George Brown on Europe’s uncertain future.


A doctor would probably call it a near-total organ failure if it was a person; a mechanic would call it a total write-off if it was a car. An economist would say it’s a very serious debt-crisis and the world economy is in big trouble, while anyone in an accounting, corporate law or – especially – a receivership firm would be dancing around screaming “jackpot”. For the everyday layman, meanwhile, it’s simply stuck up a certain very famous and much-travelled creek without a paddle.


A politician, however, would just ignore you and continue perfecting that special skill that all politicians seem to possess – namely talking a lot, but not actually saying anything. A European politician would be even more likely to do this, as they all seem to be in a complete state of denial over the current viability of the Eurozone and arguably, the European Union at large.


This article is not advocating for or against a particular position – the Eurozone must die because there does not exist any way to save it. To put it as bluntly as possible, the Eurozone is dead; the leaders just haven’t realised it yet. The advocating portion of this article is insofar as it discusses the wider European Union, which has been deeply flawed from its very beginning and is likewise desperately in need of reform. It is, however, important to note that the results of Europe’s economic integration have been quite positive on balance. For example, one of the precursors to the EU, the European Economic Community (EEC), did much to increase economic and legal standardisation of its member-states particularly in the 1970s and 1980s. This vastly improved the compatibility and overall productive potential of Western Europe. The EU has also achieved one of its explicit and most important goals via this economic integration. Specifically, any one country in Europe is now so integrated and trade-reliant on some or all of the other member-states that another world war (at least one started between the various European states) has become extremely unlikely, if not inconceivable.


During the Global Financial Crisis (GFC), many governments around the world had been forced to prevent collapses of many industries seen as critical to the economy, particularly many financial sector entities like banks that had become ‘too big to fail’ (ie: if they went bankrupt, it would cause a severe banking crisis and probably a deep recession). However, this cost a huge amount of money for governments and global debt markets became concerned about the abilities of some governments to repay the debts that they owed and so started to ask for higher, often significantly higher, interest rates on money loaned to governments. Similar to how the sub-prime mortgage credit default swaps had suddenly stopped being seen as the ultra-safe investment they were thought to be, triggering the GFC, government debt suddenly stopped being automatically considered safe and so to invest in what had become a riskier asset, more incentives were needed, meaning more profit from the investment meaning higher interest rates. In Europe, this was especially problematic for the so-called ‘PIIGS’ countries – Portugal, Ireland, Italy, Greece and Spain, as they already had significant levels of government debt even before the crisis and the GFC had resulted in several instances with sovereign debt levels blowing out to in excess of 100% of GDP. As Greece, as the initial problem, could not afford to pay the higher interest rates, there only options were either to default or to ask the International Monetary Fund (IMF) and the rest of the EU for a bailout package to help pay for their debts. This then spread to the other at-risk economies in the ‘PIIGS’ group via a phenomenon known as contagion – markets get worried about one economy with high debt levels, which causes said economy to get into strife, then the markets start to get similarly worried about other economies in the same region that seem to have similarly high debt levels and other economic indicators; in this case, low or negative GDP growth and high unemployment rates.


When you think about Greece and its historical track record with debt though, it is a wonder how a country with such a train wreck of a sovereign debt track record managed to get accepted to the European Union in the first place, considering the supposedly stringent acceptance criteria (which are discussed in more depth later). Since its independence in 1821, Greece has been classified as in default for at least 50% of the time, split into a total of six separate periods lasting as long as several decades. Therefore, based on historical precedent, there is no reason to think they won’t default at some time in the future, even if by some miracle they don’t default during the current debt crisis – an outcome that is getting less and less likely by the day. However, there is a strong argument for why Greece getting kicked out of the Eurozone would actually be to their benefit. The continuing ‘will they, won’t they’ uncertainty about whether they will stay in the Euro is arguably even more damaging to the Greek economy, as very few people would want to loan any money to them, and those who did would charge exorbitantly high interest rates that would cripple the economy anyway. As was pointed out in a recent issue of The Economist though, Greece is not really the issue right now. Greece is small – the real problem is Italy; as the world’s seventh largest economy and Europe’s fourth-largest, any debt default would be a massive disaster for the EU and, by extension, the world. Simply stopping contagion from spreading is insufficient though; what they need to do is deal with the structural issues that underlie the problem and caused the massive debt in the first place – you can’t just implement a short-term solution for a long-term problem.


