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Now is probably a good time to explain, why I did, quite recently, turn an EU-skeptic.
While the #EU failed to heed the lessons of #Brexit, the #recoveryfund is even bigger issue. Economic arguments for it make no sense.
A thread on 'stealth' federalization of the #EU. 1/25
While the #EU failed to heed the lessons of #Brexit, the #recoveryfund is even bigger issue. Economic arguments for it make no sense.
A thread on 'stealth' federalization of the #EU. 1/25
Monetary unions are fragile creatures. They are held together by political will alone.
A national #economy develops through a complex set of political, cultural and economic norms and laws. Generally, the longer the history of a nation, the more complex the mix. 2/
A national #economy develops through a complex set of political, cultural and economic norms and laws. Generally, the longer the history of a nation, the more complex the mix. 2/
This leads to a highly heterogeneous development of productivity and competitiveness across nations.
The function of a foreign exchange rate is to reflect and stabilize these differences between nations. When it is removed in a currency union, economic differences remain... 3/
The function of a foreign exchange rate is to reflect and stabilize these differences between nations. When it is removed in a currency union, economic differences remain... 3/
... and are likely to even grow.
This is because when there is no exchange rate to compensate the differences in the growth of productivity and competitiveness, production tend s to flow to the countries with higher productivity/better competitiveness.
When weaker... 4/
This is because when there is no exchange rate to compensate the differences in the growth of productivity and competitiveness, production tend s to flow to the countries with higher productivity/better competitiveness.
When weaker... 4/
economies join a currency union, markets may to assume that this means that there exists a credit risk reducing mechanism. The interest rates of their debt may fall, leading to a convergence of interest rates across the union.
Alas, weaker member countries tend to start to...5/
Alas, weaker member countries tend to start to...5/
... lose production to stronger member countries, while it becomes cheaper for them and their firms and households to acquire debt.
So, weaker economies become economically even weaker and more indebted. Then, when a shock hits, flows of capital (debt) turn away from... 6/
So, weaker economies become economically even weaker and more indebted. Then, when a shock hits, flows of capital (debt) turn away from... 6/
... the weaker nations. An asymmetric shock occurs.
Weaker countries may first try to fill the gap caused by the outflow of private capital by increasing government consumption and sovereign debt, which happened in euro after the 2007-2008 financial crisis. 7/
Weaker countries may first try to fill the gap caused by the outflow of private capital by increasing government consumption and sovereign debt, which happened in euro after the 2007-2008 financial crisis. 7/
Eventually international investors start to lose trust to weaker nations piling on debt, and the interest rates of the sovereign debt starts to rise, sometimes very fast. A debt crisis emerges.
How does one fix this? There are two choices. 8/
How does one fix this? There are two choices. 8/
1) A country can exit the currency union and default on some of her liabilities (debt).
2) The currency union can be turned into a transfer union, where stronger economies support the weaker ones economically .
This is the "end-game" all currency unions face. 9/
2) The currency union can be turned into a transfer union, where stronger economies support the weaker ones economically .
This is the "end-game" all currency unions face. 9/
They either break up (and/or create an exit mechanism) or they turn into federations.
The #EU is now in this critical juncture with the euro.
When the EU, and euro, were set up, it was agreed that countries do not share fiscal responsibilities. 10/
The #EU is now in this critical juncture with the euro.
When the EU, and euro, were set up, it was agreed that countries do not share fiscal responsibilities. 10/
The TFEU Article 125 formalized this:
"A Member State (or EU) shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State."
11/
"A Member State (or EU) shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State."
11/
During the European debt crisis in 2010-2012, the leaders of the Eurozone faced a dilemma. How to support Greece without breaching Article 125?
To bypass the Article, they setup a 'dummy-corporation, EFSF, which issued bonds guaranteed by the member states and... 12/
To bypass the Article, they setup a 'dummy-corporation, EFSF, which issued bonds guaranteed by the member states and... 12/
... provided loans to ailing member countries of the Eurozone (most notably to Greece).
So, as countries did not directly support each other financially, Article 125 was not breached, at least formally.
In practice, it naturally was breached. 13/
So, as countries did not directly support each other financially, Article 125 was not breached, at least formally.
In practice, it naturally was breached. 13/
In 2012, European leaders created an European Stability Mechanism (ESM), which provides loans to members of the Eurozone in crisis.
