Government faced an even more immediate threat, an attempt to seize power, similar to that in Russia two years earlier, by a group calling for all power to be handed over to soldiers and workers councils on the Soviet model. There were mutinies in the armed forces and the elected Government lacked the means to assert its authority.
So the Social Democrat led Government had to turn to irregular forces, drawn from people who had little sympathy with the Government, but who wanted, even more so, to prevent a Soviet style revolution. Thus the Freikorps were born. 
They succeeded, brutally, in their immediate task, and Germany enjoyed a democratic Government for ten years. But when the global depression came in 1930,Freikorps members provided a  force that propelled the Nazis into power.
This book gives a very good insight into two turbulent years of German history. It explains some of the present day antipathy between Social Democrats and Communists in Germany.
It also throws light n the chaotic, violent, and unstable state of mind, brought about by the suffering and brutalisation imposed by Great War, that existed between 1919 and 1921 all over Europe, including in Ireland.

FRUGALITY IS THE EXPLANATION FOR GERMANY’S SUCCESS

I was in Germany recently, and it caused me to ponder why Germany’s economy continues to do so well, despite the huge costs of absorbing the former Communist East.

What makes some countries grow, while others stagnate?

Obviously the age profile of a country is important.

If more of the population is elderly or retired, one will have slower growth. In 10 years time Germany may not be so dynamic for that reason.

But, at the moment, Germany is doing well.

For example, German and British car factories are running profitably at 80% of capacity production, while Italian car factories are only using 46% of their capacity, and French car factories only 62%. Running at less than 75% of capacity means running at a loss.

Rigid labour laws may explain why French and Italian factories have not been able to reduce capacity in response to reduced demand for new cars.

In Germany, youth unemployment is only 5%, while in southern Europe it is 25%.
Meanwhile, France is beginning to worry about the performance of its schools. There are suggestions that it has dropped 14 places in Mathematics between 2003 and 2009 in the OECD Pisa tests conducted in 65 countries.

China, Korea, and Finland regularly come near the top in these tests. Education for the elite in France is excellent, whereas German education is more broad based, and its apprenticeship system imparts vital skills to a larger proportion of the population.
The German Minister for Science told me that German Scientists produce 10% of all the scientific papers in the world with only 0.1% of the world’s population. China spends four times as much on research as Germany, but China produces fewer scientific papers. Specialist scientific institutes, like the Max Planck Institute, which are separated from universities (and from university politics) play an important role.
But perhaps the reason for Germany’s success can be put in a single word…..frugality
Writing of the Germans in the early 16th century the Florentine diplomat, Niccolo Machiavelli said

“The reason why private citizens are rich is that they live as if they were poor……Nobody cares for what he has not, but only for what is necessary to him”

This is as true today, as it was 500 years ago.

CAN GERMANY BAIL OUT ALL OF EUROPE?

There is a tendency, whenever a euro zone country gets in to difficulty, and needs help from its neighbours, to blame Germany for the severity of the terms imposed, and to say there is bullying involved.

In both Greece and Cyprus, we hear references to the Second World War, as if offering Greece a low interest loan to keep its state functioning , was equivalent to a military invasion, of the kind Greece experienced in 1941.
There is also talk of  the “solidarity” that Germans ”owe” the rest of the rest of the euro zone, even though  any money Germany might pay has to be raised from German citizens, under the German tax system. This is the way it has to be done, only because there is no common euro zone tax system, applicable to all euro zone citizens, from which the money might otherwise come. Indeed those who call most loudly for “solidarity” would probably be the first to object, if a common euro zone tax system, equally applicable to all euro zone citizens, was proposed.
Others criticise Germany for insisting  on “austerity” in spending by countries that are spending more than they are earning, as if there was some alternative to spending less in those circumstances. The fact is that some countries, including Ireland, are still spending more than they collect in taxation, even after one has left out of account the interest paid on past debts. Such countries have what is called a “primary deficit”.

Ireland had a huge primary deficit in 2010, has a small one today, and hopefully will have a tiny primary surplus next year. 

But if it is  to reduce its debts, and  thus not be vulnerable to disaster, if there was to be a sudden increase in international interest rates, of the kind that occurred in 1979/80, Ireland will have to have a primary surplus for many years to come.

