Wednesday, October 19, 2011

Big boys call the shots in EU financial crisis

Oct 19, 2011


Tiny Slovakia forced to join bailout despite doing everything right

By Jonathan Eyal

SMALL countries are supposed to know when to shut up and simply do as they are told.

At least that is the opinion of Mr Jose Manuel Barroso, the European Union's top-ranking official, who was infuriated last week when Slovakia, one of the EU's newest member states, had the temerity to reject a bailout plan for Europe's financial crisis. 'Sovereignty is fine,' Mr Barroso lashed out, 'but you cannot allow a small stakeholder in the community to slow down all the others.'

Slovakia ultimately relented: Under intense pressure from its neighbours, its Parliament duly voted again, approving the bailout proposals.

However, ordinary Slovaks have every right to feel aggrieved. The way big European countries treat their smaller allies is little short of appalling. An EU which was created in order to ensure the independence and equality of its members is now trampling on these very principles.

Slovakia, with a population of 5.5 million, may account for only 2 per cent of the EU's total population, but far from being the object of ridicule, it should be hailed as Europe's poster child.

The Slovaks languished under the colonial rule of Austria and Hungary for centuries and, more recently, were part of a union with the Czechs in what used to be called Czechoslovakia. That union failed and, in 1992, the Czechs and Slovaks parted ways.

In a near-mirror image of Singapore's historical experience, the Slovaks were initially told they were too small and resource-poor to thrive on their own. And, just like Singapore, they proved their doubters wrong. Slovakia attracted massive investment from overseas; it is now one of Europe's top car producers. Although still relatively poor, Slovakia's economic growth rate is among the highest in the industrialised world. It has shown that ingenuity and good governance count for more than sheer size.

When Slovakia became the first Eastern European country to join the euro currency zone in 2009, it took its obligations seriously. Its government reduced its debts and stabilised inflation, a Herculean feat which won universal praise.

Yet, to their horror, the Slovaks soon discovered that other euro member states exercised no such responsibility; in fact, they continued to borrow and spend freely. And, when Greece, Ireland and Portugal faced bankruptcy, the Slovaks were suddenly told they must pay into a fund to bail out these countries.

The sums involved are considerable: Slovakia's contribution is €7.7 billion (S$13.5 billion), a mere 1 per cent of the total bailout fund, but a lot of money for a small country. More importantly, Slovaks are incensed by the idea that they should bail out countries which are far richer, and which have only themselves to blame for their current predicament.

European officials brush aside such objections. To them, joining the euro zone club entails both benefit and responsibility.

There is no doubt that Slovakia derives enormous benefits from euro membership: It operates a currency with a global reach, it is able to borrow far more cheaply and has gained the credibility of a mature economy, thereby attracting further investment. Still, the argument that, as a result, it must now pay for its bankrupt euro partners remains false.

Existing European treaties forbid the bailout of any country and ban the European Central Bank from lending to individual states. So, Slovakia is perfectly within its rights to say no, because the current effort to save the euro is being undertaken despite, and not because of, existing legal obligations.

Still, the Slovaks have accepted that if they wish to save the European currency system, they have no choice but to cough up the cash. Yet what worries them is that the sums recently pledged are already considered insufficient; much larger figures, going into the trillions of euros, are now being bandied about.

All the initiatives on saving the euro are being launched by two big countries: Germany and France. They decide how much money should be offered, to whom and on what conditions.

What is more, an informal division exists between Western and Eastern Europe. The objections of Western European countries are always taken seriously. For instance, not one European politician dared to accuse Britain of irresponsibility when it blocked the idea of introducing a tax on financial transactions.

Similarly, no wave of criticism fell on France, the Netherlands or Ireland when they rejected a project for an EU constitution back in 2005. And no one condemned the Germans when they recently subjected Europe's financial arrangements to a decision of their own national constitutional court.

But when Slovakia dared to raise objections, it was treated much like an irritant. Literally minutes after its Parliament voted against paying its money last week, German Chancellor Angela Merkel defiantly announced that the financial bailout project 'will go ahead'.

Mrs Iveta Radicova, the Slovak Prime Minister, paid for the passage of the bailout vote with her job: She pushed through the deal, but her government collapsed, and fresh elections are due next year. Yet, the rest of Europe is mistaken if it believes this is the end of the story.

Currently, Germany and France's plan to remove the right of individual countries to make any decisions in future economic affairs, and transfer this to a European committee - which, inevitably, will be dominated by the bigger members - is creating an uproar throughout the continent. In their rush to save the euro, Germany and France may end up tearing the EU apart.

The sorry treatment of Slovakia carries a warning for other regional organisations inspired by the EU. Bodies such as Asean are frequently criticised for taking decisions by consensus because it supposedly slows down progress.

However, as the EU's current experience indicates, any arrangement which ignores the interests of individual states because they are small is not only dangerous, but also deeply unjust.

Just ask Slovakia, which did everything right and has the law on its side, but still finds it difficult to be heard.

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