February « 2013 « Euro

Archiv: February 2013

Why Economists Should not always Ask for Centralisation

25. February 2013, von Adriaan Schout, Comments (0)

Many say that the eurocrisis is not about the euro but about financial markets. Whatever the precise cause: it seems to be a purely economic crisis. Of course, the financial sector was a motor behind the crisis, but there have been other drivers too. National conditions – such as high private debts, corruption and inflexible labour markets – inflated the bubbles and accelerated the economic crisis once these bubbles burst. With this in mind, it is somewhat strange to see that the bulk of the economic discussions about solutions for the eurocrisis concern deeper integration at EU level.

Economists have pointed to the impossibilities of working with a half-baked EMU. The euro started as a Monetary Union while the Economic (now called: political) Union was lacking. What this political union should have included, according to the economic analyses, are a central bank with more responsibilities, EU bonds to reduce interest rates and solidarity mechanisms. A second focal point in the debates is the question whether austerity is wise. Economists are happy to call for EU growth initiatives and transfers.

Given these profound economic debates, it is no wonder to see far-reaching economic solutions in Barroso’s Blueprint for a genuine EMU: an additional EU budget, steps towards eurobonds, etc.

The consequence of these economic solutions is centralisation (federalisation) including treaty change. Hence, Barroso’s plans are also about transforming the Commission into a European government, European taxes, a larger EU budget and a stronger role for the European Parliament. Many economists de facto want a political union.

Yet, northern countries lack trust in southern governments and are therefore unwilling to accept EU bonds, to pay for a banking resolution mechanism or to accept other moves towards a transfer union. In the end, the EU seems to remain stuck with the Mundell-Fleming ‘impossible triangle’ that states that the combination of fixed exchange rates, free capital movement and independent monetary policy cannot be maintained.

This call for deeper integration seems perverse integration. The eurocrisis originated at national levels. Hence, the national level is the level where solutions have to be found and implemented first of all. Understanding the eurocrisis requires institutional, in addition to economic, analysis. Banking supervision was failing in all countries. National statistics proved unreliable. National political parties suffer from corruption and regional governments have been deeply involved in the housing bubble. The relevance of the national level is also with a view to the fact that the national publics lack enthusiasm for this federalisation process.

National institutions determine the state of the economy and many of these institutions have been ineffective. It is impossible to construct an EMU with (semi) failing states. Politicians need to do what they hate the most: accept independent European (in whatever form) scrutiny of their national administrations. This involves assessing the independence and quality of national statistical systems, national budgetary control authorities, deregulation authorities, tax collection systems, etc. In addition, scrutiny is needed of the quality of social economic councils in Member States, of the size and quality of  regional governments, of the management of political parties, of transparency policies in member states, of labour market and education systems, of anti-corruption policies, etc.

The measures proposed by Barroso to strengthen the EMU will become much less needed if Member States possess institutions with self-cleaning capacities. It is contrary to the subsidiarity principle in the Treaty to centralise decision making in the EU when many of the problems originate at national levels of government and when further measures can be taking at the national level. The food crisis in the 1990s was not solved through a ‘Food Union’ but by building food authorities incorporated in European networks supported by appropriate legislation and independent national controls. Similarly, competition policy in the EU is now based on independent national authorities. If Member States do not trust each other’s administrations, steps towards a closer union will be impossible. Similarly, if Member States have effective national institutions, there will be much less need for centralisation. By the same token: centralisation will fail – and lack public support – if national governments are weak. Evidently, reforming national institutions cannot be done without EU networks and EU legislation, but the bulk of the reforms should be national. This could also prevent that ‘Brussels’ is used as scapegoat, even though the Commission will always be put in the position to criticise Member States, if they lack self-correcting mechanisms. Weak Member States will, therefore, create an automatic dislike of the EU.

This focus on national institutions is also needed to break the stalemates in social policy. A growth agenda is partly blocked due to lack of trust in national institutions. Triple-A countries are afraid of reducing reform incentives elsewhere. Yet, without social support, the euro could fall apart due to the consequences of collective austerity. However, growth will not come from more money (there is no), but has to be based on sound national policies and sustainable national institutions.

National institutions should be targeted first of all in the discussion on deeper integration. Barroso’s agenda towards a genuine EMU seems logical to economist who ignore the importance of national institutions but it will never work or it will require a transfer union that is politically extremely dangerous.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Europe – Absent?