The long-term problem as far as the Eurozone is concerned, is that it does not fit the necessary criteria to be an ‘optimal currency zone’, which is the technical term in economics for a region that has a single currency. To be categorised as an ‘optimal currency zone’, a region must first have economic synchronicity; in other words, there cannot be something like a serious two-speed economy in different parts of the ‘zone’. The Eurozone clearly fails on this point. Looking at the unemployment rate, the average is 10.4%. However, this disguises the large deviation from the mean in the figures of various individual member-states; when we look at these it is easy to see a clear divide between north-west and south/Mediterranean. While countries like Austria and Germany sit comfortably on 4.1% and 5.5% unemployment respectively, countries like Spain, Greece and (the exception to the north-south rule) Ireland languish on 22.9%, 19.2% and 14.5%. The second criteria is that workers and resources need to have a high degree of mobility between countries. This is plainly not the case, or simple human behaviour would dictate that people would migrate to where there are more jobs available. While part of this is related to cultural problems, such as with different languages, a very significant barrier has been the insufficiently flexible labour laws in many of these countries that tend to discriminate against foreign workers, especially if they are not familiar with the language. The last criteria is that financial capital, especially government revenue, must be easily transferable. The EU is not a fiscal union, but rather a currency or monetary union. This means that surpluses in one country can’t be transferred to another country and used there to offset an economic downturn in that country, thus partially contributing to the multi-speed economy situation. While some moves are being made to rectify this, such as German Chancellor Angela Merkel’s proposal of a “fiscal compact”, there is still the substantial hurdle that this would require a new treaty, something which needs unanimous agreement from all 27 members of the EU. However, even if this is implemented (which is doubtful, considering the overall lack of political willpower), it will do very little to help avert the current crisis. Furthermore, similar to the arguments used to support ‘state rights’ in systems based on federalism, local is almost always better for efficient allocation of resources, as more local-based governments are closer to the people and thus better able to respond to a unique area’s unique needs. This would mean that a closer “fiscal compact” like Ms Merkel is suggesting might actually not be a better thing for the Eurozone and European Union.


The reasons for why the Eurozone did not have a real chance for long-term viability at its inception, and is certainly not viable anymore (at least in its current form, and especially in the current economic climate) are primarily economic in nature, which is to be expected when the Eurozone is the principle economic aspect of the European Union. However, there are also numerous other reasons for why the present structures and institutions of the greater European Union, while not impairing the EU’s basic functions, are undesirable and even potentially destructive.


For example, to comply with the European Convention on Human Rights – a precursor to the European Union specific Charter of Fundamental Rights of the European Union (CFREU) – the United Kingdom was compelled to introduce a statutory bill of rights in 1998, known as the Human Rights Act (1998). Little or no recognition was given to the many existing protections of human rights within the UK’s political and legal system, such as extensive precedents within British common law, nor were any provisions made for the inherent incompatibilities between the British common law and continental Civil law systems. [G1] Additionally, the need to comply with the Treaty of Lisbon, ratified in 2009, which finally gave the Charter proper legal force, is problematic because it is an international treaty that significantly degrades parliamentary sovereignty by overruling the sovereign will of the people, which is in many respects the central principle of the United Kingdom’s entire political and legal system. Without getting into a complex discussion over the nature of electoral mandates, it could be claimed that it is a case of an international/supra-national treaty essentially overruling the supposedly sovereign will of the people. Furthermore, UK courts cannot render invalid laws that are incompatible with the Charter of Fundamental Rights; they can only issue so-called ‘declarations of incompatibility’ and ‘request’ that the law be amended until it is compatible. However, the fact that these ‘requests’ are never ignored implicitly undermines parliamentary sovereignty in the UK to a very substantial degree.


