The COVID-19 is serving as an excuse for the eurocrats to further their federalistic agenda, approaching the outspoken objective of the power-grabbers of the likes of Jean-Claude Juncker to turn the European Union into the United States of Europe. The creation of the eurobonds presupposes the establishment of an institution like the ECB regarding fiscal and budgetary policy. Therefore, each member state would have to give up more sovereignty to a federal government. In a scenario where the harmonisation of rules and regulations carries on in this pan-european federation, all kinds of laws regulating businesses, labour or taxation, like a federal minimum wage law or federal income and corporate taxes, will in all likelihood be implemented, making the almost inexistent catching-up process an impossibility. Firstly, the harmonisation process in tandem with socialist and "green" policies in the peripheral european countries of the Euro Area (EA) have been hindering productivity growth and making them get under piles of debt. Since the formation of the European Monetary Union, the South, which consistes of Greece, Ireland, Italy, Spain and Portugal, has been lagging behind the North, i.e. Austria, Belgium, Finland, France, Germany and the Netherlands. In the South, the workers' unions have a lot of influence among policy makers and the public in general supports job security above labour market flexibility. In this societies, it even pervades the marxist belief that businesses only exist through the exploitation of the workers. All this foments an anti-business environment, deterring investments from being made and, thus, productivity struggles to thrive. As a result, the structure of production did not manage to flourish into a semblance of the northern manufacturing powerhouse. Moreover, the directives coming from the European Comission and other institutions of the EU promoting the harmonisation of policies hurt the South more than the North. The regulatory framework has imposed either more costs or limited production (quotas). The South had to start complying with the same regulations and practices as the North, jacking up the costs of production. For the South could only compete with the North by having lower compliance costs, besides lower labour costs - to compensate the lower productivity -, these measures have helped to foster current account (CA) imbalances. To add insult to injury, some investments that were made harmed those economies as a whole, making these nations even more unfriendly to businesses. I am talking of course about the ironically unsustainable renewable energy projects. These are very expensive and are only "financially viable" through government subsidies, tax relief or curbing the competion from fossil fuels. Hence, energy costs shot up for households and businesses as well, holding off potential investors. Furthermore, there is a popular misconception that the culprit for the southern nations' debacle is the euro. Such a belief is like an alcoholic blaming a brewery or a whiskey distillery for his liver failure. The governments, businesses and households levered up because they wanted, not because they were forced. Obviously, easier access to credit was an objective the keynesians encouraged. As you know, debt is never a problem in their book. Accordingly, the economic agents of the South used that cheap and easy financing more to consume than to produce. Like I explained above, the southern members were not successful in attracting investment to develop their productive structure, due to half-witted policies. Secondly, with the introduction of the single currency, the member states are no longer able to devaluate their respective currencies to even out the CA balance. On account of the structural competitiveness differentials between North and South and persistent imbalances in CA and external lending between them, a divergence in speculative behaviours on financial markets between those two ensued. In more detail, current account surpluses commenced to build up in the North, leading to large capital flows sent to Southern nations by Northern banks. This capital was channeled primarily for consumption. Even though businesses were also the recipient of that capital, they did not manage to increase production - for reasons exposed above - sufficiently to generate trade balance surpluses. As a result, investment bubbles were fueled and consumption boomed too. However, this was not supported by an increased productivity. Commencing in 2011, doubt for the solvency of the Southern states due to persistent imbalances resulted in the sovereign debt crisis (SDC). Since the GFC, the imbalances of the CA began to correct, with deficits decreasing, eventually, turning into surpluses. The good times of easy credit were over and the economic agents had to start paying their dues. Demand plunged because of austerity and, hence, the imbalances reduced. In order to prevent these imbalances from happening once again, it is necessary to have structural reforms. Although the paternalistic stance of the Southern governments was put on hold for a few years, which made them recoup part of the investors' and rating agencies' trust, recently these countries reversed course and started to go back to their old ways of pandering to the electorate and, specially, the trade unions. All these conditions that resulted in the SDC are still present today, though some of them are not at the levels they were prior to the GFC. Thirdly, enter the kung-flu into the picture. Governments of both the