Adriaan Schout « Euro

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Too Much Trust in EU Institutions

9. January 2014, von Adriaan Schout, Comments (0)

The general impression is that the EMU zone (which gathers countries belonging to, or potentially belonging to, the euro) suffers from a crisis of trust. How can we move forward with European integration when people lack trust in EU institutions? The facts may however be quite different: there is too much trust in the EU institutions and too much trust in the reform capacities in the EMU countries.

The guiding rule for EU-leaders has been to restore trust in the EMU and to get economic growth in the EU back on track. Many steps are being taken to rebuild trust ranging from fiscal compact and banking union, to measures to increase the relevance of subsidiarity. Overall, these measures and the fight for trust will – optimistically – lead to deeper integration.

However, the EMU zone may not suffer from a lack of trust. Paradoxically, this is bad news. First of all, there is generally more trust in EU institutions than in national institutions. Over the past few weeks, I sat in meetings with senior officials and politicians from different parts of the EU. On the question whether they would like to see the EU institutions take over economic tasks and develop into an EU economic government, the answer was decidedly ‘yes’. According to the responses, national institutions (including central banks), have been the cause of the economic and banking problems.

This trust in EU institutions is in accordance with the Eurobarometer which indicates that the people in 17 euro countries have (much) more trust in EU institutions than in their national governments. The bottom of the list with trust in national governments shows euro countries Spain (8% trust national government), Greece (9%), Slovenia (10%), Portugal (10%) and Italy (11%). Other countries with low national trust and higher trust in EU institutions include France (only 24% trust national government) and Ireland (18%).

The consequence of this situation is that there is not so much a lack of trust in the EU (and the related euro institutions) but a national trust crisis – and EU institutions are trusted to manage national economies. If the discussions of the past week are anything to go by, there is a majority of countries in the EU that would like to see the development of stronger European economic governance because they are themselves too weak to run their own economies. In the words of a minister from a country preparing for joining the euro: “the Commission can better decide what is good for us”.

The second reason why there is not a lack of trust in EU institutions is that the EU seems to suffer from traditional over-optimism. Judging by the hope that the EU is better in taking economic governance decisions than national governments closer to their voters, this over-optimism still exists. Greece, Portugal and East European countries were allowed into the EEC/EU. Similarly, accession into Schengen also proved quite easy. Membership was assumed to lead to reforms. In the same vein, despite an argument between monetarist and economic governance economists, euro membership was granted ahead of economic reforms, trusting that membership would do the trick. Hence, the EU has been gambling with economic history based on naïve trust in EU reform mechanisms.

Thirdly, countries have been trusted to be flexible and to develop. However, the French competitiveness index fell from 15th position in 2000 to 22nd in 2013. Italy’s competitiveness eroded as underlined by the drop from 24th position to 49th. Greece managed a slight but hugely painful improvement from 33rd to the 31st position.

Deeper integration is on the agenda. The EU Council meeting of December 2013 concluded additional steps towards banking union and economic contracts. The basis of the economic governance, however, remains a collection of mostly week states; states that seem to have given up managing their own economies and that place their hope in the EU. The EU might as well be doomed with this trust in the EU to solve national reform problems.

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.”

EMU Crisis, Barroso and the Inter-Institutional Balance

19. December 2013, von Adriaan Schout, Comments (0)

The start of 2014 marks and important turn in the EU: the euro crisis seems over, everyone is getting ready for the ‘this time it is different’ election campaign for the European Parliament, and the EU has to come to grips with a new president and, possible, a new balance in the inter-institutional relations. It is this set of conditions that typify the current situation in European integration in which not all is what it seems. The reason of the current confusion is that we have not come to terms with the institutional fall out of the euro crisis.

The Lisbon Treaty was supposed to be the mother of all treaties putting an end to the need for further treaty reforms. The EP was a clear winner with new voting rights and the Commission was regarded as the main loser. The extent to which the European Council was the real institutional winner only became clear as the euro crisis advanced. Member States abhorred Barroso and his Commission so that new tasks were located elsewhere – EFSF/ESM to a special body in Luxembourg, banking control to the ECB. Yes, the Commission acquired an independent budget tsar but the real bite and the extent to which this commissioner is really independent are still in the balance. The first EU semester of Rehn gained applause; his second harvested doubts. Beyond doubt, however, seems to be the president of the European Council Herman Van Rompuy. Whilst Barroso was seen as a ‘pitiful coward’ who thwarted the Commission’s right of initiative, the European Council could shine under the seemingly spirited leadership of Van Rompuy.

