European Union

The European Union is the result of an union with a matter of political and economic conveniences and long term strategic benefits. But nonetheless the practical benefits would faced societal hurdles.

An European Union would benefit the countries as a whole as it's previous status as colonial powers has waned almost quite completely. Therefore, most the EU countries with it's exploratory history has all but lost this sense of entitlement around the world. In reality, most EU companies have made most of their money in Asia- it's previous colonial states. The world has more or less levelled itself out in terms it's size proportional to it's influence. No longer does the elitist few have a huge disproportionate amount of power over many because of better advancements in technology or intellect.

Hence the EU countries has diminished in it's influence even though it's history and contributions to many social institutions still command respect among many. Against this backdrop, the European Union was set up to addressed this concern. It recongizes therefore it's diminishing influence and waning clout and hence set up an union to provide economic, political and geopolitical securities.

Hence the Euro dollar and other political institutions have been set up to coordinate actions among it's member states. The EU is not just about it's financial union, and I believe it involves immigration, social, political and maybe to a lesser degree security union. But I do not believe that the EU is an union with a common identity. It is an union of economic, social and political conveniences and therefore has lumbered along and only focusing on incremental changes.

It would therefore has to decide what does the EU really stand for. Does it want to have a national integration [ which has little chance of happening in our lifetime] or does it just want to be a loose grouping of countries which would help each other from time to time.

Let us then focus on the near term which I do believe is the latter. EU then as a bloc would then become a marriage of convenience rather than of an union [ even if they does take steps towards the former in the very long term]. Hence in this case, this would become a matter of negotiation than as a matter of integration. There then is no greater good but rather a negotiation of self-interested parties with both long and short term views, both private and public calculus.

The time horizon would determined how hard one wishes to push for one's agenda without destroying or damaging the union in the first place. The private and public calculus would then determine how much to grounds to cede on nation's behalf [ since politicians are representatives of each state] without losing legitimacy or support of the electorate.

The near term problem facing the EU would be that the soverign bond crisis. This crisis is brought about by 2 things 1) shifting methodologies in rating of credits- the paradigm shift includes even questioning the assumption of sovereign bonds as risk-free assets 2) Further to the first, that Keynsian economics or deficit spending as a matter of benign goverment stimulus has been taken a negative turn and been perceived as poor fiscal management as opposed to that necessary economic tool- of which most EU countries has taken as conventional economic wisdom.

The paradigm shift impacts has been two fold 1) downgrading credit ratings hence increasing government borrowing cost 2) austerity measures resulting from complying with new methodology of balanced or at least restraint budgets. This ultimately served to be a double whammy for the EU countries 1) who found it too expensive to borrow from international capital markets 2) are unable to print money and support the economy- hence ultimately hampering growth and discouraging jobs creation, investment and risk taking.

Conventional economic wisdom and financial innovation coupled with the rise of the welfare state and existence of untapped markets meant that deficit spending and high debt/GDP ratio is considered necessary and normal. This situation was allowed to exist insofar that financial innovation allowed a constant flow of funds inflow- hence supporting liquidity without any genuine wealth creation. They had favourable credit ratings and therefore low borrowing costs hence insofar that they were the one whom created the tools of which to rate themselves in the first place- and was also at the same time given a default status as an risk-free assets as sovereign bond issuers.

Therefore, even with high tax rates, consistent deficit spending, they had continued to have economic growth resulting from in closer scrutiny, a higher leveraged economy. But most people looked at the economic growth and seldom therefore at how it's been achieved.

Hence, at this current juncture, this paradigm shift have now did away with this idea of an unquestionable attitude towards sovereigns as risk free and have punished them higher borrowing cost on current issues as methodologies changed of which previous issues have been graded using the previous conventional and more liberal methods. The new methods now rates issues on how growth and creditworthiness is been achieved as opposed to just having using statistical methods of which with practice and knowledged can be presented to obtain a favourable rating.

Therefore the shift towards this "how" method is definite and the markets, credit rating agencies have more or less comes to a consensus on this new method. Hence the embattled EU countries can do two ways 1) fight the markets and insist that their way is right 2) find a way of generating growth while negotiating for a fund injection to increase demand and conteract the rising borrowing cost.

A 5-10% borrowing cost for ten years meant that economy has to grow as much otherwise, it would be indebted even if it grows at pace of 2-5%- which is the normal pace of a developed nation. Hence considering that only emerging economies like that of India and China are able to grow at that pace, these EU countries therefore would be in a deadly spiral of rising borrowing cost and little growth- with no access to funding and hence the country would be in effect be bankrupt. Coupled with that of a contagion effect of which even healthy countries can be affected, the risk is rather real that the high borrowing cost is being addressed.

Hence, the urgent need would therefore to obtain cash injection. Pump liquidity to the system, loosen credit requirements while ensuring that at least budget requisistes in being met- since debt is a long term liability while encouraging investments and growth. Borrowing cost would probably remain stubbornly high for the foreseeable future as they clear up or at least restructure their debt and restraint their budgetary spending.

With cash injection, borrowing cost would at least drop a substantial amount as confidence is brought into the market and concrete steps are taken in conjunction to restructure their economy, tax system and sovereigns. Hence as confidence returns, the countries can take advantage to auction off bonds while paying off external emergency cash injections which often comes with very strict requirements. This would then give them leeway in jumpstarting their economy again.