While the system of checks and balances on the various arms of government that we have in Australia works very well, these were developed to facilitate the specific needs of the colonies. The similarity with the UK is that they likewise developed a system to suit their unique needs; however these needs and the institutions adapted to serve them are often incompatible with those of other member-states of the EU (such as not having a written constitution with ‘higher law’ status, and instead relying principally on conventions).


This is the same with other issues, not just in the UK but elsewhere too, where making special arrangements would have been even more problematic and infeasible, as it would have undermined the generalities necessary for successful broad application of the regulations (as everyone would therefore want similarly special treatment). This is one of the key areas in which the CFREU again fails utterly. In A, B and C v. Ireland (2010) ECHR 2032, the European Court of Human Rights (ECHR) ruled that there was no explicit legal right to abortion contained in the CFREU. On several occasions, the ECHR has been criticised for using its supra-national status to impose a sort of federal law on the CFREU signatories, but they did not attempt to do so in this case. This is both a good and a bad thing – good because if they had tried to impose it on all member-states, it would have been disastrous for women’s rights, but bad because the resultant lack of consistency and uniformity illustrates why having a supra-national court superior to all these incompatible legal systems is very problematic.


Meanwhile, to return to the main issue of disastrous exemptions leading to economic collapse, if, for example, Greece had been allowed to be exempt from the rules pertaining to government deficit and debt limitations, other countries such as Ireland, Portugal and Spain – ie: all of the ones currently in a bit of strife over their debt – likely would have demanded similar treatment. As a result of this, either the Euro would have been adversely affected or all the other countries would have had to pick up the slack to offset those ones that were exempt. This would result in a continuing spiral of fewer and fewer countries having the rules apply to them until there were just a small number left shouldering the whole burden of keeping the Euro afloat. The Stability and Growth Pact is designed to, oddly enough, maintain the stability and growth of the Eurozone, specifically by capping government expenditure at a maximum of 3% of GDP allowable annual budget deficit and a maximum public debt of 60% of GDP. Supposedly, any violators of these provisions would face very substantial semi-automatic fines. However, there is the problem that these provisions for sanctioning are applied in nothing like a consistent fashion, with France and Germany particularly being prolific offenders.


This talk of exemptions and the lack of sanctions all ties together because the lack of provisions for dealing with governments that breached the debt and deficit rules, Greece had no incentive for not breaching the rules. However, because they were still technically not allowed to do it on paper, Greece had to essentially ‘cook the books’ for their public debt in what looked suspiciously like a gigantic Ponzi scheme. Now, with the European debt crisis, we see the same situation developing that was discussed with regards to rule exemptions, where a small number of rich member states have to prop up and bail out the rest of the Eurozone in order to prevent the currency from collapsing, either in value or just collapsing, period. To summarise, when there are no real or consistent penalties for breaking the rules, it does not matter if there are exemptions for some or not, as there will be an inevitable moral hazard situation where some members will not follow the rules, get into trouble and eventually have to go begging to the others for help to get out of it. There is a further moral hazard issue in that there was a specific provision in the Maastricht Treaty (Article 125) that specifies that there will be no bail-outs for countries that do get themselves into strife with their sovereign debt. This clause was designed precisely to prevent such a moral hazard situation from occurring. However, this has very obviously been breached several times over the past couple of years, thus eliminating the effectiveness of this clause in any future similar scenario. This provides another reason for why the European Union desperately needs to be scrapped and started over.


In order to save the Euro, the only option would be to kick out those countries that are haemorrhaging under their debt burdens. However, while this would be somewhat helpful to these struggling countries, allowing their currencies to depreciate and providing a boost to their export revenues, the symbolic/implicit vote of no confidence in their economies would quite possibly cause such a panic in bond markets that it would guarantee a default.


As Ronald Reagan once said, “centralised power is the greatest threat to liberty”. This could easily be paraphrased to concern the national sovereignty of member-states within the European Union. Like many supra-national bodies (eg: the United Nations, the IMF and the World Bank), the European Union is highly undemocratic, despite there being an actual ‘European Parliament’ with elections every five years. This lack of democracy is a result of an extensive and pervasive culture of plutocracy and overly complex bureaucratic structure that has led to the rise of a new type of civil servant – the so-called ‘Eurocrats’. The network of Eurocrats has drawn a lot of criticism over the years for a variety of reasons, but especially their fondness for over-regulation and inefficient regulatory legislation, as well as for their apparent ability to wield far too much influence over senior policy-makers.


