EUROPEAN UNION COMING APART AT THE SEAMS

The economy is reshaping world politics once again. Major adjustments are being made not only to the vision of the very foundations of the European Union, but also to the plans of all global players who are preparing for a new wave of economic crisis.

The European Union's sovereign debt crisis began in late 2009. At that time, several eurozone countries, namely Ireland, Italy, Greece, Spain and Portugal, began to experience difficulties in servicing interest on their debt obligations. This was the consequence of the growing budget deficit and the global financial crisis. The situation got worse, and at the beginning of this year, it prompted EU leaders to review the economic component of the Union and led to a political crisis in Athens and Rome.

The greatest political troubles unfolded in Athens. Mass protests left George Papandreou's government facing a serious choice: EU support in return for tough spending cuts. But Papandreou went for broke and proposed a referendum, in which ordinary Greeks would be given the opportunity to answer the question: should they take another 100 billion euros from the EU or not?

"This is the highest form of democracy, this is a great moment of patriotism. So let's give the final word to the people and allow the citizens to decide," George Papandreou appealed to the public.

Athens' announcement of a referendum was enough to dispel the euphoria on the markets: German and French indices sank by more than 5 per cent in a matter of a few hours.

Months of negotiations, hundreds of billions of euros in subsidies and reform, which all EU countries accepted at the last summit in Brussels - all the efforts could suddenly be wasted due to the fact that Europe's main debtor, Greece, suddenly hesitated over whether it needed another portion of international aid.

The reaction of European leaders can be described in one word: shock. Nicolas Sarkozy and Angela Merkel - the main sponsors of the last European anti-crisis plan - held urgent talks by phone. The neighbours could not formally reproach the homeland of European democracy -

Greece - for its desire to hold a referendum. In an attempt to calm the markets, Brussels issued an urgent communique: "The EU remains confident in Greece." It did not help.

The outcome of a referendum in Greece was obvious: most of the Greeks are against accepting assistance from the European Union, because in return Brussels is asking for further tax rises and salary cuts. In fact, the Greek prime minister committed political suicide.

As a result, there was intense pressure from eurozone countries that forced Papandreou to leave. In the space of a few days, a new government led by Lucas Papademos was formed in the country, and it will last about one hundred days - up until the early parliamentary elections.

The primary objective of the new government in Athens is approval of the loan tranche by the European Union, which became the stumbling block between Papandreou and political forces in Greece and the EU.

Nevertheless, the EU is still not satisfied. They asked for written assurances to comply with the EU countries' plan to extricate the country from crisis. Without them, the sixth tranche of aid will not be granted to the country.

What's more, Greece's withdrawal could be disastrous for the economy of the eurozone. Nobody has quit the currency union yet. And the Maastricht Treaty itself does not provide for this procedure.

 It should be noted that although the most striking manifestations of the crisis are seen in Greece, its default would not end the eurozone. A real nightmare for the entire European market was the economic destabilization in Italy - the third largest economy in the eurozone.

Italy's national debt currently stands at about 120 per cent of GDP, or about 1.9 trillion euros. This is more than that of Greece, Spain, Ireland and Portugal combined and more than the money available in the eurozone stabilization fund. Serious political and economic difficulties in Italy have already led to concerns about the possible disintegration of the single currency bloc of 17 countries.

In addition, the difference between the prices of Italian government bonds and the most reliable eurozone bonds (Germany) has reached a record high of 5 per cent. This is the highest indicator in the history of the eurozone. To stabilize the situation, next year alone Italy needs 300 billion euros.

In Italy itself, the recession is already obvious: 23 per cent of young people are unemployed; layoffs continue in industry; there is a decline even in tourism. But this is not the limit, which is evidenced by the decision of Italy's upper house of parliament - the Senate - to approve a budget law on austerity to deal with the debt crisis. The adoption of this document was the main condition for the resignation of Prime Minister Silvio Berlusconi.

It is obvious that the Greek scheme will not work in Italy, and the 50-per-cent cancellation of the debts of European banks will not help either, as in this case, the entire banking system of Europe would be paralysed. This crisis can spread to the entire world economy, causing new shocks.

eanwhile, Spain did not show economic growth in the third quarter, which calls into question its ability to achieve the deficit targets in 2011.

All this prompted British Prime Minister David Cameron to make pessimistic forecasts. He openly said that the future of the eurozone and the economic prospects of EU countries are questionable. "The market is worried and it's a key question whether the EU countries will be able to cope with the debt problem," Cameron said.

