Eurozone 2013 « Euro

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.”

The Eurozone Crisis: Finance 2 – Society 0

24. September 2013, von Alexandre Abreu, Comments (0)

An interesting and crucial feature of the eurozone crisis, which hardly ever gets mentioned, is the extent to which it corresponds to a massive, lengthy, disguised and undemocratic process of socialisation of debt relations. What started out as a massive build-up of debt/credit relations between private debtors and private creditors has been gradually converted into debt/credit relations between state debtors and state creditors, with the implication that those who will ultimately foot the bill for the inevitable restructuring of the massive ‘debt overhang’ holding the European economy back will be European taxpayers and peripheral-country citizens, rather than the financial sector and its shareholders. The aim of this post is to show why and how this is so, and to highlight the two main phases that have characterised this process.

By way of background, it is worth recalling that the 2007-2008 Global Financial Crisis and the ensuing Great Stagnation are very much akin to the 1929 Crisis and the ensuing Great Depression: in the build-up to both crises, capital-friendly growth regimes ensured the profitability of investments through direct and indirect wage compression; gave rise to increasing inequality and an increasingly central role of finance; and made up for the detrimental effect (upon aggregate demand) of this rising inequality through a massive increase in private debt. The expansion of credit served as a mechanism not only for recycling profits, but also for households to make up for their relatively stagnant incomes and for firms to expand, merge and modernise. The resulting credit-fuelled demand, again in the build-up to both 1929 and 2007, allowed for ‘roaring’ growth, but sooner or later it had to come up against its limits. And so it did when over-indebtedness reached its ceiling and surfaced as a ‘financial’ crisis, originally emerging in the system’s weakest links (in the first instance, the subprime housing credit market in the US), but ultimately exposing the unsustainable basis on which the entire growth regime was built.

In this sense, the current crisis is indeed global (or at least a crisis of advanced, mature economies as a whole), and it is indeed systemic (for it signals the unsustainability of the neoliberal growth regime). Another aspect to be noticed is the radically different character of this systemic crisis (and the one of the 1930s) vis-à-vis the crisis of the late ‘60s and ‘70s, which was the systemic crisis of a labour-friendly growth regime, brought about by the discouraging effect of declining profitability (in its turn arising out of the workers’ increasing bargaining power) upon investment. And the final background commentary concerns the key difference between the crisis of the 1930s and the current one: while they share the same underlying causes, the crisis of the 1930s took the form of the “Great Depression” because the process of deleveraging was relatively rapid, violent and uncurbed by government action; the current crisis, by contrast, has taken the form of a “Great Stagnation” (after the initial shock in 2007-09) because governments stepped in and halted the process of debt deflation (although the consequence is that there can be no sustained growth, absent inflation or major write-offs, because the ‘debt overhang’ remains in place).

In the eurozone context, this otherwise ‘merely’ socioeconomic process (which is the form it has taken in the US, for example) has taken on an especially serious and international character because of the inherently faulty features of the EMU (the inability on the part of deficit countries to undertake currency devaluations; the requirement that the burden of adjustment falls exclusively upon deficit countries, as opposed to being shared by deficit and surplus countries; the interwoven character of national financial systems and national public finances; and the ‘constitutional’ ban on inflation, which would otherwise provide the means for addressing the ‘debt overhang’).

From this perspective, the story of the eurozone crisis may be summed up in two main phases. Phase 1 corresponded to the socialisation of the debt relation on the debtors’ side: economies whose private sectors were up against the limits of unsustainable indebtedness when the process of debt deflation was triggered in 2007-08 (including Portugal, Greece and Spain) very quickly saw that private debt morph into public debt through two main mechanisms – the direct effect of financial sector bail-outs and the indirect effect of so-called ‘automatic stabilisers’ (declining government receipts and rising expenditures due to economic contraction). Recall that the eurozone’s peripheral economies currently being affected by the so-called ‘sovereign debt crisis’ include countries with vastly different public debt/GDP ratios as of 2007 (36% in Spain, 68% in Portugal, 107% in Greece); what they had in common was the unsustainable levels of net external indebtedness of their economies as a whole by 2007 (78% of GDP in Spain, 87% in Portugal, 115% in Greece). The escalation of peripheral countries’ public debt levels was a consequence, not the cause, of the crisis – and reflected the socialisation of the process of debt deflation on the debtors’ side.