However, the winner of the euro crisis might well be Barroso. Certainly, he has not nearly been the leader everybody had hoped for and he is known for his vanities. However, he showed himself able to play three games at the same time. First of all, he was wise enough to recognise that in the build-up of economic structures, heads of state had to come to grips with new rules – and loss of sovereignty. Therefore, he avoided collusions where there was no possibility to win. Knowing when to pick a fight is probably one of the most important characteristics of a Commission president. Secondly, he defended the traditional role of guardian of the treaties. How weak was he really? Commission president Barroso was not weak-hearted when it came to blocking state aid to sacred cows such as Opel and Citroen or to breaking up banks in Member States. France was attacked over fundamental human rights when groups of Roma were expelled – and, painful for Sarkozy, while a summit was going on and maximum press visibility was ensured. Similarly, free movement of people is defended with gusto against political pressure from countries such as Germany, UK and the Netherlands. Thirdly, Barroso reinforced the institutional relations with the European Parliament. The ‘this time it is different’ slogan is a next step in this trend. Barroso has been publicly expressing ‘governmentalisation’ ambitions and referred to commissioners as ministers in his economic governance blueprint. And European ministers need a true European Parliament.

Now that the important economic governance rules are being formulated and implemented, it is to be expected that the European Council will have less to do. Hence, the successor of Van Rompuy will be (much) less relevant. If, of course, Van Rompuy was really as relevant as seems now – he might well have provided the only fig leave behind which Merkel could hide her power. What will remain after the elections of 2014 is a stronger bond between EP and Commission and a more symbolic role for the president of the European Council. So, the EU may have a president at last: the president of the Commission.

Dutch minister for foreign affairs, Frans Timmermans, wrote in the Financial Times that he would now like to see that the Council broke into this ever closer bond between the European Parliament and the Commission. In 2009, the Benelux countries argued for a stronger role for the Commission. In view of the ‘governmentalisation’ of the Commission, the Dutch now argue in favour of strengthening the European Council. This may well be a big compliment to Barroso: the ‘weak president’ has thwarted the inter-institutional balance.
Before 2008, the EU basically consisted of the internal market and was based on the community method. At the start of 2014, the EU consists of two veritable pillars: the internal market and the political economic governance pillar where Commission and EP are looking for a different (political) ball game all together. Of course, the euro crisis has been hugely instrumental in this development. Yet, judging by the results, the position of the Commission under Barroso has certainly not been marginalised. History may well be kinder to him than his current critics.

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.”

Are we Living in a Post-EU Society?

20. November 2013, von Adriaan Schout, Comments (0)

There seems to be a paradox: whereas the euro crisis has enforced deeper integration, economic and political attention is shifting away from the EU. Europhiles blame the Eurosceptics but EU-watchers should be careful to follow simplistic reasoning.

Dutch Foreign Affairs Minister Frans Timmermans has the reputation to be an EU-believer and was, among others, a convinced member of the Convention that drafted the Constitutional Treaty. When he became minister of foreign (including EU) affairs, the general impression in the Netherlands, and the rest of the EU, was that his appointment was a good sign of the Netherlands becoming pro-EU again. However, now one year in office, Timmermans has shown himself rather critical of the EU. He talked about a ‘Brussels bubble’ that has lost touch with reality, criticised EU salaries and insisted on closer control of the EU Commission by the European Council (i.e. intergovernmentalisation of the Commission). Of course, it is possible to contribute this to pragmatic kowtowing to the political signs of our times or to the more reserved EU attitude of the Dutch liberal Prime Minister Rutte and his coalition government of which Timmermans is a member.

Yet, there is more. Minister Timmermans is also travelling extensively abroad. In fact, he is much more in other parts of the world than in Brussels or in EU Member States. One could could argue that the Dutch international influence via the EU would be more pronounced and, hence, that the use of all his international activism outside the EU is debatable.

In the meantime, across the channel, Cameron has expressed the possibility of an in-out referendum. A part of British industry has been issuing threats of leaving the country, and many in the EU are once again appalled by the Brits who continue to be unsurpassed EU-sceptics. However, rather than condemning – as so often happens – the Brexit discussion ignited by Cameron, we could also try to take the British debate seriously. Similarly, we might need to consider that Timmermans’ external perspective is well-founded. In any case, it has to be admitted that the British are good at thinking outside the box, so maybe there is more substance behind the Brexit debate than simple Euroscepticism.

Studies also show that big as well as small and medium-sized industry in the UK question the relevance of current EU policies and of the importance of the EU. Whereas about half of the UK’s exports go to the EU, the other half is going to other parts of the world and, more importantly, it is there where the growth in export – not just the UK’s ─ is taking place. Discussions about competitiveness are now primarily linked to comparisons with countries such as India, China, Brazil and the USA.

