Euro Crisis 2012 « Euro

The Euro Crisis in 2012: Belief, Will it be Enough?

18. December 2012, von Aldo Caruso, Comments (0)

by Ferdi De Ville

This is my final entry in this blog on the euro crisis in 2012. Many things have happened and been decided and installed the past year, too many to recap them all here. There have been moments at which a collapse of the euro area as we know it, once unthinkable, seemed really close, especially in the weeks before the second Greek elections when the Spanish banking sector was going down also. Apart from the Greek elections, some other ballot outcomes have been hailed as turning points for the euro crisis: the success of the socialist Hollande in the French elections and the victory of pro-European parties over their anti-European challengers in the Dutch elections.

But if I had to select one day of this year to be awarded the label of turning point, it would be the one on which ECB President Mario Draghi gave his ‘believe me, it will be enough’ speech, indicating that the ECB was finally willing to assume its ‘lender of last resort’ role. The ECB at the end of the summer acted on this pledge with the launch of its Outright Monetary Transactions scheme. It meant that the ECB in the end would use its unlimited resources to safeguard the euro. Together with the acceptance of a new rescue package for Greece at the end of the year, it restored the confidence in the irreversibility of the euro. This is what made Draghi the ‘man of the year’ for the Financial Times.

The OMT has not been used yet, its mere announcement has sufficed to dramatically push down the bond yields of Spain and Italy. Markets seem for the moment to belief that if needed, countries (read: Spain) will be willing to accept the conditions (apply to the European Stabilisation Mechanism and thus agree to a reform programme) for OMT. Besides this explicit conditionality for OMT, the implicit agreement of Draghi with the political leaders in the euro zone was that he would buy them time in this way that they would use to further improve their governments’ budgets and economies’ competitiveness, and, not the least, take bold steps in completing EMU.

After the last summit of the year, we must conclude that, regarding completing EMU, the OMT has resulted in exactly the opposite of what was intended. Instead of prodding Heads of State and Government of the euro area to agree on an ambitious give-and-take package deal, it has taken away pressure and has led them to retreat to their defensive positions, each vetoing further integration in those domains they dislike.

The past year, with the help of Draghi, has seen politicians continue their tried procession since the spring of 2010. Every time a crisis situation erupts (for example the collapse of the Spanish banking sector); they take a decision that is just enough to avoid disaster. Until now, they seem to succeed in this. By starting a process to fundamentally rethink EMU, they seemed to want to end this muddling and put the euro and its economy on a strong footing for once and for all. But looking back, we have to conclude that the real intention of starting this process, at the time of the Greek elections and the Spanish banking problems, was to make everyone belief in their determinedness to save the integrity of the euro.

The question for 2013 is if this ‘belief’ will indeed be enough. 2012 has seen the defusing of the explosive situations of Grexit and illiquidity-induced European banking sector collapse. But for next year, new obstacles stick up. Spain will have to borrow a staggering €207 billion in 2013, making further delay of applying to the ESM increasingly untenable. Elections in Germany make any further progress towards more solidarity (be it through banking resolution, deposit guarantee or a euro area budget) unlikely. While any lack of improvement in the employment and thus social situations in southern Europe (especially Greece and Spain) will lead to ever louder and possibly violent protest against more of the same austerity policies.

Will the past year have built enough confidence so that in this dire state both financial markets and citizens will keep believing that enough is in place to safe the euro and ensure economic improvement? We should hope so, because the ECB is now really at the limits of what it legally (and legitimately towards Germans) can do, while close to nothing could be expected from the side of the European Council with the German elections in sight. So 2013 promises to be another difficult year but with much less instruments left to react to troubles. Luckily, the challenges named above are pressing, but rather chronic than acute. It is very likely that we see a consolidation in 2013. For the optimists, those of us who are always looking at the stars, it means a consolidation of the euro, for the pessimists a consolidation of the crisis. Just as the Van Rompuy report (and the Commission’s Blueprint, and Verhofstadt and Cohn-Bendit’s plans) can be looked at as providing the guiding stars for further integration the next couple of years, or as proof of the galactic distance that these utopias are still away.

Merry Christmas!

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

A Good Week for the Euro?