Phase 2 is the one that we’re currently going through: it consists of the process of socialisation of the debt relation on the creditors’ side, as private creditors (particularly banks and other financial institutions in the European ‘core’) are gradually replaced by official lenders as the holders of peripheral countries’ ‘sovereign’ debt. After this debt was socialised on the debtors’ side as of phase 1, the impending inability on the part of the governments in question to service it meant that there were only two options on the table: either those governments defaulted, which would have meant losses for the private creditors, or official lenders like the EC-IMF-ECB troika stepped in (as indeed they did), lending just enough to support the continuing servicing of the debt while private creditors gradually rid themselves of these bonds (as indeed they have been doing over the course of the last 2-3 years).

Given that the public debt/GDP ratios in the crisis countries keeps escalating precisely because of the lethal combination of the dynamics of debt deflation and public-sector austerity (i.e. simultaneous deleveraging across all sectors of these economies, implying recession and decreasing ability to pay), it is increasingly obvious that the sovereign debt of peripheral eurozone countries will eventually and inevitably require a default or serious write-down (not like the Greek one in 2012, which did next to nothing to overcome these structural barriers). This is not a “whether-or-not” question; it’s a ‘when’ question. And when it is that this takes place is important for two reasons: (i) the later the default or write-down occurs, the more the burden will fall upon European taxpayers as a whole as opposed to private creditors; and (ii) the later it takes place, the more time peripheral country governments will have to hold their constituencies to ransom in order to undertake the neoliberal restructuring of their societies in a way which otherwise would never have been possible.

In sum, regardless of the uproar in 2008 against the financial sector, its reckless behaviour and the need to rein it in, the story of the eurozone crisis is a re-run of 2008 in a different, protracted and more subtle form: once again, finance tramples society and forces it to bear the burden of its losses.

 

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.”

Do the German elections matter?

20. September 2013, von Almut Möller, Comments (0)

As journalists from across Europe flock to Germany to report on the federal elections this coming Sunday, the question that is asked by many is “Does their outcome matter for Europe?” There is no simple answer to this. Indeed the visions of the major parties on the future of the eurozone and the union as such to this day remain rather unclear – the candidates just don’t talk about them. I speculated in a blog piece in April that it was really only a question of time until the euro hits the campaign – well, generously put, this was wishful thinking. But really, I simply got it wrong.

For different tactical reasons, both the current coalition government of Chancellor Merkel and the major opposition parties, the Greens, the Social Democratic Party and the Left, remained mostly silent on the euro. And with an overall mood of complacency in the country there was no real need to respond to public demand apart from the odd prediction about a new chapter in the Greek drama. So in one of the most formative moments in the history of the European Union, with Germany playing a major role in shaping the future EMU, Germans are pretty much clueless about what to expect on the euro after September 22.

Well, no need for Germans to be wary , so it seems. Colleagues such as Ulrike Guérot and Julian Rappold have recently dissected the positions of the parties on the future of Europe and plotted out what to expect from different election outcomes. Both concluded that the upcoming elections are likely not to change overall German policy or make Germany speeding up with Eurozone reform even if a different coalition made it into power.

I overall agree with these predictions, which of course raise a lot of questions about the prospects for the currency union in the coming months. But I want to focus on a wider point here that has been raised elsewhere, but so far has been largely overlooked by German political elites. This is a subject to be tackled by the next government: The question that is asked increasingly outside of Germany is “Is Berlin still with us?”

Two narratives started to spread that challenge what used to be a certainty about Germany. These two narratives are unfolding in slightly different communities – the EU crowd on the one hand, and the security community on the other. If these narratives continue to be around, and indeed merge, they might put the next German in a rather uncomfortable spot with long-standing partners.

