September « 2012 « Euro

Archiv: September 2012

How the ‘Future of the Euro Area’ Debate has Turned into a ‘Future of the EU’ Debate

25. September 2012, von Aldo Caruso, Comments (0)

by Daniela Schwarzer

Since 2010, the EU has undergone two closely intertwined developments: firstly, the day-to-day management of the sovereign debt crisis with many steps taken ‘overnight’ as a matter of urgency and, secondly, governance reforms which have already changed the functioning of the EMU.

This latter debate has developed considerably during these last three years. In 2010, it started out with a narrow focus on the euro area, driven by the question what would need to be done in order to prevent a comparable crisis in the future.

In 2011, the reform of the euro area became more and more intertwined with crisis management for two reasons. First, crisis management itself changed the euro area to such a degree that some member states claimed more governance reforms in exchange. For instance, with the decision to expand the EFSF, to give it more instruments and to create the permanent European Stability Mechanisms (ESM) the concern of the ‘lenders’ grew that more control over national fiscal and economic policies should counterbalance their readiness to take on larger guarantees and risks for the crisis-stricken member states. Second, the debt and banking crises turned into a fully-fledged crisis of trust. In order to regain trust in the financial markets (at least among long-term oriented investors), the euro area member states have to rework the governance framework upon which the single currency is based.

In 2012, the governance debate developed further in two interesting dimensions. Firstly, the European Union is faced with the question how to cope with its undeniably already strengthened core, the euro area. The pre-in countries such as Poland, Latvia or the Czech Republic of course have a strong interest to be associated as closely as possible to the process of deepening the euro area, and to decision-making once the new structures are in place, even before they enter. They fear a decoupling from a harder core and correctly consider rising entry costs. The opt-out countries and particularly the UK may eventually be driven further away from the EU. A fine line will have to be walked to proceed with the necessary deepening of the euro area without shying away other EU members. Secondly, the future of EMU debate has turned into a ‘future of European democracy’ debate. With the crisis of legitimacy in member states and on the EU level, the decision-making system as such is coming under scrutiny. Proposals range from strengthening the European Parliament to directly electing a European President, from turning the European Commission into a true government to introducing elements of direct democracy. EU Commission President Manuel Barroso advocated a Federation of Nation States . German political leaders have claimed a move towards a political union. The working group on the ‘Future of Europe’ initiated by the German Foreign Minister in its report also lays out steps towards a deeper integrated EU. Meanwhile, the ‘four Presidents’ in the EU/euro area (van Rompuy, Barroso, Draghi, Juncker – yet not EP’s Schulz) are working on their report on deepening the EMU and EU to be submitted to the European Council in December 2012.

The report by the eleven foreign ministers will surely not be a game changer in the future of Europe debate. Yet it is one additional manifestation of a perceived need to get seriously engaged in this process. It gives rise to two interesting observations. The first one concerns the composition of the group: there are nine EMU members plus Poland and Denmark – hence a pre-in and an opt-out country. This way of structuring the debate is promising, if the overall objective is not to divide the EU, while allowing for the euro area to deepen. While it has possibly come at the price of a lower common denominator, hence less decided policy proposals, it is certainly an important signal to associate non-EMU members.

The second observation concerns the scope of issues: Westerwelle and colleagues draw the spectrum of debated issues even larger than is usually done in the ‘future of the euro area debate’ commonly does. While a large part of the final report deals with aspects related to the deepening of the EMU, they also suggest a joint border control, majority voting in CFSP, some of them support the creation of the European army etc.

It has to be observed closely whether this broad approach actually helps or hinders the pressing task to deepen the euro area. It may be helpful if it allows policy makers to better argue their case for deepening the EU it they can add aspects related to Europe’s role in the world and the protection of European interests in a changing global environment. It may be unhelpful if voters feel overwhelmed by sudden European ambition, the urgency and sense of which they do not fully share as policy makers have neglected their leadership task of confronting constituencies with European and global realities. In this case, it may be better to refocus discussions on what has to be done in order to solve the most pressing problems, namely those of the euro area.

Dr.  Daniela Schwarzer is Senior Associate at the Research Division European Integration at the German Institute for International and Security Affairs, Stiftung Wissenschaft und Politik (SWP) in Berlin. From September 2012 till August 2013 she is Fritz Thyssen Fellow at the Weatherhead Centre of the University of Harvard.

Temporary Relief – the Big Tasks are still Ahead

21. September 2012, von Aldo Caruso, Comments (0)

by Daniela Schwarzer

The euro area is going through a moment of relief. After the ECB’s announcement of its new bond-purchasing programme (the OMT) and the German Constitutional court’s green light for the European Stability Mechanism (ESM), the bond and stock markets have recovered. Yet, the crisis probably only pauses – it has by far not been solved yet. The ECB alone cannot ensure the survival of the euro area, which can only be achieved by determined political action. This is why there is so much pressure on the member governments to hammer out a consensus around the question how a fiscal and a banking union can be introduced – steps of deepening which require a strong democratic legitimisation on the EU level.