Hence, rather than sticking to European navel-gazing, it seems justified to look at the rest of the world for market opportunities and for new threats. In principle, questioning social policy objectives – maybe precisely because they are more symbolic than real – and other developments in for example the growing tasks of the ECB and in the EU’s economic governance, seems a valid starting point in the current debates on the future of the EU. It is crucial to consider what such trends imply for the EU’s competitiveness. This is important from an economic perspective but one also has to consider that the EU’s international security and influence are intimately related to its economic strength. External benchmarking of the EU’s competitiveness should not suffer from internal euro crisis debates.

The EU may have to come to terms with the fact that we work and live in a post-EU society, which also helps to put the traditional European claims into perspective. There is a keen awareness in the Netherlands that 70% of our trade goes to countries within the EU, especially to countries within 1000 kilometres of our borders. This has actually little to do with the EU. Trade relations with neighbouring countries are bound to be important, irrespective of the European integration project. Although important, extensive trade with countries close by are more or less traditionally given. Trade with other parts of the world is clearly increasing and posing new and painful challenges. To focus trade relations more on the rest of the world seems a natural and necessary development.

We in the EU may have to accept the post-EU society as a reality. Voters, consumers and industry have interests beyond the internal market and internal eurozone worries. This recognition has, in principle, little to do with anti-EU sentiments. It would be a mistake to taboo those who’ cast their nets out further’. On the contrary, accepting this might actually help us to get a better focus on what is important within the EU, e.g. standing together in external relations, and what is potentially dangerous such as, for example, creating a French-type EU. The European Union is important, but there is a lot more in the world that counts.

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.”

Parallel Currencies are no Alternative for the Euro

21. October 2013, von Adriaan Schout, Comments (0)

Many are upset about the ‘TINA-type solutions’ for the euro crisis. ‘There-is-no-alternative’ (TINA) seems to have been an irrevocable characteristic of the euro right from the start. A sense of ‘having been forced onto the people’ was kindled by the fact that in most countries the single currency was adopted without referenda. Subsequently, many of the measures including EFSF, ESM, disputable bail-outs of governments and banks by the ECB, sharpening up of the stability and growth pact and the 2pack (which forces Member States to hand in national budgets before being adopted in parliament) have all contributed to the image of the euro as extremely risky and as an undemocratic intrusion on national competences. On top of this, many countries struggle with the constraints of the dubious 3% rule. If economic governance is to work, Barroso in his blueprint has given a clear insight into what it involves, including an EU finance minister and EU bonds.

There is a sizeable group in the eurozone that does not want these TINA-type steps towards a federalised and centralised EU. Many would like to leave the EU straight away. Others, such as German Professor Kerber and adepts of The Matheo Solution, suggest to introduce types of parallel currencies or currency units (calculation currencies such as the ECU). According to Kerber, if southern states do not want to leave the euro zone, then the countries with a current account surplus should introduce their own currency. He suggests that since the relevant northern countries are only Germany, the Netherlands, Austria, Finland and possibly Luxembourg, the new currency might as well be the DM under the watchful eye of the Deutsche Bundesbank.

Hopes of a parallel currency immediately lead to serious questions (even if we ignore the political complications and impossibilities). Firstly, there are legal questions about breaking away from the eurozone. Will the Commission use all legal means to ensure the integrity of the eurozone? Secondly, one should not think lightly of the consequences for the competitiveness of the new DM block when the DM revaluates. Thirdly, a break-up would complicate the necessary steps towards the banking union even more and thwart the internal market at least in financial services. With bouts of devaluations, any banking resolution mechanism would be frail. However, most worryingly of all would be the fall back towards the ERM (European Exchange Rate Mechanism) days when especially southern countries had to devalue repeatedly. This had profound economic consequences including financial losses while structural changes continued to be stalled and spells of high unemployment because countries mostly postponed devaluations to ensure prestige. (B. Connolly (1994), The Rotten Heart of Europe, Faber and Faber.)

The changes for successful reforms in countries outside the euro framework are (decidedly) lower than within the eurozone. The best options for structural changes in expenditures, labour market reforms, tax reforms, deregulation, anti-corruption policies, rule of law measures, banking supervision, etc. are within the euro system. This will, in the long run also benefit the eurozone and EU more broadly.

Evidently, the costs of dealing with the current bubbles in the eurozone are huge. However, these costs in terms of ban risks and government deficits have already been committed and have been shifted to, among others, the balance of the ECB. They will not go away with a break-up of the euro. Inside or outside the euro, adaptations will remain expensive.