1. The first is the “Germany plays its national card and is willing to go-it-alone” narrative. It is well known in the meantime and encompasses the observation that Germany in the course of the euro crisis developed a good sense of its national interest and used its clout to impose its preferences for the Eurozone architecture on other members. A less prominent facet to this narrative in the continental European debate, but quite present in Britain and the US, is the prediction that the eurozone with its struggling southerners has made Germany look for alternatives elsewhere, notably the emerging economies. “The Germans are bigger than the eurozone”, to put it in a nutshell.
2. The second is the “free-rider” narrative of Germany surfing happily the waves of economic globalisation, with an exports model that fits into the demand of the day, while consuming global security that others provide for. The abstention in the UN Security Council on Libya still resonates, as does Mali – Berlin celebrating 50 years of Franco-German reconciliation while letting Paris do the dirty job in Africa. And then, Syria – aren’t the Germans out once again? “If only the world was a happier place, but it isn’t, and the Germans are cherry-picking the nice bits”, such is the storyline.

From a Berlin perspective I have to say that none of these narratives are entirely convincing to me, but I can see why this current coalition triggered these perceptions elsewhere. Clearly, even without agreeing one has to acknowledge they exist. And such views are likely to spread further unless a new German government made its positions on its European and international choices clear again, and acted accordingly. I don’t see a great deal of awareness over these issues here in Berlin. But I do believe that there are serious questions out there about Germany being a reliable partner, and these questions need a response from the next federal government in Berlin.

I’ll get back to where I see the next government placing itself with regard to these two narratives once the dust settles next week.

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.”

Much Ado about Nothing

26. July 2013, von Alexandre Abreu, Comments (1)

As many readers will have heard or read through other media, the last few weeks have seen a political crisis emerge, develop and finally subside in Portugal. The plot has been a convoluted one, with much toing-and-froing and backtracking, as well as attempts to change the game altogether – but all it came down to in the end was next to nothing. Anyway, now that none of the key players seem to have any cards left to play in the immediate future, it seems like a good time to summarise the events which took place throughout the month of July.

Act 1.
The proximate cause of this political crisis was the resignation of the former Minister of Finance, Vítor Gaspar, on July 1st. Mr Gaspar, a technocrat, was the chief domestic ideologue and implementer of austerity and an all-powerful figure in the centre-right coalition government. His resignation immediately brought on a political earthquake because instead of claiming personal reasons and quietly leaving the stage (as is the standard practice in these cases), he was candid enough to write a public letter of resignation in which he acknowledged the failure of the strategy that has been adopted thus far. Then, on the following day, Paulo Portas, then Minister of Foreign Affairs and leader of the junior coalition partner (the Popular Party, or CDS-PP), seized the opportunity to tender his own resignation from the government. His allegedly irrevocable decision was driven by strictly tactical political considerations: up until now, his party has succeeded in playing a duplicitous role whereby it actively supports austerity measures while simultaneously criticising them in public for leaving insufficient room for “the economy”. As a result of this Janus-faced strategy, the CDS-PP has managed to maintain its poll ratings at around 12% even while the senior coalition partner, the PSD, has been plummeting in the polls (from 39% in the June 2011 elections to 25% at present). However, as even tougher times lie ahead (with the Troika demanding additional permanent budget cuts worth around 3% of GDP in the near future), and with local elections coming up in September of this year, Mr Gaspar’s resignation (and the alleged appointment of a new minister of finance by the prime minister without consulting with the junior partner) seemed like a good opportunity for the CDS-PP to leave the government and avoid the electoral erosion that would surely come about in the next few months.

