EU Uses Greece to Expand Powers – Countries Are “Sovereign-Lite”

Friday, May 14, 2010

Ever been in a situation where one misbehaving peer (at home, in school or at work) ends up causing pain for everyone else? Rather than sending the naughty person to the corner, the principal or the HR department, the parent/teacher/boss uses the behavior as an excuse to add new rules that apply to everyone. EU has just chosen this route.

The Wall Street Journal described the change in “EU to Take More Fiscal Control” (By Charles Forelle and Matthew Dalton, May 13).

“The European Union’s executive arm called for centralized review of member countries’ budgets, a first step toward a tighter integration of fiscal affairs in Europe that would have been all but unthinkable just a few months ago.

“The European Commission proposed Wednesday that EU governments submit their budgets to Brussels for review by other governments before they are passed by parliaments. It also advocated punitive measures for countries that flout the EU’s budget rules. These could include cutting them off from EU subsidies and forcing them to make deposits to a rainy-day fund.”

So, the EU members will lose independence (along with $750 billion) to keep Greece in the fold. Note that “punitive measures” and cut-offs from subsidies will apply to future miscreants.

I had thought the EU’s choices were two: bailout or banishment (see “Greece – There Is Another Solution” – May 6). What I didn’t expect was this political result: bailout with EU power expansion. Certainly, a decision to toss out Greece would have been politically challenging. But this proposal – reducing individual country independence – would seem to be off-limits for Germany, France and many other EU countries. The Wall Street Journal does note,

“EU countries have long reserved supreme authority over taxing and spending to national parliaments, and there remains resistance, particularly in Germany, to ceding that control.”

EU members are “sovereign-lite

Definition: “Sovereign (adj) – independent of outside authority”

Clearly, EU/Euro member states no longer meet that definition. The EU’s proposed new rules would further reduce their status. Let’s label them “sovereign-lite.” The descriptor is important because it puts the “contagion” risks widely discussed into proper context. There are two levels of worry, but only one is valid:

  1. Spread from Greece to Spain and Portugal. Although Greece stands alone in its situation and behavior, Spain and Portugal are more at risk because all three countries are EU member states. The EU’s bailout funds and willingness are limited.
  2. Spread from those countries to the US and UK. Yes, US and UK holders of the European countries’ debts could be affected, and any Euro or European economic hit could reduce US and UK company sales. But “contagion” means the spread of a disease or corrupting influence, not a simple cause/effect. The US and UK, being truly sovereign (and appreciably stronger), are virtually immune to that contagion risk.

Understanding “sovereign-lite” means we can read and dismiss this popular type of article:

“While there is a broad agreement among investors that credit rating agencies were justified in downgrading peripheral European sovereigns [Greece, Spain and Portugal] last month, investors are questioning why advanced economies such as the UK, the US and Japan – which face mounting fiscal problems of their own – have managed to retain their triple-A ratings.” (Risk.net, “Sovereign ratings on UK, US, Japan under fire from credit investors,” by David Evans, May 12)

So… When we read about sovereign risk spreading from Greece, Spain and Portugal to the US and UK, we can remember that those EU countries are only partially sovereign, so the logic really doesn’t hold.

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