A group of hikers has gone astray. They are trying to reach a castle visible on a hill in the distance, but the path they are taking clearly won’t lead them there. Their leader, however, reacts by telling them to pick up the pace.
This is the situation in which Europe and European Commission President Jean-Claude Juncker find themselves today. The euro has proven to be a mistake, because it created an inflationary credit bubble in the south which destroyed the region’s competitiveness and, after it burst, demanded giant aid programs from the northern countries.
Of course, these programs stabilize the false relative prices that developed during the bubble period. And the Schengen agreement has opened the floodgates for a new migration from the poorer regions of Asia and Africa into the social welfare states of northern Europe. Mr. Juncker’s reaction is to bring even more countries into the euro zone and the Schengen Area. He is the charismatic and yet confused leader of a group of hikers who keep getting lost under his leadership.
Although there is no legal obstacle to (almost) all EU countries eventually becoming part of the euro zone, Mr. Juncker apparently wants to soften the convergence criteria, as well as to provide financial incentives for joining. This will lead to the same kind of destructive overheating of the economy that occurred in southern Europe.
In expectation of joining the euro zone, the citizens of Croatia, Romania and Bulgaria have already gotten themselves into financial trouble by taking out excessive euro loans. It is understandable that the western banks that issued these loans want to see euro printing presses set up everywhere. Then these countries will be in a position to pay off their creditors by printing money themselves, if necessary, as was the case in southern Europe in the last 10 years.
The protection offered by euro printing presses will keep private credit flowing and allow for the continued issuance of foreign currency loans. The credit that is artificially inflated by this protection will continue to expand government systems and increase pensions, social transfers and civil servant pay as well as lead to overheating in the real estate sector and create wage increases in domestic economies, undermining international competitiveness.
Because currency devaluation is no longer possible, the still-intact countries of northern Europe will be asked, once again, to tolerate these countries’ use of the printing press and support them with ECB guarantees and real financial transfers. Mr. Juncker’s program will trigger the same chaos that we have already experienced in southern Europe in the eastern European countries that are not part of the euro area yet. It will be Greece squared.
A similar verdict applies to Mr. Juncker’s proposal to expand the Schengen area eastward. Hasn’t the new mass migration of recent years shown that Europe has too few internal and external border controls? Why was the flow of refugees from Turkey stopped? Because of the agreement with Turkey, as Mr. Juncker claims? Or wasn’t the causal factor the fence in Macedonia, as the Frontex border protection agency reported, which Austrian Foreign Minister Sebastian Kurz had built with the cooperation of the Visegrád countries?
In light of the latest flows of refugees leading from Turkey across the Black Sea to Bulgaria, and in light of the foreseeable problems with the accession negotiations with Turkey, the Hungarian fence on the border with Serbia and the border controls on the Romanian border are extremely useful for Europe’s stability. The countries of central Europe should resist the attempt to prevent border controls at the Romanian border by admitting Bulgaria and Romania to the Schengen Area. What exactly is the head of the European Commission on about?
Of course, the European Commission cannot ignore the interests of financial institutions in Paris, Luxembourg and Frankfurt. A crisis among banks that backed the wrong horse by investing in foreign currency loans in eastern Europe is undoubtedly unpleasant. Of course, even more unpleasant is the turmoil that would be unleashed by inflationary economic bubbles in eastern Europe and new flows of refugees to central Europe. The time has come to talk sense into the leader of the European group of hikers and ask him to correct his course.
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