Act 2.
The resignations of both Mr Gaspar and Mr Portas seemed to signal the government’s imminent downfall, but in fact the play had barely begun. The prime minister, Pedro Passos Coelho, responded by refusing to accept Mr Portas’ public resignation and offering to negotiate. In return for the continuing support of the CDS-PP, Mr Coelho offered the junior coalition partner the leadership of the negotiations with the Troika and control over economic decision-making, in addition to offering to appoint Mr Portas as “Deputy Prime Minister” (a hitherto-inexistent post). This was too much for a party worth 12% of the electorate to turn down, even at the cost of future electoral erosion, so Mr Portas backtracked on his “irrevocable” decision, and the cabinet reshuffling was publicly announced and officially proposed to President Cavaco Silva (who also hails from the PSD). Then, as analysts argued over whether the president would simply confirm the reshuffling or refuse to condone the change in the balance of power in favour of the CDS-PP (thus bringing down the government and calling an early election); Mr Cavaco Silva surprised everyone by attempting to change the game altogether. He refused to follow either option and instead called for broad-based discussions to be held between both coalition partners as well as the main opposition party (the Socialist Party, or PS), with a view to the signing of a “national salvation pact” which would commit all three parties to endorsing austerity regardless of the outcome of the next general election (which would be anticipated by a year to coincide with the formal conclusion of the Troika’s period of supervision in June 2014). Mr Cavaco Silva was thus offering the socialists the opportunity to move into power one year ahead of schedule in return for their formal commitment to maintaining the same political course as the current government.

Act 3.
The president’s surprising proposal was an attempt to set a booby-trap for the socialists. If the latter refused to negotiate, they could be accused of adopting an irresponsible and uncompromising stance in the face of national emergency; if they agreed to endorse the “national salvation pact”, they would be decisively compromised in their ability to simply carry on waiting for the government to fall, and contestation within the party itself would increase significantly. Therefore, it was quite obvious that accepting such a proposal would amount to political suicide on the part of the PS – so what followed was a week of mock negotiations, supposedly leading up to the signing of a pact that at least one of the concerned parties had really no interest in. Eventually, the various parties announced that the negotiations had come to nothing, and did their best to blame each other for the outcome. And the President, whose move failed to bring about the desired results, ended up confirming the cabinet reshuffling that had been proposed a week before and withdrawing the promise of an early general election in September 2014.

Analysis.
The ultimate cause of this political crisis was, of course, the country’s ever-worsening economic and financial situation and the increasingly obvious fact that austerity is spreading social and economic destruction without even bringing public finances under control. As the political fall-out from all this becomes increasingly imminent, cracks have begun to emerge in the ruling coalition and in this instance these were only overcome at the cost of offering the junior coalition partner effective control over economic policy (though this will change nothing of substance). The president seized the opportunity to try and tie the main opposition party to the same pro-austerity course of action through a formal long-term pact, but this was an ill-considered move that had little chance of succeeding. The final outcome is a government whose credibility and popularity, which were already in shambles, have been additionally shaken and whose downfall was only temporarily postponed through offering vastly increased powers to the junior partner. Given that the economic and financial strategy will remain virtually unaltered, the social, economic and political situation will continue to deteriorate, so sooner or later a new crisis will erupt. For the time being, however, it was really much ado about nothing.

German Government Embraces Multi-Speed Europe

25. July 2013, von Almut Möller, Comments (0)

It almost slipped off my radar in the summer break, which Berlin dived into at the end of June: the German government seems to change course on its stance towards a multi-speed Europe or, as analysts like to put it, differentiated integration.

If this is really the case then here is some revolutionary news that will change the face of the union as we have known it.

So, what happened? In an opinion piece for Frankfurter Allgemeine Zeitung, one of Germany’s leading daily newspapers, Foreign Minister Guido Westerwelle made the case for a hands-on approach towards different speeds for Europe last week.

It is worth quoting what I consider the essential passage of the piece:

“The dilemma is that in Europe 17 countries share a currency, but there are 28 in the Union. How can we move forward given this tension?

That will only be possible if we start thinking in new ways on integration policy. Reinforcing the eurozone means a clearer commitment by Europe to the principle of different speeds than was previously the case.”

To my knowledge this has so far been the most explicit statement on the need to embrace different speeds in order to engineer the widening gaps between the ‘ins’ and ‘outs’ of the eurozone by a member of the government over the past years. Up till now, the federal government carefully avoided to openly address the de facto decoupling of the eurozone from the wider union. Officials frequently pointed out that, according to the treaties, the euro was the currency of the whole union. With a few exceptions all EU members were ‘pre-ins’ to EMU. Obviously, such an approach reflects the destructive potential that multiple speeds might develop for the union as a whole. In the course of the crisis centrifugal forces have already stretched the cohesion of the union to its limits, and the eurozone is far from being a healthy core naturally taking the lead.