That is the only way to reduce the debts it ran up through the primary deficits it ran in the recent past. This is not something “imposed by the Germans”, it is imposed by the rules of mathematics, and by compound interest in particular.
Of course there is one alternative-inflation-  the alternative of inflating debts away. Inflation devalues everything. It reduces the value of money, and in so doing, it also reduces the value of debts…….and, of course, of savings.

If inflation is greater than the rate of interest, debts will reduce. But the value of pension funds, of bank deposits and of life assurance policies would also reduce. Inflation would mean falling living standards all around, because, if a country is to stay competitive, wages would have to increase at a slower rate than prices. Those on fixed incomes would see their living standards decline even more, because they could buy much less each year with their fixed income.

Inflation is very hard to keep under control, once it starts to take hold. Germany tried to inflate away its First World War debts in the 1920s, and the experience was a complete disaster. Understandably, it does not see inflation as a solution to Europe’s debt problems today, and nor should we. 
Some argue that Germans themselves should spend more and save less, and say this would help other countries in Europe. This is already happening to some extent . German imports were 10% higher in 2011, than they were before the recession, whereas almost every other European country is importing less now that it was then.   It is fair to say that Germany’s balance of payments surplus, at 6% of GDP, is very high indeed, too high, and that this surplus is not being used all that wisely. Germany could do more to free up its own internal market, and the OECD has been critical of it on that score, but that offers a long term, rather than a short term, solution for the rest of Europe.
It is also important to deal with the myth than Germany is a terribly wealthy country, that it can afford to bail everyone else out.

Germany’s present competitiveness is of recent origin. A dozen years ago it was the “sick man” of the European economy, struggling with the unexpectedly high costs of absorbing East Germany. 
Germany got a big bonus from the opening up of China, which imports a lot of German engineering goods, while other European countries( eg.Italy) have lost for the  same reason, because Chinese consumer goods are undercutting them in their specialist markets.
Germany is an elderly country, with far more people approaching retirement age than are preparing to enter the work force. 
Probably for this reason, its medium term growth potential, and thus its medium term debt repayment potential, is low, by comparison with other countries in Europe. 
The OECD did an estimate of real growth potential for different countries from 2016 to 2025. Its estimate for Germany was  only 1.2% pa over the ten year period, for Netherlands 1.4%, for Italy 1.5%, for Portugal 2.1%, for Spain 2.3%, and for Ireland  it  was projected to be 2.7% a year!
German families are apprehensive about the future, and if those OECD figures are to be believed, it is hard to blame them.
German families do not FEEL wealthy.

Only 44% of Germans own their own home, as against 58% of French people, 69% of Italians, and 83% of Spaniards. According to a recent Bundesbank study, the average household wealth in Germany is  195,000 euros, as against 229,000 euros in France, and  285,000 in Spain.

This is the reality with which German politicians have to cope.

It does not mean that they are always right, but it does mean that they have to be cautious. It also means that Germany alone cannot solve Europe’s  financial problems.

WHAT WOULD HAPPEN IF THE EU BROKE UP?

