The EU summit in Brussels this week is a story of a glass half-empty or half-full. The member states (minus the UK) agreed to a cap on spending deficits and penalties (unless a majority of members decide to overturn them.) Meanwhile, the banks continue to remain dangerously invested in shaky government bonds. No decision was taken regarding the lender of last resort. How Standard & Poor‘s will react is an open question.
The result is not all bad but it is overall insufficient. Egos were badly bruised. The UK (already out of the euro-zone) now finds itself isolated in the EU as a whole. The Franco-German “Merkozy axis” holds firm. It remains to be seen if the markets will follow suit. They might very well deem the measures too timid. In fact discipline overruled creativity. The existing toolbox provided for classical, not unexpected measures. More ambitious structural adjustments would have needed a review of, or an addendum to, existing treaties, which is anathema for the UK.
In Brussels there was more fear than gravitas. Hence the 27 have not reached Varennes yet, but they were getting close. The measures which were agreed upon will have to prove their worth. Meanwhile there is a different, more political development in the making, which remains largely unspoken. The EU has definitively moved eastwards. Berlin is no longer shy assuming a leadership role which might spread geographically, re-creating a contemporary version of a remodeled Mittel-Europa. Poland rises, the southern rim looks hopeless in the short term, France has no alternative but to follow Germany, and the UK sulks. The EU is not a happy family indeed. The US meanwhile might get slowly out of the deep hole they created by over-spending, under-investing in infrastructure and getting hooked to reckless wars and political gridlock.
It is to be hoped that the Europeans will not be complacent because this EU patient is still in the E.R. and the illness is highly contagious. The borrowing binge might well return with a vengeance as the meltdown of a big bank cannot be excluded, with major negative consequences for global growth. The Chinese distant attitude is a symptom which needs to be closely watched. The increased involvement of the IMF is a welcome, but insufficient move indeed.
The EU was able to avoid a meltdown for now. Brussels brought improvement if not a cure but there are too many cooks in the kitchen. Beggars and lenders mix in a cacophonic atmosphere. They should wake up and smell the coffee instead and recognize that, for the time being, Germany is the sole conductor. The fight between inter-governmental and federalist avenues remains inconclusive. France wants more Europe because it needs a ladder to stand taller than it is. Germany requires a set of binding rules and no inflation erga omnes. The UK finds itself de facto isolated and P.M. David Cameron may have taken up a fight which might have unforeseen repercussions on the Continent and in London. The carriage to Varennes was overcrowded and lost precious time bickering on the way. Historical precedents may look irrelevant but they might also teach us a lesson. Both the EU and the euro-zone need to give unambiguous signals so that transparency both in remedies and endgames will reassure the world at large. If the UK really wants to bid as in a bridge game, it better distinguish between a hand with winning cards, or a hand without loosing cards.
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