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Home / Opinion / Online-views /  Could 2014 prove crucial for EU?

For half a millennium, Europe has been “civilizationally" integrated through an interchange of ideas in philosophy, mathematics and physics, through Latin being the “mother" of most European languages; also many European rulers were related through marriage or otherwise. Early in the 19th century, Napoleon, after conquering most of continental Europe, invaded Czarist Russia in a bid to create a single political entity. The dream ended when he had to retreat in humiliation. Later, in 1815, following the defeat in the Battle of Waterloo, he was forced to go into exile to St Helena. A century later, an assassination in Sarajevo triggered World War I, which led to the triumph of communism in Russia, and a break-up of the Turkish empire. The latter, in turn, created various states in today’s Middle East, to accommodate the colonial ambitions of France and Britain.

The region continues to be volatile a century later—the ongoing battles in Iraq and Syria bear witness to the fact.

Could 2014 turn out to be equally momentous in terms of its impact on the European Union (EU)?

One reason for such thoughts is the results of the election to the European Parliament in May. Anti-immigrant, Euro-sceptic parties turned out to be big winners in at least two major EU member-countries, Britain and France. These parties will surely impact the direction in which the EU moves over the next few years: towards greater integration and even a common budget, or more powers for member-countries and less for Brussels. The last major step towards greater integration, at least within the euro zone, was the common banking regulation.

More recent has been the confrontation between Britain and most of the other members of the EU over the appointment of the next president of the European Commission. Britain was supported only by Hungary in opposing the candidate backed by the remaining 25 members. In many ways, Britain has always been ambivalent about the post-war European project which is now the EU.

Then prime minister Margaret Thatcher, for a while, had brought all EU decision-making to a halt over the question of British contributions to the EU budget. A decade later, the pound was thrown out of the exchange rate mechanism of the European Monetary System, when it could not keep the exchange rate within the agreed band, despite very heavy intervention by the Bank of England. The result was that Britain is the only major economy within the EU which is not part of the euro zone.

The present Conservative PM David Cameron, like Thatcher, wants a renegotiation of the EU treaty, aimed at lesser power for Brussels and more for national governments, and has promised a referendum in the UK on the subject in 2017—provided the Conservatives are re-elected next year. His recent humiliation over the appointment of the head of the European Commission may well influence how he handles the renegotiation process and the stand he takes on the referendum itself. There is a question mark, of course, on whether the UK itself will remain united until then, since there is a referendum in Scotland in September over the question of seceding from the UK, as the Scottish Nationalists desire. Meantime, the political crisis and confrontation in Ukraine continue, and the EU is threatening stronger sanctions against Russia.

Within the euro zone, the sovereign debt crisis seems to be well under control. In fact, 10-year yields on Spanish, Italian and Irish bonds are comparable to, if not lower than, corresponding US bond yields. The other side is that economic output is stagnant and inflation, at 0.5%, is at a four-year low. Years of easy money have not led to creation of employment: in Spain, for example, youth unemployment is at an explosive 55%.

For students of international banking and finance, there have been two recent developments which are of interest.

As may be recalled, Argentina defaulted on its external bonds in 2002; the outstanding debt was of the order of $100 billion and most of the holders agreed to restructure the debt, writing off a part of it. However, the defaulted bonds did not incorporate the so-called “collective action clause", which makes such restructuring binding on all. In the absence of such a clause, the remaining holders are insisting on full payments. Such bonds are mostly held by so-called “vulture funds", who buy such bonds at dirt cheap prices in the secondary market. One large hedge fund sued the Argentinian government in US courts. The technical question before the court was whether the “pari passu" clause allows Argentina to service the restructured debt unless it meets its obligations to the hold-outs. Last week, the highest judicial authority in the US ruled in the negative, and Argentina is in technical default on a payment due on 30 June. Whatever the legal issues, this decision is one more example of how the rule of law can sometimes encourage immorality. Should vulture funds gain at the cost of those who agreed to the restructuring or, more broadly, the poor Argentinian taxpayer? Surely, we have advanced from the era of the debtors’ prison?

The second case involves BNP Paribas, the largest French bank, which was fined $9 billion for contravention of US economic sanctions against Iran and Sudan. Clearly the exorbitant privilege of the dollar being the world’s dominant reserve currency is being used in pursuit of US’s hegemonic foreign policy agenda.

A.V. Rajwade is a risk management consultant, columnist
and author.

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