28/09/2012 by Don Quijones
If you were to spend a day in the European Parliament, in Strasbourg, you might be forgiven for coming away with the impression that all is well in the “old continent” – a few glitches here and there perhaps, but on the whole things are coming along swimmingly.
Meanwhile, back in reality, events on the ground in Europe are turning from bad to worse, to worser still. Molotov cocktails are flying in Athens, the Spanish parliament has been surrounded by thousands of raging Madrileños and the Spanish province of Catalonia is threatening to separate from Spain.
What’s more, daylight robbery seems to be worming its way back into fashion among Europe’s political class, following the Spanish government’s decision to raid 3 billion euros from the nation’s social security fund – the same fund that holds less than a year’s worth of pension reserves and has gone “all in” on Spanish bonds, hardly the safest investment out there, all things considered.
The pilfered funds will be used to prop up an economy whose health has been in terminal decline ever since the country’s real estate bubble burst in 2008-09. Throw in the fact that the country’s slow-motion bank run has begun to seriously pick up speed, and you have all the makings of a financial maelstrom.
As CNBC reported in early September, on a three-month rolling basis, portfolio and investment outflows from Spain totaled 52.3 percent of the country’s gross domestic product (GDP). That’s more than double the outflows from Indonesia during the Asian crisis of the late nineties, which reached 23 percent of GDP.
According to Spanish writer Roberto Centeno, the deposit flight could end up costing Spain’s banking sector as much as 360 billion euros of its deposit base by the year’s end, representing a staggering 35 percent of the country’s GDP. To put that in perspective, the total destruction of wealth caused by the country’s bitter three-year civil war (1936-39) is estimated to have cost around 24 percent of GDP.
In a vain attempt to plug the gaping financial black holes and stem the economy’s internal bleeding, at least for a few more weeks, the government has announced yet another round of austerity measures. They include a prolonged freeze of civil service pay, a 30 percent slash in the Culture Ministry’s budget, new taxes for businesses and a cut in benefits for the physically disabled and dependent – savings which will be used to inject yet more cash in the country’s crippled banking sector.
None of which will do any good, of course. As Zerohedge notes, with cash exiting at such a rate, “all attempts to save the local banking system – which is now reliant on the ECB for funding to the tune of a record €412 billion, and which means the country has already been bailed out by the ECB – are futile…”
To add insult to injury, the country has just learnt that its Triple-A-coated sugar daddies in North Europe – Germany, Finland and The Netherlands – have abandoned their former pledge that the ESM bail-out fund would take over Spain’s funding burden by recapitalising its banks directly.
Which can mean only one of two things: Either Spain will have to bite the bullet and request the mother of all bailouts, the price of which will be perpetual indebtedness and subordination to the Troika’s every whim and dictate, as has already happened to Portugal, Ireland and Greece; or, as Ambrose Evans Pritchard posits in the Daily Telegraph, the Spanish arch-nationalists in Rajoy’s circle could “offer a condign riposte, and bring down the entire temple on the heads of the creditor powers.”
The Rise of Catalan Separatism
Meanwhile, just over 500 kilometres to the north-east of Madrid, Catalonian nationalism is stirring. Home to Spain’s second largest city, Barcelona, and Spain’s second language, Catalan, Catalonia has been a massive net provider of central government funds for decades. But now the Catalans are demanding a piece of their own action, through the creation of a fiscal pact with the Spanish state.
In the absence of any form of compromise from Rajoy’s ultra-nationalist government, the president of Catalonia, Artur Más, felt compelled to announce new regional elections for the 25th November. By going directly against the wishes of the Spanish government, Mas has tied not only his own but also Rajoy’s political fate to the outcome of Catalonia’s struggle for independence (or at least, the reimbersement of some of its “expropriated” funds).
In essence, the dispute between the central government and one of its strongest and richest regions has escalated to a full-on Mexican standoff. If Mas wins the elections, as is expected, he will be in a position to call a referendum on independence – a referendum which, in theory, won’t be allowed by law in Spain and which will almost certainly either be ignored or ridiculed by the Spanish government and press.
But should the referendum turn up a majority vote in favor of independence – a 50/50 possibility according to recent polls – then things could get very serious, very quickly. Hints have already been dropped by right-wing elements in the Armed Forces that the Spanish army could invade and “reoccupy” Catalonia in the event of a “yes” vote.