18. December 2012, von Aldo Caruso, Comments (0)

by Ferdi De Ville

Those that still doubted that the EU was a right choice for the Nobel Peace Prize have been rebuked by the Heads of State and Government of the euro area at last week’s summit (13-14/12). The leaders decided at this meeting, which for months was announced as the gathering that would give birth to Economic and Monetary Union 2.0, to keep all peace and quiet and shy away from any decision that smelled of boldness and could cause disturbance.

Since June, European Council President Herman Van Rompuy had been working, in close collaboration with the presidents of the European Commission (Barroso), Central Bank (Draghi) and the Eurogroup (Juncker), on a ‘Master plan’ that should lead to the completion of the Economic and Monetary Union. It would consist of four building blocks: financial, economic, fiscal and political union. It was hoped by European Federalists, long by heart, or only just by mind (those that believe that only drastic integrationist reforms can pull us out of the crisis), that Van Rompuy would succeed in presenting a package deal whereby every camp (northern, surplus countries led by Germany and southern deficit countries led by France) would make some difficult concessions and secure some precious demands. Germany would have to swallow European supervision on all banks and a European bank resolution and deposits insurance scheme as well as a euro area budget for automatic stabilisation in case of asymmetrical shocks, and would gain stronger European interference with economic and fiscal policies, resulting in a European Treasury in the long term, and for France and the southern countries it would be the reverse.

Instead of taking a leap forward on all four legs at the same time, the European Council has done no such thing. Once more the meeting ended in one of those typical lowest common denominator outcomes in which the EU excels. Germany jammed on the brakes when the issue of a  banking and budgetary union came up, causing other countries to hold back the ‘contractual arrangements’ that would put their economic policies further under European surveillance. To save face, a very modest system of common banking supervision for only the 100 to 150 biggest European banks instead of all 6.000 has been agreed. All other issues have been postponed until the June 2013 European Council, where they will be ‘further examined’. It is to be expected that no progress will be made until the German elections in September of next year. And some have hinted that only after the establishment of a new European Parliament in mid-2014, elected by an electorate knowledgeable about the euro crisis, further steps in European integration can be taken.

This summit confirmed the opinion of many observers that our European leaders only succeed in making bold decisions as long as they feel the threat of the pending catastrophe of the disintegration of the euro. The past couple of weeks, such pressure has eased significantly. This is thanks to the Outright Monetary Transactions programme of the ECB established in September that led to spectacular decreases of Spanish and Italian bond yields, and also due to the very recent agreement on the Greek rescue programme that gives the country respite for almost two years, so that its prime minister could confidently declare that “Grexit is dead”. Together with last year´s  two longer term refinancing operation programmes of the ECB, these decisions have made an imminent collapse of the European banking sector or of one of the Member States, and thus of the euro as such, much less likely.

President Van Rompuy called last week “a good week for the European Union, a week to be remembered”, with the agreement on a single supervisory mechanism, the release of a new support credit line for Greece and the receiving of the Nobel Prize in Oslo. It remains to be seen if history will indeed be so kind for Mr Van Rompuy and the others of the European Council. If the last summit of 2012 will indeed be remembered as the umpteenth small, peaceful step – the ‘European way’ – in resolving the euro crisis and building a better EMU, or if it will become the textbook example of the indecisiveness and complacency of our European leaders.

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

Crisis Management and Integration at Gun Point

13. December 2012, von Aldo Caruso, Comments (0)

by Daniela Schwarzer

The ways decision-making that has taken place both in crisis management and in governance reform has increased the perception of democratic deficits in the EU. At peaks of the crisis, key decisions were taken at emergency summits, discarding the European Parliament, providing a key role to Germany and France at the costs of the medium-sized and smaller member states, while national parliaments were only able to give their consent after the fact – at such a high price for dissent that this politically hardly became an option. These crisis management decisions were characterised by a lack of transparency and accountability and a lack of political leadership and public communication which could have played an important role in preventing adverse reactions among national publics. Meanwhile, because of a lack of a perceived self-interest in a more substantial approach to crisis resolution, some necessary financial steps to resolve the crisis could not be taken because of the clash between what creditor and debtor countries needed to do to retain domestic support and democratic legitimacy (Simon Tilford, Has the eurozone reach the limits of the politically possible?, CER comment, 12 July 2007).