It is noteworthy that in his piece Westerwelle now uses the “17/28”, and not the “25 and a few odd outs” formula usually put forward by the government. Now, the question obviously is what to make of this? Arguably, this is a minister known for initiatives such as the “future of Europe group” that have never quite taken off. The newest declaration adopted in Palma de Mallorca this week went down almost unnoticed. It might well be that the minister’s move, regardless of its timeliness and strategic value, is lost in the silly season. Even more importantly, it depends on whether his message is supported in the federal chancellery. This is where all major strategic decisions have eventually been taken on the Eurozone over the past years. Clearly, the foreign office suffers from being marginalised even further over Germany’s ‘ Europapolitik’. It is possible that the minister and his aides in the foreign office now make an attempt to win back some territory over the strategic questions related to the future of the union. But will this initiative fly?

Politically speaking the contentious issue of multiple speeds is much more relevant for both insiders and outsiders of the eurozone than the initiatives of Guido Westerwelle to trigger an institutional debate on Europe’s future. In terms of substance there might well be allies in Paris on differentiated integration, certainly more so than on the institutional questions over which the German foreign office struggled to bring the French counterparts in. Interestingly, Jacques Delors has been promoting his ideas of rethinking EMU and reconciling it with what he calls “Greater Europe” on various occasions over the past months. Is he intellectually paving the way for the socialist leaders in Paris to find common ground on the future of Europe with Germany again?

It is difficult to tell whether the minister’s piece reflects the wider views in the government, and whether it turns into government policy in the fall. The federal elections could obviously make a difference if they brought a different coalition into office. But if we see more of the same in September, and if Westerwelle’s move is indeed part of the overall thinking in the German government (remember that Wolfgang Schäuble has a soft spot for differentiated integration too), we might see Germany starting to actively engineer a new kind of union under the next government.

“We must always have an eye on the part, but also on the whole” is how the foreign minister concludes his piece. Is Germany about to plot out in greater detail a strategy for a Europe of different speeds that balances the needs of the eurozone with those of the wider union? There will be tough issues to address in the coming months and years. The most important one is clearly whether it will be possible at all to reconcile the future economic and monetary union with the common market as a whole. And what is the glue that will bind the new layers of membership together? In terms of substance, process and alliances there is still a great deal of thinking to be done to make a union within the union work.

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.

German Federal Constitutional Court Chews on Role of European Central Bank

18. June 2013, von Almut Möller, Comments (0)

Verdicts from Karlsruhe usually serve as pacifiers for the German public and, more recently, for the eurozone as a whole. Remember the ruling on the ESM and the Fiscal Compact, which the German Federal Constitutional Court concluded was reconcilable with the country’s basic law, or Grundgesetz, in September 2012. What a relief this announcement was for the eurozone’s capitals in their step-by-step struggle for the rescue of the common currency. Germans tend to have a great deal of respect for their constitutional court, and fellow Europeans over the past years learned that every year or so they would have to set eyes onto this city in the southwest of Germany: What does Karlsruhe say?

However, on the euro, things remain far from being put to rest. The overall question that continues to loom is to what extend the more recent rescue measures are covered under the Grundgesetz, or whether they lead to a further Europeanization that the German constitution does not allow for in its current shape. The eurozone continues to be a moving target and at the time of the ESM verdict in the fall of 2012 the judges already knew they would have to chew on another measure of the euro rescue: the ECB’s Outright Monetary Transactions (OMT) programme announced as the court was still dealing with the ESM and the Fiscal Compact. With the programme the ECB said it was ready to buy government bonds of eurozone countries affected by the crisis in order to stabilize their interest levels.

Critics say that this programme violated EU treaties, in particular article 123 of the Treaty of the Functioning of the EU. It is however widely assumed that without this bold move of the ECB the eurozone would not have made it into 2013. What is being questioned though by several groups, among them the NGO “Mehr Demokratie” supported by various organisations and 37.000 German citizens is the legality of the rescue measure. Did the ECB go well beyond its mandate and did it thereby violate the budgetary rights of the German parliament and of German taxpayers? Clearly, these are fair and reasonable questions to ask.