As if to confirm his words, in Germany, the Christian Democratic Union, led by Chancellor Angela Merkel, prepared a resolution providing for the withdrawal of some countries from the eurozone. The document contains a provision that eurozone states that are unwilling or unable to meet all their financial and economic requirements may leave the euro area, while retaining their membership of the EU.

This information came at a time when the business world realized that Berlin and Paris were preparing profound reforms in the eurozone, providing for the establishment of a federal core with a single economic and tax policy. In this case, those of the 17 countries of the euro area who are reluctant to give up another part of their national sovereignty will be able to leave it, under this plan. According to the Western media, it is about creating a so-called "strong six" within the euro area, which would include Germany, France, the Netherlands, Luxembourg, Finland and Austria, i.e. "amputating the crisis periphery".

 Meanwhile, Chancellor Angela Merkel herself acknowledged that Europe will need at least 10 years for financial recovery. "The debt crisis cannot be overcome in an instant," said the head of the German government, explaining that "the debts have accumulated over decades". At the same time, the German chancellor appealed to the Europeans to strengthen fiscal discipline. "There is no reason for pessimism. But in Europe everyone must make an effort and do all their homework," Merkel believes.

Problems have appeared in Europe's second largest economy - France. Paris has stepped up efforts to consolidate the budget, as it seeks to protect the top-notch AAA credit rating and avoid the financial pressure that has overcome Italy. Prime Minister Francois Fillon said that the country's budget will be reduced by 7 billion euros in 2012 and 11.6 billion euros in 2013.

Oddly enough, according to most experts, Germany, like other lenders, is to blame for the general crisis in the eurozone as much or maybe more than Greece. After all, when a bank allocates loans to not a very reliable borrower without having any real collateral for the loan or guarantees that the money will be returned, then this financial institution itself is to blame for the failure to return the funds. The same thing is happening to major eurozone countries, primarily Germany, which gave Athens loans at 5 per cent per annum in pursuit of big profits, while Berlin itself borrowed money for this at less than 3 per cent on the financial market. In other words, it got almost a double profit.

And very few people in Europe did not care when the Greek debt exceeded the acceptable threshold of 60 per cent of GDP, established by European agreements. Incidentally, in contrast to the size of the country's budget deficit, the amount of public debt was well known to both creditors and international organizations.

In a feverish search for a way out of the crisis, economists and politicians are calling on the ECB to decide on unconventional and radical measures. Otherwise, the debt restructuring in Italy will be the actual start of the collapse of the currency union.

The topicality of the issue was further highlighted at the G20 summit in Cannes. US President Barack Obama, summing up the summit, expressed hope that Europe can overcome the current financial crisis in the eurozone.

Great concern about the developments in the euro area was also expressed by US Treasury Secretary Timothy Geithner. He noted that "the eurozone crisis is now the main challenge to the growth of the world economy". "The states of the eurozone must act more quickly to restore financial stability," Geithner said.

In turn, Janet Yellen, the deputy head of the Federal Reserve System (FRS), which acts as a Central Bank in the United States, openly acknowledged that the debt crisis in the eurozone is likely to cause substantial harm to the US economy. According to her, US banks have a controlled amount of government bonds of the most problematic countries of the eurozone. However, the US banking system's dependence on the financial well-being of other larger countries of Europe is higher. In this regard, Yellen announced that the FRS will start another round of stress tests for 19 leading US banks, designed to determine their resistance to the deteriorating economic situation.

The political leaders of emerging economies have come out with explicit criticism of eurozone governments recently. For instance, China and India issued a joint statement, noting "uncertainty about the stability of the sovereign obligations of certain developed countries".

Indeed, since the moment the crisis in the European Union deepened this summer, the decline on the stock markets of emerging economies also accelerated. The funds that have invested in them and brought a capital inflow of 500 billion dollars since 2009 experienced a sharp outflow of funds in August this year, and it is still continuing.

According to Bloomberg, "if Europe wants to avoid the economic catastrophe that threatens it, it should use its entire arsenal, which is about 3 trillion euros". The agency stresses that the biggest problem in Europe at the moment is the loss of confidence in the troubled countries of the eurozone, and to restore it, it is necessary to do three things that European leaders have so far failed to do.

"First, we must abandon the illusion that some governments of the eurozone, particularly Greece, will be able to pay off their debts. Secondly, it is necessary to give a realistic estimate of the amounts that European banks will lose when the governments of these countries declare bankruptcy and, thirdly, there should be necessary financial guarantees to convince the markets that these bankruptcies and the damage they cause will be the last."

One thing is clear: the crisis in the eurozone is likely to be the top story in the coming months. As for the European leaders, they are under increasing pressure to find feasible, comprehensive solutions as there are fewer and fewer supporters of a united Europe in the Old World.