The consequences of the crisis and of the design of crisis management instruments seem to have created a vicious circle of declining legitimacy. Citizens in states that received bail outs seem to feel little gratitude for the support but rather saw rescue packages as designed to help save a European cabal of political and banking elites in league with each other. Meanwhile, public opinion in the donor countries is likewise critical of the financial help they have to pay for. As soon as real losses become apparent, this sentiment will increase. The crisis meanwhile remains unresolved. This is partly because a lack of legitimacy in EU decisions prevents ‘more Europe’ which could eventually solve crisis. Governments are squeezed between what markets want and what populations will accept. This is one of the reasons why they resort to the ECB as the main crisis manager. It expanded its potential role with the announcement of the OMT-programme in September 2012 which can eventually involve unlimited bond purchases from troubled member states, in exchange for conditionality which governments and the European Commission and IMF will have to police. However, the ECB’s blunt step may eventually entail financial losses which end up with the ECB’s shareholders – the euro area member states and their tax payers.

All three developments (the lack of policy choices, the technocratic approach in policy-coordination and the lack of democratic legitimacy of crisis management which de facto deepens integration) all pose serious challenges to national democracies and the legitimacy of the overall integration project. The time is ripe to engage in a serious debate how monetary and increasing fiscal and economic integration can be matched by legitimate, democratic decision making in and for the euro area.

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

Technocracy versus Democracy

13. December 2012, von Aldo Caruso, Comments (0)

by Daniela Schwarzer

The fact that the crises hit the euro area so hard revealed fundamental flaws in the architecture of the currency union. The absence of joint fiscal and economic policies or transnational budgetary stabilisation mechanisms are two of them. In response to the crisis, the EU decided to reinforce rule-based, technocratic coordination both for national fiscal and economic policies. Rules are to be applied with less political leeway, and the possibility to sanction Member States has been extended to the preventive arm of the Stability and Growth Pact. The idea to introduce more European considerations into the formulation of national policies has lead to the introduction of the so-called ‘European semester’, an attempt to streamline the coordination processes.

From a democratic perspective, at least three problems emerge. A first is related to the rules-based approach as such. If respected, it considerably limits democratic policy choices in the member states. If there is a conflict between national preferences and the rather inflexible rules whose implementation is equipped with little democratic legitimacy, there are two possibilities: a) the government ignores the rules which may eventually undermine the credibility of the EU’s legal and regulatory framework; b) the government changes policies due to European pressure but these limits imposed on a liberal democracy by unelected bodies outside the purview of public accountability will increase problems of legitimacy.

A second problem is related to the process of policy coordination. Conflicts have arisen with national parliaments which criticise that their rights and responsibilities are seriously limited, for instance if a national programme is sent into the European scrutiny process by the executive, before the national parliament has even seen it. Moreover, the crisis is leading governments to attempt a recentralisation of powers domestically in order to control regional spending.

Thirdly, the EU as a more regulatory state has traditionally relied more on output than input legitimacy. But in the current crisis, the EU fails to deliver output. It is rather seen as the problem (both by debtor and creditor countries) for low growth rates, restrictions on public spending and high unemployment, rather than as a solution. This is not just a temporary problem of two, three crisis years. Given the structural weaknesses of the euro area governance set-up, there are strong arguments for a substantially deeper integration which would allow the euro area members to take legitimate and efficient policy decisions.

The problem of technocratic intervention is particularly important for member states that had to apply for a rescue programme of the Troika (European Commission, European Central Bank, International Monetary Fund). In these countries, the population’s say over economic decisions has been rendered largely null. The Greek situation has been judged as ‘no longer compatible with democracy’ (Wolfgang Munchau, Greece will have to default if it wants democracy, FT, February 20, 2012).

