European Union Doomed to Fail
The European Union is doomed to fail because the divide between the northern and southern countries is just too great, former Fed Chairman Alan Greenspan told CNBC in a recent interview. High quality global journalism requires investment. Eurozone leaders were struggling on Tuesday to reach agreement on a much-anticipated deal to reverse their spiralling debt crisis amid mounting signals a definitive agreement would not be reached at a key summit. According to officials briefed on deliberations, talks between European government negotiators and representatives of Greek bondholders remained inconclusive, putting at risk one of the three key pillars of a deal: a final resolution on Greece’s second bail-out. A draft of the summit communiqué circulated to national capitals late on Tuesday and described to the FT does not include any wording on a completed deal on Greek bondholder haircuts, and instead refers only to a second bail-out being concluded sometime in the future. No timetable is mentioned.
“At the outset of the creation of the euro in 1999, it was expected that the southern eurozone economies would behave like those in the north; the Italians would behave like Germans. They didn’t,” Greenspan said. “Instead, northern Europe fell into subsidizing southern Europe’s excess consumption, that is, its current account deficits.”
Greenspan predicts that as the south’s fiscal crisis deepens, the flow of goods from the north will stop altogether and southern Europe’s standard of living will go down. High quality global journalism requires investment. In addition, a separate “draft terms and conditions” paper on a second key pillar in the deal – beefing up the eurozone’s €440bn rescue fund – makes clear that leaders will be unable to attach a figure to how much firepower the leveraged fund will have. “A more precise number on the extent of leverage can only be determined after contacts with potential investors,” the draft states. The draft communiqué suggests final details of the overhauled €440bn fund, formally known as the European financial stability facility, may not be concluded until eurozone finance ministers meet again. Their next scheduled meeting is not until November 7.
“The effect of the divergent cultures in the eurozone has been grossly underestimated,” he added. “The only way to have several currencies from divergent nations lumped together is if they are culturally close, such as Germany, the Netherlands and Austria. If they aren’t, it simply can’t continue to work.” Greenspan feels that, to a very large extent, what’s driving the United States at the moment is Europe. “Today, there is one single integrated global stock market,” he said. He also expects the European crisis, coupled with a failure to address the U.S. budget deficit, may be severe enough to cause a bond market crisis if the market suddenly decides the U.S. is more like Greece than not. “It is very difficult to predict when a bond crisis could happen,” he said. But getting an agreement on the U.S. budget will be difficult, he added, because Washington is the most polarized he’s seen it in his career.
European leaders could still complete details in the 24 hours ahead of the summit, which has already delayed a decision twice because of continued disagreements. The draft communiqué, for instance, contains gaps that are frequently filled in the hours before such summits.But officials described mounting concerns that the summit will fall well short of market expectations. The extent of nervousness over a potential failure of eurozone leaders to reach a deal was made clear on Tuesday after European markets briefly fell sharply after European Union officials announced they had cancelled Wednesday’s scheduled meeting of all 27 EU finance ministers, which was to have laid the groundwork for the evening summit. A person involved in the decision said it was simply a matter of ‘’good housekeeping” since heads of government of all 27 countries will now be meeting Wednesday night, which had not been anticipated. But a letter written to EU leaders by Polish finance minister Jacek Rostowski, who chairs gatherings of his counterparts, said he understood “the full package may not be ready” by Wednesday, citing it as a reason to postpone the finance ministers’ meeting.
The political costs of falling short were made clear Tuesday in the Netherlands, where the main opposition party threatened to block any agreement to emerge from Wednesday’s summit unless it had sufficient scope to solve the eurozone crisis once and for all. The shift reflects the Dutch opposition’s frustration at being forced to support endless half-measures that have failed to stem the crisis. Ronald Plasterk, Labour party spokesperson for financial affairs, said a deal would have to include a haircut on Greek debt of 50 per cent “at the very least” and include “convincing and effective” measures to strengthen the EFSF if it were to gain his party’s support – on which the Dutch government relies to overcome the anti-Europe stance of the far-right PVV. Greenspan would like to see Congress address the revenue side of the budget problem by eliminating government subsidies through tax breaks, like the deduction for mortgage interest payments.
“Much fiscal policy is implemented, not through spending increases, but through tax credits and other so-called ‘tax expenditures,'” he said. “The markets should respond to them as they do spending cuts, with little contraction in economic activity. We thus could get a very large positive impact on the deficit from such reductions, with minimum negative impact on the economy.” European Union Doomed to Fail