However, its loans are conditional meaning the countries that borrow from the ESM need to apply structural reforms and austerity. 14/
However, its loans are conditional meaning the countries that borrow from the ESM need to apply structural reforms and austerity. 14/
Then in early 2020, #coronavirus pandemic hit.
It caused economic malaise in all countries of the Eurozone, but hit the southern member states a more heavily.
Because the southern countries had become highly indebted, supported by the EFSF, ESM and the #ECB ,... 15/
It caused economic malaise in all countries of the Eurozone, but hit the southern member states a more heavily.
Because the southern countries had become highly indebted, supported by the EFSF, ESM and the #ECB ,... 15/
... they are more vulnerable to such a shock. If the weaker economies would not be able to sustain the shock, they might default and leave the euro.
This could lead to fracturing of the Eurozone and cause massive losses to German and French banks,
16/ https://twitter.com/Steffen18346341/status/1283827484891455489
This could lead to fracturing of the Eurozone and cause massive losses to German and French banks,
16/ https://twitter.com/Steffen18346341/status/1283827484891455489
which had lent aggressively to the southern countries (most notably to #Italy ).
So, it was no wonder that the leaders of #Germany and #France panicked. Not only could the euro collapse, but so could their banks. This had to be stopped.
But, there was a problem: The TFEU.
So, it was no wonder that the leaders of #Germany and #France panicked. Not only could the euro collapse, but so could their banks. This had to be stopped.
But, there was a problem: The TFEU.
It strictly restricts how the #EU can use its budget (Article 310 
) and how it can distribute funds (Article 125).
In their panic, German and French decided to bypass these mutually agreed rules.
They proposed to establish a fund that. .. 18/
https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12016E310&from=EN
) and how it can distribute funds (Article 125). In their panic, German and French decided to bypass these mutually agreed rules.
They proposed to establish a fund that. .. 18/
https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12016E310&from=EN
... would establish a Fund, where the #EU would borrow from the capital markets and give grants to member countries, with the biggest shares going to Italy and Spain.
While the EU can borrow and lend, it cannot borrow and distribute funds through her budget (Art. 310). 19/
While the EU can borrow and lend, it cannot borrow and distribute funds through her budget (Art. 310). 19/
It's also illegal to give grants (income transf. are banned by Art. 125), which is why the fund is not to be called by its actual name "bailout fund", but non-controversial names like "investment fund" or #recoveryfund .
The fact is that the #EU leaders are lying to us. 20/
The fact is that the #EU leaders are lying to us. 20/
The fund will not lead to a recovery in Europe, as it is way too small and the crisis is global .
The fund will just, illegally, establish a transfer union in the #EU and push us into a federation, and without the consent of the people. 21/ https://gnseconomics.com/2020/02/10/the-stages-of-the-collapse/
. The fund will just, illegally, establish a transfer union in the #EU and push us into a federation, and without the consent of the people. 21/ https://gnseconomics.com/2020/02/10/the-stages-of-the-collapse/
I believe, firmly, that all institutions need to serve the people.
When the #EU decided to start serving German and French banks, and to grab budgetary sovereignty from its member states, it lost its justification.
The #EU has given us a choice. 22/
When the #EU decided to start serving German and French banks, and to grab budgetary sovereignty from its member states, it lost its justification.
The #EU has given us a choice. 22/
Either we accept the “goal” and start towards full federalization of Europe, and lose our independence, or we risk the breakup of the Union.
The history of concentrated power is extremely ugly in Europe. There are no guarantees that some future powers dominating the EU... 23/
The history of concentrated power is extremely ugly in Europe. There are no guarantees that some future powers dominating the EU... 23/
...would not lead us down the same path.
Economically, federal Europe would make no sense, and the Nordic countries would lose their cherished welfare states.
This is why we, the people of #Europe , need to decline the invitation to the federalization of the #EU , ... 24/
Economically, federal Europe would make no sense, and the Nordic countries would lose their cherished welfare states.
This is why we, the people of #Europe , need to decline the invitation to the federalization of the #EU , ... 24/
by turning down the #recoveryfund , even if it risks breaking the whole Union.
We need to have institutions that serve us, not the elite, and if it leads to dismantling of dysfunctional institutions, like the #EU, so be it.
/End
We need to have institutions that serve us, not the elite, and if it leads to dismantling of dysfunctional institutions, like the #EU, so be it.
/End