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

Economic Liberalism and Democracy

13. December 2012, von Aldo Caruso, Comments (1)

by Daniela Schwarzer

More and more, the debate in Europe is turning towards the question whether we are facing a crisis of legitimacy or even democracy in the EU – on top of the banking and sovereign debt crisis. In this and two following blog posts I am developing some thoughts on the challenges national democracies are currently facing in the euro area.
The tensions between economic liberalism and political liberalism have been identified decades ago. Economic, in particular financial openness can indeed have destabilising political effects. The European Union in this regard poses a particular challenge to its Member States. The creation of the single market and the introduction of the single currency considerably limited the ability of the Member States to influence the economic developments in their home countries. The euro area members have handed monetary and exchange rate policy over to the European level – and have hence given up the most powerful instruments to influence their economies. Meanwhile, there are no other instruments for macro-economic policy making on the EMU level in the absence of a euro area budget or European labour policies. As a consequence, macro-economic policy developments are no longer a matter of political choice. They are a more or less random result of the aggregate of national policy choices which usually do not fully take into account the new realities of sharing a currency and an economy and the monetary policy stance of the European Central Bank.

Meanwhile, capital mobility, in particular under the conditions of a single currency, has increased the pressure on governments to become more competitive. As Fritz Scharpf and others have argued, monetary and financial market integration have led to a bias towards supply-sided policies on the national level in order to attract investment and corporations which are tempted to move to sites with lower taxes and production costs. Until the sovereign debt crisis started to hit the eurozone in early 2010, low interest rates in the less competitive and less fiscally sound Member States hid these new constraints and have provoked irresponsible behaviour of the political and financial elite which now has to be paid for by the citizens. But since markets switched from an under- to an overemphasis of country risk, these same governments are exposed to severe constraints.

All governments of the euro area face much more restricted policy choices and can no longer credibly claim that they are able to influence growth and employment in their country. Increasing European and global competition puts them under pressure to reduce tax-financed welfare spending while unions face tough choices of either accepting lower wages and less attractive employment conditions or seeing jobs move out of the country. The challenges to post-war social market economies are hence substantial: measures to regulate employment and production conditions are as much at stake as are redistributive welfare and taxation policies which were designed to cushion off the unequal distribution effects.

Interest groups and governments seeking to maintain the welfare state now turn to the EU to provide the protection that used to be ensured on the national level. Given monetary integration and factor mobility in the EU, this is the right place to look. But the EU has no tools to provide social protection, transfers or the like to its citizens and there is little chance that the Member States will put the necessary competencies, instruments and financial means at its disposal in the near future.

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

Launching a European debate?

4. December 2012, von Aldo Caruso, Comments (0)

by Ferdi De Ville

Thus is the subtitle of the Communication from the European Commission ‘A blueprint for a deep and genuine economic and monetary union’ presented by President Barroso on 28 November. Without the question mark, of course. But I put it there, because it remains to be seen if this long document full with jargon and abbreviations will succeed in launching a public debate on how EMU should be reformed.

It could be considered strange that the Commission has written its own report on the future of EMU when Van Rompuy is doing the same exercise, nota bene in collaboration with Barroso. But this has happened before, as two years ago, when both Van Rompuy and the European Commission made similar proposals regarding economic governance that led to the six pack and the European Semester.

In a 52 page document, the Commission now proposes a radical, detailed and time-framed reform of EMU. Changes leading, inter alia, to a substantial EMU budget, debt mutualisation and strong central powers in economic affairs should be carried through in a sequence. This progression begins with sometimes embryonic steps (e.g. a convergence and competitiveness instrument) that do not necessitate treaty reform to be undertaken in the next 18 months, doing more far-reaching modifications that might involve changes to the treaties between 18 months and five years (e.g. a debt redemption fund), and radical leaps towards a federal union to be taken in more than five years time (e.g. an EMU Treasury Commissioner).

While we don’t know the details of Van Rompuy’s final report that will be discussed at the next European Council Summit on 13th and 14th December, we can point to two notable differences between this Commission roadmap and the interim report of Van Rompuy’s masterplan. First, the European Commission is more ambitious in a number of respects, especially as regards the size of the EU’s budget and on the competences for a future Treasury Commissioner. Second, the Commission is trying to fit the proposed reforms within the European Union framework and under the Community method, not creating eurozone or intergovernmental circuits besides the EU. This is all logical from the perspective of the Commission’s bureaucratic interests, but that will not make its proposals easier for the Member States to suggest.

