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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman.
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  • A Clinical Diagnosis Of The European Tragedy 0 comments
    Aug 19, 2012 7:27 PM

    Interviewer: We must stand together, because otherwise Europe has little chance against emerging giants like China and India.

    Jean-Claude Juncker: We [Europe] are small, we are becoming weaker, we are also demographically weaker, and the only solution for the next 30 years will be that we as Europeans come increasingly closer together. We are few in number; if we stop integration, we will lose economic power, and when we no longer have this common currency, we will have absolutely no political significance. The Europeans are dwarfs. We must show the world something giant, and that's the euro.
    ---Jean-Claude Juncker, president of the Euro Group, interview June 8th, 2012 (Luxembourg Government News)

    For students of postwar European history, it should not come as a big surprise to learn that the rationale for European monetary union is political and not economic. The economic arguments were invented to justify the grand political scheme: One continent, one currency, one government, one state.

    Europe, especially France, did not enjoy the spectacle of America's postwar hegemony, only made more galling by the collapse of the rival superpower. The US (with Britain) created the entire architecture of the postwar world: UN, NATO, IMF, IBRD, GATT/WTO, etc. The governance structure of NATO, the IMF and the World Bank are fashioned such that the US has effective control.

    This may have made sense in a world in which the US accounted for half of world GDP, but less so now when the US produces less than 25% of world GDP. America's disproportionate power sticks in Europe's craw.

    The European project was conceived as a way to restore Europe to its historical position as a central player in the Concert of Nations. The idea was fraught with political minefields: the power of a unified Germany, the awkward status of the former Soviet Union, the entanglements of NATO, the problems of continental governance, and the simultaneous desire for integration and national sovereignty, to name a few.

    The EU is an ineffective political solution to the French envy complex. This is particularly true when one considers that this would-be "world power" lacks an army, navy, air force, strategic weapons and a seat on the Security Council. Some of the EU members have these things, but Europe doesn't.

    Europe is a ill-conceived political organization with an improvised economic structure built around it. As Mr. Juncker said, its goal is to confront the world with something big in order to have political significance. So it is big, it does have a common currency, and yet it still lacks political significance. A regional discussion club which lacks both a foreign policy and a military cannot fulfill its role as a player on the world stage.

    There is a second fallacy underlying the European project, and that is the mistaken notion that the larger the economic entity, the more prosperous it will be. "We will lose economic power"--what does that mean in any practical sense?

    Some of the most prosperous and successful nations in the world are small, and some of the poorest and least successful countries are very large. Size and prosperity are uncorrelated. Switzerland does not wake up at night worrying about its global economic power.

    Not only does membership in the eurozone convey no economic benefits, it comes with a steep economic price. Does anyone believe that Norway, Sweden, Denmark, the UK and Switzerland are disadvantaged by their non-membership in the eurozone? Indeed non-membership is a distinct advantage--and every one of the abstainers is still rated AAA, which is not a coincidence.

    What does it mean to say that "Europe has little chance against rising giants like China and India"? Little chance to do what? Make things that people want to buy? Enjoy sound economic policies? How do the "emerging giants" threaten Europe, when what really threatens Europe is depression and a looming debt crisis, not some imaginary loss of competitiveness against large poor countries.

    The European Project is a wooly-headed idea with no compelling political or economic rationale, which is threatening to condemn half of the continent to penury and intractable indebtedness. The idea that the "loss of political significance" is worse than a depression is not only fallacious, but also elitist. It is better that the people of Southern Europe have jobs and houses, than it is that "Europe" succeeds.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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