Stratfor and Pilar López de Ayala

Tuesday, June 12, 2012
In this Stratfor article Frriedman discusses the ongoing EU crisis as it moves on to the economic problems and bailout of Spain.

As he points out there was much less political posturing with the Spanish bailout than the earlier Greek drama. Friedman thinks this is just adjusting to the process of the crisis, rather than addressing the underlying crisis itself.

He then discusses the EU developing mechanism of further European integration via an EU Finance Minister. The problem with this approach is that it cedes national control of budgets, and with it sovereignty, to Germany's and Brussel's bureaucrats. Whether the European public will except such integration is a question that remains to be answered.

The beginning of the article is excerpted below, with a link to the entire article at the end of the excerpt.

For the article's Hot Stratfor Babe I looked to Spanish actresses and, after carefully weighing the pros and cons of each, I finally selected Pilar López de Ayala for the honor.

I don't know much about Ms de Ayala. in fact, truth be told, I don't know anything about her outside of the fact she appears to be a successful Spanish actress. I actually chose her because she had one of those long Spanish names that amuses Americans for some odd reason.

Spain, Debt and Sovereignty
By George Friedman, June 12, 2012

Eurozone countries on June 9 agreed to lend Spain up to 100 billion euros ($125 billion) to stabilize the Spanish banking system. Because the bailout dealt with Spain's financial sector directly rather than involving the country's sovereign debt, Madrid did not face the kind of demands for more onerous austerity measures in exchange for the loan that have led to political instability in countries such as Greece.

There are two important aspects to this. First, yet another European financial problem has emerged requiring concerted action. Second, unlike previous incidents, this bailout was not accompanied by much melodrama, infighting or politically destabilizing threats. The Europeans have not solved the underlying problems that have led to these periodic crises, but they have now calibrated their management of the situation to minimize drama and thereby limit political fallout. The Spanish request for help without conditions, and the willingness of the Europeans to provide it, moves the European process to a new level. In a sense, it is a capitulation to the crisis.

This is a shift in the position of Europe's creditor nations, particularly Germany. Berlin has realized that it has no choice but to fund this and other bailouts. As an export-dependent country, Germany needs the eurozone to be able to buy German products. Moreover, Berlin cannot allow internal political pressures to destabilize the European Union as a whole. For all the German bravado about expelling countries, the preservation and even expansion of the existing system remains a fundamental German interest. The cycle of threats, capitulation by creditors, political unrest and then German accommodation had to be broken. It was not only failing to solve the crisis but also contributing to the eurozone's instability. In Spain, the Germans shifted their approach, resolving the temporary problem without a fight over more austerity.

The problem with the solution is that it does nothing to deal with the larger dilemma of European sovereignty and debt. Germany is taking responsibility for solving Spain's banking problem without having any control over the Spanish banking system. If this becomes the norm in Europe, then Germany has moved from the untenable threat of expelling countries to the untenable promise of underwriting them. Europe, in other words, has accommodated itself to the perpetual crises without solving them.

In our view, the root of the problem is the struggle to align the world's second-largest exporter with a bloc of nations that ought to be enjoying positive trade balances but are instead experiencing trade deficits. Germany, however, views the root of the problem as undisciplined entitlement and social program spending that leads to irresponsible borrowing practices. Thus the Europhiles, led by Germany, don't look for solutions by redefining the European trading system, but rather by disciplining countries, particularly within the eurozone, on their spending and borrowing practices.

According to a report in German magazine Der Spiegel, European Central Bank President Mario Draghi, Eurogroup President Jean-Claude Juncker, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso are drafting a plan to stabilize the system. Under the purported plan, all eurozone members would be required to balance their budgets. Borrowing would be permitted only if approved by a Europe-wide finance minister, a position that would have to be created and supported by a select group of eurozone finance ministers. If approved, money could be borrowed by issuing eurobonds.

The report appears to be well grounded, with European leaders confirming that the four individuals are working on a plan (though they did not confirm the plan's details). The approach outlined in the report would attempt to resolve Europe's problems by increasing the Continent's political integration -- a concept that has been discussed extensively, particularly by the Germans and Europhiles. Given the circumstances, this would seem to be a reasonable position. If all of Europe is going to be responsible for sovereign debt issued by member countries, then the stakeholders who have the most invested in the European project must have control over borrowing. The moral hazard of de facto guarantees on borrowing without such controls is enormous.

There are two problems inherent in this approach. The first, as we have said, is the assumption that Europe's core problem is irresponsible borrowing and that if borrowing were controlled, the European problem would be solved. Irresponsible borrowing is certainly part of the problem, but the deeper issue is trade.

The European Union is built around Germany and therefore the sort of economic dynamism that Germany enjoyed in the 1950s and 1960s, when the country benefited from access to the U.S. market while retaining some protection for its own emerging industries. Eurozone countries' inability to cover debt payments stems in part from their inability to compete with Germany. Under normal circumstances, the economies of developing countries grow through exports driven by lower wage rates, but the shared currency prevents developing European countries from taking advantage of low wages. Borrowing may be too high, but Germany's dependence on exports makes it impossible for Berlin to allow a Greece or a Spain the time and space to develop critical economic sectors in the way that the United States allowed Germany to develop after World War II.

The second problem is the more serious one. The ability to manage a national budget, including the right to borrow, is a central element of national sovereignty. If the right to borrow is transferred from national governments to unelected functionaries appointed by a multinational entity, a profound transformation of democracy in Europe will take place. The European Union has seen transfers of sovereign rights from national governments and their electorates before, but none as profound as this one. Elected governments will not be able to stimulate their economies without approval of this as-yet-unnamed board, nor will they be able to undertake long-term capital expenditures based on the issuance of bonds. This board thus will have enormous power within individual countries.