Hiding in plain sight

Q&A: Europe's new treaty to tighten budget rules | Reuters

I know this is being treated as a minor treaty, and one that will do little to help the confidence of investors. However, I can't help but to see this as a major step. The media keeps writing and talking about how the treaty itself, if passed, will do little to help with confidence but that, should there be a snag or two in the negotiations, it could actually weaken confidence. I just don't see that. Maybe I'm missing something obvious. After all, this isn't just the media or just the politicians talking this way. Everyone is. The media, the politicians, the businesspeople, investors, the pundits and columnists, everyone has been talking for months, over a year, about the possibility of a collapse of the eurozone. You see people making predictions that the euro has only a 50% chance, or whatever, to last through the year. The contagion will spread, they won't be able to handle it, and Europe will be dragged into recession. This will, in turn, drag the US back with it. Given China's upcoming (hopefully soft) landing, that could potentially mean another worldwide recession. Sounds awful, right?

I don't mean to suggest that this can't happen. But I didn't find it likely a year ago, and I don't find it likely today. First of all, there is no mechanism for a state to withdraw from the euro or for the euro countries to boot one of their members out of the club. Second, it wouldn't be to the advantage of any of the 17 eurozone countries to do that. The smaller countries are relying on the EU and euro institutions to help them out. And the larger countries (most notably Germany and France) aren't interested in surrendering their influence over the other countries. It's true that the bailouts aren't popular in Germany. And so? I don't care how democratic (or not, in the case of most EU institutions) the country's governance is, sometimes the government goes against the will of the people. It's supposed to. Representative democracy, as opposed to the direct kind, is in part an acknowledgement of the fact that the issues are too many and too complex to allow people to make informed decisions on all of the issues in their spare time. Germany has shown no sign that it's willing to just let the troubled states of the EU go bankrupt. It has demanded strings be attached to the help it provides. That's not unusual, though. The IMF has historically done the same thing. Why do people who give to charities not give to homeless people on the streets? Because they want to ensure to the best of their abilities that the money they're giving away charitably is used for purposes they approve of and not, say, alcohol and drugs. Same thing, but on a personal level. Germany attaching strings, therefore, should be expected and is in no way an indicator that Germany is prepared to let states in the eurozone fail.

I wrote a paper for a class last year on the question: Why Is Germany in Favor of European Integration? I'm tempted to post it in a few parts on this blog. I've done that with a health care paper I had to write in the past. Saves me some typing.

Anyway, it would seem to me that the EU has continued to, and will continue to, integrate. The UK is wary of being part of it, understandably. But the Franco-German axis is pushing it. At the moment, the EU would still be most accurately seen as an international organization, albeit an elaborate one. There are two key powers for a state. One is the military/security situation. The other is taxes. France has been pushing the former for decades. Germany's been pushing the latter for years. Those are the two most powerful and influential states in the EU, and they've had a tendency to operate in tandem as part of a Franco-German axis. Or, at least, attempt to do so. For pro-EU types, that's encouraging.

The treaty being worked out right now would give the ECJ power to levy a fine on a state that didn't meet the budget deficit requirements. The deficit can't be any larger than 0.5% of the GDP, and the fine can be up to 0.1% of the state's GDP. Such definitive control over a clearly domestic, intrastate process and the means for punishing bad behavior are both big steps in the direction of federal power. This is significant, on a level beyond investors' confidence. That's a transient thing. As the now-tepid recovery picks up in the US, if China does in fact achieve the soft landing they appear to be shooting for, investors will gain confidence. The mood of the markets is a response to more than just what's going on in the conference rooms of Brussels. The world-at-large improving, as it's doing, will pick up their confidence levels in Europe too. Later, and less, but nevertheless. As time passes and the stories in the media aren't constantly about this worrying statistic or that one, but rather economic news gets back to a more normal state, there will be an upward spiral. The reverse of what happens as recession approaches (when it doesn't do so suddenly).

This recession will take time to fully recover from. The economy itself in advanced countries is changing from an industrial one to the next step, whatever it may be called. Post-industrial, at the moment (rather unimaginatively). In the US, a lot of people's money was in their houses, and the housing market crashed. That will take time for the consumers to rebound from, and the US is a consumer-oriented economy. Third, the financial system itself is what screwed up. That's how businesses get anything done in the modern economy. It is unreasonable to expect a speedy recovery given that. And, lo and behold, we're not getting one. Unemployment will take awhile to recover due to items one and three, and that's exactly what the CBO has consistently projected.ll

It's interesting to report on every bad number that comes out. And in the age of 24-hour news media, and social media, every number that isn't completely positive can be spun ad focused on and made to look bad. In an era where most media is owned by for-profit big businesses it shouldn't be surprising that that's what they report on. Even nonprofits have to take that into consideration because if they aren't watched because they don't give enough play to stories like that then they could go under just as easily as a for-profit company can. Combine that with the interest politicians have in declaring that we're on the brink of disaster but it can be avoided if only we vote for them and their parties and you have a recipe for fear-mongering. Which is exactly what we have. News isn't limited anymore by trying to fit everything into a half-hour TV program, or an hour-long radio program, or X column inches. The media and the politicians have incentive for fear-mongering, and they have the space and time for it.

I mention all that because that affects how investors and the markets writ large react. Which means their confidence is shaky and we all get to read endless stories about how the EU, and the euro specifically, is on the brink of collapse. That's all perception, though, and it doesn't change the underlying reality. The economy is improving. The numbers show that. Jobs are being created at faster rates, even though there are blips. Consumers are spending more, people are loaning more, and countries are, slowly, getting their fiscal houses in order. That's all in plain sight. Commentators and the players in the game itself are just missing the forest for the trees. It's obvious the eurozone will continue on. It's obvious the economies in the Western world are recovering, even if slowly and unevenly. It's obvious politicians understand the magnitude of the problems facing their states. The EU will continue to exist, as will the euro. It will still expand. Croatia is likely to be added soon (their referendum tomorrow is expected to approve their accession to the EU). There will be further integration. Especially as China continues to rise, Russia continues it's resurgence, the Eurasian Union forms (if it's as successful as Putin is hoping it is. If it's a failure, the Europeans won't care about it), and the US turns inward slash turns its focus to Asia Pacific rather than Europe. The US has sixty-some military bases in Germany, I believe. It's also my understanding that 15-20 of them are scheduled to close within 5 years. And that's before the most recent strategic review and the upcoming military budget. The EU isn't going anywhere anytime soon.

EDIT: For some reason, I accidentally typed "access" when I meant "axis". Fixed that.