The undemocratic nature of the European Union is best evidenced in the fiasco regarding Greece’s referendum on the bailout package conditions in November 2011. The reasoning was that an issue of such importance as a bailout package that would impose significant hardship on the Greek people should require a proper democratic mandate. As such, the then Prime Minister, George Papandreou, announced a referendum was going to be held, prompting an uproar from Brussels and other EU leaders (especially Germany’s Angela Merkel and France’s Nicholas Sarkozy), as they knew based on the existing evidence of opposition to the Papandreou government’s already in force austerity measures that a referendum had a significant risk of failing. As a result of the pressure being exerted by larger EU member-states, Papandreou was forced to stand down as PM, the referendum was cancelled and the Greek Parliament chose a new PM. While this last bit is entirely consistent with parliamentary democracy, if Papandreou hadn’t been forced by the powers-that-be in the EU to step down in the first place, a new PM wouldn’t have been necessary. Additionally, his replacement was someone who could definitely be classed as a Eurocrat-insider and therefore someone who would be perhaps less assertive in resisting demands from Brussels. It is perfectly legitimate in a parliamentary democracy that the Prime Minister should stand down if he loses confidence of the parliamentary majority. However, the sidelining of the Greek peoples’ democratic rights certainly is not congruent with the principles of democracy. To put it more succinctly, it should be their choice to screw up their own country if they want to, and if the other countries in the Eurozone don’t like it, then kick Greece out of the Eurozone. A similar situation occurred with Silvio Berlusconi in Italy very soon after when market bond rates for Italy’s debt suddenly jumped to record highs. It is ironic that rather than one of the myriad scandals surrounding his infamous ‘bunga-bunga’ parties and various criminal charges for corruption and sex with underage girls, it was actually his losing the confidence of his own Parliament on an important regulatory vote due to rising interest rates for Italy’s sovereign debt that finally brought him down. However, this can still be seen as somewhat undemocratic, as he was forced out by fluctuations in an unelected market making politicians skittish and was again done at the urging of the Brussels bureaucracy.


Prior to the Treaty of Lisbon abolishing them, the European Union was based on three key pillars – economic integration, a common foreign and security policy, and judicial cooperation. Although they were abolished by the Treaty of Lisbon in 2009, these broad principles still form the key underlying tenants of greater European integration. However, there is a big problem with the common foreign policy aspect – they can never seem to agree on one!


For example, only some member-states helped overthrow the Taliban in Afghanistan, and even fewer were in the ‘coalition of the willing’ that helped invade Iraq in the 2nd Gulf War in 2003. Closer to the present day, the EU’s involvement in the no-fly zone intervention in Libya was the done entirely by UK, France and Italy, while practically everyone else in Europe either condemned it or just tried to ignore it. Additionally, although technically the Schengen zone was considered to be under the ‘economic integration’ pillar, it is seemingly starting to fracture, and the reason for this has been mainly foreign in origin, specifically, there was the dispute between Italy and France over Libyan refugees being allowed through Italian customs without especially rigorous border controls being enforced, prompting France to close its borders with Italy temporarily. Germany also tried something similar around the same time, but their motives were more clearly economic in nature, as they were deliberately trying to restrict their borders to foreign workers at the urging of domestic trade unions advocating workforce protectionism, especially trying to restrict those from Eastern Europe who tended to be willing to work for less and thus potentially undercut German workers on wages.


In spite all these criticisms, the Eurozone – and the European Union as a wider body – are doing the best they can, given the institutional constraints they need to work within. However, that is not an endorsement, but rather an indictment. A couple of months ago, an issue of The Economist was headlined “How to save the euro”. My simple response to this – don’t. Likewise, don’t ‘save’ the European Union, at least not in its current form. If this is as good as the Eurozone and the European Union can be given their current structures, they should be scrapped entirely and reformulated anew.




  1. This comment relates specifically to paragraph 8.

    ‘the United Kingdom was compelled to introduce a statutory bill of rights in 1998, known as the Human Rights Act (1998).’