With an impressive line-up including Minister of Finance Wolfgang Schäuble, powerfully eloquent political figures such as Gregor Gysi, the head of DIE LINKE in the Bundestag, and the euro-critic MP Peter Gauweiler, the president of the Bundesbank Jens Weidmann and ECB executive board member Jörg Asmussen, the stage was set for drama in Karlsruhe. The media particularly loved what was framed as two gladiators, reportedly friends from university days in Bonn, confronting each other in the courtroom: Jens Weidmann, well-known for its critical stance on the ECB’s bond buying programme, was the only member of the Governing Council that voted against the programme in the fall of 2012. Jörg Asmussen then has been an articulate and public advocate of the ECB’s programme, making the point that while indeed the mission of the central bank was to work for price stability in the eurozone, there was no point in sticking to a narrow interpretation of the mandate when the eurozone was facing a breakup. There are a number of very complex issues that the court will have to look at in the months to come, and many of them are without precedent. But not surprisingly, German gladiators deliberate even the hottest issues in the calmest way – no big surprises in the courtroom last week.

Politically speaking the issues on the table are certainly powerful, and potentially challenging what has perhaps been the most effective intervention in the euro rescue so far. The weird thing is that while the current German government and all that work for a further recovery of the eurozone certainly long for yet another pacifier made by Karlsruhe, the court might have to disappoint when it announces its conclusions in the fall: de facto, Karlsruhe for now is dealing with a non-issue. So far, the ECB only announced the OMT programme without implementing it in detail, a move that proved enough to prevent the breakup of the eurozone. Can a mere announcement form the basis of a court case? The president of the Federal Constitutional Court Andreas Voßkuhle during last week’s hearings made the point that the court’s power was limited. The ECB was an independent European institution, indicating that it was beyond Karlsruhe’s competence to rule over the ECB’s action. Commentators say there is a chance for the case to be conveyed to the European Court of Justice in the end – which perhaps would bring a different dynamic to the outcome.

What has already been a feature of last year’s deliberations on the ESM and the Fiscal Compact was visible again last week: The highest German judges would perhaps like to stay away from the politics of the euro rescue, but because of the nature of the complaints clearly struggle to do so. Ironically, the ECB would (or should) also be more in its comfort zone in a less politicised role.

The real baffling issue around last week’s shoulder rubbing between Karlsruhe and Frankfurt is therefore the weakness (some would even argue the absence) of politics. Without any doubt, the OMT will not solve the problems of the eurozone in the end. For the eurozone’s governments still to make their case! I am not sure the June summit will bring some of the much-needed decisions and will get back to this.

Reckless Spending and Excessive Wage Growth: Myths Debunked

13. June 2013, von Alexandre Abreu, Comments (0)

If I were to pinpoint the two most harmful and most often repeated myths at the core of the orthodox account of the euro crisis, these would surely be, first, that the public debt crisis across the eurozone was solely or mostly caused by reckless government spending; and second, that the fundamental competitiveness problem of the economies of the eurozone periphery is a result of excessive real wage growth. Both of these propositions have been repeated so often that they have become a sort of common wisdom – and yet they are both false.

Let us begin with the first proposition. The problem with it, of course, is that it disregards the crucial facts that: a) budget deficits are an endogenous variable whose ‘receipts’ and ‘expenditures’ components are both adversely affected by recession, as indeed they have been in the last few years and especially so in 2008-2009; b) that in many eurozone countries, bank bailouts account for a substantial portion of the budget deficits of the last few years and c) that factors other than budget deficits contribute to public debt levels spiralling out of control – namely the compounding interest charged on that debt, particularly when far in excess of GDP growth (the so-called ‘snowball effect’). Take all of these into account and you get a very different picture from the alleged government largesse.