Many of the reforms proposed are sensible, and the outlined sequence is intelligent. Also, the European Commission dedicates some pages to the interesting question how a genuine economic, monetary and fiscal union could be accompanied by democratic legitimacy and accountability. But the document leaves unanswered the crucial question how enough democratic support for the reforms put forward can be assured. To wait with the more radical steps (that need treaty reform) until the European elections of 2014 is indeed reasonable, but does not guarantee that European citizens have consciously reflected, let alone support, this fundamental reform of how Europe is governed.

The problem is, again, that European citizens know and care little about how economic and monetary union functions. Europeans will not be warmed up for further European integration by hanging up a banner on the European Commission’s buildings that reads ‘Towards a stronger European economic governance’. Citizens do not support the common currency (zone) for its own sake, so it is not sufficient to sell reforms with the argument that it will make EMU governance stronger. It is necessary to explain stronger for what?

An example illustrating the difference between legitimating the proposed reforms by procedural and substantial arguments can be taken from Daniela Schwarzer’s latest blog. She rightly argues that an unemployment benefits scheme at the European level would not only be an ‘automatic stabiliser’ that makes EMU more stable (stronger), but that it would also strengthen the social pillar of the integration project. In the Commission Communication, only the first (purely economic-functional) rationale is mentioned.
Overall, there is no intention in the Communication to, next to completing financial, economic, fiscal and political union, also finally establish a genuine social Union. While, following Jacques Delors’ triptych “Competition that stimulates, cooperation that strengthens, and solidarity that unites”, real integration in social protection could be a vision that rallies European citizens. Now, the focus is –again– predominantly on cooperation that strengthens the governance of EMU through disciplining Member States.

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

Towards a Eurozone Budget

13. November 2012, von Aldo Caruso, Comments (1)

by Daniela Schwarzer

One of the important debates ahead of the EU summit in December is the one on a potential future eurozone budget. There are many competing ideas around what to do with a potential eurozone budget and how to shape it. There are as many good reasons to equip the European Monetary Union with a federal budget. The most important ones are macro-economic.

Had the euro area been equipped with a budget that would have allowed macro-economic stabilisers to work on a pan-European level, the divergence between e.g. Spain or Ireland and the rest of the eurozone would probably never have become as important as it did in the run-up to the sovereign debt and banking crises. The mess we are in right now would be less serious. In particular as national budgetary policies have not provided a sufficient degree of macro-economic stabilisation as they should have, the case for a European mechanism is very strong.

There are several ways to equip the euro area or the EU with instruments of macro-economic stabilisation. With regard to the (stalling) negotiations of the EU-budget, an important opportunity is being missed. One useful measure would be to introduce own resources which have a stabilising function, for instance an EU corporate tax. On the expenditure side, investment spending should in the future be fine-tuned to match the business cycle of the recipient country, for instance by extending or speeding up the funding period. Structural funds could thus stabilise national or regional business cycles. The same logic could be applied to spending directed toward research and development, vocational training initiatives and life-long learning.

Moreover, in order to contribute to stabilising business cycles across regions and over time, the European Union should be able to build up reserves during economic upswings and spend these in economic downturns. This can be achieved without allowing the European Union to accumulate debt, if the system had been or will be introduced during a cyclical upswing. Such reserves could have complemented the five billion euros of discretionary
spending by the Commission during the severe economic recession in 2008-2009 had the system been put in place in the early years of the EMU.

Fourthly, an additional pillar of automatic stabilisation should be introduced, namely a European unemployment insurance scheme. Each country would continue to operate its own scheme, reflecting national preferences and traditions. A European unemployment insurance would not raise the overall contributions for employers and employees. It would only compensate for cyclical unemployment (and not for structural unemployment) as only those who have been regularly employed for a certain period prior to unemployment can receive payments.

All suggested measures are huge steps in terms of reforms; in particular the unemployment scheme would be an important step of integration, following a macro-economic case, but simultaneously strengthening the social pillar of the integration project. While the opportunity to introduce the suggested reforms to the EU budget is being missed in the course of the current negotiations, the introduction of a European unemployment scheme should be further investigated. This can be done for the euro zone only, or even only a selection of member states. The introduction of a European unemployment scheme would not require a Treaty revision, but it could be negotiated among the willing member governments. There is little excuse not to embark on this project now, given all the other disappointing results of negotiations with regard to the EU budget and ahead of the December summit.

