http://blogs.telegraph.co.uk/bruno_w...eu_cracking_up

Is the European Union showing signs of cracking? There are new signs of unprecedented strain as the economic crisis kicks in.

Intensive, even frantic, talks are going on behind the scenes to keep the lid on the political fall out from the economic meltdown.

The European Commission and Czech EU presidency, they took it over from France on Jan 1 (it hasn't been easy, see here and here), have announced an emergency summit for the end of February.

The emergency? Nicolas Sarkozy.

The French president's threat (made in Munich, where there are bad memories for the Czechs) to call a crisis meeting of the eurozone countries in Paris has set the cat amongst the pigeons.

It is not his job for starters.

But he has made little secret of his desire to run the show and has treated the Czech EU presidency, who are supposed to be in charge, with true old Europe patrician contempt for "parvenu" East European members of the club.

Mix all this Napoleonic hubris and power grabbing with President Sarkozy's astonishing attack on the single market last week and he is beginning to seriously rattle assorted EU officials and diplomats.

To recap, Mr Sarkozy last week pointedly referred to a Peugeot-Citroen plant in the Czech Republic to say that planned French government aid to automakers would be on the condition that all cars would be "Made in France".

This is what he said: "If you build a Renault plant in India to sell Renaults to Indians, that's justified, but if you build a factory, without saying the company's name, in the Czech Republic to sell cars in France, that's not justified".

Like it or not, that is what the EU's single market is all about. Is Mr Sarkozy now against it? Question that and then what is left for the EU?

This all comes as the Elysée announces up to 6 billion euro worth of handouts (£5.25 billion) to Renault and PSA Peugeot-Citroen.

The five year loans will include conditions such as a halt to layoffs and a suspension of factory closures in France.

Prague is furious.

Mirek Topolanek, the usually unflappable Czech PM, has lashed out by warning Mr Sarkozy that the Lisbon Treaty, much beloved in Paris and Berlin, might be a casualty.

"If someone wanted to really jeopardise the ratification of the Lisbon Treaty, he could not have chosen a better way and a better time," he snarled on Monday.

A Czech statement: "As the Prime Minister of the Czech Republic I do not understand the argument that it is unjustifiable to manufacture cars for the French market in the Czech Republic. The attempts to use the financial crisis to introduce such forms of protectionism and protective measures may slow down and threaten the revival of the European economy".

Don't these two know they are in the same Union?

It doesn't seem so.

Mr Topolanek on Monday morning made it clear that the emergency EU summit was because of "the latest selective and protectionist steps and statements made, among others, by President Sarkozy".

"Similar statements will undoubtedly lead to an escalation of such steps and, in effect, to a prolongation of the crisis which affects the economies of the whole EU," he said.

In the face of the worst recession for 60 years, this kind of European disunion does not bode well for the EU's ability to handle it.

It gets worse.

Behind this very public spat, behind the closed doors of Brussels, in the secret ambassadorial conclaves and working groups some really heavy stuff is going down.

Eurozone finance ministers dine in Brussels tonight. Alistair Darling joins them for a full, precooked Ecofin breakfast on Tuesday.

Top of the menu will be the unpalatable question of the "impaired assets" in the EU's banking sector, the ones that have caused all the problems.

Britain has raised the idea of an insurance scheme to underwrite "toxic" debts. The EU wasn't too impressed, see here.

Germany and Italy is thinking about creating "bad banks" as a repository for the dodgy assets.

The Commission wants agreement, especially on the method that will be used to define and value assets in order to prevent market or competition distortions across the EU.

Whether it is "bad banks" or "toxic insurance", this will cost a lot of money, and yes that's public money.

It will significantly raise government borrowing at a time when bond markets are getting very twitchy about the ability of some countries (Spain, Greece, Portugal, Ireland, Britain and others) to pay it back.

This is the phenomenon of widening spread yields, when investors judge it riskier to buy the debt of a Britain or Spain than the debt of a Germany or France.

In line with the risk, and the low performance of some EU economies compared to others, the markets demand a higher premium on government bonds issued to raise the cash.

The more the doubts and debts, the more the markets ask governments to pay to service their borrowing and all the more indebted governments become.

It is a vicious spiral that threatens to tear both the euro and the EU apart.

If spreads grow so great some countries cannot raise cash to buy all that toxic debt, what does the EU do?

If a government, either in the Union or the euro, defaults on debts what happens?

If the EU, or EMU, lets one of its own go to the wall what is its political future?

So alongside toxic debt, finance ministers will also be discussing bond markets and here lies an ambush for Germany, the EU's biggest and best economy.

One official said: "There is no paper on this. For obvious reasons, it is too sensitive, as sensitive as it gets".

Some countries want a European debt agency, issuing euro bonds to underwrite debts. Germany will be the country expected to pay and how will German voters, feeling the pain of their own recession, feel about that?

Boxing a reunified Germany - a 20th anniversary this year - into the EU and the euro has been one of the strategic goals of European geopolitical strategy, including for the German political class.


Can it last another 20 years? Is the EU in danger of cracking up?




One of the comments on the article posed some interesting questions, which I would be interested in the answers:

The central question is Germany’s willingness to underwrite the sovereign debt of France (Italy and others come into the picture, but the Franco German relationship is the real motor for all things EU).

France for decades now has relied on wealth transfers from Germany to support its prodigal fiscal spending. In other words Germany has been supporting French spending on French outputs that have an economic value of less than the amount Germany has spent on them. These transfers have always been destructive of Germany’s stock of wealth.

In the current economic crisis the ability of Germany to replace the wealth it transfers to France is much reduced because German firms are engaged in fewer wealth creating transactions.

From this situation arise a number of critical questions for which you may like to do some research:

a) What is has been the historic annual ratio of German wealth transfers to France versus the French annual deficit?
b) What is this German wealth transfer to French deficit ratio today?
c) What is this transfer ratio projected to become?
d) If Germany had to accept liability for future French sovereign debt what would the level of indebtedness of each German taxpayer be?
e) How does this compare to current German taxpayer indebtedness for German sovereign debt?
f) What would the increase in interest on German sovereign debt be if they made themselves liable for French sovereign debt?

Answers to these questions may provide insight into the uber question of German taxpayers support for French fiscal deficits.