Of course, we can throw away all hope for reform in countries such as France, Italy and Greece. If we are so negative, we would better dismantle the euro as soon as possible. However, it would be in all our interests to ensure reforms. Changes seem to be taking place in and, in any case, prospects for reform are best within the eurozone (ask the Dutch).

Parallel currencies show at least that alternatives for the euro do exist but it seems wise to keep such disruptive alternatives at bay for the time being. Thoughts about parallel currencies are signs of serious euro frustration but not of ‘cold thinking’.

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.”

Barroso Stretches the Limits of Subsidiarity

15. July 2013, von Adriaan Schout, Comments (0)

By Adriaan Schout and Judith Hoevenaars (Instituut Clingendael)

The eurocrisis has reignited debates on subsidiarity. On June 21st, the Dutch government presented the (disappointing) results of a subsidiarity review, listing 54 EU measures or policy fields which could better be regulated at the national level. The UK is working on a more extensive proposal to flow back European powers to the national level. These national exercises are a response to delinking enthusiasm for the ‘ever closer union’, while Brussels’ influence over the Member States grows. Subsidiarity, which governs the exercise of European powers, is under pressure as EU competences are expanding and it is no surprise that it tops the agenda in several Member States.

Yet, the principle of subsidiarity suffers from institutional vagueness. Subsidiarity is not just a technical or judicial concept, but also a political one. A legalistic interpretation of subsidiarity would emphasise that the EU should legislate ‘as closely as possible to the citizens’, especially in areas where it has no exclusive competence. However, the application of the principle, of which the rules are laid down in Protocol No 2 attached to the Treaties, inherently entails a political assessment. Subsidiarity is aimed at preventing unnecessary centralisation of powers just because that would favour the functioning of the EU in the view of the European institutions. Hence, the Commission has to justify each new proposal with a convincing argumentation why Europeanisation is required. Yet, the eurocrisis has stretched the boundaries of subsidiarity and the division of competences between Member States and the EU to its limits.

As it seems, the EU Commission’s political agenda is to centralise more powers in Brussels. In this respect, the Commission is using the political opportunity and room of maneuver in the application of the principle of subsidiarity to expand EU control. Barroso calls for a full banking, economic, fiscal and political union in the ‘Blueprint for a deep and genuine economic and monetary union’. His vision of the EU includes European ministers, an increased EU budget and centralised banking supervision. In particular, the Blueprint calls for centralisation of democratic control by the European Parliament. The institutional ambitions of the Commission and its wish for further conferral of competences to the EU level are legitimised by underlining that “national economic policy-making paid insufficient attention to the European context within which the economies operate”. In other words, the message is that the Member States can’t govern their economies, so national competences have to be handed over so that the EU will do it for them.

The blueprint is not written in the spirit of subsidiarity, exploring how the national administrations of the Member States can be strengthened to meet EU requirements, but from a centralised perspective. In response to the eurocrisis, the economic governance powers of the Commission have already expanded substantially. In the traditional division of roles the European institutions would set the standards (3% and 60%), the national governments or regions would be responsible for the implementation and the Commission would monitor and control the Member States. The EU reaction to the crisis has set aside this model of governance, deviating from the principle of subsidiarity, by pleading for more powers and budgets.

The principle of subsidiarity is reduced to a mere check box in the legislative procedure and has fallen victim to the political aspirations of the Commission. National governments and especially national parliaments – as guardians of the principle of subsidiarity – must ensure a strong subsidiarity test as a mandatory part of each EU legislative process also when it comes to the responses to the eurocrisis.

The Commission and the European Semester: is the Fox Guarding the Chicken?

5. June 2013, von Adriaan Schout, Comments (0)

2013 is a pivotal year for Commissioner Rehn, the European Semester and the Commission. All three have had to prove their legitimacy regarding economic governance. Rehn’s credibility and that of the European Semester centre on the reputation of the Commission and that of DG EcFin in particular. Given the importance of the European Semester, it is important that there are no doubts about the independence and the quality of Olli Rehn as Commissioner. To save the euro project and the trust people have in the Commission in euro-related processes, it was decided in 2011 to create the post of an ‘independent’ Commissioner to supervise the Stability and Growth Pact. The famous six-pack and two-pack have reinforced the role of the independent Commissioner who now has the power to monitor and even fine Member States. The Commission’s unshaken reputation is crucial, if it wants stand up to criticism in the media and by peers and (Nobel-prize winning) economists.
Alas, the Commission does not stand the test of quality and of independence. As a result, the criticism on this year’s reports and recommendations has been overly political – for example concerning the extra year France received to bring its deficit down – and cannot be brushed aside.