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

How Euro Area Trade with the Rest of the World Contributed to the Euro Crisis

31. October 2012, von Aldo Caruso, Comments (0)

by Ferdi De Ville

Right at the time that the euro crisis had begun (to the relief of decision makers) to retreat from the front pages of newspapers, in Belgium the Ford Genk tragedy happened. The decision of the Ford Europe board to close the plant in the Flemish province of Limburg, making 10.000 workers redundant, and move the production to Valencia, has many links with the euro crisis. First, the overproduction problem in the automotive industry, which may be structural in the end, has been worsened dramatically by the crisis. In difficult times, many people postpone the purchase of a car, and especially of big cars such as the models that were made in Genk. Second, according to some, the decision by Ford to close the Genk plant and move the production to Valencia is due to the lower wage costs in Spain. While this can be disputed, as the labour share in the cost of producing a car is very limited, it is indeed the case that the labour cost in Spain has quite substantially decreased since the crisis (with around 5%), and hiring and firing has been made easier. Successfully: Spanish exports are up 23.6% since the beginning of the crisis, according to Deutsche bank. Third, the harsh decision (and ruthless style of communicating it) has been seen as exemplary for the current power of multinational corporations that operate on an international scale, over governments and trade unions in Europe that still play (in the case of states at least still in fiscal and social matters) on the national level.
This only by way of introduction and to point out that the subject of this post is more topical than might appear at first sight. I want to highlight an interesting IMF research paper that handles on the role of external trade imbalances in the euro crisis.

It has been recognized by many prominent observers (e.g. Martin Wolf, Paul Krugman, Paul De Grauwe and Fritz W. Scharpf) that the (im)balance of payments problem in the euro area was the decisive factor in the euro crisis. Mostly, this accumulation of current account imbalances in the euro area has been explained as an endogenous process – as a vicious spiral caused by the one-size-fits-none interest rate of the European Central Bank. This in turn led to housing, financial and consumption bubbles in the peripheral countries and to divergent inflation and wage developments between the peripheral and core countries (especially Germany where real wages declined between the time of adoption of the euro and the crisis).

The IMF working paper now shows that the current account deficits of peripheral countries are to a large extent the consequence of external trade shocks, actually more than of internal trade flows. However, all is connected in the euro crisis. The authors note that ‘in particular, the rise of China generated strong demand for machinery and equipment goods exported by Germany while exports from euro area debtor countries were displaced from their foreign markets by Chinese exports’. Moreover, the higher oil prices and delocalisation of (parts of) firms to emerging Europe worsened the situation of peripheral economies while benefitting the German economy and outwardly integrated German machinery and equipment exporters in particular. To complete the circle, the worsening competitiveness situation in peripheral economies was compounded by the appreciating euro, but this was for some time sustainable through easy financing, in part thanks to interest in euro area financial assets because of this appreciation. However, international investors did not buy peripheral states’ bonds directly. These were purchased by core euro area countries’ banks, contributing to the enormous intra-euro area liabilities of the peripheral countries when the crisis erupted.

This important study not only shows that an important accessory to the euro crisis has hitherto been neglected: external trade. But this also questions an important part of the recovery and future growth strategy of the euro area and the European Union in general: to export itself out of the crisis (and towards sustainable growth). If an important problem of the peripheral countries in the past decade has been that it has a competitive production structure vis-à-vis China (while Germany and other core countries have a complementary economic fabric), than a policy of simply increasing exports to China and other emerging economies cannot be a solution for the troubled euro area countries. It is illusive (and undesirable) that these countries can compete on price with emerging economies any time soon. So if we want the peripheral economies, and Greece and Portugal in particular, to become export-oriented growth poles within the EU the coming years and decades to allow them to compensate for this crisis, we should not focus on their price competitiveness problem (alone). These countries need targeted investment in the export sectors of the future. It has been said repeatedly that, also taking into account the countries’ comparative climate advantages, the renewable energy sector is a first candidate.

