Peak Irony in No-Exit Union: As Grexit Chaos Resurges, Lithuania Joins
from Wolf Street On January 1, 2015, the Eurozone quietly welcomed a new member, Lithuania, to its fold. The former Soviet satellite became the 19th EU Member State to have joined the increasingly beleaguered currency union. According to an opinion poll conducted by Berent Research Baltic on behalf of the Bank of Lithuania, 53% of the Lithuanian population support euro adoption. And who wouldn’t trust a central bank to conduct an honest and fair survey of public approval of something as insignificant as the adoption of a new currency? One group that clearly didn’t was the eurosceptic Europeans United for Democracy (EUD) party which commissioned a poll of its own via Baltics Survey. The results could not have diverged more from the Bank of Lithuania’s poll, with only 26% of respondents approving of the government’s decision while 49% disapproved of it. Who’s to say which is right? Or at least righter? In the end the point is moot since, in time-honored EU fashion, no public referendum was held on the matter. Instead the final decision was taken in parliament while the Supreme Administrative Court blocked any attempts to call a referendum. After all, one can never be too careful these days: voters might have voted NO, just as French, Dutch and Irish voters did in their respective referendums on the Nice Accord, to no avail. As the current European Commission President Jean-Claude Juncker predicted in 2005, correctly, Europe would ignore any popular rejections. “If it’s a Yes, we will say ‘on we go’, and if it’s a No we will say ‘we continue’,” he said. A Poster Child of Austerity Lithuania’s admission into the euro zone is the result of many years of painstaking – and in many ways painful – economic and fiscal tightening, or what ECB Chairman Mario Draghi glowingly calls “growth-friendly consolidation.” In 2009, in the wake of the financial crisis, economic output plunged 15% in Lithuania. But the country of 3 million people stayed the course. Instead of allowing the country’s currency, the litas, to devalue, the government embarked on a harsh austerity program, cutting the government deficit from 9.4% in 2009 to 2.1% of gross domestic product in 2013. After five years of brutal financial adjustments, the economy began to “turn the corner” (another way of saying that it hit rock bottom and could go no lower). In the last two years (2013 and 2014) it has grown by 3.3% and roughly 2.9% respectively. “The Baltic countries have demonstrated that adjustment is possible – even without currency devaluation,” Mr. Draghi crowed at an event organized by the Bank of Lithuania in September 2014. It was a barely veiled criticism of the failure of Southern European economies such as Greece and Italy to make good on their promises of austerity. What Draghi conveniently failed to mention was the heavy price that Lithuania has had to pay for said adjustment: namely, a brutal brain drain that is emptying towns and causing worker shortages across the country. To wit, courtesy of Associated Press:
Emigration has been on the rise since 2004, when this country of 3 million people joined the EU, whose membership guarantees freedom of movement. During the 2008-2011 financial crisis, more than 80,000 people – almost 3 per cent of the population – left every year, mainly to Germany, Britain and other richer economies to earn salaries many times higher. Experts forecast that trend to continue, or even increase.
Whether the ends (Lithuania’s membership of a poorly conceived, deeply flawed currency bloc) ultimately justify the means (complete loss of economic sovereignty to supranational institutions such as the European Central Bank, the European Stability Mechanism and the dreaded Troika), only time will tell. If in the end they don’t, the Lithuanians will soon learn what many Greeks have learned through the bitter painful experience: joining the euro may not be easy – in Greece’s case, it required the help of some highly creative Goldman Sachs bookkeeping fairy dust to get through the door – but leaving it is a challenge of a whole different order. The Euro Currency Prison Club There are two main reasons why leaving Club Euro is quite simply not an option. The first is the financial chaos that would likely ensue. Yes, recent months have seen a great deal of talk that the euro crisis has finally been put to rest. According to Michael Hüther, the head of Germany’s IW institute, “the knock-on effects [of a Greece exit] would be limited. There has been institutional progress such as the banking union. Europe is far less easily blackmailed than it was three years ago.” However, as Ambrose Evans Pritchard points out, such a rosy picture rests on the overarching assumption that the Merkel plan of austerity and “internal devaluation” has succeeded:
An army of critics retort that the underlying picture is turning blacker by the day. Europe’s rescue apparatus is not what it seems. The banking union belies its name. It is merely a supervision union. Each EMU state bears the burden for rescuing its own lenders. Europe’s leaders never delivered on their promise to “break the vicious circle between banks and sovereigns”.
As long as the German government and Bundesbank continue to deny Draghi the powers he covets the most – outright monetization of the euro and the mutualization of sovereign debt – Europe’s monetary union will remain half-baked. Most of Europe’s biggest banks are as weak and undercapitalized, if not more so, than they were during the first euro crisis. Given as much, it is hardly beyond the realm of possibility that another Greek financial tragedy could unleash an uncontrollable chain of contagion among other sovereigns (Spain, Italy, Portugal, perhaps even France) as well as financial entities heavily exposed to Greek debt or the billions or trillions worth of related credit default swaps. In other words, chaos. The second reason why Club Euro has no get-out clause has more to do with political rather than financial capital. Put simply, too much political capital has been invested in the decades-old European Project for it to be jeopardized by the popular will of a country like Greece (or for that matter, Spain, the UK, France or indeed even Germany). On this topic, Mario Draghi said the following in a press conference last May:
They [euro critics] vastly underestimate the amount of political capital that has been invested in the Euro. And so they keep on asking questions like: “If the Euro breaks down, and if a country leaves the Euro, it’s not like a sliding door. It’s a very important thing. It’s a project in the European Union.”
Secrecy, Obfuscation and Deception The euro has a pivotal role to play in this project, serving as a sly stepping stone to ever closer union. As long as most people don’t understand what is happening under their noses, incremental steps can be taken to move the European project along toward its ultimate goal of complete monetary, banking, fiscal and political convergence – a fact that Juncker as good as admitted in a recent interview:
We decide on something, leave it lying around and wait and see what happens. If no one kicks up a fuss, because most people don’t understand what has been decided, we continue step by step until there is no turning back.
For decades, secrecy, obfuscation and outright deception have been the handiest weapons in the eurocrats’ arsenal. Even back in 1962, during the early years of the European Common Market, Jean Monnet, the French politician widely recognized as the godfather of the European Union, said that Europe’s nations should be led “towards a superstate, without their people understanding what is happening.” Now, in the year 2015, that dream is tantalizingly close to consummation. The problem is that people are finally beginning to cotton on. Last year, eurosceptic and anti-austerity parties took Brussels by storm; this year they threaten to disrupt the delicate two-party political balance in a number of national parliaments, including Greece, Spain and the UK. Naturally, the markets will not be happy as jitters over a possible Greek, British or Spanish exit rise. The one thing they ignore, however, is that for the moment there is no door through which to exit the Eurozone or even the EU. And the EU will stop at nothing – including bloodless coups d’état – to keep it that way. By Don Quijones