Saturday, February 20, 2016

Britain Forces Concessions To Stay In European Union!

Another Problem For The Weak Union
The Euro-zone faces several headwinds that threaten the very existence of the 28-nation alliance. One is whether Britain remains part of the struggling group.  Friday, British Prime Minister David Cameron won unanimous support from the European Union for concessions he sought from the bloc ahead of a referendum on Britain's continued membership in the group. Following two days of intense negotiations the deal which received unanimous support was announced from Brussels. Cameron negotiated the deal to give the U.K. special status in the EU that would allow it to opt out of an "ever-closer union," and that it would "never join the euro" currency. The deal also allows Britain to place "tough new restrictions" on foreigners using its welfare state.

Cameron said he would ask his cabinet to approve the deal on Saturday. "In my view, (this) is a time to stick together," Cameron said. "I think the British people would be safer (in the union) than out." As of now no date has been set for the referendum which may come as early as June. Polls show the British public is closely divided on the issue. Ironically, as we often see in the case of a bad marriage the area is bound together more out of the fear of what will happen if it dissolves rather than because the relationship is working well. Since the volte-face by Greek Prime Minister Tsipras last summer, and a temporary solution to the Greek debt crisis other problems have surfaced to stress the area. A flood of refugees and the issue of how to deal with their arrival as well as the security threats they might pose have taken center stage, but only over shadow the unresolved economic matters that continue to fester.

Greece has not caused a catastrophe so far, but problems within the Euro-zone are far from over. It is clear the pot is simmering and likely to boil over at any time, when it does boil over Greece will not really be the reason the Euro-zone crumbles. Instead we should be prepared to point the finger at the EU, ECB, and the IMF for their collective insistence that Greece, Italy and Spain pay back debt that will never be repaid instead of accepting the reality that concessions must be made. The limited contagion view is complete nonsense, the European debt problem is going to explode, and whether or not it becomes a earth shaking and economy halting event depends on how those in charge respond as events unfold. While it is not only possible, but likely that before long Greece will exit the EU or like Britain be granted "special status" the initial fallout should be limited.

It is clear Britain has forced these concessions upon the other members as the fragile coalition continues to be held together by a thread. It is only after Spain or Italy heads for the exit will bigger problems emerge. The longer the ECB and EU attempt to hold this mess together without debt write-downs the larger the catastrophe will be. The fact remains the Euro-zone economy is stuck in place and is going nowhere despite all the over the top efforts by the European Central Bank to stimulate the economy. As usual difficult structural reform is lacking and the only real effort being made by politicians is to give the impression that leaders are hard at work trying to arrive at how to correct the problem. It has become the chief pastime of those in power to project the illusion of progress, but action always seems to be lacking.

The Euro-zone Has Failed To Take Action In This Crisis
Haunted by slow economic growth much of the Euro-zone has struggled since 2008 and high unemployment has been the norm for years. Because of this not long ago France's President declared the French economy to be in a “state of emergency,” and announced a package worth about $2.2 billion to subsidize job creation and temporarily move half a million unemployed people off the welfare rolls. Critics immediately seized on the measure as having more political than economic meaning. And they questioned whether the new steps would have any more measurable impact than previous stimulus plans. We must note stories like those above are all over the place and this is even before we get to the issues growing from a massive flow of refuges into the Euro-zone.

People arriving  with nothing and often not even speaking the language has created conflict between not only countries already beleaguered by slow growth, high unemployment, and deficit budgets and their better off neighbors. Also, within many of its member countries tensions are growing, for years Gypsies in Italy have been considered by many Italians to be a problem. Italy and Spain already suffer from not enough jobs to bring about solid growth. Youth unemployment in Italy hovers just over 38% after reaching an all time high of 43.6% in August of 2014. Spain also suffers a high level of structural unemployment with the unemployment rate never dipping below 8% for decades. This makes Spain the OECD country with the highest unemployment rate. As in Italy the youth are most effected, youth unemployment in October and November of 2015 sat at north of 47% giving young people little hope.

This situation is not expected to get better anytime soon because the policies holding this mess together do not contain what can be seen as drivers and engines of growth. Just this week steel company managers and thousands of their employees from across the European Union descended on Brussels to protest the import of cheap Chinese products and to warn the 28-nation bloc not to open the doors further to Beijing. Again the steel industry is up in arms over China and its illegal export subsidies that allow it to sell products below production cost and the harm it does to the European steel sector. This only highlights the dire problems Europe faces as it tries to bring about economic growth in a competitive global market. After many attempts it seems real growth and reforms remain slow or nonexistent.

To say the Euro-zone is a dysfunctional mess is an understatement. A part of almost every proposal created by the leaders of the Euro-zone is loaded with efforts to try and convince Europeans that Europe is part of the solution and not the problem. Meeting after meeting often results in schemes that struggles to gain traction because they almost always require a transfer of wealth where the bloc’s healthier members and markets are asked to support its weaker ones. Of course as expected the elite calling the shots live in elegance as they spin their schemes to reflect hope of progress. Recently, supporters of deeper financial integration again hit a roadblock from Germany in their endless efforts to secure agreement on a common scheme to protect bank deposits, but that is expected in Euro-zone politics. It should be noted granting any country special privileges will only encourage other members to renegotiate terms in the future.

Footnote; Currently the thought of taking a holiday in Europe seems daunting. Attempting to travel through the area when facing closed borders, strikes, homeless refugees, and even violence has offset the excitement of tourist enjoying the weaker euro. As always articles on many subjects may be found in my blog archive, thanks for reading, your comments are encouraged.

Footnote #2; It should be mentioned the vote in Britain will be tremendously important to Ireland because of its special relationship to the UK.  

1 comment:

  1. Debt writedowns come with a price. Who is going to recapitalize the Northern European banks who have recklessly lend to Spain, Greece and Italy?

    Take one guess...