Hopefully, besides the other important recent finding by the IMF that the fiscal multiplier in advanced economies is much larger than assumed (and, consequently, austerity is much more damaging to output in the near term than believed), this analysis will lead to a rethink of the euro crisis approach, and of the policy towards peripheral economies in particular. Together with the Ford Genk catastrophe, it also compels us to think more critically about the EU’s external trade policies. And finally, both should for the umpteenth time be an irresistible wake-up call to at last develop Social Europe.

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

Greek Days Have Started

30. October 2012, von Aldo Caruso, Comments (0)

by Carsten Brzeski

With three meetings in less than two weeks, eurozone finance ministers hope to finally strike a deal on giving Greece more time for its adjustment.

The decisive phase for Greece has started. Yesterday, Eurogroup president Juncker announced an unscheduled meeting of eurozone finance ministers on 8 November. With the scheduled conference call of ministers on 31 October and the already planned Eurogroup meeting on 12 November, ministers will have three meetings to decide on further steps for Greece. Even if the Troika report has not (yet) been officially released, it seems clear that the eurozone is willing to give Greece somewhat more time for the adjustment.

More time, however, would eventually also cost more money. According to earlier market reports, a two year delay of the austerity measures could lead to a financing gap of between €15bn and €30bn. This financing gap would have to be closed to keep the IMF on board of the Greek rescue and to be able to pay out the next tranche of the loan – of course, always assuming that Greece fulfils its obligations of the structural reforms and austerity measures.

Generally speaking, more time for Greece could be ‘bought’ by two main options: a third bailout package or debt forgiveness. This is what according to media reports is also proposed by the Troika. However, neither of these two options is politically attractive for most eurozone countries as both options would cost tax payers’ money. Therefore, it did not come as a surprise that the German government directly and indirectly tried to rule out both options, with opposition against debt forgiveness being much louder than against a third package. Particularly, German chancellor Merkel seems to be – very gradually – giving up opposition against a third aid package. While a third Greek bailout would probably not be supported by all of her own coalition’s lawmakers, Merkel could get parliamentary support from the biggest opposition party, the social democrats. Less than one year ahead of the federal elections, eurozone matters could increasingly be dominated by German domestic politics.

Debt forgiveness (aka Official Sector Involvement) would, according to the German government, be against the principle of no-bailout (for the government) and against the principle of no-monetary financing (for the ECB). While the monetary financing argument remains a strong one for the ECB, the no-bailout argument looks much weaker, particularly in light of all rescue actions of recent years. As a consequence, some kind of OSI should not entirely be ruled out. However, it would not come for free for Greece. In our view, OSI or debt forgiveness would come with even more strings attached than the current programmes, leading to more and far-reaching loss of sovereignty. The core eurozone countries would do everything to avoid the impression that OSI is relief for free. Otherwise, other eurozone peripheral countries could be tempted to ask for the same.
Given the broader consequences of OSI or debt forgiveness and the limited political appetite in several eurozone parliaments for a third bailout package, filling the funding gap for Greece will again require some creativity. A possible way out, at least in the short term, could be a combination of several options, such as lowering the interest rates on the first two Greek packages and front-loading parts of the funding of the second package. This could again kick the Greek can further down the road.

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

‘For Europe’ – Finally Some Visions

11. October 2012, von Aldo Caruso, Comments (0)

by Ferdi De Ville

Since the outbreak of the euro crisis, many observers, including yours truly, have lamented the lack of vision in the way European leaders have dealt with the eurozone’s problems. While their strategy of muddling through has until now succeeded in preventing the break-up of the euro area, many opinion makers argue that this cannot indefinitely be kept up, let alone that the crisis could be definitively solved through half-baked measures. Such halfway solutions only repeat the mistakes made by the fathers of the euro when they knowingly set up the Economic and Monetary Union (EMU) in an incomplete fashion (for a similar argument regarding financial supervision reforms see here). Moreover, a long-term vision is necessary to convince the financial markets and citizens of, respectively, the irreversibility of the euro and the desirability thereof.