I have attended a number of conferences in the past few weeks where the future of the European Union has been discussed. Where previously the EU’s continuance was complacently taken for granted, now there is much more uncertainty, but also much more interest.
The European Union has been a remarkably successful institution building project. It is the first ever voluntary coming together of sovereign states, pooling some of their sovereignty, so that they could do more together, than they could separately.
Almost every other political unification or state building in history has involved the use of force, including the creation of the UK and the maintenance of the USA. The EU came together peacefully and voluntarily.
Some might argue that the EU was necessary only in order to cement a post war reconciliation of Germany and France and that, now that that is achieved, it has done its job and needs no further development.
This is wrong for two reasons.
WHY THE EU IS STILL AN ASSET
1 . AN ASSURANCE OF MUTUAL SECURITY,
 Firstly, the fact that there is a queue of states still lining up to join the EU shows that the EU still provides a necessary political and economic umbrella under which reconciliation and mutual security between states can be  assured in the twenty first century.
This was why the Baltic states, Poland and other central European states joined, and it is the reason several Balkan states, and even Georgia and Ukraine might like to do so. It is also the reason why Greece, much to the surprise of many, has favoured Turkish membership. While the United States of America is remarkably successful in many ways, there is no queue of other American states lining up to join. Even Puerto Rico has not done so after more than 100 years of Washington rule
2. A WAY TO MANAGE GLOBALISATION DEMOCRATICALLY
Secondly, the EU is the most advanced effort in the world providing a measure of democratic supervision into globalisation. Unlike other efforts to supervise globalisation, like the United Nations and the World Trade Organisation, the EU has a directly elected Parliament which co legislates for the EU alongside the 27 Governments, who often decide issues by majority. Other international organisations operate on a purely intergovernmental basis, which means that there has to be unanimity to get a decision, and democratic involvement only arises when a deal already negotiated in private, has to be ratified in national parliament  without possibility of further negotiation or amendment.
As a result, other organisations, like and the WTO and the UN, can do much less, and have to  do much more of what they do behind closed doors, than is the case with the EU.
My view is that the EU provides a unique model for democratic rule making, at supra national level, something which will become more, not less, necessary as we proceed into the 21st century.
  Indeed the failure of the world to deal with climate change is a good example of the weaknesses of present intergovernmental models of global governance. If the different regions of the world had Unions, like the EU, which could negotiate seriously, and with genuine political legitimacy, as the EU can, the failures of Copenhagen and other climate change summits would not have happened.
If the EU were to break up, either because of the collapse of the euro or because a major country like the UK feels it has to exercise its right to leave the EU, and either event were to set off a breakdown of the trust that keeps the EU itself together, we would have lost a unique instrument for security building in Europe, and for problem solving in the wider world.
I would now like to analyse those two potentially existential threats to the EU, the euro crisis, and the UKs possible desire to leave.
Of these, a  break up  the euro is undoubtedly  by far the  more serious existential threat to the EU, because the scale of the economic losses is potentially much greater, and the  means of controlling  those losses, are much less.
THE EURO CRISIS IS NOT SOLVED
The euro crisis has become slightly less acute in recent weeks. The announcement of a new bond buying policy by the European Central Bank has calmed the markets. But there is no doubt that the markets will test the ECB’s will power at some stage.
Meanwhile the link between the solvency of European banks and the solvency of European states has not been removed.
 A default by any EU state would wreck the banks of that state, because each state’s banks tend to be big  purchasers of the bonds of that state.
Similarly a potential collapse of a bank in a state would force that state to inject capital into banks, if it did not want a run on banks generally to take place, and contagion to other countries. The  confidence loss caused by a major bank getting into difficulty could lead to a dramatic collapse in state revenues, leaving it with a much increased budget deficit, at the very time it was also having to find the money to recapitalize the bank.
FOUR THINGS THAT MUST BE DONE TO SOLVE IT
If these problems are to be resolved, four things will have to happen, more or less at the same time.
1. Greek Government debt will have to be forgiven.
2. The ESM will have to be seen to be big enough to stand behind Spain and other countries that might get into difficulty, on a contingency basis,
3. The new mechanisms to supervise, and if necessary rationalize, Europe’s banks will have to be put in place.
4. The already agreed reforms to reduce deficits, and to promote growth by opening up the job and service markets to competition will have to be demonstrated to be being fully implemented, in letter and spirit, to show creditors that, if one forgives debt or creates enlarged the ESM, one is not throwing good money after bad.
At the moment, the Greek debt issue is not being tackled, and seems to have been postponed until after the German election in September. The delay may not be the worst thing in the world, if it allows time for Greek reforms to begin to establish credibility. It also allows time to educate public opinion in creditor countries like Germany, and in countries sitting complacently on the sidelines, of the true consequences for themselves of a euro break up. Greece also need immediate help to finance itself to the end of 2013, and that bridging finance cannot await elections in Germany or anywhere else.