As long as investors are not convinced of the irrevocability of the European Monetary Union, there will not be a lasting relief from the crisis. Investors still have to assume that a self-fulfilling prophecy materialises and the euro breaks apart – because they try to protect themselves from exactly this scenario. It is this risk of EMU dissolution that is priced-in when Spain, Italy, Portugal and Ireland have to pay high risk premiums when the refinance themselves on the market. Also the real economy suffers from these negative expectations: investment stagnates in some member states. When, as in the case of Greece, there is a risk that investment may lose 50 to 70 % of its value due to a currency depreciation, then no money will flow in. Consequently, the economic situation does not improve or deteriorates further, which then makes an EMU exit more likely. Also, the credit crunch that many companies in southern Europe suffer has to do with scepticism and attempts to avoid risks, in this case on the side of the banks.

The resolution of this crisis of trust requires measures that make the irreversibility of the single currency credible. What the euro area needs is a banking union that is based on three pillars: a powerful supervisory authority, a common deposit guarantee scheme and a bank resolution fund. In the fiscal field, in addition to closer coordination of national policies, the issuance of euro bonds which would make member states less vulnerable to self-fulfilling financial crises like the one we are witnessing since 2010. Also, a serious debate is needed in how far automatic stabilisers would help the eurozone prevent future cyclical imbalances. This is why the emerging debate on a European unemployment scheme and a serious debate on a re-design of the EU budget including EU taxes are so important.

But more mutualisation and risk sharing in the field of banking and public finances, further integration towards more coordinated fiscal and economic policies and possibly the creation of European transfer mechanisms will be politically unsustainable if these steps of integration are not accompanied by democratic decision making on the EU level.

This is where the current debate on political union comes in that is developing in some member states. The big challenge of the European Council meetings up to the end of 2012 will be to create a common understanding that technical solutions to the banking and debt crises and to the governance deficits of the euro area require a far-reaching re-think of the legitimisation of European policy decisions. While the involvement of national parliaments is useful in some regards, the European Parliament is a key actor to bring into the future governance set-up of the euro area.

Dr.  Daniela Schwarzer is Senior Associate at the Research Division European Integration at the German Institute for International and Security Affairs, Stiftung Wissenschaft und Politik (SWP) in Berlin. From September 2012 till August 2013 she is Fritz Thyssen Fellow at the Weatherhead Centre of the University of Harvard.

Approaching Fall

10. September 2012, von Aldo Caruso, Comments (0)

by Ferdi De Ville

Slowly but surely everyone is returning from the summer holidays and getting back to business. For politicians and observers involved in the euro crisis, the long vacation was more tranquil than expected. The open-return flight tickets of politicians did not have to be used preliminary and observers could feel increasingly relaxed at not looking at their smart phones for some time. This welcome time-out was to a large extent thanks to the famous ‘it will be enough’ speech held by Mario Draghi at the end of July in which he declared that the ECB would do everything that is within its mandate to safeguard the euro; including interpreting that mandate broadly.

However, the coming weeks and months promise to be very hectic again. Eurozone leaders will have to be creative once more in developing solutions to unexpected crises and observers will need to learn to understand and use the acronyms and expressions the decision-makers come up with (I recently added OMT and sterilisation to my euro crisis dictionary). Let me use my first blog after the break to set out what is to come and to be expected in the first months of the second half of this year.

September has begun with, again, all the spotlights on the ECB President who outlined the details of its bond buying programme. Judged by the positive reaction by markets and most observers (and the absence of negative reactions by eurozone heads of state or government), it seems that the euro has convincingly taken this first post-summer hurdle. This measure may make what is to come also more manageable. And lots is to come, all steeped in uncertainty.

On 12 September, the Dutch hold general elections on the same day that the German Constitutional Court is to decide if the European Stability Mechanism and the Fiscal Compact violate German basic law. It is widely expected that Karlsruhe will not obstruct the euro crisis resolution, but the details of its argumentation may further limit the manoeuvring room for Merkel. The Dutch elections are unpredictable, the latest polls forecasting that a part of the electorate is returning from the political extremes to the centre. Anyhow, it will be important for the further course of the crisis if the next Dutch government will be more or less flexible towards further support for ailing countries. If, after Finland, the government will further harden its stance, it might become extremely thorny for the eurozone to find the necessary compromises in new emergency situations that will surely pop up in the coming months.

In the beginning of October the troika will submit its new report on Greece on which the extension of its support programme (and thus its survival as a euro member) depends. Much speculation and diverging statements have already been made in anticipation of this report (examples here and here).

In the meantime, it is much expected that Spain will in one way or another have to apply to the rescue mechanism. This has the positive effect of making it eligible for ECB support, but the downside is that it will be subjected to strict conditions that may cause further domestic social unrest. Italy still seems to have a chance to escape this scenario, although reform fatigue and political posturing in the run-up to the elections may quickly change this.

