Some objects move in the kaleidoscope,0.jpgIIRC Keynesian economist AGL Shackle coined the expression “the world is kaleidic” which is a nice way of saying that one can go from the heights of optimism to the depths of despair by just changing a few things.   Economics and other things with positive feedback loops in them (like politics which of course is part of the ‘system’ within which the economy is embedded) can change rapidly with just a few changes.  Last time we had a really great depression we got the worst war humanity had ever known.  Well we’re not close to that yet, but now that the financial markets are all shook up, now that employment is plummeting at frightening rates in one developed country after another, all sorts of objects are moving around in that kaliedoscope.   

Below the fold is “Europe in Reverse” by
Joschka Fischer in which the potential unravelling of Europe is sketched out. Oh to live in interesting times.

BERLIN The legendary American investor Warren Buffet once said, Its when the tide goes out that you find out who has been swimming naked. That particular piece of wisdom referred to the situation of companies in an economic crisis. But it can also be applied to countries and economies.

In Europe, the situation is cause for growing concern, because the global economic crisis is relentlessly laying bare the European Unions flaws and limitations. Indeed, what Europe lost, first and foremost, with the rejection of the constitutional treaty is now obvious: its faith in itself and its common future.

Amid this worst crisis since 1929, America has opted for a truly new beginning with the election of Barack Obama, and is now in the process of reinventing itself. By contrast, each passing day seems to drive EU members further apart. Rather than reinventing itself, Europe, under the pressure of the crisis and its own internal contradictions, threatens to revert to the national egoism and protectionism of the past.

Europe today has a common currency and the European Central Bank (ECB), which have proven to be bulwarks in defending monetary stability during the financial crisis. Any weakening of these two institutions would cause severe damage to common European interests. But EU member governments behavior during the past few months raises grave doubts about whether they see things this way.

The longer the crisis continues, the more obvious it becomes that the common currency and the ECB alone are not enough to defend the Common Market and European integration. Without common economic and financial policies, coordinated at least between the members of the euro zone, the cohesion of the common currency and the EU indeed, their very existence are in unprecedented danger. To be sure, the crisis has placed a stranglehold on countries worldwide. But there are significant differences and economic imbalances within the EU and the euro zone, reflected, for example, by increasingly divergent interest rates.

Confidence in Italy, Spain, Ireland, Portugal, and Greece is rapidly evaporating, while the stronger economies in northern Europe are doing better, although they are struggling, too. Should this continue, perhaps bringing a de facto end to the Maastricht criteria and rising national protectionism in the form of industrial subsidies, the euro will be seriously jeopardized. It is easy to imagine what the euros failure would mean for the EU as a whole: a disaster of historic proportions.

 Moreover, the new EU member states in Eastern Europe, which have neither the economic strength nor the political stability of long-term members, are now beginning to take a nosedive. Given the exposure of some euro-zone states such as Austria, this crisis will also affect the euro area directly. To wait and see is, therefore, the wrong strategy.

There is no reason to believe that the current global economic crisis has bottomed out. So, assuming that it intensifies further, Europe will rapidly face a grim alternative: either the richer and more stable economies in the North first and foremost Europes largest economy, Germany will use their greater financial resources to help the weaker euro-zone economies, or the euro will be endangered, and with it the whole project of European integration.

Why not, then, quickly introduce new instruments such as Eurobonds, or create an EU mechanism comparable to the IMF? Each would certainly be costly particularly for Germany and therefore would be anything but popular, but the alternatives are much costlier; indeed, they are not serious political options.

Institutionally, there is no way around a European economic government or enhanced economic coordination (or whatever you want to call it), which in fact would be possible informally and thus without any treaty change.

Unfortunately, it has become clear that the Franco-German engine, which is crucial to the EU acting in unison, is momentarily blocked. Their rhetoric suggests that France and Germany have a great deal in common, but the facts speak a completely different language. In nearly all strategic aspects of EU crisis management, Germany and France are blocking each other although ironically, both are doing virtually the same thing. They are thinking first and foremost of themselves, not of Europe, which is thus effectively without leadership.

The EU was and is institutionalized compromise, and must remain so now, in the midst of a global economic crisis. If Germany and France dont quickly resolve their differences and find a joint strategic answer to the crisis, they will damage themselves and Europe as a whole.

It must never be forgotten that the EU is a project designed for mutual economic progress. If this economic bond disappears, national interests will reassert themselves and rip the project apart. Europe today does not lack economic strength, but rather the political will to act in unison. Here is where Germany and France must lead the way.

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15 years ago

Wasnt Fischer part of the problem? – as Greens leader in govt he helped bring in all sorts of airy fairy policies, to be paid for by the State.

He speaks of the “Franco-German engine” but before they started kowtowing to Paris/Brussels Germany was a powerhouse. Once again Germany has been damaged by France.

15 years ago

America coughs and the world splutters.