Total colapse or United States of Europe

The pulse

In the recent months, we`ve witnessed some tumultuous events going on in Europe. The old continent is confronting an economic and social crisis, the likes of which it hasn`t faced for the past 80 years, ever since the great depression of the 1930s. 

The money has run out, as debt of EU countries has reached unsustainable levels. Street protests and riots start to resemble more and more full blown revolutions, as we`ve recently seen in pictures of burning Athens.

The context (2008-2010)

To put things in context a bit: the 2008 crisis, which originated in the US, swept throughout Europe, bringing a credit crisis, lack of economic growth, higher levels of unemployment  and uncertainty. 

In the years that followed, 2009 and 2010, spirits became animated, throughout the world, by a so called “economic recovery”, which US Federal Reserve started by doing two big QE(quantitative easing) programs, injecting cash liquidity into the financial system to jump start the flow of credit to businesses, that in turn should have generated job growth and consumption.  The employed technique was similar to that of a paramedic doing electroshocks on a car crash victim. However, what it managed to achieve, was to just extend the patient`s agony, as year 2011 showed patient was still very much agonizing in a coma. 

The context (2010-2011)

Year 2011 culminated with the Occupy Wall Street movement, which started on Wall Street, in New York, US, but quickly spread to whole country and basically throughout the world soon after. Core of the movement was made up by young disenfranchised individuals with huge student loan debt. Unable to get jobs, in a sluggish growth environment where most companies laid people off, shipping jobs overseas, occupiers have taken their frustration on the Wall Street banking and financial sector who was recipient of several government bailouts since the 2008 crisis began. Movement spread to several US cities, sparking riots and clashes with riot police. However, winter of 2011 came and Occupy movement entered in hibernation mode, waiting to be resurrected in the spring of 2012.   

 


The Occupy movement spread as wide as South America, Europe, Australia and in Asia,  marking the sign of these distressed economic times on a global scale. 

In Europe, many companies followed the US pattern, closing factories and outsourcing jobs to stay competitive, laying off thousands of people on monthly basis.

 Under these circumstances, a great number of European countries have become unable to sustain themselves, as revenue generated from taxes became lower and lower. The IMF (International Monetary Fund) stepped in as a financier of last resort. However, the IMF is not in the business of giving something for nothing, and asked in return harsh austerity measures and cuts in government consumption, which basically means cutting wages, sacking people, cutting state departments and so on.

As IMF acted more on the EU periphery, throwing a bone to the none Euro-zone countries in Eastern Europe, the ECB (European Central Bank) took a direct role in helping out Euro-Zone countries, those currently using the Euro currency, such as Italy, Portugal, Greece, Ireland and Spain, also known as the infamous PIIGS (Portugal, Italy, Ireland, Greece, Spain). They`ve chosen to do so, to save the European monetary union, in an attempt to spread financial contagion. The help was given indirectly by having the ECB buying government bonds of those afflicted countries.

2011 was the year of several deep budget cuts throughout Europe, lots of political shakeups and street protest. Berlusconi, Italy`s prime minister, lost his decade long grip on Italy, Greece`s Papandreou government having suffered same fate, both being replaced with government of technocrats appointed by the EU Troika. As these governments were politically unwilling or unable to impose fiscal austerity measures, they were replaced by putting pressure on the political parties in those countries. The ECB wanted to make sure their money would not be wasted and real measures were going to be implemented.

The 2012 predicament – The two paths

Year 2012 found these newly elected governments, especially the one from Greece, led by Lucas Papademous, unable to implement the needed austerity measures and cuts. Recent riots in Greece have resulted in total chaos and the burning and looting of museums as well as major corporate stores and several buildings throughout Athens. Greece, unlike the other PIIGS countries can no longer be helped by buying their government bonds, as their yields(or interest Greece government has to pay) has skyrocketed to unsustainable levels. Greece currently receives aid packages conditioned upon implementing harsh austerity measures. However, given the looting and recent chaos in the country, it has become apparent, Greece may not tolerate this level of austerity. A deep division between Angela Merkel(the German leader) and the German financial minister(Wolfgang Schäuble), has basically created two paths going further as follows:

Path One – supported by Wolfgang Schäuble

Optimistic (Schäuble): Greece defaults and EU union is strong enough to take the hit

   Pessimistic (Merkel): Greece defaults and  risks  taking the  whole EU monetary union down with it

    

Path Two – supported by Angela Merkel

Optimistic (Merkel): Keep sending money to Greece, while pressing them to implement deep cuts and austerity, thus avoiding a Euro Zone meltdown and contagion.

Pessimistic (Schäuble): Keep sending money to Greece and sustain the necrosis, risking death of the Union, instead of cutting the leg and saving the body.

Total collapse or United States of Europe

However, both of the above scenarios might result in a total collapse of the European Union, as the money to keep buying PIIGS debt is just not there. 

In the optimistic scenario (if you can call it that), and if the above plans do work, Europe will be totally reshaped, sovereignty taken away from EU countries, with a tight centralized control imposed by Germany, the de factor leader of the European Union. Under this scenario, all the important economic decisions will be taken by a central European commission, while the European governments will have to act as servants, executing the orders. Europe will become a federal state, following the US model.

 Influential voices in Germany, such as the ex chancellor Gerhard Schroeder,  have already called for a United States of Europe.  

"The current crisis makes it relentlessly clear that we cannot have a common currency zone without a common fiscal, economic and social policy,"
 "We will have to give up national sovereignty."
"From the European Commission, we should make a government which would be supervised by the European Parliament. And that means the United States of Europe."

The pessimistic scenarios will bring about a total collapse of the Union, with grave economic repercussions, compared to which the 2008 crisis will look like a mere a prelude or anemic appetizer. 

"May you live in interesting times" is an old and curios Chinese curse which brings this whole political debacle to a new level of understanding.