The future of the European Union: 27 minus 26!

A few days ago, the European Union signed a yet again new treaty aimed at guarantying better fiscal discipline in each of the 27 member states. The news, as usual, was greeted with optimism within the supporter of European unity, because it is perceived as a step in the right direction to solve the problems that Europe faces. As far as China is concerned, I perceive that some thinkers take the view of “Europe needs to solve its problems by themselves, and, in any case, China’s dependence on export is declining very quickly – next year it may even be a trade deficit! – and, therefore, a collapse in demand from Europe will not have a dramatic impact on Chinese GDP growth”.
I am afraid, both of the two concepts above, may be over-optimistic. In this piece, I discuss Europe first.
The new treaty signed on January 30^th is simply a ‘follow-up’ from the agreement discussed back in December. At that meeting, the UK decided not to sign the treaty. Euro-optimists nevertheless hailed it as a success and EU president Barroso said emphatically, more or less “it is a treaty of 27 members, minus one”. At the recent meeting, the UK was joined by the Czech Republic after premier Necas, decided not to sign the treaty. Now it is “27 minus 2”. The new treaty should be signed in March; however, President Sarkozy of France, who is running for elections to be held in April, said France would only approve the treaty after the new president is elected –this will be either Sarkozy himself or his opponent Mr Hollande. Mr Hollande does not support the current terms of the treaty; could it then be “27 minus 3”? Clearly, if even France itself begins to be a doubtful supporter, then the whole agreement would likely collapse.
Prior to the EU meeting, Germany had suggested the Greece should completely give up control of its fiscal policy, should prioritize interest payments before any other expenses. In other words, the Greek national budget should be administered by the European Union; this approach is typical of the corporate world: the creditor lends money to a distressed company, but also needs guarantees; and, when these guarantees are not satisfied, they the creditor takes control of the company. Mrs Merkel must have thought that the same concept could be applied to countries. Luckily, she half-retracted this proposal, as people in Greece were getting ready to pull out from dusty drawers long forgotten Anti-German, Anti-Nazi, Anti-War slogans. If Greek people had their way, the EU treaty would be “27 minus 4”, but for the time being, democracy has been suspended/put on halt in Greece and the government takes decision on behalf of its people.
 
Let’s now move on to Italy, another democratic nation, run today by a non-elected government. New Prime Minister Monti, after a great start, begins to give in to political and popular pressure; some of the early austerity packages are beginning to be cancelled or diluted. Economists always points to the fact that, even if Italy has a large government debt (standing at around 125% of GDP, smaller only than Greece, Portugal and Ireland, but bigger than France and Spain), it has relatively low private and corporate debts (45% and 80% of GDP,respectively ), so that the overall national debt/GDP, standing at 250% of GDP, is almost exactly that of France, and now smaller than Spain as well.
In other words, optimist economists claim that Italy’s debt situation is actually not that bad. They, of course, don’t mention that deleveraging government debt by taking money away from citizens is easier said than done. We know how Greek people have reacted and, as an Italian myself, I can ensure you that people in Italy will not accept their own money to be used to pay back government debt, especially because they perceive that such debt pile has been accumulated over years of bad government, wide spread corruption, and for the personal benefits of few elites. People on the street are beginning to make their voices heard. Soon, it may be “27 minus 5”, and from then on, we don’t need to do too much analysis to guess what the end game will be.
Up to now, as I discussed in a previous column, the dust of war in Europe were buried deep and competition mainly manifested itself during football matches; then slowly, it moved on to the economic sphere; now, we it is entering the dangerous world of politics, philosophy and definition of national sovereignty.   I wish to clarify, as to avoid mis-understanding, that I am a supporter of Europe and the European Union, but I clearly see that the common currency, the Euro, is causing cracks to appear. 
As an economist, I expect that 2012 will see the departure from the Euro of, at least, one country. In game theory, rational players anticipate the opponent’s next move and so on and on, so that the equilibrium point is often resolved instantly. In politics, which is not rational and value-maximizing like economics, this does not happen. I therefore, appeal to all politicians ,especially German, to try to see into the future (27 minus 26),  put aside their own ‘Folie de grandeur’, unravel future scenarios to today and quickly set a path for a re-introduction of national currencies across Europe.. the sooner, the better.