Europe faces political war on two fronts as backlash builds. The EU's Eastern states shocked to lose their sovereignty over borders, just as southern Europe lost economic sovereignty by joining the euro.

Europe faces political war on two fronts as backlash builds

The EU's Eastern states shocked to lose their sovereignty over borders, just as southern Europe lost economic sovereignty by joining the euro.

By Ambrose Evans-Pritchard9:45PM BST 09 Sep 2015 / http://www.telegraph.co.uk/finance/economics/11854259/Europe-faces-political-war-on-two-fronts-as-backlash-builds.html

The European Union is fracturing along multiple lines of cleavage, torn by an emerging Kulturkampf over migrant flows before it has overcome the bitter conflict at the heart of monetary union.

“The bell tolls, the time has come,” said Jean-Claude Juncker, the head of the European Commission, in his State of the Union speech.

"We have to look at the huge issues with which the European Union is now confronted. Our Union is not in a good situation,” he said.

Perhaps it would be churlish to point out that the cause of this near existential breakdown is a series of moves that have his fingerprints all over them:

The fateful decision to launch the euro at Maastricht in 1991 without first establishing an EU political union to make it viable, and to do this despite crystal-clear warnings from experts within the Commission and the Bundesbank that it would inevitably lead to a crisis - the "beneficial crisis" as the EMU enthusiasts mischievously supposed.

The escalating treaties of Amsterdam, Nice and Lisbon, each concentrating power further in the hands of a deformed institutional system, sapping at the parliamentary lifeblood of the ancient nation-states that can alone be the fora of authentic democracy in Europe.

Above all, to destroy trust by overruling the categorical "No" of French and Dutch voters to the European Constitution in 2005, and bringing back the same treaty by executive Putsch, with a disgusted but complicit British prime minister signing the document in a side-room in Lisbon safely screened from the cameras.

One might have thought that the proper conclusion to draw is that the EU can only save itself at this stage by abandoning the Monnet method of treaty-creep and reflexive attempts to force integration beyond proper limits, and retreat instead to the surer ground of bedrock nation states wherever possible.

But no, Mr Juncker wishes to invoke treaty powers to force countries to accept 160,000 refugees by a quota, whether or not they agree with his solutions, or indeed whether or not they think it is highly dangerous given the state of total war that now exists between Western liberal civilisation and Jihadi fundamentalism.

Personally, I think Europe's nations should open their doors to those fleeing war and persecution, with proper screening, in accordance with international treaties on refugees, and in keeping with moral tradition.

Those countries that etched the lines of Sykes-Picot on the map of the Middle East in 1916 as the Ottoman Empire was crumbling, or those that uncorked chaos by toppling nasty but stable regimes in Iraq and Libya, have a special duty of care. But the point is where the final authority lies.

By invoking EU law to impose quotas under pain of sanctions, Brussels has unwisely brought home the reality that states have given up sovereignty over their borders, police and judicial systems, just as they gave up economic sovereignty by joining the euro.

This comes as a rude shock, creating a new East-West rift within European affairs to match the North-South battles over EMU. With certain nuances, the peoples of Hungary, Slovakia, the Czech Republic, Poland and the Baltic states do not accept the legitimacy of the demands being made upon them.

There is a paradox to Europe's crisis. Italy's ex-premier Mario Monti says all three of the immediate dramas eating at Europe involve issues in which people - in a sense - want to cleave more closely to the Union.

For refugees coming in biblical proportions, EU soil is the promised land. The crisis with Russia erupted because Ukraine wanted to join the club. The perennial saga in Greece is dragging on because the Greek people want to stay in the euro.

This is true, but it is also meaningless if the project is disintegrating at the core. Marine Le Pen's Front National in France has lost no time seizing on events, insisting that nearly all the refugees are in fact migrants, and claiming for good measure that Germany is letting them in only to work as "economic slaves".

She continues to lead the polls in France, rock solid at 29pc in the latest Figaro survey despite expelling her own father from the party in an astonishing spectacle of political parricide.

There is a high chance that her lead will increase as the initial burst of generosity and warm feelings in parts of French society start to fade, and the long slog begins.

The eurozone is still in a structural economic depression. Do not be fooled the short-term cyclical recovery under way. It comes very late in a global expansion that is already long in the tooth, and is too anaemic to stop political revolt festering across much of southern Europe.

The European Central Bank expects growth of 1.4pc this year and 1.7pc next year. This is thin gruel, given that all the stars are briefly aligned in favour of what should be a roaring boom.

Fiscal policy is neutral after years of pro-cyclical tightening. The ECB is conducting €60bn a month of quantitative easing. The euro has fallen 24pc against the dollar over the past year. Oil prices have dropped by half. Yet even this blitz of stimulus cannot seem to close the output gap.

The rift between EMU's North and South was on vivid display last weekend at the Ambrosetti forum on Lake Como - a gathering of the EU elites - where a top French official accused the Germans to their faces of conducting "religious war", wrecking monetary union in a Calvinist urge for the moral cleansing of debt.

Even if the Teutonic "morality tale" of what went wrong in EMU were true - and Paris rejects the premise - it is too late to close the 20pc to 30pc gap in labour competiveness between the two halves of monetary union purely by forcing retrenchment on the South.

It is precisely such an asymmetric policy that pushed the eurozone into a 1930s contractionary vortex. It has been self-defeating, in any case. The deflationary effects have pushed up debt ratios even faster.

Germany's push for "competitiveness" is a cover for what has in reality been a wage squeeze, stealing a march on other countries within EMU by beggar-thy-neighbour tactics.

The French official said such policies are a zero-sum game in a monetary union. They should not be confused with genuine "productivity" gains, the real measure of economic progress.

Berlin's idee fix with moral hazard - its insistence that there should be no let up in austerity until reforms are delivered, lest there be back-sliding - flies in the face of the academic literature. Reforms need extra stimulus to cushion the shock.

German officials in the room smiled cherubically, unwilling to concede an inch of ideological ground. Not only are they certain of their moral cause, they also deem EMU policies to be vindicated. Just look at Spain. Shows what a country can do.

The French might retort that Spain has revived its car industry - now working "tres turnos" around the clock, and exporting 85pc of output - by luring production away from France to Spanish plants with a 27pc cut in wages. This way lies a race to the bottom.

As for Greece, nothing is resolved. There may or not be a workable government in Athens after the elections next week. The creditors have yet to clarify what they mean by debt relief, if anything, and the International Monetary Fund refuses to participate in the latest €86bn loan package until they do.

The level of austerity agreed cannot plausibly be achieved. The primary surplus is once again a box to be ticked, a lawyer's concoction. The terms for Greece are even tougher than those rejected by Greek voters in a landslide referendum in July. "It is impossible to enforce," said Yanis Varoufakis, the former finance minister.

"The IMF does not think it can work, nor does the US Treasury, and I know Wolfgang Schauble doesn't think so either because he told me. There is no functioning banking system in Greece. Non-performing loans are 45pc, and any recapitalisation will be wasted. In six months we're going to have to go through exactly the same crisis again," he said.

The risk is that the global economy tips into another downturn over the next 18 months, before the eurozone is really back on its feet, with debt ratios much higher than in 2008, unemployment still stuck at almost 11pc and investment still 4.5 percentage points of GDP below pre-crisis levels (IMF data)

As the World Bank warned this week, all it will take is a mistake by the US Federal Reserve as it begins to tighten, setting off a chain-reaction through emerging markets.

The European Project has very little economic and political capital left to defend it if anything goes wrong now. As Mr Juncker says, the bell tolls.