Germany's Grand Plans for Europe

During the past weekend, the European leadership and the European Central Bank agreed to lend Spain 100 Billion Euros - to be used to re-capitalize Spanish banks that have seen their reserves fall dramatically because of the collapse of the Spanish housing market.
Stock markets rallied this morning in Europe and America, but the rally was short-lived because the European move amounted to just one more temporary band-aid pasted on a large, gaping wound.
And, as Greece, Portugal and Ireland realized what the Spanish had “pulled off,” they were publicly vocal about the unfairness of the deal Spain got.
You see, Greece, Portugal and Ireland also needed money for their banks and other economic problem areas, but to get the Euro funds they had to agree to severe austerity packages that have seriously depressed their economies and, in particular, job markets - because austerity is a buzz word for eliminating public employees, cutting social services, and drastically reducing government projects that pumped money and jobs into their economies.
The result was that the economies almost came to a halt, with unemployment skyrocketing toward 20% and above, especially in the younger age groups -- for example in Greece where youth unemployment is estimated to be at 50%. And, with such slowdowns, tax revenues fell sharply, leading to even more cuts in government services.
But, Spain avoided the “austerity” route since, as explained by the European leadership, Spain had already cut 38 Billion Euros out of its government spending.
Now, Greece, Portugal and Ireland are denouncing a “two track” system for treating Eurozone countries in trouble.
Before you say, who cares, think about this.
German Chancellor Angela Merkel has for more than a year held every bailout seeker’s feet to the austerity fire. But, Spain slipped through just this past weekend. Is it a coincidence that it was also this weekend that the German Chancellor was outlining her plans for a “two track” Europe? I doubt it.
In yesterday’s blog, you read the quote about Merkel wanting nations "in a currency union have to move closer together", reinforcing the shift to "a multi-speed Europe" which began with the introduction of the single currency.
Chancellor Merkel also this past week emphasized her commitment to encouraging Eurozone governments to cede some fiscal power to Brussels.
"We need more Europe. We don't only need monetary union, we also need a so-called fiscal union," she said. "And most of all we need a political union -- which means we need to gradually cede powers to Europe and give Europe control."
The German Chancellor and her government believe that only a political and fiscal integration will bolster investor confidence in the Euro over the longer term.
To put pressure on other Eurozone countries to agree, Germany has asked Herman van Rompuy, European Council president (with no power except what he has by virtue of being appointed by the European leadership), to make suggestions about a banking union at the next EU summit at the end of June.
But persuading even countries like The Netherlands, which usually follows Germany’s lead, to transfer sovereignty to a European entity will be very difficult, as became clear last week when it questioned Merkel's call for some countries to integrate faster than others.
Dutch finance minister Jan Kees de Jager said "one of the fundamental causes" of problems in Greece, Italy and Spain was that the single currency had fostered economic divergence, not the promised convergence. "Within a single European economic and monetary union, I don't think it's possible to have structurally different paths."
The Dutch government is facing elections later this year in which both the far right and left are very opposed to tighter European political integration, putting the government on the defensive over any delegation of political power to Europe.
This was also seen in the recent French presidential election where the Socialists promised that they would oppose European financial and fiscal rules when they disfavor France.
So, Chancellor Merkel has traded one rejected idea (severe austerity as the cure for fiscal and budgetary woes) for another idea (political and fiscal integration) also very likely to be rejected for some time to come.
But one idea floated in Europe a year ago seems to be gathering steam - and it is a very worrisome idea indeed - a tax on every financial transaction in the Eurozone.
Germany is pushing forward with its financial tax unilaterally with the apparent support of all parties in the Bundestag (parliament).
Great Britain has a similar tax, in the form of a stamp duty, much like the tax stamps one has to buy for property deed transfers in America. The Socialists in France now say they will go ahead with their own version of the financial transaction tax.
German political leaders see these moves as "a basis for a first step at European level" fiscal integration.
Why is all this a bad idea - one which, by the way, even President Obama has put aside? Because money moves freely and rapidly. So, if a financial transaction costs more in European financial centers because of the transaction tax, the deals, i.e., the money will move - probably to Singapore and Hong Kong and other Asian and Middle East financial centers. And, once money has moved, it takes time and costly incentives to lure it back.
So, Europe, beware. You may be using a tool that will deliver unexpected, negative results - big time!
Meanwhile, back in Berlin, the German government is waiting to see what happens with the new parliamentary elections in Greece next Sunday, and it feels no need to hurry with new proposals to help Greece get out of its economic hole until it knows who it will be dealing with - unlike Spain that got what it wanted fast because it suited Germany’s plan.
And you thought Europe was a democratic operation. Think again.