South and the North are implementing policies. to safeguard jobs and wages, cranking up unemployment and business subsidies, as well as loan guarantees or moratoriums. Thus, they will certainly increase these programs and come up with new ones, like Spain is, for example, doing, which is pondering some sort of Universal Basic Income, i.e. helicopter money, much like the US and Hong Kong are executing. Consequently, budget deficits and public debts are set to skyrocket. Seeing that the Southerners have extremely tight leeway to increase their debt without prompting the loss in their creditworthiness, they are adamantly advocating the establishment of the eurobonds. Eurobonds are government bonds associated with all EA members. In this way, the interest rate of these securities contemplates the risk of all member states, possibly consisting on an weighted-average of the interest rates of each country. Thereby, the issuance of these bonds is associated with different states, for which credibility varies. There are several reasons for and against this instrument. On the one hand, there are the pros:
Assuming that the Eurobonds are issued, the Southern members would gain leeway to increase public spending, not just during recessions, but during expansions too. As a result, the North would require the South to strictly follow some metrics to force them to keep their books in good financial health. Fortunately, these metrics already exist: the convergence criteria agreed in the 1991 Maastricht Treaty. Naturally, of the four Maastricht criteria, only the sound and sustainable public finances would be considered, as the other three are ceased to exist since the onset of the EA.
For the sake of argument, that criterium would demand each state to keep the budget deficit under 3% of GDP and the government debt at a maximum of 60% of GDP. These are the actual requisites of this convergence criteria. Yet, the Southern countries, once the EA kicked off, returned to their over bloated government expenditures and social programs. Inasmuch as each member state is accountable to their respective financial stresses, the North turned a blind eye to the soaring government debts, until the SDC almost brought the EA experience to an end. Thus, if the eurobonds are to come to fruition, the North would not make the same mistake and would, in turn, be at the helm of the finances of the South, for the Southerners have proven they cannot be trusted. Considering that we are in the bust phase of the business cycle, the North could aid the South by sharing the burden of increasing budget deficits. Inversely, during the booming phases, the North would not let the South to go back to their paternalistic ways, such as over protective labour laws and bulging social safety nets. Without doubt, the citizens of the South would be resentful for not having the independence to determine their own affairs and, instead, their decision power would be relinquished to an alien, unrecognisable entity. Finally, this instrument would indulge the eurocrats to advance their federalistic agenda, driving the process of integration and homogenisation of the european legal and structural frameworks. As I explained above, the fact that the South bbegan adopting the same rules and regulations practiced in the North, in addition to imposing quotas on various goods and enacting "green" policies, the CA became ever more negative. Moreover, this inhibited the production makeup from evolving into a higher value-added configuration. Proceeding with the establishment of such a federation, which may be called the United States of Europe (USE), the South would presumably keep lagging behind the North in terms of the state of production development, taking into account the harmonisation process would carry on its momentum. Therefore, the North would keep on being the producers, meaning that the (real) wealth gap between them and the periphery would widen even more. The illusion that the South is getting wealthier would be just that, smoke and mirrors. The process of vendor financing between North and South would continue, with the North lending euros to the South so that it could buy the production of the North. Additionally, the rich Northerners would spend part of their incomes vacationing throughout the South. Despite all this has already been occurring, forming the USE would ensure that these dynamics could not be broken off. However, this might prevent a repeat of the SDC from happening. Accordingly, the South and its people would strengthen its debt slaves status, as well as becoming the official playground of the Northerners. For that reason, the Southerners' raison d'être would formally be to consume the Northerners' products and to serve them in their endeavours, putting the prosperity of the Southern states on stand by. To conclude, the main culprit for the suffering of the Southern europeans are themselves. Because they restrain themselves from putting into action policies that would make them more productive, they keep on lagging behind the North. To be fair, the EU with its federalistic and homogenisation fetiches also contributes to their misfortunes. Consequently, further integration with common fiscal and budgetary policies, which would necessarily bring about integration in other fronts, would only guarantee the status quo is maintained, making the Southern states vassal nations of the North.
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AuthorDaniel Gomes Luís Archives
March 2024
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