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Union Not A Nation

May 10, 2010

I am all for cooperation between nations and people. I am also an advocate of open borders if the security issues are not compromised. The European Union has done a commendable job in bringing Europeans together and speak in one voice. Such cooperation is unique and should be emulated by other regions of the world. In fact, some regions like South Asia and North America have already taken a leaf out of the EU experience and have their own regional cooperation initiatives like the SAARC and the NAFTA.

Till the European Union was a loose association of countries of Europe coming together on various common issues, the EU was beneficial. The special trade agreement between the various European countries was also an idea that benefitted the various European partners. It was when the EU became ambitious and tried to challenge the might of the United States by floating a common currency in 1999 called the Euro that many a skeptics got up and started to take notice about an economic decision that did not make sense. The power of the dollar was hurting the various economies and countries such as Germany and France wanted to have a close economic pact and what better way to come together than to float a common currency? The Euro came into force in 1999 and the Deutsche Mark, the Franc and the Lira and other currencies were phased out. There was a bit of a chaos at that time as those people who had Marks and Francs needed to get them converted into Euro and the exchange rate was not quite clear and fluctuated on day today basis, as can be expected.

While Britain agreed to be a part of the Euro zone, they were smart enough not to discard their own currency – the pound sterling. In Britain both the Euro and the sterling are accepted as legal tender. One of the emotive political issues in Britain remains the retention of the pound sterling. Now after the Greek crisis, I guess the issue is settled for some time to come and there shall be no debate on whether to retain the sterling.

There are other nations like Norway and Switzerland that realized that their standards of living were so high that they cannot be a part of a Union that had such glaring disparities. I guess nations such as Norway and Switzerland made the right decision and their stand has been vindicated after the current crisis which may have been settled for now after a more than 600 billion Euro bailout plan, but were this to scuttle in any way and the Spanish, Portuguese and the Irish economies to wilt, the economic repercussions could be far reaching.

The crisis in Greece had its genesis in the clumsy management of the economy there. Once there was a deficit that became unwieldy the economic gurus went in for ‘solutions’ that only exacerbated the crisis rather than solving the problem. Huge debts in a relatively small economy as that of Greece were bound to result in problems that needed external intervention. In a faltering global economy that was trying to come out of a debilitating recession, the last thing that the world needed was a Euro zone nation wilting under unmanageable debts. The fragility of the Euro zone has surfaced.

While the Germans were expecting tax cuts and fiscal relief from the government, Angela Merkel had no option but to throw in huge sums to rescue not only Greece but to create a fund that could act as a buffer in case of a crisis any time in future. This is being resented by Germans and they cannot understand as to why they need to be penalized for the omissions and commissions of the people of another country.

The present economic crisis may be tidied over by Germany and France and were the world economy to rebound people might forget the present Greek crisis and its economic fallout. However, the fundamental questions will not be tackled and this disparate economic entity with a common currency called the Euro is bound to face problems from time to time. Germany and France cannot be a guarantor’s for the whole of the EU forever. The other member states need to show more responsibility and resolve in managing their economies.

The last, I presume is the fundamental problem that ails the Euro. While cooperation between all the member nations of Europe is a welcome move and has been there for sometime even in such spheres as foreign relations, a common currency is another proposition altogether. The currency of a nation in many ways defines the nation. It is the soul of the nation and stands out as an emblem of nationhood. An American dollar, an Indian rupee, an Italian Lira, a French Franc and a German Mark are symbols of nationhood. You cannot paint a whole lot of nations with one brush.

Each nation has its strong and weak points. The currency of a nation helps define the economic and social policies of that nation. While some can argue that Europeans have a common culture and a common ethos and therefore they need to come together, it is also true that the economic realities of Eastern Europe are very different from those of the west. The per capita income is so different and their economic and fiscal needs require different solutions. What is happening today was inevitable in a way. The richer countries of the Euro zone are being called upon to bail out the other nations that are not in the same economic league. This will keep happening, if this artificial union of nations insists on keeping a common currency.

The politics and the economics of a nation are closely intertwined. You cannot have national politics and transnational financial system. This is a flawed approach to creation of an economic entity. If the Europeans are serious about having a common currency to create an economic edifice that can challenge the US and other emerging economies then they shall need to amalgamate the whole of the Euro zone into one political entity. The European parliament already exists but the powers are limited. Nation states still have their own identity and they are loath to disband a political system for obvious reasons. If the Europeans are so keen on coming together, they will need to come together politically and become one economic and political whole that is seamless and a European nation state that is controlled from one national capital, maybe Brussels. The state assemblies should then have limited powers on local basis only – something like we have in India where the centre has most of the powers and the states have limited economic and political leeway. That is the way the American union works too. If the Europeans are ready to go that far to make one Europe happen, then perhaps the Euro might work. Otherwise this one currency formula for a disparate entity that is the Euro zone will be a constant source of headache for those who floated the idea in the first place. Nations have currencies, unions don’t and that is the lesson that needs to be learnt from the present crisis in Europe.

Addendum: A direct fallout of the bailout package is that Angela Merkel has suffered an election loss in North-Rhine Westphalia region and has lost the slim majority in the upper house of the German parliament.

Update 14.05.2010: Obama on a visit to Buffalo has remarked that the recession is not over. He says that till folks do not find jobs and find it difficult to pay bills – the recession is not over, whatever the economists might say. And he is right.

The way the markets have reacted to a trillion dollar package to tide over the Greek – European crisis does not give confidence at all. The fundamentals are shaky and it shows in the way the markets are reacting.

Update 1.12.2010: Since the Greek crisis the Irish economy has also wilted and they have had to ask for a $90 billion bailout. The interest rate was a point of contention and it appears the Irish will be paying at least a percentage point more than the Greeks.

Skeptics point out to a crisis in near future in Portugal and Spain too. I will not be surprised if that happens. It is very likely that the trillion dollar fund may dry up very soon.

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2 Comments leave one →
  1. December 1, 2010 6:39 pm

    Kudos for the great piece of writing. I am glad I have taken the time to read this.

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