25. February 2013, von Almut Möller, Comments (1)

This is my first entry in the Eurozone 2013 blog. Based in Berlin, in the following months I will comment on the steps taken by EU leaders to reform the Eurozone from the German capital, and will include my observations on the German euro debate.

As it happens, the German President, Joachim Gauck, has just given his long-awaited Europe speech in Berlin. Surely, the outside observer might think, his speech was only one of many interventions in a Europe debate in full-swing in Germany. After all, this is a key country when it comes to fixing economic and monetary union (EMU), with more major steps that will affect the direction and functioning of the eurozone and the overall EU likely to be taken this year. Surely, one might think, in a year of federal elections there will be competing political and economic visions on the future of Europe, and the opposition parties will want to mobilize their respective constituencies in the battle for the chancellery.

You will be surprised to hear that compared to what is at stake, and contrary to what we have seen in the French 2012 presidential as well as in the 2013 Italian election campaign: Germans so far are not fretting about Europe.

I see three main reasons for Europe being largely absent from the campaign so far:

1. Crisis, what crisis? The crisis is not making the headlines, at least for the moment. And with the German economy still doing well, a majority of Germans – unlike fellow EU citizens in other countries – simply do not feel the impact of the crisis.

2. The Merkel factor. Germans tend to trust Angela Merkel’s ability to do what is necessary to help the countries in crisis to recover (and there is a sense of solidarity by now), and to keep an eye on Germany’s interests when negotiating the future make-up of the euro governance with the other euro members.

3. The consensus country. Because of 1) and 2), all opposition parties struggle to challenge Angela Merkel’s conservative party. Adding to this is that Germans currently seem to like the idea of a ‘grand’ coalition of Conservatives and Social Democrats, so there is a tactical temptation for the Social Democrats not to bark too loudly.

Going back to the president’s speech; it is unlikely to trigger a euro debate. The president in the German system does not have political clout and by custom does not get involved in politics. In today’s speech, President Gauck did not cross this line. But the office is traditionally used to shape fundamental debates, and I believe this speech will be influencing the parameters of the Europe debate among the elites in the months to come.

Indeed, the president presented some fresh thinking. Gauck, a pastor and civil rights activist in the German Democratic Republic, put Europe’s citizens at the centre of his hour-long speech. Hardly did he touch on the crisis, on the role of governments, and on detailed suggestions on how to make the European Union work better.

He must have felt that in Germany and across Europe, citizens feel disempowered by the crisis, by nonstop rhetoric that makes them fearful, by complex and technical measures difficult to grasp, and by diplomats negotiating about their future behind closed doors.

Gauck’s language therefore was a language of empowerment. This was the vision of a democrat, a free citizen of Europe, wanting to encourage Europe’s citizens to live up to the task of being citizens in a European res publica, learning to shape their future together.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

The European Periphery: Between a Rock and a Hard Place

20. February 2013, von Alexandre Abreu, Comments (1)

The strategy of the Portuguese government in the context of the current crisis, which is essentially aligned with the prescriptions of the ECB-EC-IMF troika, revolves around two axes that, indeed, were also typical of the policy packages implemented in the global south from the 1980s onwards: stabilisation, which in this case refers to slashing public expenditure and curbing the current account deficit; and structural adjustment, which basically refers to labour market deregulation and the privatisation of those companies that still remain(ed) within the public realm.

In the context of this strategy, the resumption of a growth trajectory (even while adopting a permanently contradictory fiscal policy) is presented as hinging on the latter structural reforms. The alleged mechanism, which will be well-known to the readers of this blog, is to undertake an internal devaluation by forcing wages down, in order to mimic the external devaluation of a no-longer existing Portuguese currency. Wage compression across the board, promoted through various mechanisms (the downward pressure of unemployment upon wages, the nominal freezing of the minimum wage, labour market deregulation, etc.) is expected to translate into an increase in the price-competitiveness of Portuguese exports, and these in turn are expected to drive growth.

So what is wrong with this story? Basically, the problem is that it misrepresents the determinants and obstacles affecting the competitiveness of the Portuguese economy. In a paper published in Voxeu in 2011, Jesus Filipe and Utsav Kumar have shown, among other things, that the competitiveness problems of the European periphery, and of Portugal in particular, cannot be traced back to the evolution of their aggregate labour costs, but rather to the composition of their export baskets: Portugal’s exports, much like China’s and those of the remainder of the European periphery, are concentrated in the product groups characterised by relatively lesser complexity (in the sense put forth by Hidalgo and Hausmann), while Germany’s and France’s, for example, are concentrated in the more complex categories.