When trying to understand the process through which the ‘independent’ Commissioner has operated, we stumble upon questions concerning the procedure the country reports are actually written by the Commission. First of all, there is the issue of other Commissioners making public statements about Rehn’s work. The remarks by Commissioner for Industry and Entrepreneurship Antonio Tajani who openly criticised Rehn’s emphasis on austerity and those made by Commission President Barroso, that the boundaries of the public acceptance of austerity have been reached, have resulted in any statements by the Commission and hence Olli Rehn being put in a political perspective. Secondly, DG Ecfin does not write the reports independently but needs input from other DGs and hence has to work with colleagues who, for example, fall under Commissioner Tajani’s authority. Thus, Rehn’s reputation depends on more than just DG Ecfin’s work but also on the negotiations among DGs. Thirdly, we do not exactly know what happens with the reports from DG Ecfin once they are passed on to the College of Commissioners. Even officials from DG Ecfin were surprised about changes made in texts. Apparently, there is a lack of transparency at this stage within the Commission.

Fourthly, other Commissioners are allowed to pose questions concerning the reports and recommendations in the College which suggests that there are discussions on the proposals put forward by Rehn before adoption by the College. In addition, Barroso is advised by a senior economic advisor (a newly created post) who is apparently in a position to second- guess the work of Rehn as independent Commissioner. Generally speaking, Rehn wears at least two hats: that of independent Commissioner concerning the excessive deficit procedure and that of ‘normal’ Commissioner (as one among equals in the College) concerning the structural imbalances procedure.

Hence, Rehn’s position in the college is complicated and far from transparent. The six-pack dictates that Member States have to have an independent budgetary authority. Strangely enough, this requirement does not apply to the Commission (DG Ecfin) itself. As a result, we are stuck with a semi-trustworthy European Semester. The Commission confuses its functions as independent economic analyst and its ambition to operate as economic government of the EU.

Reputation is a key factor in advanced economic societies. The Commission does not seem to care about the reputation of the ‘independent’ Commissioner. If it did, it could separate data gathering (Eurostat – also falling under the College of Commissioners), data analysis (DG Ecfin), policy advice (the College) and monitoring (DG Ecfin). Now, all these functions, including the political aspects, remain combined. This situation is unacceptable in view of the required transparency, the promised independence and basic principles of good governance to separate policy from analysis and from supervision. Yet, it is well recorded that the Commission is not very fond of putting its tasks at arm’s length in independent agencies.

Power seems to be more important than reputation. It is high time the Commission re-examines its organisation in the light of the demands of a reliable European Semester process. It remains doubtful whether the Commission will be happy to accept the consequences. It seems to prefer to operate as the fox guarding the chickens.

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.”

Will France Become like the Netherlands or the Netherlands like France?

28. May 2013, von Adriaan Schout, Comments (1)

To understand the euro project we need to go back to 1989 and the frustrations over exchange rate adaptations under the European Exchange Rate Mechanism (ERM). France was frustrated by the hard Deutsch Mark and, occasionally, lost billions on aligning the FF to the DM. Mitterrand used the German unification as a lever to get Kohl to accept the euro. This was regarded by the Dutch with grave worries for various reasons. In essence, the euro is a French project.

For one, the Dutch, together with the Germans, wanted at least to ensure that the euro would be a hard currency and demanded the Maastricht criteria, the SGP and an independent ECB. The demand for rules to reinforce economic institutions continues and resulted of late in an ‘independent Commissioner’ and semi-automatic sanctions. The euro may have a French pedigree but was supposed to become German/Dutch and, with that, ‘southern’ Europeans would/should become like the Germans/Dutch. One of the most recent steps in this effort was the line in the six pack that all countries should have an independent budgetary authority. The Dutch have such a prestigious economic analysis bureau but in France this function has been part of the Ministry of Finance. Strong economic governance goes together with strong, independent, rule-bound and transparent institutions.

The Netherlands is now in a recession and economic prospects seem to be gloomy for some time to come. To be able to reform, the Dutch need to rely on their proven social ‘polder-model’ and recently a social pact between employers and employees was agreed on and supported by the government. However, the government did not want the independent budgetary control office to examine the consequences of this social pact nor its implications for the 3% rule. Moreover, this control office recently had a shift in leadership and a top civil from the ministry of finance was appointed. The new director may be extremely competent but the image of independence is endangered. Moreover, Prime Minister Rutte spoke out to be optimistic about economic prospects. Yet, over-optimism has been one of the most annoying characteristic of politicians when it comes to reliable statements about the SGP criteria. Recently Hollande also presented a brighter economic future for France than Olli Rehn. In the debate for EP on 7 May, Dijsselbloem ̶ albeit it as chair of the Eurogroup ̶ emphasised that we should not examine the weakness of banks until the eurozone has the resolution mechanisms in place. Hence, the message seems to be, let us postpone the facts until we think we are ready. Is it wise to circumvent facts, to thwart the image of independence and not to analyse major reform proposals?

