Adriaan Schout « Euro

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The French Squeeze

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

There are signs that the economies in the eurozone are picking up in various ways. Recent figures of the ECB on Target2 (the capital account of the eurozone countries within the ECB) show remarkable signs of improvement. The claims of the triple-A countries Germany, Finland and the Netherlands on the problem countries are going down. The Dutch and the German claims at the peak of Target2 lending in 2012 amounted to € 173 billion and € 750 billion, but these have dropped by almost 20% since. There are many explanations for this development. Draghi’s promise to do ”whatever it takes” to keep the eurozone intact, has created the trust needed to restart trade in sovereign debt of Spain, Ireland, Portugal and Italy. In addition, (wage) reforms and austerity measures have reduced the imports; investors are returning and exports of for example horticultural products are increasing.

These developments in the south imply enormous reductions in risks for the budgets of northern countries. If the situation in the problem countries had deteriorated, the Target2 claims could have end up as losses – and downgrades – for the triple-A countries. These claims are not just important in terms of abstract risks on the ECB books, but they also have practical implications for the national debt positions. The Dutch government used the profits from the Central Bank on the sovereign debts from Southern countries to lower its public debt figures, so that the deficit is at least cosmetically closer to the 3% monitored by Olli Rehn. However, including the Target2 risks of the ECB in the national budgets would show that national debts are potentially much higher. Also in this respect the drop in the ECB’s Target2 exposure is good news.

However, the difficulties in the eurozone and the Target2 risks are far from over. The Global Competitiveness report for 2012-2013 displays the many remaining economic hurdles in the eurozone including repeated warnings over inflexible labour markets in Spain. Moreover, the outcome of the recent elections in Italy obviously creates additional challenges.

The real worry however is France. Its Target2 deficit has not gone up due to the deterioration of its current account. Moreover, its public debt is rising above 95% – which means that its debt becomes unsustainable. The global competitiveness index of France has fallen last year from 18 to 22. It is doubtful whether the French social economic institutions – including its labour relations – are up to the economic challenges France is facing. Despite the efforts of Olli Rehn with the reinforced EU semester, France has shown few signs of improvement over the past year. Worryingly, with the economic reforms in its neighbouring countries including Spain and the Netherlands, its competitiveness and current account balance is being threatened from all sides.
We saw in August 2011 that financial markets woke up to the worries over Italy’s economic situation. Typically, this awakening did not happen with a whisper but with a bang. The crisis in the eurozone was then probably at its worst because of the size of the Italian economy. An immediate crisis over France may not be around the corner, but all ingredients for the next major euro problem are present. Symbolically as well as economically, a eurocrisis over France would be extremely damaging to the European integration project as a whole.

It is surprising that the French interest rates are currently still comparable to those of Germany. Either financial markets are irrational or they are counting on Draghi’s unconditional support for France. Both explanations would be very dangerous economically and politically. Irrational financial markets could prove to be extremely volatile and a repetition of August 2012 is possible. Alternatively, German – and Dutch – patience with Draghi and the ECB could reach its limits. FDP chairman Brüderle already warned France that reforms are needed. The EU cannot afford an existential crisis because of French economic negligence.

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.”

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.”

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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