The EU has already enacted a raft of legislation, including the Fiscal Compact Treaty, to ensure that countries reduce their deficits, and liberalise their labour and service markets. . One of the reasons growth potential has been low in Greece, Italy, and Spain is lack of competition or flexibility in key sectors
But Germany is not yet satisfied. It wants to have an EU Commissioner with the power to veto state budgets, and enforceable contracts on reforms between states and the EU.  But not enough attention is being paid to the fact that Germany, France and other core countries could also be doing a lot more themselves, to open up their own digital, financial, energy, retail and professional service markets. While Germany has set a good example in labour market and pension reform,  there are other reforms it could initiate, that would help other EU countries to sell more goods and services into the German market, and thereby trade their way out of their problems.
There is understandable political resistance in Germany to any further debt forgiveness for Greece. But debt forgiveness within the euro is one thing. Greek exit from the euro is an entirely different matter. It would be far more dangerous, and that needs to be explained to German public opinion.
WHAT WOULD HAPPEN IF THE EURO ZONE BROKE UP?
Even a disorderly default by a country within the euro, no matter how severe its consequences for its own people and for its creditors, would have far less severe consequences for the euro, and for the EU itself, than an exit of a country from the euro would have.
I have heard a view from some Northern Europeans that an orderly exit of Greece from the euro could be contemplated, if it was accompanied by building up a huge fund, much bigger than the existing ESM, to stand behind all the other euro area states, so as to prevent a Greek exit leading to a loss of confidence in the financial position of the rest of the euro zone.
I believe this view, that Greek exit from the euro can be managed, is profoundly mistaken.
The whole edifice of the EU rests on law. The EU has no police force to enforce its will. It relies on member states freely respecting the interpretation of EU law by the European Court of Justice, and implementing the Court’s decision, however unpleasant that may be. The exit of a country from the euro is, quite simply, a breach of their Treaty obligations, and treaty obligations have the force of law.
The euro was established on the basis that it was irreversible. A Greek exit, particularly if it was condoned or encouraged by other members, would say loudly that the euro is not irreversible.
That would lead to constant speculation in the markets as to who would be next. And as speculation increased, so too would the size of the funds or guarantees needed to check it, increase. That in turn would then lead heightened risk that some of creditor countries, who would have to provide these funds and guarantees, might decide that they themselves should exit the euro, and re-establish their own currencies. That would be the end of the euro.
Breakups of currency unions have happened before, in Austro Hungary after the First World War, and in Eastern Europe in the 1990s when the rouble zone broke up. As described in a recent article by Anders Aslund of the Peterson Institute of International Economics, the consequences of this were disastrous.
A  SCENARIO THAT MIGHT LEAD TO THE END OF THE EU ITSELF
New currencies would have to be established. The relative value of these currencies would be unknown and unknowable. Some would lose value very quickly and others would shoot up in value.
Exports would become dramatically uncompetitive in some cases, and in others they would become  so cheap that there would be  accusations of dumping, currency manipulation, and calls for  immediate reintroduction of  import duties to level the playing field. Such duties, if imposed, would  end the Single Market.  And that would be tantamount to the break up of the European Union itself. Open markets, the assumption on which Ireland built it entire economy over the last 50 years, would be gone.
In some countries the banking system would break down, and people would have no access to credit for even the most basic transactions.
In others, people would cease to trust the value of their own money, and money, after all, is based on a promise and if people can no longer trust the states standing behind the promise that underlies their money, the basis for money itself is gone.
This is not fiction. It is what happened when the rouble zone broke up in the 1990s and explains why incomes fell by 50% in the former rouble zone countries. And the exporter nations within the rouble zone, like the Russian Federation, suffered just as much hardship as the importer nations, like Latvia and Estonia.
The political stresses that this scenario for the 500 million people of the EU, and their Governments, would be such that trust between European nations would easily break down completely.
We see signs of that happening already, but it is being held in check by the hope that problems can still be resolved on a collective basis. A break up of the euro would show that that was impossible to resolve matters on a collective basis, and it would then be a case of every nation for itself, with particularly severe consequences for smaller countries, like Ireland.
…………AND MEANWHILE IN THE UNITED KINGDOM
As if Europe did not have enough problems, one important EU country, the United Kingdom of Great Britain and Northern Ireland, is preparing to renegotiate the terms of its own membership of the EU, and hold a referendum on the outcome, which would potentially decide whether the UK would stay in the EU or leave.
The first thing to say is that the UK is entirely free to do this. Unlike other Unions, like the United States or the United Kingdom itself, the European Union is a Union which states are free to leave, so long as they fulfil their normal obligations under international law, which arise when any country withdraws from any international treaty.