Rumsfeld once stated that there are known unknowns and unknown unknowns, but the eurozone has invented the ‘unknowns we’d rather not know’. The French had a political perspective on the fiscal policy whereas the Germans and Dutch stood for rationality. As it now seems, the euro is not changing Hollande into Kohl, but it might make the Netherlands more French.

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.”

Doubts about Rehn’s Position as Independent Commissioner

7. May 2013, von Adriaan Schout, Comments (0)

Rehn has spoken. Friday 3 May, the independent Commissioner for economic and monetary affairs gave his verdict on the state of the national economies in the EU. His statements were remarkable in several ways and come at a time when he has to prove his worth as an independent Commissioner. France, which has been dragging its feet regarding the necessary reforms, has received two extra years to bring its budget in order although its deficit is 4,2% and its public debt is moving towards an incredible 96,2% next year. The Dutch are in a better position but received a one year delay while allowing the public burden to increase instead of pushing for reforms. Newspapers and civil servants point to heavy lobbying of, in particular, France.

How do we know whether Rehn has spoken words of wisdom? Whatever Rehn says, he will always be criticised by many. If he criticises, for example, Berlusconi for having failed to reform, even his Italian colleague Antonio Tajani (Commissioner for industry) openly speaks out against him. If he cautions over austerity, he is criticised by EPP MEPs for failing to keep Member States to stick to the rules of the Stability and Growth Pact (SGP). Even Barroso has been going over Rehn’s head by stating that austerity has reached the limits of popular support – displaying evidently that Barroso is primarily a politician. Barroso may not have contradicted Rehn over the need for some slack, but his comments have placed Rehn’s work as independent Commissioner in a political light and Barroso has hinted at differences in the Commission. Other attacks come from economists and Nobel-prize winner Paul Krugman made fun of Rehn’s over-optimistic growth forecasts in the Financial Times and slashed his emphasis on austerity (‘Rehn of Terror’). Hence many, including his colleagues in the College, disagree with whatever Rehn concludes.

Rehn’s advice is easily distrusted. Therefore, the analyses and recommendations of the European semester commissioner should be widely recognised as the result of careful examination of long term trends in national and European economies. The weight of his words depends in many ways on the respect peers in governments, journalist and financial analysts have for the independent Commissioner as institution. His prestige depends on the analytical quality of the reports of DG EcFin, on the reputation of this staff and on the extent to which procedures are trusted to guarantee quality and independence.

Much has been achieved in terms of ensuring the quality of the work of DG EcFin, but not enough. First of all, there are trends that are incompatible with the role of an independent Commissioner. The Commission is increasingly presenting itself as a political body, searching political support from the European parliament and calling itself a ‘government’. This seems to be a worrying step away from the traditional focus of the Commission on content as envisaged by Jean Monnet. An ‘independent Commissioner’ as part of a political ‘government’ seems to be a paradox if not a straightforward contradiction. Pleas in Barroso’s State of the Union (2012) to operate ‘independently under the supervision’ of the European Parliament are equally confusing.

Secondly, the process through which the independent Commissioner formulates conclusions and economic advice to Member States needs to live up to standards such as independence from political influence from both within the Commission and from Member States, quality (size and expertise) of the staff of DG EcFin and transparency. However, if we try to piece together how DG Ecfin operates within the Commission, we cannot conclude that quality and independence are guaranteed.

To start with, reliable statistics are the basis of any economic report. It was already known to insiders that European statistics were unreliable but the Greek crisis in 2009 proved that some countries provided rubbish if not lies. No economic system in the 21st century should aspire to function on the basis of a suspicious statistical system. Moreover, if only for its prestige, Eurostat should not fall under the College of Commissioners but should be an independent agency.