The Spanish government has also threatened that it would veto “indefinitely” its eventual application to the EU as an independent nation as well as impose tariffs on Catalan exports to the rest of Spain. The Spanish business community has also weighed in, with many chief executives threatening to move operations elsewhere should Catalonia successfully shake off the Spanish “yolk”.
As with any Mexican standoff, there can only be one person left standing. The question is who will it be: Rajoy who, let’s face it, is already on his last legs, or Mas, who at the very least must extract significant financial concessions from the central government in order to save face?
A Much Bigger Question
Most importantly, Spain’s current difficulties offer a glimpse of the huge problems a European political union will face in balancing the needs and aspirations of 17 culturally, linguistically and economically distinct nations.
If a middling-sized country like Spain that has held sway over its territorial domain for nigh-on 300 years is unable to prevent serious discord from erupting between its regions, what hope is there for a wholly artificial 17-state fiscal union. As Fortune magazine put it, “if Catalonians have a problem with redistributing their wealth to a neighboring Spanish state, how would they feel if it is redistributed to, say, Slovenia or Cyprus?”
Sadly, this question seems all but a non-issue to most of today’s crop of fervent federalists in Brussels and Strasbourg. After all, the European dream must live on, whatever the price.
And it is this total disconnect with reality that will ultimately be the deathknell of the euro project. The brainchild of dreamers and utopians from among Europe’s political and business elite, the euro was, in the words of one of its original architects, Jacques Delors, “flawed from the start”.
In fact, many of the basic flaws that existed in the single currency’s original design were flagged up at the time, especially in the UK’s eurosceptic press. Writing in 1992 in the London Review of Books, Wynn Godley noted that “if a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.”
Sound familiar? Well it should, as five out of the 17 euro zone countries – Spain, Greece, Portugal, Italy and Ireland – have already experienced a mass exodus of many of their “best and brightest” to stronger-performing economies in Europe or elsewhere – an exodus that threatens to continue indefinitely, as long as job opportunities in the peripheral countries continue to shrink.
Meanwhile, as the on-the-ground realities continue to deteriorate, the eurocrats cling ever more tightly to their pipe dream. There’s no going back on the euro, ECB Chairman Mario Draghi recently said. There’s certainly no plan B, that much is clear.
The EU: Where Democracy Comes to Die
In his recent state of the union address, the president of the European Commission, Mario Barroso called on the European Union to become a “federation of nation sates” and proposed that some 6,000 banks across the euro zone fall under the supervision of the ECB.
So, let’s get this straight: a crisis that was largely the result of excessive concentration of power and dangerous levels of interconnectivity within the banking sector will be solved by … yes, that’s right, more of the same. Like all good eurocrats, Barroso is never one to let a small thing like reality get in the way of the EU’s dogged advance.
As we are now beginning to see, the European project represents an existential threat, not only to national sovereignty, but to the institution of democracy itself. As Nigel Farage, a British MEP and one of the lone voices of sanity in the EU parliament, recently said, “it’s not that the EU is undemocratic – it’s completely anti-democratic” (for more of Farage’s caustic delivery, watch the videos below – Spanish subtitles included).
In 2005, both the French and Dutch people voted against the proposed EU constitution. The EU response: continuez tout droit, full steam ahead. Ireland then rejected a modified version of the same constitution not once, but twice. What did the eurocrats say? Please vote again and this time remember to choose the right answer (clue: it begins with “Y”).
Such anti-democratic tendencies are not merely an accidental by-product of EU processes, they are at the very core of its fabric.
In the space of just a few weeks in November 2011, the EU imposed new, unelected political leaders (both, incidentally, former employees of US investment bank Goldman Sachs) on two supposedly sovereign democratic nations: first, Lukas Papademos, to replace Greek PM George Papandreou who’d had the bare cheek to propose a referendum allowing allow the Greek people a vote on new austerity measures; and then Mario Monti, to replace the admittedly maverick, bunga-bunga-loving but nonetheless democratically elected Berlusconi.
The financial and general press were by and large thrilled by the new appointments, as one article after another appeared praising the new age of “technocracy” – a term that until recently had rather sinister conotations due to its close association with the fascist dictatorships of 1930s and ’40s Europe. For example, in his essays on fascism, George Orwell wrote that “a technocratic society is a prerequisite for fascism.”
Whether we are on the road to fascism or not, surely the time has come for us, the citizens of Europe, to begin seriously questioning what a European banking, fiscal and political union would actually portend for the future of Europe. Just look around you, at Spain, at Portugal, at Ireland and Greece and ask yourself: is this really the path to progress, prosperity and freedom?