Of course, there is a lot to be said about the quality of public finance in many of these countries in the last few years or decades, including with respect to ruinous public-private partnerships, tax exemptions and other forms of government capture by vested interests. However, the idea that the simultaneous public debt crises of numerous eurozone countries was caused by governments in all of these countries suddenly and recklessly deciding to increase spending on a whim is, quite simply, not true. What really underlies the public debt crisis is the lethal combination of recession, deflation and the unbelievably Byzantine financial-sector mediation between the ECB and governments (a case-study in financial expropriation for many decades to come). And the corollary is that austerity only makes everything worse and will continue to do so; the only way to solve the (public and private) debt crisis is growth along with moderate inflation (and in some cases the inevitable write-downs).

The second fallacy is also a particularly persistent and pervasive one, and usually relies on showing how the nominal compensation of employees, or alternatively unit labour costs (ULCs), increased in excess of productivity in the eurozone periphery in the last couple of decades, thereby causing competitiveness to deteriorate. In turn, this argument very quickly leads to the conclusion that regaining competitiveness requires sharp wage cuts (internal devaluation). This, too, has been repeated to the point of exhaustion, perhaps most notably and recently by Mr. Draghi in a two-hour session with the eurozone’s 17 heads of state and government in March (see the power point here). Both the argument and the conclusion are plainly wrong, however.

As Felipe and Kumar show in one of the most important (and neglected) papers to have been written on the euro crisis , while ULCs lend themselves to an intuitive and correct interpretation at the firm level (say, the labour cost of producing a table or laptop), at the aggregate level of the economy they are constructed using the economy’s value added, rather than physical quantities, as the measure of output – and therefore the ‘intuitive’ interpretation is no longer appropriate. Rather, these authors show algebraically that, at the aggregate level, ULCs are nothing other than a simple product of two factors: the labour share in the functional distribution of income multiplied by the price deflator (rate of inflation). Allow me to rephrase this: an increase in aggregate ULCs can only be accounted for about by an increase in the labour share of income and/or by inflation. Indeed, we can construct an exactly analogous indicator, called Unit Capital Costs (UKCs), which increases to the extent that the capital share of income increases and/or that there is inflation. And what do we get when we do compute this indicator for the eurozone economies? Refer back to Felipe and Kumar (p. 16) and… lo and behold: with the sole exception of Greece, UKCs increased more than ULCs in every single euro zone country both between 1980 and 2007 and between 1995 and 2007.

The interpretation should by now be obvious: Greece was the only euro country where the functional distribution of income changed in labour’s favour in the last three decades; in all the other countries, the capital share of income increased at the expense of labour; and the extent to which the various economies had greater or lesser increases in both their ULCs and their UKCs was a consequence of differential inflation. So ULCs are really quite distinct from real wages; and following this aggregate approach to its logical policy consequences would entail measures to cut down profits, not wages, in order to regain competitiveness. The real culprits of the differential change in ULCs (or the nominal compensation of employees) across the euro zone is differential inflation and the real wage decrease in the European core – not real wage increases in the periphery.

Promoting competitiveness in the periphery through wage compression is therefore both cynical and wrong – in several different ways. First, workers are being forced to foot the bill twice over; second, the prime determinant of economic competitiveness is not sale price per se, but rather sale prices combined with the pattern of productive specialisation (and recessionary internal devaluations are not helping with the latter, either); and third, the Great Stagnation that the US and Europe as a whole have been living through is a consequence of insufficient demand in the context of a massive (though protracted) process of debt deflation, so compressing wages in the current context is a sure way to further compress demand and curb growth (see here for more detailed information on this).

On some occasions, this erroneous diagnosis takes on an especially aberrant and cynical twist: that’s when the argument is constructed around a comparison of nominal ULCs (or the nominal compensation of employees) with real (i.e. deflated) productivity. Seems obviously wrong even to a first-year undergraduate, wouldn’t you say? Well, that’s actually what many analysts and commentators have been doing for quite a while – and it’s also a key part of Mr Draghi’s story (check slides 9 and 10 in his power point presentation, link above).

So neither is the public debt crisis caused by reckless spending, nor is declining competitiveness a consequence of excessive wage increases. And yet, these ‘fairy tales’ are repeated again and again to make us believe them and are used as a pretext for deleterious and counterproductive policies. We’ve been here before (does the name Heinrich Brüning ring any bells?) – and it wasn’t pretty. Shouldn’t we be taking the lessons from history far more seriously?

