Europe: Illusions and Reality


2017-11-10  Dr. Harald Malmgren

Europe is in a period of fundamental transition.

French President Macron has put great energy into what sees as the next phase of European development, namely intensified integration of the EU member states into a common framework of governance.

He has even called for a common security effort backed by an EU military.

French President Emmanuel Macron delivers a speech on the European Union at the amphitheater of the Sorbonne University on September 26, 2017 in Paris. Credit: CNN

Macron’s proposals have had strong backing from the European Commission, which sees itself as the likely governing body in a more fully integrated European Union. The Commission is also busy devising a wide range of initiatives that it might take that would reduce or eliminate remaining rights of member governments to ignore or overrule EU Commission regulations and mandates.

What Macron seeks for the EU is not very different from what previous French governments have been seeking for many years, namely consolidation of budgets into a single EU budget, with debt sharing among members. It has long been Germany’s position that debt sharing remains illegal under existing EU treaties, as well as under the German Constitution.

To be cynical, Macron wants to distract French voters from focus on internal needs for economic and labor market reforms, and instead shift focus to consolidation of the EU or Eurozone financial structure. On the one hand, Macron seeks greater French budget flexibility than the Maastricht Treaty provides, and hopes that a new German coalition would be less resistant to some form of debt sharing among all EU governments.

The timing of these new ideas for EU unification is inconsistent with what is happening politically and economically at the EU national and local levels.

Brexit opened a huge crack in EU cohesion, but it is not the only crack to be found.

An array of lesser cracks is appearing both between and within the member states.

There has been little media attention to Belgium, which has long been engaged in the formulation of a divorce agreement, with settlement of assets and future obligations, between Flanders and French-speaking Wallonia. With separate budgets already operational, Belgium has one flag flying over two separate societies, keeping for now the illusion of one nation.

Historical differences played a role in the peaceful separation of the Czech Republic from Slovakia less than 25 years ago. Rifts are emerging in several places: Catalonia vs. the Spanish central government; regional governments in Italy seeking greater autonomy from Rome; Scots from the UK. Merkel’s open border policy for refugees has even generated strains between Bavaria and Berlin.

Merkel’s open borders policy resulted in hordes of refugees migrating from the Middle East to EU countries. Many of the refugees are resistant to any form of legal or social assimilation, insisting on their own forms of maintaining social order. They continue resistant to conformity to the laws of nations to which they have fled. The sanctity of Schengen rules within the EU has broken, resulting in a widening gap between some of the Eastern European members and the rest of the EU.

This refugee crisis has also intensified increasing political pressures for pushback on Brussels “overreach” in its seemingly relentless effort to enlarge its regulatory grip on member states and even local governments. The EU Commission in practice has become maker of European laws, by promulgating directives and then sending national appeals to those directives to the European Court of Justice (ECJ) for review. In turn, the ECJ routinely upholds the EU directives and overrules national objections, effectively establishing laws without parliamentary consideration.

Spain’s Constitution was written to bring to an end the vestiges of Franco and his followers. The Constitution included powers for the central government to prevent any form of separation of regions of Spain from the central government. When the Catalonia referendum was called, PM Rajoy reacted with thuggish physical force to disrupt the referendum. When independence was declared, Rajoy acted not only to oust the Catalonia elected government, but ordered arrest of elected Catalonia legislators and officials under charges of sedition and treason.

Although acting within his Constitutional rights, Rajoy sought to suppress freedom of speech by charges of sedition and treason. His actions drew silence from the EU Commission and Donald Tusk, President of the European Council, even though Rajoy’s actions appeared to violate human rights provisions of the Lisbon Treaty of the EU.

Rajoy’s actions to coerce compliance by use of police and court powers to suppress independent political views now pose hard questions about the credibility of the Lisbon Treaty or any other EU treaty.

The big anti-EU and anti-Euro push by Le Pen and her FN party failed in France, but the extreme nationalism sentiments remain, like hot embers, ready to flare up again in France as Macron’s Presidency continues to lose popular support.

The 5 Star movement is still strong in Italy, and now even Berlusconi is seeking to return to politics and capitalize on growing anti-EU political sentiment in Italy together with regional unrest and pressures to restore greater autonomy to the local governments.

Macron and the EU Commission are effectively discussing the future of the EU without regard to security issues, except to talk positively about the idea of an EU army which is beyond the financial means of most EU member states.

A new “cluster” of European nations with a common security objective has quietly emerged recently in the form of focused military cooperation and coordination among the Nordic nations, Poland, the Baltic States, and the UK.

This cluster is operating in close cooperation with the US military.

The Danes, Norwegians, the Swedes and Finns are cooperating closely together on defense matters.

