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November 29, 2011, Tuesday

A revolution in the making

No, this is not an article about the first free elections in Egypt in 60 years, which could produce a victory for Islamist parties. It is not about the victory of the Moroccan Justice and Development Party (PJD in French acronym, AKP in Turkish), either. Add to these successes the leading role of the moderate Tunisian Islamists, and it would not be an exaggeration to talk about revolutionary changes under way in North Africa.

No, the revolution I am referring to is the total overhaul of the European Union as a result of the present euro crisis. For months now, European leaders have been struggling to find the right answers to save countries that are no longer able to make ends meet. But they never succeeded in convincing skeptical financial markets that the EU was in full control and that trust in the euro could be restored. Instead, the ongoing doubts about the effectiveness of Spain’s drastic budget cuts and the new revelations about Italy’s poor economic situation have led to growing speculation the euro is on the verge of collapse and that European leaders are not able or willing to do what it takes to prevent this nightmare scenario.

The cover of this week’s edition of The Economist says it all. The picture is of a euro coin crashing down; the title reads “Is this really the end?” The main culprits according to the leading global weekly are Germany’s Chancellor Angela Merkel and the European Central Bank (ECB). The bank rejects the idea of acting as a lender of last resort to embattled, but solvent, governments because it does not want to reward bad behavior and because it wants to stick, dogmatically, to its traditional role of securing price stability and low inflation. But with the eurozone in such dire need of a quick but sustainable fix, many observers agree with the recommendations of The Economist. They are all convinced that the ECB must buy government bonds of endangered economies on a large and unlimited scale to prevent these countries from being ruined by the extreme high interest rates they have to pay on the international money market.

The second main actor being blamed is German leader Merkel, firstly because she is preventing the ECB from playing the role most specialists want the bank to play now. But also because she refuses even to contemplate the introduction of so-called Eurobonds that would allow eurozone members to refinance their debt via the issue of bonds guaranteed by the eurozone itself. National and vulnerable debt markets would be replaced by one large and attractive continental debt market that could profit from lower interest rates. The German government is basically against this option because it will probably mean that Germany will have to pay higher interest rates than the extremely low ones they are paying now and because Berlin fears that other eurozone countries will not be willing to stick to the required tough standards.

With all potential exit routes blocked, even the biggest euro optimists started to doubt whether this time around the EU would be able to find an effective last-minute solution. But news is now coming out that Germany and France are preparing plans that could indeed be called unorthodox and groundbreaking.

According to German newspapers and the well-informed, Merkel and Nicolas Sarkozy, in close cooperation with the Dutch, Finnish, Austrian and Luxembourg governments, are considering a core eurozone that would issue joint “elite” bonds in a bid to raise more money at low interest rates for themselves and, under strict conditions, for the troubled southern euro-countries. This tighter fiscal union, established via an intergovernmental treaty, would be joined by those willing to participate but not necessarily by all present 17 eurozone states, let alone by all 27 EU members. To ease some of the immediate problems, the German chancellor would even be willing to soften her position on ECB lending.

On Dec. 9 there will be a crucial EU summit. Until then, we will undoubtedly see more speculation about radical changes to the present setup of the EU and the eurozone. It seems to indicate that, finally, EU leaders have understood that they are expected to come up with plans that were unimaginable one year ago. To save the euro and the EU, some revolutionary thinking is needed. Let’s see whether they manage.

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