Europe For Citizens

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

The 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.”

Frau Merkel and the ‘C-Word’

5. June 2013, von Almut Möller, Comments (0)

Both the European Commission and the International Monetary Fund (IMF) have just published findings about the performance of the German economy and the state of structural reforms. While there is plenty of discussions in Berlin about what ‘the others’ (in particular France) are not getting right, there is not much of a debate on what ‘the others’ (Commission and IMF) suggest that Germany is or is not getting right. The new findings did not get much attention in the public debate.

Not surprisingly perhaps, as both reports continue what sounds like good news and point out that Germany’s public finances have been overall sound. The IMF underlines that Germany’s “safe haven status and strong balance sheets” has been an “anchor of stability” during the eurozone recovery. When it comes to the recommendations, however, the IMF experts do again not shy away from getting involved with the politics of the euro crisis, welcoming this year’s marginal loosening of the fiscal stance: “(…) fiscal over-performance should be firmly avoided as it could imply a contractionary fiscal stance that is unwarranted in the current low growth environment.”

The Commission is more cautious on the question that has been dominating the eurozone debate for the past months: is Germany that is leading on fiscal consolidation (which makes it look like the teacher’s pet, something Chancellor Merkel was so pleased about in her home country) the real burden to the eurozone? It is hardly surprising that the Commission avoids this hot issue, since the report is a mere recommendation to the Council of Ministers. And, arguably, the Commission diligently follows a rather narrow mandate in assessing German fiscal policy and its 2013 national reform programme. However, against the background of a fierce debate (mostly resonating outside of Germany) on how to trigger jobs and growth in the eurozone the European Commission’s proposals look rather innocent. Frau Merkel, of course, will have been pleased not only with the findings, but also with the fact that the Commission basically restricted itself to inserting the data they collected in the Member States into tables without spending too much time on interpreting them.

The IMF underlines Germany’s crucial role in shaping the future institutional and legal framework of the eurozone. This reads like a hardly veiled criticism on Chancellor Merkel’s so far rather woolly ideas. Just last week, her joint proposal with President Hollande on establishing the function of a permanent president for the eurozone raised eyebrows even within her coalition in Berlin. While I believe it was right to respond to the French initiative launched by President Hollande, as I suggested in my previous blog piece, Merkel should not underestimate the attention she gets for such moves. She might have considered it as a friendly yet half-hearted response to the bruised neighbour, likely to end up watered down or even abandoned the moment its gets on the agenda of the 27 members. But Merkel should know that any move that might shed light on where Germany wants to take the eurozone is taken rather seriously these days and tactical moves are likely to be met with indignation.

Another more telling intervention of Angela Merkel received attention this week. In an interview with DER SPIEGEL the chancellor reiterated what has become in my opinion the word around which she develops her construction plan for Europe: coordination. In her world, the Commission president has a “coordinating function over the policies of the national governments” and therefore should continue to be nominated by the heads of state and government (with a certain role for the European Parliament to play). No more transfer of competencies to the Commission, but improved coordination in policy areas that can strengthen the competitiveness of the eurozone. Read again her Bruges speech of 2010 – it is pretty much in there already.

Needless to say that Merkel’s “c-word” has been a declaration of war to those who carry the “f-word” banner (in the continental, not the British understanding of federalism) advocating for strong and independent EU institutions. A widely overlooked decision: the heads of state used a clause in the Lisbon Treaty and agreed to keep one Commissioner for each Member State at the recent May summit. While this was only a formal adoption of a decision previously being granted to Ireland, Chancellor Merkel was surely pleased. After all, the European party families are gearing up their campaigns for the European Parliament elections in 2014 with joint candidates for the post of the Commission president. What a nightmare for the ‘c-lady’ to imagine a democratically legitimised president of the European Commission representing the majority in the EP, presiding over a reduced college of Commissioners. What would the reports of such a more independent figure have looked like?

After the questionable results of the “open methods of coordination” in the Lisbon Strategy of 2000 – will coordination as a mode of governance get its second wind? Frau Merkel is taking the lead in its revival.

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...)

Supported by