The UK has been an uneasy member of the EU from the outset. While Churchill envisaged a United States of Europe, he did not envisage the UK, which still had a global Empire at the time, being part of it. The UK did not attend the 1955 conference in Messina which led to the Treaty of Rome. When it eventually joined the Common Market, a decision endorsed by a referendum, the idea was sold to the electorate as an economic arrangement, whereas even the most cursory reading of the Treaty of Rome would have shown it to be much more than that.
A THREAT TO VETO THE EU BUDGET
The United Kingdom is now threatening to veto the entire EU budget,  something it is legally entitled to do, unless there is an absolute freeze on the size of the budget. The difficulty with this stance is not legal, it is political.
 The EU Single market, which guarantees free movement of people, goods and services, was created as a political deal.
 Weaker economies opened up their markets to stronger ones, and removed protection from local businesses, on the basis of a promise that they would qualify for structural funds to modernise their economies. These funds are what the EU budget provides. (Some of the EU budget also goes on agriculture, but that has fallen from almost 80% of the total originally, to only 30% today.)
The political difficulty with the UK stance is that of fairness.
In the past, when countries like Ireland, Spain, Greece, Portugal, and even the UK itself, joined the EU, we all qualified for very substantial EU structural funds, in the form of aid for agricultural modernisation, general infrastructure, training, communications etc.
Now, when the EU has taken in 12 central European countries who are almost all relatively far poorer by comparison with the rest of the EU,  than we were when we  joined, these 12 are to be told, if the freeze the UK  wants is to go into effect, that they are not to get even a fraction of the help Ireland, Spain, regions of the UK and others qualified for as of right after we joined. This is causing resentment.
I heard an Estonian Minister complain recently that, under the existing EU budget which is already an unfair compromise, his farmers have to compete in the same EU market with west European farmers who are getting three times the subsidies. Unless there are to be drastic cuts, this sort of anomaly can only be put right by an increase in the EU budget.
The problem is that the UK Government has made the size of the budget a red line issue without getting into any informed debate about what the money is actually spent on, or about what sort of EU budget is necessary to ensure that the  EU Single Market, to which the UK itself is very much attached, works fairly and is preserved.
The UK wants access to the single market, but is not prepared to pay any entry fee.
AND A DEMAND TO RENEGOTIATE THE ENTIRE BASIS OF UK MEMBERSHIP OF THE EU
The same problem arises in the renegotiation of the terms of UK membership for which the current  UK Government wants. In preparation for this renegotiation, the UK Government is now doing a comprehensive audit of all EU laws, to identify areas of activity that could be taken back from the EU to be administered exclusively under UK law instead. There may be some good ideas emerging from this, on which all other members could agree, but there may also be a lot of problems.
The difficulty is that the UK wants to take back, yet to be specified, powers, but also to retain full and unfettered access for all its goods and service exports to the EU Single market. 50% of UK exports go to the euro zone, whereas only 15% if euro zone exports go to the UK, so this is important to the UK.
The difficulty is that the EU Single Market, like any market, is a product of common rules, regulations and conventions. A market is a political construct. Without common rules or understandings nobody could rely on what they were buying.
That is why, for example, there have to be common EU quality standards to construct a common EU market. Otherwise one country could impose peculiar quality standards, designed to exclude competitors from its market and to enable its own producers to make monopoly profits at the expense of its consumers. Any rulemaking power that could be abused in this way, cannot be handed back to national level without endangering the Single Market. That is the problem that the proposed UK renegotiation of  its EU membership terms will encounter.
And the competition in any market also has to be fair, and someone has to regulate that. If competitors have different environmental, or product liability standards, or if some firms are operating monopolies or cartels, the competition will not be fair. These matters cannot be handed back to be decided by national authorities without also endangering the Single Market.
 If the UK were to draw up a list of EU rules it would like to make in Westminster rather than Brussels, the other 26 could also do the same, but they might come up with a very different list. The process could become bogged down in serial  reopening of compromises, made years ago, on issues that have little relevance to the urgent existential threat  the EU faces today.
One gets the impression that many in the UK do not really care about that.
 The EU is still regarded by many in the UK as a foreign country, not a Union of which the UK itself has been an integral part for the past 40 years. Membership of the EU is seen as a convenience rather than as a commitment. If the price of satisfying UK voters is to cause more problems for the “foreigners”, in “Europe”, that is not seen by some UK political leaders as such a bad thing.
The difficulty is that the “foreigners” in Europe may not see it like that.
With so many genuinely urgent things to do, such as safeguarding the very existence of the EU itself, the other 26 member states may just not be inclined to devote time to a painstaking case by case analysis of a series of requests for new UK opt outs from some bits of some rulemaking authority, with UK opt ins to others, and to a judicious analysis of whether each one of these decisions might affect the integrity of the Single Market, either now or at some time in the future.
