Europe’s recent attempt to manage the persistent debt crisis still remains a source of great concern. Naturally, the issue is magnified by the constructs of the European Union, overwhelmed by healthy egos and very little money.
The European Union is a confederation of 27 nations who collaborated to facilitate the free movement of goods, labor and capital. In fact, the majority of all EU trade is done internally in what has collectively become a $16 trillion economy. It was originally established to maintain peace in the aftermath of WWII, believing that nations who trade together stay together, preferring bottom lines to bombs.
In 1993 the EU ratified the Maastricht Treaty, which led to the unification of the currency of 11 member states into a single denomination in 1999 that has since grown to 17 nations. During the course of unifying the currency, the European Central Bank was formed to issue money and maintain price stability.
If everyone knows it’s broken, make it too complicated to fix. The European Commission can both propose and initiate legislation and is responsible for upholding treaties. The European Council, on the other hand, is composed of the heads of states and offers strategic direction, albeit with no formal authority.
The Council of Ministers, heavily influenced by France and Germany (who diluted the Stability and Growth Pact meant to safeguard against excessive debt levels to suit their own purposes), sets medium term goals and approves the budget and legislation proposed by the European Commission. There’s also a European Parliament, the only elected political body in the EU that exercises legislative functions in conjunction with the European Council.
These competing bodies must then referee supranationalism and intragovernmentalism. The former sentiment is generally adopted by European Commission, who believes the health of the EU goes beyond national interest. The Council of Ministers, however, promotes cooperation between national governments often associated with the latter argument.
The recent events necessitate financial contributions from wealthier member states and austerity measures from ailing countries that require approval from their respective bodies of government, all of whom maintain different interests and historic relationships. To put the current dilemma into context, these elaborate bureaucracies and legal principles must now coordinate with one another to manufacture economic growth and prevent a sovereign debt crisis.
Germany may be the only successful child amongst a family of high school dropouts who can dig the EU out of this hole, despite an impertinent spouse tired of writing checks and supporting weaker members of the brood. Please note that the taxpayers of Germany heard stories from their grandparents about the Weimar Republic and fear hyper inflation the way Americans ignored the savings habits of the greatest generation.
This meandrous process has produced cosmetic remedies, such as leveraging the European Financial Stability Facility to provide insurance for suspect Italian and Spanish debt, at best a high stakes game of chicken. Private investors can either throw good money after bad or watch capital disappear in a disorderly liquidation of sovereign debt. It’s Mary Poppins at her best - pick your poison and pretend it’s a spoonful of sugar.
The global markets are all watching Europe’s efforts to unscramble scrambled eggs; the one size fits all monetary policy apparently appropriate for no one. Things might work out in the end, but sooner or later this collage of erudite politicians must play the role of a tailor, a vocation for which few of them have any experience.
Ivory Johnson, CFP, ChFC, is the director of financial planning at Scarborough Capital Management, Inc. and has over 20 years of investment experience. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance. He can be followed on www.IvoryJohnson.com.