Last week, Guy Verhofstadt and Daniel Cohn-Bendit have published their vision “For Europe!: Manifesto for a post national revolution in Europe”. This is only the latest in a number of visions that have been or are being developed by European policy-makers since European Central Bank President Mario Draghi followed commentators in urging the politicians to spell out a long-term plan.

Shortly after his summons, Draghi together with European Council president Herman Van Rompuy and two other EU presidents (Manuel Barroso from the European Commission and Jean-Claude Juncker from the Eurogroup) started working on a ‘master plan’ for the euro. This roadmap towards a genuine Economic and Monetary Union identified the four building blocks for a stronger EMU: Banking Union, Economic Union, Fiscal Union and Political Union, but did not spell out the details of these reforms. This has already caused confusion and resentment with regard to the one pillar where the European Commission has made progress: on banking union. There is a discussion between especially Germany and the European Commission about the number and size of banks that will be supervised at the supranational level by the ECB, as well as on the interpretation of bank recapitalisation by the ESM that was also agreed at the June Summit.

Not less struggle should be expected on the concrete interpretation and put into practice of economic, fiscal and political union. At the European Council next week (18-19.10.2012) the interim report of the Roadmap will be discussed (the draft conclusions have been leaked here). The most salient ‘new’ proposals, situated in the areas of economic and fiscal union, are for ‘individual contractual arrangements’ between eurozone countries and the European level on reform programmes and the mentioning of fiscal solidarity and an appropriate fiscal budget for the euro area.

Another ‘official’ visionary paper is the final report by the Future of Europe Group, made up of the Foreign Ministers of Austria, Belgium, Denmark, France, Italy, Germany, Luxembourg, the Netherlands, Poland, Portugal and Spain, thus not only representatives of euro area member states but also including an opt-out and a pre-in country. The time-horizon of this report is further away than that of the Van Rompuy roadmap, so it also proposes more profound reforms such as closer cooperation in external action, strengthened cooperation between European and national parliaments, and other reforms to enhance the democratic legitimacy of the Union, inter alia through the nomination of a European top candidate by each political group for the next EP elections. It also contains some ideas on how to improve the efficiency of the EU, as by reforming (the working of) the Commission, as well as the parliamentary system, with a European Parliament with the power to initiate legislation and a second chamber for the member states.

But the most utopian of these recent visions developed by politicians is without doubt Verhofstadt and Cohn-Bendit’s ‘For Europe’ called a ‘realistic utopia’ by the authors themselves. Verhofstadt and Cohn-Bendit give their all to advocate a real ‘Federal Europe’, hitting out at those who are merely defending their national interests during this crisis or, worse, want to use the crisis to (re)allocate competences to the state and regional level and play nationalist or regionalist emotions. It is also an unvarnished swipe at Barroso’s idea of a ‘Federation of Nation States’, yet another vision, which he outlined during his State of the Union. Verhofstadt and Cohn-Bendit claim that the democratic revolution (led by an avant-garde within the European Parliament) is not only a logic conclusion from an analysis of the crisis, but can simply be its single effective solution.

‘For Europe’ is less-detailed than its much shorter variants, insisting chiefly on the need to radically reform the constitutional structure of the EU (if necessary creating a two-speed or -lane Europe), and giving the federal level a substantial fiscal competence and budget. The authors expose themselves to easy criticisms that they simultaneously damn nationalism and advocate a kind of European pride, a post-national nationalism that could very difficultly not be seen as a contradiction. However, given the character of the authors this should be interpreted as provocation, rather than naivety. Verhofstadt and Cohn-Bendit are equally knowingly daredevillish when they propose that the European Parliament should declare itself a Constituante after the 2014 elections and should write a Constitution that is subsequently offered to the European populations on a take-it-or-leave it basis.

While the visionary politicians blame each other for being too timid or other-worldly, their discord is to a large extent explicable by their different positions – la fonction fait l’homme, en effet. More interesting is that on a more distanced reading we note some convergences that were unthinkable only a couple of months ago. We see some proposals returning in each of the visions discussed, most notably the (more) direct election of the President of the European Commission and the need for a eurozone budget that allows automatic redistribution, for example trough a European unemployment insurance scheme. It is now tensely waiting on the final version of the Van Rompuy Report that should be ready in December.

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

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