Moreover, although major improvements are to report in terms of economic governance resulting from the 2- and 6-pack, the European semester is still not supported by a transparent depoliticised analytical process. DG EcFin has been enlarged but it is still unclear what is being done with its staff reports. The parts of DG EcFin that are independent remain in any case dependent on other – political – DGs for sector input. Also, the staff papers are forwarded to the College. The staff papers are ‘the sole responsibility’ of the independent Commissioner although officially other Commissioners may pose questions and other DGs are consulted in the writing of SGP reports and of conclusions of the macroeconomic imbalances procedure. Furthermore, the President of the Commission is supported by a Chief Economic Analyst in the process of the drafting of the recommendations. It is unclear why Barroso has an additional analyst if reports are produced by Rehn and DG EcFin. Finally, there are actually confirmations that the recent statements by Rehn have been strongly influenced by national lobbying.

Hence, also the production of the country reports and recommendations should be set aside in an independent agency – just as the 6-pack dictates that Member States should have independent budgetary authorities. If there is an ‘independent Commissioner’ he should not be part of a College. This would also improve the transparency of the process.

As it stands, the legitimacy of the Commission’s role in the renewed European semester remains weakened by compounded functions and procedures. One thing economic governance requires is reliable and transparent institutions. The Commission, of course, will be strongly opposed to any discussion of redesigning its tasks and powers. A pity for those who hoped that the European semester was the start of something new.

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 or DijsselDoom – a Dutch Perspective

9. April 2013, von Adriaan Schout, Comments (0)

I already presented my reservations against the appointment of Dutch Minister of Finance, Jeroen Dijsselbloem (Labour Party) as President of the Eurogroup. The public outrage following the bankruptcy of the banking sector in Cyprus has raised new questions concerning his ‘presidency’ (for which in Dutch the more modest ‘chairmanship’ is used). My initial doubts concerned the question whether this prestigious position would be in the interest of the Netherlands – and I was bold enough to propose Olli Rehn as possible candidate for a permanent chair after his departure from the European Commission in 2014.

The Cypriot turbulence in March immediately tested Dijsselbloem’s ability as a chair. He had become minister of finance in the Netherlands only in November 2012 and his appointment was almost immediately followed by rumours about his candidacy as president of the Eurogroup. In that respect, the criticism of his lack of experience and authority during the Cyprus crisis came as no surprise. For his two rescue proposals for Cyprus the media treated him on nicknames such as “DieselBoom”, “DijsselDoom” and “EuroBaldrick” (borrowed from the series Blackadder) as well as on appeals for his resignation. The fierce debates he provoked centre on the question as to whether the deposit holders are really completely safe. ‘True’ EU believers – and bankers who long for stability – would have preferred a banking resolution including European deposit guarantees in order to prevent bank runs whereas EU sceptics wished for the dismantling of the euro. Moreover, as was to be expected, Dijsselbloem was scorned as a Dutch puppet of Germany and blamed for defending the Dutch position instead of being a neutral chair.

Yet, in view of political realities like the upcoming elections in Germany and the public reservations against saving zombie banks and eurozone countries, the decisions of the Eurogroup to dismantle the Cypriot banks and to bail in seem inevitable. Moreover, given the lack of money in any country, it is highly unlikely that former Eurogroup President Juncker would have been able to orchestrate a different outcome. Approximately € 3 trillion is needed to stabilise banks in the eurozone. It is simply impossible to avoid more haircuts. Still, Dijsselbloem’s presentation of the measures appeared cold and his alleged Dutch bluntness provoked comments like the one by Juncker that you sometimes have to lie as chairman of the Eurogroup – as if financial markets preferred unreliability instead of predictability.

Also, the role of the chairman of the Eurogroup seems to be widely overestimated, if one has a close look at the EU power structure. A lot of criticism on Dijsselbloem is politically naïve in view of the strong resistance against the Cyprus bail-out not only in Germany but also in countries such as France where EU Affairs Minister Moscovici talked about “casino banking” on Cyprus. It seems widely regarded as reasonable to bail-in bondholders and deposit owners – particularly in the absence of an effective European resolution mechanism.

Hence, Dijsselbloem seems to have withstood the criticism well so far. Yet, there are issues for which he could be criticised, which in some cases can be blamed on his lack of experience. First of all, he made himself more important than he really is by ̶ during the hearing before the European Parliament ̶ taking the blame for the bailing-in of savings below €100 000 in the first deal with the Cypriot government. Firstly, the chair (President of the Eurogroup) is not a decision maker but mainly a spokesman: it was the decision of the Eurogroup to bail in those savings. Secondly, he referred to the bail-in of Dutch bondholders. A chair should be as neutral as possible and avoid telling the world how good his native country is in dealing with a crisis. Particularly Dutch politicians should take care not to be too outspoken. Dijsselbloem’s presentation of the Netherlands as a role model fuelled the criticism that he was pursuing a national agenda. Thirdly, he talked in terms of “core” and “periphery countries” as well as “the north” and “the south” whereas a chair should avoid divisions at any cost (as he later seemed to have realised).

