The Fate of the Euro at Stake

It took the United States of America more than 150 years from its inception, with the signing of the Declaration of Independence, for the US to become a country with powerful federal authorities (Federal Reserve, Treasury/IRS, FBI, etc.) which far outweighed and superseded the power of state & local authorities. During that time the US fought wars against foreign nations, a bloody civil war, vastly expanded its borders, and accepted massive waves of immigrants from around the globe. The current form, function, and structure of the government of the United States has been 235 years in the making and required blood to be spilt and huge sacrifices to be made.

Europe, a continent, which has had many different forms of governmental structures for far longer than the US, is currently on a path to federal union (very much in the image of the United States) from which it cannot turn back. The adoption of the euro meant that a European economic, fiscal, and political union was only a matter of time – It has always been a simple question of not if, but when? The problem for EU leaders has now become one of how to advance the concept of a United States of Europe from non-binding statements issued from Brussels meeting rooms to real legislation and treaty changes. This is no small task.

The United States has always been special in that regardless of one’s place of origin, once you became naturalized as a US citizen you were suddenly an American. We all share a different heritage, we have different faiths, and we have different skin colors, but at the end of the day we all call ourselves American – This is very powerful.

If you ask a Frenchman what his nationality is, he will say “Je Suis Française”, the same goes for Germans, Greeks, and Maltese – They are German, Greek, and Maltese first, and European second. A European Federation with powerful centralized authority will have to make powerful inroads into European national pride and sovereignty.

Jean-Claude Trichet said it well when he wrote:

“The future of Europe is in the hands of its democracies, in the hands of Europe’s people. Our fellow citizens will decide the direction Europe is to take. They are the masters. But, however Europe’s institutions take shape, a truly pan-European public debate is essential…..As Europeans, we identify deeply with our nations, traditions, and histories. These are Europe’s roots. But we also need to extend our branches more widely.”

Simon Busuttil, a Maltese member of the European Parliament, writing in the Times of Malta wrote:

“It (economic union) would also have included establishing a European Treasury with a proper EU budget. Incredibly, the annual EU budget that is meant to help the less developed EU regions is still limited to just under one per cent of the entire EU wealth. It needs to be much larger if it is to be truly effective to be able to make the necessary financial transfers to iron out the economic imbalances between EU regions.”

And there you have it, “financial transfers to iron out the economic imbalances between EU regions”, a fiscal transfer union is required to form an economic union. Sammy Meilaq, also writing in the Times of Malta, offers an important glimpse into the psychology of many European socialists as to what the current conflict in the eurozone is all about:

“Previous shortcomings within the democratic system had included treaties enacted without popular mandates, top officials not being directly elected by the people and the European Central Bank not being under democratic control…..Recent events have exposed the European Parliament as being of little relevance in the shadow of Angela Merkel and Nicolas Sarkozy. Referenda have been de facto prohibited. Brussels continues to increase its powers, reducing the sovereignty of the smaller nation-states while, in practice, Germany and France still call the shots. Greece and Italy have been humiliated by the imposition of governments by debtors’ prison warders, led by Lucas Papademos and Mario Monti, both of Goldman Sachs notoriety. Europe has reached a stage where democracy is incompatible with the forces of the free market.”

Mr. Meilaq goes on to say:

“The people do not seem to matter at all, even though the unregulated banking sector is the cause of their hardships, not a potential cure to it…..The fundamental conflict, therefore, lies between the stubborn adherence to the free market ideology when the necessity of a social market policy is now as evident as the high bright sun of an August noon.”

Many different concepts of how a European federal union should work, many cultures, many languages – The details of the structure and function of a European federation remain mind boggling. Regardless of what Merkel, Sarkozy, or Von Rompuy say over the coming weeks and months, in the end it will be up to the voters in each eurozone nation to decide whether a federal europe is right for them.

I expect this path toward European federation to be a bumpy one and in all likelihood some eurozone member states will choose to opt out and exit instead of relinquishing sovereignty to a single European centralized authority. The stakes are high and margin of error is small, with the specter of ongoing democratic elections in each of the eurozone nations adding powerful and unpredictable variables to an already highly tenuous situation.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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