Friday, 3 December 2010

The Threat to European Unity

There should be no doubt about the seriousness of the present crisis in the eurozone and the European Union. Not only does it threaten the very existence of the euro but it also raises the question about the future viability of the European Union, at least in its present form. The fallout from the global financial crisis has shaken the European economies, further fragmenting the EU into competing blocs with differing interests. A danger exists that European unity will be broken through the richer states breaking from the ideals and practices of cohesion and solidarity that have underpinned the project of European convergence.

There are two major elements to this:


Since the outbreak of the global economic crisis, from the end of 2007, public debt has increased in the EU member states by over 25%. This is a direct result of the economic contraction within the European economies and the huge sums of money that governments have spent bailing out the very financial institutions that were responsible for the crisis.

The effects of the economic crisis have been most sharply felt in the economies on the periphery of the EU, which were most dependent upon an inflow of foreign capital and credit – e.g. the Baltic States, Ireland, Greece, Spain, etc. Those countries that were also members of the eurozone, or had their currencies tied to the euro (such as in Latvia or Estonia), have been worst affected. They have been unable to devalue their currencies, in order to help boost exports, and they are now coming under intense pressure to bring down their budget deficits and levels of public debt, to meet the previously defunct criteria laid out in the Growth and Stability pact. In turn their national governments are compelled to introduce new austerity measures – which only serve to further depress economic growth.

After first striking Greece, the European Central Bank’s ‘shock-doctrine’ has now reached Ireland. The ECB had previously lent the Irish government €100bn, as it had been unable to support its own own banks after being starved of cash due to the very low corporate income taxes in Ireland and the dramatic collapse in its property market. The latest loan to the Irish government is worth €85bn, although it is not clear that this will be large enough to repay all the creditors. All this in a country that was the neo-liberal poster-boy of Europe and whose economic model had been praised as one for emulation by the Polish PM, Donald Tusk, and British Finance Minister, George Osborne.

With most of the bailout money being provided by the EU’s richer countries - particularly Germany, but also the UK - one may think that this shows how the ethos of solidarity within the EU remains strong. However, this loan is being given at a punitive interest rate of 7%, which will therefore see the new creditors receiving a healthy return on their loan. British banks already have £140bn worth of loans in the Irish banks, meaning that it is in the British government’s direct interest to protect them from collapse. All of the money included in the current bailout goes exclusively to these banks and not a cent is being used to invest in the economy, save jobs or protect the country’s ailing public services. In fact the opposite is the case. The bailout has been granted with the proviso that the Irish government introduces a new austerity programme that will cut welfare entitlements, reduce the minimum wage, shrink public sector pay and jobs and slash spending on health (by 7.5%) and education (12%). No wonder that political forces who are offering an alternative economic programme in Ireland are on the rise.

The real fear now is that this crisis will spread to other eurozone countries in Southern Europe, such as Portugal and most worryingly Spain. However, non-eurozone countries in Central-Eastern Europe, such as Poland, are also being affected by this crisis. The latest events in Ireland have resulted in a sharp fall in the Polish zloty, even in relation to the euro. Investors are afraid to locate capital in government bonds in ‘developing’ European countries and are moving out of countries such as Poland. These governments are under intense pressure, from financial markets and the EU, to reduce their budget deficits and public debt. For example, the EU is pressuring the Polish government to bring down its budget deficit from its present level of near 8% to 3% by the end of 2012.

CEE countries such as Poland, that stand outside of the eurozone, now find themselves in a catch-22 situation. On the one hand being outside of the eurozone gives these countries more economic flexibility and the currency devaluation helps their competitiveness. The lure of eurozone entry does not seem as attractive as it once was (although it remains a stated aim of the CEE governments) and it certainly no longer offers the haven of financial security that it used to promise. However, the devaluation of the Polish Zloty is causing other problems – primarily by increasing the cost of debt. Millions of Poles have taken out loans and mortgages in foreign currencies (predominantly Swiss Francs) and any devaluation pushes up the cost of their repayment. Likewise the currency devaluation and rise in government bond yields are pushing up Poland’s public debt towards the dreaded 55% of GDP mark.


The second potential schism in European unity is occurring over disagreements surrounding the EU budget. Immediately these have broken out over the size of EU expenditure in 2011. The proposal by the European parliament to increase this by around 2.9% was agreed by delegations from over 20 countries. However, such proposals have to be unanimously agreed within the EU and so far it has been blocked by an alliance of ‘netpayer’ countries, including the UK, Holland, Sweden and Denmark.

These clashes are just a foretaste of the conflicts that could breakout during negotiations over the size and composition of the next EU budget, that will run from 2014 to 2020. According to reports the UK is currently forming a coalition of net-payer countries with the aim of reducing this budget from the current 1.13% of EU GDP to 0.85% - i.e. by €250bn. These countries would like to set the agenda for the talks at the next EU summit in December – as the Presidency of the EU will be held by Hungary and Poland (i.e. recipient countries) in 2011.

These discussions will not just concern the size of the 2014-20 EU budget but will also focus on how cuts in this budget should be made. It is unlikely that major cuts will occur in the Common Agricultural Policy (CAP) and agricultural subsidies, which take up nearly half of the EU budget. This is partly due to the political pressure of major players such as France, but there is also a more general political reason for this assumption. Agricultural subsidies have been an important source of money for farmers in the EU and have thus helped to retain the dominance of Christian Democracy within many EU states. With such parties presently dominant within most powerful EU states at the moment, we may expect that this status-quo will be preserved. It is therefore probable that the major cuts in the next EU budget will be made through reducing structural and cohesion funds. This money has been used to invest in the infrastructure of the poorer EU regions – first in Southern Europe and Ireland and more recently in CEE (although it should be noted that poorer regions in the richer countries have also been beneficiaries of these funds.) Cutting the structural and cohesion funds in the next budget will be most painfully felt in CEE where the EU's poorest regions are situated. Poland will be particularly affected, as it has so far been the largest recipient of EU funds. Also Romania and Bulgaria - the poorest EU countries - will particularly suffer as they are yet to receive any significant EU money after joining the EU, in 2007, after the previous EU budget had been set.

Following the collapse of Communism, there was no significant investment in the infrastructures of the CEE countries, with foreign investment normally connected to the sale of state assets. It was only after entry into the EU that some direct investment in these countries' infrastructures has occurred, although this has been at a much lower rate than during previous EU expansions. Throughout the past two decades the major Western European economies have made huge profits by monopolising sectors of the CEE economies, opening up these economies to western products and gaining access to a new pool of cheap labour. However, with the economic crisis having moved from the private to the public sphere, the era of austerity is now shifting from the national to the European level. This is undermining the economic basis for the project of European unity and convergence which can only survive if some mechanism of economic redistribution - counteracting the diverging effects of the free-market - is in place. The alternative is to widen divisions in Europe and give impetus to right-wing nationalist and populist forces throughout the continent.


  1. Cameron, "child of Thatcher", to ape Chamberlain?

    "Central and eastern Europe is a region not far away, of which we know a lot, but let's cut their EU money anyway because of ideology".

    Did you see the FT series last week on EU funds - a mild sniff of UK scepticism in the air, but not as extreme or as hysterical as you often get. The one letter published in reaction so far was hugely positive about the funds' impact in north-west England:

  2. Didn't see the FT series I'll try and check it out. Fact is that many regions in the UK (such as the NW England, but also places like S.Wales, Cornwall, Scotland)received a lot of EU funds over the years. The battle is really on now for the next budget and St.George Cameron and his Bullingdon bullies are leading the charge to cut funding


Go for it - but if its abusive then it gets blocked