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Monday, March 02, 2009

When a real crisis hits...

People who thought that the EU went through a crisis this summer when the Irish rejected the Lisbon Treaty must have experienced some serious reality checks lately. Or at least recieved a lesson in semantics.

At yesterday's EU 'emergency' summit tensions were running high, and the use of the word "crisis" actually seemed justified for a change.

EU leaders seemed unusually desperate to put on a show of unity. Czech Prime Minister Mirek Topolanek said, "In the media it looked as if we had very different views, but in the discussions we very much agreed." (while adding: "This is the greatest crisis in the history of European integration.")

However, few doubt that the financial crisis-turned-recession is rapidly turning into a full-blown policy crisis, with some serious cracks emerging within the EU.

Mark Mardell notes on his blog. "Make no mistake, the world's economic crisis is putting this unique institution, the European Union, under very serious strain. The jeopardy is financial, political and philosophical."

It appears that competing interests, fuelled by the recession, have created - or perhaps re-created or reinforced - at least three default lines within Europe:

East vs. west: At the summit, EU leaders rejected the idea, put forth by Hungary, for a regional aid package of up to €190 bn to help underwrite the bad loans currently plaguing many of the eastern and central European economies. Instead, they agreed that aid should in principle be extended to the new member states on a case-by-case basis.

Some of the newer member states fear that they will be left hanging, lacking the ability of the bigger economies to inject cash into the their ailing economies and insure the toxic loans they're stuck with. As Poland's Europe minister Mikolaj Dowgielewicz put it, "We fear there will be two plans to save the European economy, one for the west and the eurozone and another for the rest. That's an idea that would be very dangerous for the EU." Hungary's PM Prime Minister Ferenc Gyurcsany went a step further warning that "We should not allow a new iron curtain to set up and divide Europe into two parts."

Protectionists vs. free-traders: And speaking of east-west divides, Nicolas Sarkozy appear to have taken a step back from his plans to condition state aid to the French auto sector on all parts of being "made in France". In early February, Sarkozy infuriated the Czechs by making specific reference to a Peugeot-Citroen plant in the Czech Republic as an example of where such provisions should apply.

According to a statement from the Commission, Sarkozy agreed over the weekend that any aid to carmakers will come without the "requirement to prioritise France-based suppliers"- although the details are still unclear.

However, the old free trade-protectionism default lines remain - with perceptions of what "protectionism" actually means diverging sharply. All over Europe, policy-makers are faced with the dilemma of how to formulate pragmatic policies that will satisfy voters at home, while avoiding sinking deeper into protectionism.

In this scenario, it is perhaps unsurprising that the line between protectionism and pragmatism is becoming increasigly blurred. But some seem less keen than others to keep the distinction. On Thursday the French Industry Minister, Luc Chatel, said of his government's aid package to French car plants,

"There is nothing protectionist about this plan. It is aimed at companies which
make cars on French territory, whatever their nationality. It comes with
conditions which have always existed at the heart of the European Union."
And following the summit yesterday, a far from repentant Sarkozy said,
"Take my friend Gordon Brown - and you know how much I trust him - who owns
70% of a bank. Seventy per cent! It's nationalisation. So explain where is
the logic in saying there's no problem when a state takes 70% of a bank but
helping manufacturers to get credit, that is a problem. Who says
Gordon Brown is a protectionist ? Who would say such nonsense? Nobody
is a protectionist in Europe, nobody!"

Eurozone vs. the rest: As the crisis puts serious strains on the eurozone, even German leaders - traditionally opposed to grand rescue schemes - have signalled that they're willing to bail out fellow eurozone members if one of them (such as Ireland) were faced with bankruptcy. The Merkel/Steinbrueck U-turn has been subject to some serious criticism from ECB heavyweights (highlighting the "moral jeopardy" involved and the "no bail out" clause in the Maastricht Treaty) while sparking fears in the eastern and central parts that future aid from Europe's bigs will be skewed towards eurozone members.

The stakes are certainly high: the east-west divide - percieved or real - could land a blow to the post-communist European integration of recent decades, while protectionist measures could seriously undermine the Single Market, effectively hampering a European economic come-back. And in the background is the looming threat of a cracking eurozone.

Amid these tensions, EU politics is clouded in unusual uncertainty. On his blog, Bruno Waterfield asks the critical questions:

If Hungary or other countries cannot raise cash to buy debt, what does the EU

If a government, either in the Union or the euro, defaults on debts
what happens?

If the EU lets one of its own go to the wall what is its political

Sensibly, the European leaders yesterday committed themselves to “getting the real economy back on track by making the maximum possible use of the single market, which is the engine for recovery.”

But can they deliver? As unemployment reaches record levels, credits are downgraded, more industries shut down and voters grow impatient (think Lincolnshire), will Europe's leaders be able to 'sell' the idea of free trade as the path to recovery? The answer is probably that they will have to - but it will be a tough sell indeed. In times of recession, 'open borders' is not the most popular policy in town.

And do EU leaders have a mandate from their citizens to engage in large cross-border rescue operations, involving taxpayers' money?

Alas, the EU has spent much of its political capital in recent years on institutional navel gazing, vain projects, and attempts to push through a treaty that would have done nothing to help Europe through the recession - ignoring three referenda results in the process. Now, when faced with a real crisis, that capital would've come in handy.


John McClane said...

"the world's economic crisis is putting this unique institution, the European Union, under very serious strain (Mardell).

Unique in what sense? The Roman Empire was very similar. As was Europe under the Nazis. And Soviet Russia. All had Quisling governments in the provinces unwilling to face up to the central power.

Anonymous said...

Mr. Sarkozy surprises me sometimes. He's a very baffling person to me. How can talk about providing aim to the French car manufacturers only and yet claiming it's not protectionism. The Gordon Brown example has nothing to do with what he intended to do. If the French automobile factories in Czech and Slovakia had to move back to France it would cause a disaster in these countries. Did he not think about that? In the time of this crisis, protectionism is the worst choice of all. Good for one country, horrible for the rest.

Take care, Lorne