Remarks by NATO Secretary General Jens Stoltenberg at the official inauguration of the European Centre of Excellence for Countering Hybrid Threats in Finland

Enhanced cooperation is a response to fears of Russian incursions which are not new, but have roots in centuries of Russian interaction with Northern Europe.

It is also a response to the weak defense and security policies of most of the rest of Europe, notably the emasculation of any meaningful German military by the German government.

The Norwegians and Danes notably and reaching back to the UK are adopting the concepts of warfare pursued by the US military in its new focus on conflict in a fully integrated battle space operating in high intensity and at high speed.

At the heart of this integrated approach to building a credible deterrent to Russian “adventurism” and territorial incursions are the 5th generation F35 aircraft capable of coordinating and applying firepower from land, sea an air simultaneously.

Norway, Denmark and the UK are all acquiring the F-35 as part of the evolving collaborative approach.

The pilots in this assemblage of F35s are all trained in the same locations in the UK and the US, and are able to fly each other’s aircraft without adaptation.

It should be noted that Italy’s military wants to find a way to interact with the Northern Europeans as well as the UK and is acquiring F35s for itself to enable participation on short notice.

Will other political or security clusters appear elsewhere in Europe?

Fundamental divisions are emerging among Eurozone members regarding monetary and economic policies.

Countries like Austria, Slovenia, the Netherlands and the Baltic States are aligning with Germany and its Bundesbank, against the continuous pressure from Italy, France and Spain for greater flexibility in dealing with their crumbling banking structure.

Much of the mainstream media ignores the pervasive sickness of the Eurozone banking system, rarely giving brief recognition to problems of non-performing loans.

The reality is that hardly anyone knows the scope and depth of the bad loans of the Eurozone banks, because mark to market was long ago suspended.

There is no broad municipal bond market similar to that of the US. Most local governments in Europe operate within financing arrangements with banks.

One is reminded that the first European Banking Authority stress tests a few years ago declared Dexia, a Belgian-Luxembourg bank, as the safest of all major European banks. When the Great Financial Crisis took effect, Dexia was one of the first to fail. Most noteworthy, the Federal Reserve and Treasury became actively engaged in the rescue of Dexia, and Dexia became one of the largest beneficiaries of Treasury funding for troubled banks.

The reason was that Dexia had developed specialization in financing of local governments, and in doing so had even become an important supplier of funding for the US municipal bond market. Dexia had also become the principal funder for much of northern France, Belgium and Luxembourg.

Most of the European banking system is exposed to risks that are not readily visible, support of local governments being but one. All of the Eurozone banks are dependent on “Eurodollar” funding, and from time to time short-term funding shortages of liquid dollar denominated assets erupt. The European Central Bank was only able to keep its banking system alive at the peak of the post-Lehman crisis with the support of Federal Reserve swap lines to overcome insufficient dollar liquidity.

The fragility of the Eurozone banking system has not been repaired since 2008. Instead, the ECB has used its QE to buy up sovereign debt and corporate debt in order to compress risk spreads and create the appearance of a functioning financial market. The ECB, operating as a kind of gigantic waste management facility has transferred trash from all over Europe to the ECB’s balance sheet.

The ECB can postpone unwinding that balance sheet a few more years, but eventually the pile of trash will have to be dealt with. In the meantime, financial markets operate as if the ECB had actually cured the Eurozone debt market sicknesses and revitalized Eurozone banks, when in reality the shifting ownership of trash from one owner to another, with Germany the ultimate backer, has simply created an illusion of stability.

As a result of the most recent elections, German politics looks to be turning towards greater nationalism and growing unhappiness with the EMS, the ECB, the European Commission ambitious overreach, and even the weakness of the European Council.

Apparent weakening of Merkel’s grip on German politics suggests that the occasional financial rescue summits under Merkel and Schäuble leadership are unlikely to recur in future Eurozone crises. Nearing the end of 2017 Italy looks likely to be the ground zero for a financial earthquake that is likely to shake all of the Eurozone.

The European Union has turned a corner and is now likely to experience disintegration, at first slowly, but when financial markets become stressed, rapidly.

Like bankruptcy, a process of decay developing slowly, and then all at once.

Editor’s Note: In a recent article by Lisbeth Kirk published in the EUObserver on November 10, 2017, the reworking of a European approach seen from the perspective of Northern Europe was analyzed reinforcing much of Dr. Malmgren’s analysis in this article.

In Greek mythology, the hero Odysseus was sailing home from the Trojan War through the Strait of Messina (which separates Italy from Sicily) when he was beset by two monsters – Scylla and Charybdis – one on either side.

