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Friday, December 2

Guest Post: If it walks like a duck and quacks like a duck…

Guest post by Mr. Hannu Visti: translation by MoreLiver. You can follow me on Twitter and Facebook and email me for suggestions and requests.  

If it walks like a duck and quacks like a duck…

…it could be a duck.

Sarkozy and Merkel are tinkering some sort of a stronger economic union to save the monetary union and the common currency. I see here a possible final failure, but also a small glimmer of hope – the same that has faintly twinkled couple of times during the past month and again today.

The glimmer of hope is that when respected players think something is important and promise to do something about it, the markets reward the news by bull run. In reality the possibility of solving something next Monday is nonexistent, but still many want to believe in it. These reactions have been seen previously several times after last summer.

This tells us that people still have some faith in the future. Any signs are read and interpreted as the depression would finally end. We do not know when it will end, but we know that it needs people who believe in the future. Clinging to such thin straws tells us that people are weary and have had enough of the crisis. Signs like these bring some faith to people who have otherwise lost it.

The attempt of Sarkozy and Merkel is nevertheless hopeless in many ways. I am not exactly sure what will make their plan fail, but it is one of the following. Let us first define the problems. We are about to create some sort of “stronger fiscal union” that would supposedly improve the situation. 

1. Even the craziest dictators have not managed to pull off something like that in couple of days. The idea that two nations with opposing views could do it is absurd.

2. Sarkozy has said that a transnational economic union is needed to save the euro, but he is not prepared to trade in France’s sovereignty. Merkel has said that a transnational economic union is needed, but he is not prepared to trade in Germany’s sovereignty. We have been told that some sort of transnational union that has no power over its founders is needed.

3. The economies of Germany and France are in different positions – France is under water, while Germany is strong. The discussion on the economic union is thus conducted by the wrong countries. EU was a political construction trying to minimize the reasons for war between France and Germany. Now they still try to solve Europe’s problems with bilateral talks, even though France is a beggar and Germany gives if it gives. By pretending to be equal a setup is formed that cannot provide a working solution.

4. The core of the transnational decision-making according to Merkel would be the power of Brussels over the national budgets. But who has the power in Brussels? The French and the subalpine Africa. All the previous agreements have been bent as the French have wanted to construct “social Europe” or whatever took their fancy. The Germans have also drifted away from the agreements, but at least they have not camouflaged it as anything else.  What purpose does it serve to put the national budgets under the power of people who are under the power of the countries they should watch over? Also the measure would not help in time, as the next year’s budgets are already in place and next changes would be seen earliest in 2013. As there are probably only weeks left, what would this accomplish?

5. Even if a transnational budget office in Brussels would see the day of light, how would it work in practice? What would happen when one member country would announce that it will not stick to budgetary discipline, as their nation requires more fiscal support? The budget office would have no power to force countries back in line. The outcome would probably be endless summits and negotiations resulting in watered-down compromises and everyone smiling beneath the euro flag for the press photographers.

6. The French fundamental problem is that they think different public sector projects are more important than budgetary discipline. The budgetary discipline makes sense only if it is the prime directive and not the fifth on the list after agriculture, social transfer payments, corporate welfare and bribery. The budgetary discipline has already been tried out and in theory the old version is just as obligatory, but nobody has felt obliged. How a new discipline would work if there is no real will to adhere to it?

7. The German fundamental problem is the resistance against Eurobonds and  ECB’s direct (instead via banks) peripherial support by the ECB. As long as Eurobonds do not exist, the periphery will not get financing it needs at a reasonable price. It also looks that the printing machines are needed for many things, like paying the pensions, if the public deficits are to be put on a sustainable path. Resisting this categorically for historical reasons does not lead anywhere. The printing machine also acts as a deterrent by calming the markets and increasing trust and predictability. Germany’s resistance creates a ‘printerless world’ that is easy to attack from every direction.

8. The transnational economic union is a constitutional problem at least in Germany. It would probably be a problem for France, but they can bribe away the problem. In Germany it is impossible to circumvent the constitutional court. Even if the court would not eventually find a problem in the plans – which I do not believe – the delay would be too long. 

9. Neither country has the political power to pull this off.

We are therefore not holding our breath but hope that talks and summits are finally over. Markets will have to solve the problem, as politicians are unable to do it. The aftermath will be easier, as markets only require reaction ability but no visions.