    “Despite having been strongly opposed to the Convention” the UK signed up to the European Convention on Human Rights in 1951. It was a Labour Government which incorporated the ECHR into the Bill which became the Human Rights Act 1998 following a White Paper, ‘Rights Brought Home’, in 1997. It was NOT compelled to do so. Articles 1 and 13 of the ECHR are NOT included in the Human Rights Act 1998. No British Government has ever accepted those two Articles.

    ‘the British common law and continental Civil law systems.’

    There is no such thing as British law, common or otherwise, or one thing that can be called the British legal system. The following is a comment from a blog post about the UK Supreme Court –

    ‘Bear in mind that the legal system of Scotland is regarded as predominantly Romano-Dutch. It is based on principle not precedent. The law of England is Common Law, and founds upon precedent, not principle. Whilst it is correct to say that the Supreme Court is a British institution and there are some Scots lawyers there, it is not satisfactory to have decisions of the Scottish judiciary overturned by an organ which is mainly composed of people untrained in Scots Law. The point about the House of Lords is only partially correct, in that the House of Lords could not retrospectively unpick decisions of the Scottish Courts (or the English Courts). But it seems the Supreme Court can.
    In fairness to all concerned, it would appear that this was not the intention behind the setting up of the Supreme Court, as it was intended only to look at “constitutional” matters eg disputes between devolved legislatures, or between them and Westminster. Using it for Human Rights issues is an accident of circumstances, arising from the fact that Human Rights is not a devolved matter and so is reserved to Westminster, and so is under the Supreme Court.
    Finally can I point out that it is not Scotland which has a “different” legal system. It is England. Every other country in Europe uses a legal system broadly similar to Scotland, based on Roman Law.
    Except England.
    England is the only country in Europe to use Common Law. That is why it would be infinitely preferable on the basis of jurisprudence to have Human Rights appeals heard in Strasbourg by lawyers trained in broadly similar legal disciplines to Scots Law than in England by a majority of Common Law judges. Every other jurisdiction in Europe has Strasbourg as the ultimate court of appeal in this regard. It is our basic right to have the same for Scotland, not as an independent country, which it is not, but as a separate jurisdiction with a separate legal system (which it is).’

    The following are extracts from the Wikipedia entry for ‘Common Law’ –

    ‘Scotland is often said to use the civil law system but it has a unique system that combines elements of an uncodified civil law dating back to the Corpus Juris Civilis with an element of common law long predating the Treaty of Union with England in 1707…Scots common law differs in that the use of precedent is subject to the courts’ seeking to discover the principle that justifies a law rather than searching for an example as a precedent, and principles of natural justice and fairness have always played a role in Scots Law…Scots common law covers matters including murder and theft, an has sources in custom, in legal writings and previous court decisions.’

    ‘that significantly degrades parliamentary sovereignty by overruling the sovereign will of the people, which is in many respects the central principle of the United Kingdom’s entire political and legal system.’

    The phrases ‘parliamentary sovereignty’ and ‘the sovereign will of the people’ are contradictory. You obviously don’t know what parliamentary sovereignty actually means and how it works. The Parliament of England was deemed to be sovereign in English constitutional law in 1688, however, on 1 May 1707 the Treaty of Union between the realms of Scotland and England came into effect. Nowhere in that document, or since then, has the Parliament of the UK been deemed to be sovereign. That has only been assumed because Westminster was the location of the pre Union Parliament of England and was within the jurisdiction of English law.

    ‘If the Scottish people expressed a desire for independence the stage would be set for a direct clash between what is the English doctrine of sovereignty and the Scottish doctrine of the sovereignty of the people.’

    SOURCE: ‘The Operation of Multi-Layer Democracy’, Scottish Affairs Committee Second Report of Session 1997-1998, HC 460-I, 2 December 1998, paragraph 27.

    ’76. …The laws of Scotland and England are, in some respects, tending towards uniformity…Nevertheless the two systems remain separate, and – a unique constitutional phenomenon within a unitary state – stand to this day in the same juridical relationship to one another as they do individually to the system of any foreign country.’


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