Odysseus had to figure out which was the lesser of the two evils as he passed through the strait to reach home.

The old trope came up again when Nordic countries recently met in Helsinki for their annual session.

Odysseus’ story can be used to describe how smaller countries are preparing to navigate between Germany and France in future, when Britain is no longer a member of the EU, one MP noted.

French president Emmanuel Macron laid out his vision for an overhaul of the EU in September.

His EU would include a more integrated eurozone with its own budget managed by a finance minister who would be held responsible by a eurozone parliament.

The European Commission would be reduced to 15 members and half the members of the European Parliament would be elected through trans-national lists already in 2019.

Macron kindly waited for the Germans to hold their national elections before presenting his big plan and he is still waiting for Berlin’s answer, because Germany is locked in ongoing coalition talks.

“There is a wide agreement between France and Germany when it comes to the proposals, although we must work on the details,” was the only comment from chancellor Angela Merkel so far.

Meanwhile, other EU countries are considering what the new European set-up might look like and how they fit in, when the UK leaves the bloc at 23:00 GMT on Friday 29 March 2019.

“I think we are going to see even more and closer UK-Nordic co-operation as a result of Brexit and I think that is also what the UK understands because we are very like each other. I mean, sharing lots of common values,” Swedish conservative MP and Nordic Council presidium member, Hans Wallmark told EUobserver in Helsinki.

“What we are probably going to see also is this new power between Merkel and Macron and we need to sail in between those Scylla and Charybdis,” he said.

“The UK has been a very close ally to all our countries, especially Finland, Sweden, and Denmark. It has been a natural partner. We have balanced the UK against Germany and we have been in the middle. With the UK out of the EU, we suddenly risk looking like the ‘extremists’ on issues like being pro-market economy, pro-free trade – the kind of things that the UK has promoted”, he added.

“We need to build new alliances and for us it would be natural to do that between Finland, Sweden, and Denmark, but also the Netherlands and hopefully Germany,” Wallmark said.

New leadership

The Nordic council has existed since 1952. Its assembly of 87 national parliamentarians meets annually. This year it met in the Finnish parliament.

Bertel Haarder, a Danish MP and Nordic council member, told this website that Europe needed leadership and that Merkel and Macron could not do it by themselves.

“I think they would both love it if Nordic countries and Benelux countries took a leading role,” he said.

“Brexit has left us in a Union with 27 countries where the Nordics as well as the Benelux countries may feel a bit more alone,” he said.

“We have a very good friend in Germany and may also get a very good friend in Emanuel Macron’s France, but you never know,” he added.

“Southern European countries of course have their own agenda and the Central and Eastern European countries have rising nationalism and more of those countries are not so easy to co-operate with anymore. So it is time for the Nordics hopefully together with the Baltics and the Benelux to take a leading role”, the MP said.

The three Baltic prime ministers, by tradition, already meet Nordic leaders for a summit during the Nordic council session. A representative of the Benelux parliament was also present at the event.

The Benelux Parliament was established in 1955 and is composed of MPs from Belgium, the Netherlands, and Luxembourg.

Its seat rotates among the cities of Brussels, The Hague, and Luxembourg for two consecutive years at a time.

“We come together three times a year and more often in committee sessions to discuss our Benelux agenda,” said Andre Postema, a deputy who represents Labour in the Dutch senate and who is currently president of the Benelux parliament.

“There was always a balance of power between France and Germany, and Great Britain, which had a more transatlantic view. Now, that they are leaving, we will be missing a partner in that because that’s also the case for the Netherlands and for many Nordic countries – of course we are Europe-oriented, but we are also Atlantic oriented,” he said.

“With Brexit we lose a powerful partner … that’s a reason to join hands between the countries of the Nordic, the Baltic, and the Benelux,” he told the EUobserver in Helsinki.

“The German-French axis is quite determined now, quite powerful and it is not that their ideas are necessarily bad, but it is always good to have our voice also heard,” he said…..

Ireland’s prime minister met his Nordic and Baltic counterparts in the margins of the EU summit in Brussels in October.

The Nordic countries form together the world’s 11th largest economy and share many of the same values.

“The Nordic region is part of Europe. Nordic co-operation is also taking place in a European framework,” Norway’s conservative prime minister, Erna Solberg, said in a speech Helsinki.

“when Europe stands in a demanding recovery period, it is important to voice clear Nordic support for European cohesion and cooperation. We are seeing more and more people looking to the Nordic countries, as Britain withdraws from the EU,” she said.

“This provides opportunities. In climate and environment, we see that Nordic solutions become European solutions,” she added.

“We have something to give, when Europe is being tested,” she said…..