In this context, the developments of the past 15-20 years have left the European periphery between a rock and a hard place: on the one hand, direct competition in the least complex product range has increased dramatically in the wake of the EU’s Eastern enlargement, China’s accession to the WTO and the EU’s trade agreements with Morocco, without there being any possibility of adjusting through currency devaluation; on the other hand, the possibility of upgrading the complexity features of the export basket has been denied both by Germany’s (and other core countries’) own wage compression in the past 10-15 years and by the fact that the instruments that make it possible to actively promote such an upgrade are effectively denied by EU and WTO rules, unlike what was the case when the most advanced industrialised economies undertook that upgrade themselves. Kicking away the ladder, indeed.

So that’s why this strategy will not work: becoming competitive through wage compression in the same product categories as China and Morocco, for example, without recourse to currency devaluation or trade protection at the EU level, would require cutting down wages to an extent that could only bring about massive immiseration – and even that would probably not do the trick, given such issues as economies of scale or differences in environmental legislation. That the benign alternative – upgrading export complexity – is not feasible, either, under the current EU and Eurozone constraints shows the scale and complexity of the predicament in which the European periphery currently finds itself, well beyond the temporal horizon of any stabilisation package or financial assistance programme – and, of course, does not bode well for the future of the Euro.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Euro crisis: a View from Lisbon

20. February 2013, von Alexandre Abreu, Comments (0)

In my first contribution to this blog, I would like to start with outlining what I’ll set out to do in the coming months. The readers of this blog will be quite familiar with the ‘orthodox’ account of the current crisis in the eurozone: profligate public spending by governments in the European periphery, which need to be brought under discipline from the outside, coupled with anaemic growth/recession largely caused by excessively high wages and excessive labour market regulation, calling for ‘structural reform’. Moreover, readers will also be well acquainted with some of the systemic aspects which have long been emphasised by the more politically-progressive accounts: the inability on the part of peripheral economies to adjust to asymmetric shocks after having forfeited most of their economic policy instruments; their dramatic loss of competitiveness due to an overvalued Euro and an overvalued implicit internal exchange rate; the ECB’s late, indirect and highly conditional assumption of its role as lender of last resort; not to mention the deleterious effects of austerity upon growth, employment, social cohesion… and even the budget deficit and the sustainability of public debt themselves.

I will not be rephrasing these arguments in detail. Rather, in addition to commenting on new developments as they occur, what I’ll try to do is to render all of the above a bit more vivid to you by showing how these rival accounts apply to the Portuguese case; how general factors and forces at the European level articulate with class interests in Portugal; what the effects of the prescribed medicine have been in this country; and what the balance of forces and the state of the public debate are at any given moment.

As an appetiser of sorts, here are some of the issues that I’ll be expanding on in my next few blog posts:

  • Seen from the left, burgeoning public debt is largely a consequence of the crisis, not a cause (Portuguese public debt stood at 72% of GDP in 2008, compared to over 120% at present). However, there have been, and continue to be, serious issues concerning the quality of public spending (including public-private partnerships that commit the Portuguese Government to ensuring internal rates of return in excess of 10% to major conglomerates for decades to come).
  • Seen from the left, rising labour costs in Portugal have not been the cause of deteriorating competitiveness (indeed, unit capital costs have increased more than unit labour costs over the last two decades). Rather, the overvalued (implicit and explicit) exchange rate, alongside the inability to upgrade the pattern of productive specialization (itself explained by structural factors), are what is to blame.
  • Seen from the left, the medicine that has been prescribed in tandem by the ECB-EC-IMF “troika” and the right-wing Portuguese government places all the burden of an “adjustment” which will not work upon those who are most vulnerable and least responsible: workers and popular classes. This involves dismantling a Welfare State that is barely 40 years old, having been a product of the 1974 democratic revolution – a settling of scores long sought by the most conservative sectors of Portuguese society.
  • Seen from the left, the way in which the crisis has been addressed so far by both the Portuguese and European authorities is not at all about bringing public debt under control or boosting competitiveness. Rather, it is about seizing a unique opportunity to re-engineer society in neoliberal fashion, by dismantling the Welfare State and sharply compressing direct and indirect wages.

These are critical, dangerous, but also very interesting times. I hope you’ll find my left-leaning views from Lisbon to be interesting and informative, too.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Dijsselbloem as Eurogroup President – Curse or Blessing for the Netherlands and the Euro?

