DE BORCHGRAVE: Saving a buckling EU

by Michael Butler on November 3, 2011 11:16 AM in Politics

Is China now emerging as banker to the rest of the world? The United States owes China $1.3 trillion – out of a total U.S. public debt load of $14.1 trillion. The U.S. also owes almost $1 trillion to Japan.

So clearly, 17 European Union nations that share the same euro currency could not turn to the United Statesto help bail them out of their liquidity crisis. China was the only power in the world that could afford to rescue the euro from collapse.

China also has almost 6 million workers on a wide variety of projects all over the world, from a casino complex near Nassau in the Bahamas to a mineral-rich mountain near Perth, Australia.

Greece is the sick man of Europe’s common currency union. Its public debt hovers at 120 percent of gross domestic product. Undermining confidence in the euro, Italy is now coequal with Greece. It owes a staggering $2.7 trillion, or 120 percent of its gross national product, now the second-largest in the world after the United States – clearly too big to bail out.

Silvio Berlusconi’s government is hanging by a thread, too weak to take any drastic remedial measures.

The best Italy could offer is to raise the pension age from 65 to 67 – but not before 2026 – 15 years hence.

Wherever they searched inside the eurozone and the larger Atlantic zone, there was no solution.

This left China. French President Nicolas Sarkozy phoned his Chinese counterpart, Hu Jintao, to request support. Klaus Regling, the German chief of the European Financial Stability Facility (EFSF), arrived inBeijing two days later in the role of mendicant.

For China, the role of Europe’s savior following 66 years as a U.S. protectorate would be well-nigh irresistible. But China is not about to jump through European hoops into the monetary quicksands of Europeon the strength of a friendly Gallic phone call and a Teutonic visitor.

An emergency EU agreement after night-long negotiating sessions among aides to principals had banks agreeing to:

c A 50 percent loss on their holdings in Greek government debt, tantamount to a 100 billion euro loss on holdings of 200 billion euros.

c Seventy principal banks to raise an additional 106 billion euros by the middle of next year to enable them better to cope with financial stress.

c Raise a recently created eurozone rescue fund to 1 trillion euros.

Holders of Greek bonds have been told they must accept a loss of at least half the face value of their Greek paper.

Most big investors bet against Greece with “derivatives,” financial instruments that turn a profit when there is a debt default. They are a sort of lucrative heads-I-win-tails-you-lose, complex financial instruments designed principally to protect the banks.

European leaders had tinkered with a package of tentative measures to bail out its leaky bailout fund, which would recapitalize Europe’s banks and reduce Greece’s crushing debt load.

World markets keep grasping at straws in the euro wind tunnel.

Dow Jones assumed it was a win for stability in Europe and registered its biggest monthly percentage gain in almost a quarter of a century.

Europe was still reeling under the Greek crisis that has been ongoing since the fall of 2009. European central bankers saw no grounds for the kind of optimism that drove up stock markets. Gimmicky financial instruments, they said sotto voce, were used to boost the effectiveness of the bailout fund.

The monetary union’s crisis is endemic. What’s needed is the next step to proper integration, or a fiscal union. To make that possible, 17 European countries, with France and Germany in the vanguard, would have to surrender power to a federal rather than a confederal entity.

Thus, Europe’s political chiefs – e.g., Mr. Sarkozy and German Chancellor Angela Merkel – would be relegated to becoming de facto governors of a European province, no longer heads of state. The federal budget, as in the United States, would be determined by a federal government.

Under a federal government and a fiscal union, the president of France and the German chancellor would no longer be able to strut their stuff around the world as heads of countries. The likelihood of this happening short of a dire global crisis, range from nil to zero.

Mrs. Merkel and Mr. Sarkozy would rather opt out of their monetary union and revert to national currencies than accept the role of European provincial governors.

If the euro fails, said Mrs. Merkel, “No one should think that a further half-century of peace and prosperity is assured [because] it isn’t. We have a historic duty to defend and protect the unification of Europe that our forebears achieved after centuries of hatred and bloodshed.”

In 1951, Europe’s founding father Jean Monnet told us that Europe would not exist as a single entity, like the United States, until it had common armed forces. The European Defense Community (EDC) was designed to bring about a single army, air force and navy among the six founding members of a united Europe – France, Germany, Italy, the Netherlands, Belgium and Luxembourg. Great Britain didn’t join the European Economic Community (EEC) until 1973.

Pierre Mendes-France, the French prime minister who negotiated an end to the Indochina War in 1954, also torpedoed the EDC. Had the EDC gone forward, Gen. Charles de Gaulle, would have scrapped it, too, when he returned to power in 1958.

Since the end of the Cold War 20 years ago, nationalism in Europe has grown stronger.

In Greece today, newspaper cartoons show Greeks giving the Nazi salute to mock their government knuckling under to Mrs. Merkel’s terms for a Greek bailout. European inspectors will be setting up shop inAthens to monitor Greek compliance with austerity measures over the next nine years, to 2020.

In Portugal, labor leaders are protesting what they call “a state of occupation,” a reference to Brussels-based inspectors from European Union headquarters.

No one really wants the euro to fail. But no one wants the political instruments that would insure Europeagainst failure – a federation, a fiscal union and a European bank with federal authority.

Arnaud de Borchgrave is editor-at-large of The Washington Times and United Press International.