The EU's Haircut; Got 99 Problems, Politics Shouldn't Be One

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The EU has come to an agreement on how to stop the crisis contagion, save the Eurozone/ EU and avoid a worsening of the current situation.  Avoiding words such as “default” or “re-structuring” the agreement includes a 50% haircut of debt coming from Greece and strengthening the European System of Financial Supervisors (ESFS).  This is likely to put additional pressure on European banks and especially French ones.  However, if all goes well then the crisis will hopefully not spill-over to other Member States; for example Portugal, Spain, or more scarily, Italy.  Markets appear to have taken a break from their volatile state, but it remains to be seen if this is going to last.  Unfortunately, closing national elections in central MS have led to unproductive comments and political polarization.  This puts further pressure on the European project, provides little benefit with respect to party popularity (even backlash) and is likely to further upset markets. 

The implementation (finally) of austerity measures by Greece will play a big role in this.  As massive protests continue to take place, along with growing social unrest, a politically indecisive government and parliamentary debates with a lot of irrelevant argumentation; the picture looks bleak.  “Emergency income measures” (aka more taxes) on top of a hiked VAT, have blocked any market movement, are hindering potential for growth, keeping investors outside of the country.  Public coffers might be empty causing nervousness to the government, nevertheless increasing taxes has not been helpful.  Ensuring that the public pays actual taxes should be the priority; a large problem with the Greek taxation system is evasion.  Somewhere between 3-4 billion euros are not collected annually.  Moreover, corruption and lack of a strong institutional framework are further hindering development.  The Commission seems overall unimpressed by the implementation of recommended/ requested tasks.  

Domestic polarizing politics in other Member States have not been helpful and will also play a role in future market reactions.  For a start Germany’s liberal FDPs coalition government partners following dropping popularity polls have adopted a more market control rhetoric, even openly discussing a Greek default.  Though this is more of a strategy than an actual belief of the FDP in an attempt to differentiate themselves from the CDU and bounce back; results included a crushing slump in local elections in Berlin.  Federal elections are closing in, there will be more similar talk.  The SDP has gained popularity despite of/ because of the SDP’s pro-EU/ Eurozone/ solidarity approach; using overall more sensible public arguments. French President Nicola Sarkozy has defended the haircut but also mentioned in a national television interview that it was a mistake to let Greece join the Eurozone 2001.  Whether that is true or not is less important right now, mentioning it bluntly on national television might make markets volatile again, anger others/ New Member States and domestic voters.  Most likely, Mr. Sarkozy is winking at (very) right leaning voters of Ms. Le Pen, perhaps he is playing the blame game as French elections are also closing and it seems Mr. Hollande is likely to win. 

These are mere examples, politics across the EU look messy. In Italy Prime Minister’s Silvio Berlusconi’s court cases, refusal to step down and austerity measures (while facing a potential full blown crisis) is causing social, political and market unrest.  Though he has managed to gain stability and maintain government control, elections are probably close. Ironically, the UK’s David Cameron has had to deal with back-benchers of his own party who wanted a referendum on the country’s EU membership. Yet another publicity stunt, nevertheless a fair warning that anti-EU rhetoric that goes beyond rationality and slips over to populism will come back to haunt you.  The UK is currently fighting the implementation of a Financial Transaction Tax which would hinder London.  Other countries’ domestic politics are not looking much better, just glance at Slovakia, Spain, or Belgium.

Politics are playing an important role across and within Europe today; this is a first. It is also the first time the EU is facing crisis this big as a union of 27 countries. But it has the finances, creativity and potential to deal with it.  The real threat the project(s) is facing (EU and EMU) is the focus on domestic politics, polarization and the lack of a European point of focus. Parliaments and political parties should bear this in mind; the European Parliament could take a more coherent stance. Perhaps political representatives and parliaments should use their (now) transnational impact for positive and constructive arguments; advocating that the EU has nothing to offer cancels the amazing past 50+ years of the project with a childish, arrogant and untrue argument. Going further down this road will only put the whole lot back in the same position they were in 2009 as quickly as you can say; bail-out.

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