Apart from these ‘big occasions’ that may each become a large incident derailing the euro, much conflict can be expected in filling in the details of some important agreements-in-principle that have been taken before the summer. Most important is fleshing out the banking union. A clash between Germany and the Commission is building up, with the first wanting to limit supranational oversight to multinational, systemically important banks, and the second (referring to problematic cases as Northern Rock, Dexia and Bankia) insisting on including all banks. Later in October, Draghi, Van Rompuy, Barroso and Rehn will present their interim report on how to complete the Economic and Monetary Union.

After the presentation of the ECB’s bond-buying plan, my safest bet would be that we are in for a(nother) fall full of mini- and mega-crises and summits-of-the-not-so-final-chance. Problems in (at least) Greece, Portugal and Cyprus will turn out to be worse than currently known (or acknowledged). Spain will have to eat humble pie and Italy will have show uncharacteristic political determination and stability. The space for compromise between German demands and Greek willingness for more austerity in exchange for money is extremely limited. And finding consensus between Germany and France on abandoning economic sovereignty, between the Commission and Germany on banking union and between northern and southern Europe on solidarity and responsibility in fiscal union will be extremely challenging. Every test contains the possibility of failure. But I think the euro will stand not fall. And that, notwithstanding the continuous reciprocal condemnations and provocations, even Greece will still be part of the eurozone when we start the Christmas holidays.

This brings me to the intriguing question, raised by my colleague Hendrik Vos, of when we will precisely decide that the eurocrisis is over?

To be continued.

Dr. Ferdi De Ville is assistant professor at the Centre for EU Studies, Department of Political Science, Ghent University where he teaches and writes on economic and monetary union and the euro crisis.

Mario Draghi’s Pudding

10. September 2012, von Aldo Caruso, Comments (0)

by Carsten Brzeski

At its meeting on 6 September, the ECB kept interest rates on hold and presented details of its new bond buying programme. Mario Draghi truly presented his “believe me it is enough”. Now the ball is back in the eurozone governments’ court.

The ECB’s macro-economic assessment was clearly not a top priority at this meeting. The ECB’s staff projections have hardly received so little attention as today. In its macro-economic assessment, the ECB acknowledged a further deterioration of the economic situation in the eurozone. In the latest ECB staff projections, GDP growth forecasts for both this and next year were revised downwards. ECB staff now expected GDP growth to come in at -0.4% (from -0.1% in June) and 0.5% (from 1%) for next year. As regards inflation, the projections were revised slightly upwards to 2.5% (from 2.4%) for this year and 1.9% (from 1.6%) for next year. As the economic assessment might still be too positive, a rate cut in the coming months looks still possible.

All eyes were focussed on the ECB’s possible plan for bond purchases. By keeping interest rates unchanged, the pressure to at least deliver on the plan had increased even further. And, indeed, ECB president Draghi delivered the new ECB bazooka: the so-called OMT (outright monetary transactions) programme.

With the start of the OMT, the old Securities Market Programme (SMP) will be officially put to an end. According to the ECB, the new OMT is aimed at”safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy”, a clear attempt to present it as a pure monetary policy tool and not as a way to finance governments in need. As expected, the OMT will be conditional on an EFSF/ESM programme. According to the ECB, such a programme does not necessarily have to be a fully-fledged bailout package but could also be a precautionary programme. As the ECB said, “involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme”. In our view, all of this means that the ECB will only activate its OMT programme if a country in question has agreed on a so-called Memorandum of Understanding with the Troika and if EFSF/ESM engages in purchases in the primary market. The OMT will be focused on the short end of the yield curve on, in particular, sovereign bonds with a maturity of between one and three years. The OMT will not only be applied to future bailout candidates but could already be started for Eurozone countries currently under a macroeconomic adjustment programme once they start to regain bond market access (which seems to be a rather stringent condition in our view).

Bond purchases under the OMT programme will be sterilised and the ECB will not take a senior status on its holdings. When and how the ECB plans to intervene, however, was not disclosed. It seems as if there will not be any explicit targets. The ECB only plans to announce its purchases ex post on a weekly and monthly basis. In addition to the OMT programme, the ECB also announced that it will accept government bonds as collaterals independent of their credit ratings (except for Greek bonds).

All in all, the ECB has presented a big new bazooka, which should help buying time. This is probably the furthest the ECB can go to help governments. The focus on the monetary policy transmission and strict conditionality should also calm the Bundesbank temper, even if they would not admit it. However, the emphasis on the transmission mechanism is also a danger as it still contains a logical contradiction. With the OMT, the ECB will only repair the transmission mechanism in countries that ask for EFSF/ESM funding. However, what about the other countries? It remains a bit strange. For the time being, one thing is clear: never underestimate Mario Draghi. He clearly delivered on his “believe me it will be enough” announcement. A man of his word! But as he said himself: “the proof is in the pudding”.

Dr. Carsten Brzeski (Carsten.brzeski@ing.be) is Senior Economist at ING BELGIUM SA/NV – Economic Research.

Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

Supported by