Even though these issues are mainly issues of style and nothing serious, the international press once again saw a reason to complain about Dutch bluntness and about pushing through the Northern austerity agenda. Similarly, when Dijsselbloem, as Dutch Minister of Finance, attacked the Commission’s request for an additional € 11.2 billion for the budget for 2013, a question basically unrelated to the euro crisis, this led to head lines such as ”Dijsselbloem, president of the Eurogroup, joining forces with the UK” (EurActiv 3 April 2013). This shows that it seems to be inevitable that the chair of the Eurogroup is not regarded as neutral but as a national politician.

If Cyprus can cause an existential euro crisis overnight, it is very likely that more and more serious crises are to be expected. Against this backdrop, complaints about Dutch bluntness, accusations of Dijsselbloem acting as a German puppet or being part of the British camp, are particularly unhelpful both for the EU and for the Netherlands. What the Eurogroup urgently needs is a professional chair!

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.”

What a Tomato Can Tell us about the Euro

22. March 2013, von Adriaan Schout, Comments (0)

In order to form an opinion on the effects of the euro, we could start out from a simple question: what sort of impact had the introduction of the euro on a specific product, let us say a tomato, that a country (e.g. the Netherlands) cultivates and exports? The Netherlands has a strong horticultural sector. At first sight, it seems as if the Dutch exports in horticultural products have benefitted greatly from the euro. In 2010, almost 10% of the workforce worked in the production, knowledge development and trade of vegetables and fruits. 75% of the exports of tomatoes, cucumbers, paprika, etc. were within the EU. Exports within the EU have benefitted from European integration since 1992 with the removal of trade barriers, the definition of common food laws, the protection of patent rights and the introduction of the euro. Since the introduction of the euro in 2002 the exports of vegetables and of fruits have increased massively with 90% and more depending on products and regions. Exports to southern European Member States have proven to be particularly impressive with a growth of 241% between the introduction of the euro and 2010. Does this mean that the euro was a big success?

There are many reasons for this sharp increase in exports from the Netherlands and for the increasing imports by the southern Member States. One explanation for the favourable exports between 2002 and 2010 was the introduction of the euro. Tomatoes and related products are bulk products with low margins. Hence, the export success depends on enormous volumes combined with low profits margins. As a result, small changes in costs result in major changes in trade. The introduction of the euro contributed in two ways to the export success. The euro implied lower transaction costs, and lower costs with bulk products imply more exports. In addition, the economic conditions in the southern countries was inflated due to investments in housing, the inflow of cheap capital and high consumption. There were few incentives within the eurozone to lower wages and prices. As a result, Dutch horticultural exports to southern Member States flourished and investments in production went up, meaning that the success of the Dutch production and exports was partly a sign of failing market adjustments in the south.

Evidently, this upswing in Dutch exports has had its flip sides. Production in the south was pushed back before 2010. At the same time, investments in the Netherlands had gone up leading to the current overcapacities. These days, Dutch export of tomatoes within the EU is dropping. At first sight, this might appear to be a logical consequence of the general economic crisis given that consumption is falling in many eurozone countries. What is much less realised is that it is also the introduction of the euro that can partly be blamed for the present economic setback in horticulture. Currently we see wages in southern eurozone countries dropping, production and export of horticultural articles from the south are increasing, and, as a result, imports from the Netherlands drop and exports to the northern countries increase. Dutch export is not only dropping towards southern countries but also towards countries like the UK due to stronger competition from southern tomatoes.

Looking back, it would have been better had the market for horticultural products remained more in balance. The success of the exports was in part the result of failing markets within the eurozone. Would markets have adapted more smoothly, exports from the Netherlands would not have grown so fast and this would have prevented overinvestments and less adjustments once the crisis set in. Similarly, production in the south would have increased earlier had markets been more flexible.

This shows that the introduction of the euro – a macroeconomic development – resulted in microeconomic imbalances in the market for horticultural products. Looking back, the increase in Dutch exports following 2002 was too high and is now followed by a reversal of trade flows. The story of the tomato tells us that the increase in exports due to the euro was also a sign of insufficient adaptations in the south and has resulted in a hard landing that could have been prevented had the euro not functioned as a ‘sleeping pill’ to postpone market adaptations. At the same time, export surpluses were not matched by adaptations in exchange rates so that adaptions in the end have been more abrupt. What goes up must come down. Paradoxically, the euro has aggravated the ups and the downs. Like it or not, the well-functioning of markets is even more important with 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.”

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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