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JERUSALEM, ISRAEL–Investors are looking ahead to what many are hoping will be a landmark EU summit next week, but some economists are concerned that the fiscal fabric of the euro area simply will not allow for the drastic changes necessary to keep the region together.Renowned Financial Times columnist and economist Martin Wolf is one of those euro-sceptics, arguing at the Israeli Presidential Conference in Jerusalem on Wednesday that any hope for federal union in Europe is politically doomed.
“What does Europe look like if we get through this and solve this crisis?” he asked rhetorically. “It looks a lot more like a federation,” he argued, calling banking union and basic social services a part of that plan. That said, “there isn’t the slightest chance of getting to that federal union on the current path,” he added.
That’s because the popular political will to suppress sovereignty in countries simply isn’t there, even if Germany finally concedes to make more drastic changes.
“If they agree a federal constitution, a genuinely federal constitution, there will be referendums…[Euro supporters] are going to lose those referendums. This resolution will not be enacted.”
Wolf explained that recent developments have completely changed his view of how the crisis will pan out. “I regard a partial break up at least–and it’s not the view i took a few months ago–as extremely likely in the next few years.”
A “balance sheet recession [in which countries build up too much public and private debt] runs right through the middle of the eurozone…and Europe is almost perfectly designed not to be able to respond to that crisis,” he explained. What’s more, “the idea that standard austerity programs will work seems to be a fantasy.”
Recent developments that have quelled angst over Greece and Spain, Wolf argues, are short-lived at best.
“The Greek program is now about to be limited by a government who doesn’t really have a majority, headed by a man who has spent the last 2 years campaigning against it. Anyone who thinks this program will be carried out is living in a fantasy,” he remarked, to audience laughter. “If they don’t [make changes to the bailout program], it will collapse.”
The same rationale carries over to Spain, which he argues will ultimately need a government bailout program to finance its debt burden. “The program, if it looks like any other program is going to break down in Spanish politics,” which will lead to a rise in extremism.
If Wolf’s analysis is correct, then investors can expect little from the upcoming summit, and too-little-too-late policy action from EU leaders. This is a grim prognosis for the European project.
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