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Friday, June 29, 2012

Incremental Change in the E.U.: A Banking Regulator

 The E.U.’s European Council, which represents the union’s state governments, agreed at the end of June in 2012 to make the federal bailout fund directly available to banks. Spanish banks had been seeking 100 billion euros. Counting the bailout funds as debt of the state rather than as bank debt would have further increased Spain’s relatively high borrowing costs. Counting the bailout funds as bank rather than state debt can be viewed as an instance of the E.U.’s “direct effect,” wherein the federal level can directly affect E.U. citizens and their private associations.  This distinguishes the E.U., by the way, as an instance of modern federalism, from the old foedus (i.e., treaty), or confederal (“alliance”) type of federalism. In other words, already by 2012 the E.U. as a federal system was akin to the U.S. post-1789 (i.e., after the Articles of Confederation).  The direct effect implies the existence of a federal government (rather than a mere alliance of sovereign states).  And yet, state leaders such as Francois Hollande were referring to the E.U. as seulement an “economic and fiscal union.” C’est démodé, meme borné. (1) Such figures, with an obvious self-interest in perpetuating le pouvoir of their respective state governments, were referring to the European Council’s approval of a new federal banking supervisory body akin to the Federal Reserve in the U.S. as a “banking union.”

 The rhetoric aside, the decisions of the European Council to allow federal bailout funds to go directly to state banks and to approve the creation of a federal supervisory body for banks a par for the course for the E.U. in respect to its history. Integration, which is code for transfers of governmental sovereignty from the states to the federal level, has proceeded in incrementally in fits and stops since the Shuman plan in the early 1950s. In this respect, the innate cautiousness of Europeans can be seen. To suggest that even in a fiscal crisis a constitutional convention should be held to concentrate on a leap of sorts ignores the history of European integration as well as “the way things are done."

I suspect that the E.U. will continue to move, albeit slowly, toward a more balanced federal system (it being already a political system). Hence, I would urge investors not to be too influenced by the sensationalistic media headlines that warn of the imminent demise of the euro or even the E.U. itself. As a similar example of misleading (and self-serving headlines) in the U.S., the Huffington Post claimed on the day after the U.S. Supreme Court (equivalent to the ECJ in the E.U.) decided on “Obamacare” (Affordable Healthcare Act of 2010) that the war “had begun” on “Obamacare.” Fortunately, the European media are not as obsessed with the perpetual election campaign for the U.S. Presidency. My point is that investors should not be rattled by opportunistic headlines. To put it another way, Europe will muddle through. In fact, a glance at the $16 trillion federal debt in the U.S., plus the respective public debts of several of the republics therein, might suggest that the incremental approach of the Europeans in the midst of a “crisis” may be a sort of safe haven, if viewed in a long-term perspective rather than borné.

In a nutshell, for all of my criticism of the sheer depth of European denial concerning the E.U. itself as a federal system, I’m rather bullish on Europe. Meanwhile, I see festering sores in the U.S. that are silenced for the time being by artificially low interest rates and distracting headlines.


Steven Erlanger and Paul Geitner, “Europeans Agree to Use Bailout to Aid Banks,” The New York Times, June 29, 2012. http://www.nytimes.com/2012/06/30/business/global/daily-euro-zone-watch.html?pagewanted=1&_r=1&hp

1. “This (mentality) is antiquated, even narrow-minded.”