20. February 2013, von Adriaan Schout, Comments (1)

Finding suitable chairpersons for EU meetings is extremely difficult.  Since ‘presidents’ can be politically quite threatening they should preferably come from small countries. They should be rather gullible and non-threatening people.

As our euro notes prove, the EU has no shared values and that makes chairing particularly difficult. The design of the euro notes was a bit of a challenge. With only 7 notes (from five euro up to 500 euro), any selection of people as figureheads on the notes proved impossible. Erasmus was Dutch and protestant. Jean Monnet was of course a pure technocrat and only known to a handful of Europhiles – apart from being French. Hence, the notes depict the most self-evident symbols of unity (or dis-unity!) one can possibly imagine: bridges and windows. Yet, even these architectural wonders of our European history had to be imaginary because real bridges or window would cause jealousy.  The euro was supposed to be the symbol of our collective future that we carry with us in our pockets but it actually shows that the EU lacks agreed values – at least in economic terms.

This makes chairing the Eurogroup very difficult. The paradox of European leadership is that leadership is about connecting, but with so many differences in values, interests and cultures, leadership is almost impossible. It can only be extremely subtle – hence the emphasis on presidencies as honest brokers and on neutral presidencies.

Chairing the Eurogroup is probably currently the biggest challenge because this is the meeting where battles are fought and the most sensitive dossiers for the European Council are prepared. The Eurogroup is divided between north and south, it is divided over the role of the ECB, and it has to discuss reform programmes between debtors and triple A countries. As Jean-Claude Juncker’s track record shows, it is easy to run into all sorts of difficulties, as happened with Merkel and other heads of state over the idea of launching eurobonds.

The Dutch were very happy with an EU top position. Part of their ambition to chair originates from the frustration of being not one of the bigger countries (overlooking that chairmen – Juncker, Barroso, Van Rompuy – actually come from small countries). The newspapers were full of the fact that the chair is always best informed, in the middle of the negotiations and that he thus can steer negotiations. I beg to differ: steering negotiations should not be overestimated. Moreover, I doubt whether a chair is always optimally informed. We have, e.g. seen Van Rompuy presenting presidency papers that could almost immediately be retracted because France and Germany put their papers and agenda’s on the table showing that France and Germany seem to be perfectly able to communicate with each other directly. Apart from being obviously overruled, this also proves that the President of the European Council is completely sidelined whenever it suits the Member States.  Van Rompuy, on the other hand, has shown that he is very flexible (yes IMF, no IMF; no flexibility; yes flexibility in Deauville) and not easily insulted when overtaken by the real power blocks.

What is worse, the costs for the Netherlands – and for the euro – can be high. First of all, there is no such thing as a neutral chair. If the Dutch Minister of Finance Jeroen Dijsselbloem is even-handed, he will run into difficulties with Germany and with other EU countries at the same time.  Compromises are not regarded as neutral, and if there is one thing that is really important to the Dutch than it is good relations with Germany. As Juncker’s experience shows, chairing the Eurogroup includes a big political risk vis-à-vis the Dutch-German relation. Secondly, it will be difficult for the Netherlands to fight for its interest. After the decision was taken to support Spanish banks through the ESM, the Dutch, Germans and Fins got together to dictate the rules. This post-hoc redefinition of outcomes of meetings – which always happens because ministerial meetings do not settle details – will be very difficult for the chairing country. Being a triple A country, the Netherlands should fear for its influence because the devil is always in the detail. Thirdly, the power balance may have been redefined by Dijsselbloem’s new position meaning that the Netherlands has to change its tune. Of course, there is now a Dutch junior minister at the table to defend the Dutch position, but everyone knows that that the senior minister sits in the chair. Finally, democratic control can be complicated. Discussions in Dutch parliament prior to important Eurogroup or European Council meetings will probably be different. Minister Dijsselbloem now has so much confidential information through his many talks with eurozone politicians that he will likely be restricted in his debates with parliamentarians.

Apart from these political costs, chairing means showing the eurozone members that the own house is in order. This is difficult enough for the Netherlands these days. It would have been good to invite a country to chair that is really making a lot of effort to prove financial markets, that it is desperately reforming. An Irish chair could have been the wiser option.

Finally, ministers come and go. Juncker stayed for a decade. Dutch governments change on average every two years. Acting ministers in the chair add the risk of a high turnover of chairpersons. This can be avoided by choosing a professional chair. Olli Rehn is available in 2014.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

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...)

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