 And the European Court of Justice would certainly have difficulty interpreting the consistency of a special EU menu for one country with the basic freedoms for all on which the EU is based.
 There is also the old question of whether UK Ministers and MEPs should continue to have voting rights on things they are opting out of. As it is, one has to say that it is distinctly odd that the present Chairman of the Committee of the European Parliament that deals with euro currency matters, represents a constituency in the UK, which has no intention of joining the euro.
If,  as is likely at the end of its proposed renegotiation, the UK is dissatisfied with the result, because not enough powers are being handed back to Westminster, it will have little option but to recommend that the UK withdraws from the EU. 
 It is setting itself up now, to find itself in exactly that position, in 2016.
THE UK’S OPTIONS OUTSIDE THE EU
 This will require careful handling because 50% of UK exports go to the EU, and London is Europe’s main financial centre, for the time being anyway.
 How is the UK to protect these interests if it is outside the EU?
One possibility is to join Norway, Iceland and Liechtenstein in the European Economic Area, which would guarantee full access for UK goods and services to the EU market. But the price for that would be having to implement all EU legislation that was relevant to the Single Market, and contribute to the EU budget, but without having any say in EU decisions.
That would be worse from a Euro sceptic point of view than the UK’s present position, even though it would guarantee continued access for the UK to the EU market for both goods and services.
The other possibility is to follow Switzerland and negotiate a series of bilateral trade deals with the EU. The UK would not be entering such negotiations from a position of strength, because it relies more on the EU market, than the EU relies on the UK market.
Switzerland has negotiated full access to the EU market for goods, but not for services. Services are the UK’s key export sector, so a Swiss style deal would not be attractive.
If Britain negotiated a Customs Union with the EU, like that of Turkey, it would find its trade policies with the rest of the world were still being determined in Brussels, but with less input from London than at present. Again it would also only have a guarantee of access for goods exports but not for services.
Finally, the UK might simply leave the EU, without negotiating any special deal. That would leave it paying tariffs on its exports to EU member states, including Ireland, and would necessitate the reintroduction of customs posts on the border in Ireland. It would undermine years of peacemaking by successive   Irish and UK Governments, and would cost thousands of jobs in export firms in both the UK and Ireland.
CONCLUSION
My sense is that the pressures that cause fracture in the EU derive from a lack of understanding among the general public of the extent to which their livelihoods  depend on economic developments in other  countries and of how unrealistic, in modern conditions, is an “ourselves alone” policy.
 Political leaders make little  effort to explain this, because to do so would undermine the  nationalist myths which brought most states into being in the first place, and also because it is often convenient to blame the EU for  the effects of decisions that were necessary but are unpalatable. For these reasons, little effort is made to forge any form of patriotic pride in the EU or its achievements.
No venue has been created in which an EU wide public opinion might be formed.
This must be done, if sufficient mutual understanding and support is to be created to allow the EU to create the degree of burden sharing and mutual supervision that is necessary to guarantee the long term  robustness of the euro, and thus of the EU itself.  In a word, the EU needs more democratic cement to hold itself together.
European Parliament elections are not truly European. They are 27 different elections, in 27 different countries, in which national issues predominate.
The European Parliament itself has refused to contemplate the election of some of its members from EU wide party lists, which would begin the process of creating an EU wide debate because it would necessitate an EU wide political campaign on behalf of the rival EU wide lists of candidates.
The President of the European Commission, and the President of the European Council, are selected in private meetings of heads of government. They do not have to win the votes of EU citizens, and consequently EU citizens do not have the feeling that they can vote the government of the EU out of office, in the same way that they can vote their national government out of office.
Thus the EU does not enjoy democratic legitimacy in quite the same way that national governments do.
As a member of the Convention that drafted what eventually became the Lisbon Treaty, I urged unsuccessfully that the EU should have a Presidential election on these lines.  I suggested that the President of the European Commission should be selected in a multi candidate election in which every EU citizen would vote, rather than be selected, as at present, by 27 heads of Government, meeting in private, to be approved in a single candidate vote in the European Parliament.
This proposal received almost no support at the time, although it has since been adopted as policy by the German CDU. If that had happened when it was proposed, the EU would now be in a much stronger democratic position to devise a more coherent response to the euro crisis, and to find a solution to the UK’s difficulties. The UK press would not be able to argue that EU leaders were “unelected”. The Commission, headed by a President with a full EU wide democratic mandate, would have more authority to propose solutions. The council of 27 heads of government would still play a vital role,  but the EU would be less constrained by the electoral timetables of individual countries, as is the case with the German election of 2013.

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