The Iron Lady Was Right

So the big news out of Europe over the past few days has been David Cameron’s veto of the most recent euro summit agreement to stop the bleeding of the single currency in face of bond market pressure. From what I can tell, most people are claiming this is Britain’s final mistake after years of rocky relations with Brussels. Cameron, who was looking to protect that all-important British financial industry from the relatively more strict regulations on the continent, chose not to join the newest coalition of willing EU members. Not surprisingly, the rest of Europe is pretty angry, and for some good reasons. First, it could appear to the continent that Britain thinks it deserves special treatment compared to the rest of Europe even though Britain’s economy is also running up against another recession. Second, the consensus seems to be that Merkozy finally have united behind the idea of stronger economic integration for the eurozone and the EU as a whole. Cameron’s veto threatens this newest incarnation of a rescue plan.

Of course any observer could simply throw the moralizing right back at France and Germany by simply saying, “where was all this urgency back in June/July/August/September/October….?” For months, Europe’s core leaders have sat on their hands, pandering to their electorate while they watched bond yields rise all across Europe and rating agencies handed out negative outlooks like they were candy.

Frankly, this is more of the same from Europe, despite the current consensus on a somewhat cohesive plan to solve the debt crisis. The reason why is simple: the new plan won’t help. What we have seen from Germany and France over the past few months has actually been relatively consistent. The core economies allow some voluntary haircuts, or have the ECB buy some bonds while simultaneously demanding that the recipient country must accept strict austerity that in both the cases of Greece and Italy eventually forced out the elected government. in place of the democratically elected leaders, Italy and Greece are now must deal with so-called “technocrat” governments. This is really just a synonym for unelected bureaucrats who, if they want to receive their aid from the ECB and the European safety fund, must accept rules handed down to them by France and Germany. This sounds more like vassal-status than equal members of a common market to me.

And of course, under Merkel’s new plan (the one Cameron vetoed), guess what the peripheral European countries can expect? You guessed right! More rules about budget deficit caps, debt to GDP caps and economic sanctions if you don’t comply. This isn’t a bold new path towards an integrated Europe. This is a takeover of the fiscal policy of the peripheral economies of Europe. First, peripheral Europe surrendered its monetary policy in the hopes of capital movement and price stability. Now in order to stay afloat amidst the sea of debt accumulated since the minting of this single currency, the peripheral economies will now have to alienate their fiscal independence or face the sanctions and rules written by Germany and France.

Now I’m sure plenty of your are thinking to yourselves that the Maastricht treaty wasn’t exactly the most strictly enforced pre-crisis. But you have your answer right there in the word “pre-crisis.” Now that Europe’s leaders have seen what havoc can be wrought by uncoordinated fiscal policies, the core economies will be much more vigilant over the finances of their neighbors. What we are seeing is a very abrupt and most likely to be painful shift towards a federal Europe.

And this brings me back to our friend Mr Cameron and his supposed blunder. In thinking about this article, I remembered a video I’d seen of Margaret Thatcher talking about (amongst other things) the ramifications of a single currency. You can watch the video here if you’d like. Twenty years ago, the British Prime minister saw ahead that by “surrendering” the right to control monetary policy was really just a “backdoor to a federal Europe.” We see this manifesting itself right before our eyes. In the face of pressure from France and Germany, democratically elected leaders are replaced by unelected bureaucrats who are bound to follow policy dictated by the more powerful European leaders. However, this further integration will not solve the underlying problems of peripheral Europe, which are low-growth, poor demographics, and an unfavorable exchange rate. Unsurprisingly, those pesky Italian bond yields are creeping back up towards 7% amidst factory slow-downs.

The British plainly saw 20 years ago that a monetary union would eventually necessitate a fiscal one, which would further deprive sovereign nations of their democratic rights. David Cameron made a clearly unpopular move, but he made the democratic one. A closer union of Europe must be based on mutual respect and democracy, not economic and monetary domination by a handful of countries over the rest. Until Germany and France are ready to agree for more democratic control of the European institutions by majority national vote, all European countries should resist further integration.