Who Will Pay For The EU?

Eastern European countries gave a bleak assessment of their economic prospects yesterday with Hungary talking of 5m unemployed turning up in Western EU Countries looking for work and benefits. Though the remark was aimed at Germany, it is worth remembering that only Britain and Ireland have fully opened our borders up to accession countries.

The Times Headline today speaks of a New 'Iron Curtain' as a plea for €190bn from the West to the East of Europe was immediately rejected. The strength of the Union may soon be tested.

This is all very interesting. I wrote about the stability of the EURO recently and I pointed out that in the event of any crisis, it is likely that politics will supersede economics in any decisions that are made.

The impetus of any Eastern EU and any EURO bailout lies with Germany. The EU is based largely on German plans and finances. If a bailout is needed it will probably fall on the Germans to raise and guarantee the required capital. However, it is not clear to what extent the German people are willing to prop up the EU, and so it will be a rocky few months.

Germany has not yet ratified the Lisbon Constitutional Treaty, and a potential €uber-billion bailout will not help the German political classes force it through any quicker. In fact the dialogue has changed somewhat and some of those raising opposition to the Treaty are looking at the possibility of opt-outs and a break mechanism so as to limit the costs to the EUs biggest contributors. If a succession of Economies began to collapse in Eastern Europe the IMF may not have sufficient reserve to react.

Absent from all of this are Britain and France. France may make a token contribution if all others do, but Britain is getting deeper and deeper into debt through borrowing in an effort to kick-start the financial industry. Germany will not act alone if an Eastern EU bailout is needed, and no one else, including Britain will likely have much in the way of the funds to help. Personally I hope we are not asked, because I do not trust this government to overstretch yet further our increasingly fragile economy.

I would imagine any German led deal would require two conditions. Firstly the big contributors to the EU will need to stump up a share to make it easier to sell to the German people and secondly the Germans then may force some form of direct taxation on the people of the EU to guarantee The EU it's first direct revenues. The harmonising and central collection of VAT has been mooted in the past.

I wouldn't mind making a prediction, well a pushing a theory really. If we look at my previous post, and at the events of the weekend it looks more and more (to me) like we are seeing the first real tensions on EU membership. If the Eastern European Countries need a bailout then they may need to look to Russia or America, and the necessity and politics of any deal may preclude continued EU membership.

Likewise if Ireland's economy was to crash, they might find themselves required to act outside of the Central Banks economic rules, and if things get really bad may need to leave the EU altogether. There has always been a large proportion of people in the UK that would welcome much looser ties as well. So what could result is the formalisation of a Central European State and around the edges those exiting member nations may turn back to trade agreements, rather than Union membership. The umbrella of EFTA membership may allow for this to happen with as little pain as possible.

Those nations who have long yearned for their superstate will get their wishes and can have all the trappings of their Federalist dreams, they have a currency already, and all the buildings and courts are in place. They may even be prepared to help Italy and Spain as part of the deal. It could eventually be a win/win situation as those countries who look most in trouble are those where a dissenting voice to a Federal Europe are most heard, UK/Ireland, Scandinavia and Eastern Europe.