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Too Much Trust in EU Institutions

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

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

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

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

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

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

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

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

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

Europe For Citizens

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

EMU Crisis, Barroso and the Inter-Institutional Balance

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

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

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

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

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

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

Europe For Citizens

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

What is EU Membership all About?

19. December 2013, von Almut Möller, Comments (0)

This is my last entry in the Eurozone 2013 blog. I want to conclude with some general remarks tackling what sounds like a rather innocent question and is the subject of a paper I am working on: What is EU membership all about? The question was put to me for a talk at a summer school in Britain earlier this year. Needless to say, the British are particularly concerned with what I call the changing notion of EU membership. Is it essentially about the single market, Eurozone membership, or about a community of rules and values? All of them really, one might respond, but things are not that simple anymore.

Ever since the governments of the Eurozone started to repair the dysfunctional economic and monetary union the notion of membership has been blurred. This development is nothing new – we have seen that the essence of EU (formerly EC) membership shifted along with successive treaty reforms, most markedly with the Treaty of Maastricht that significantly widened the scope of joint policies. With the need to further integrate EMU in the course of the crisis we are currently seeing yet another shift of membership – one that might turn out divisive.

What kind of union are we talking about? This question challenges not only the political identity of euro and non-euro members of the EU-28 such as the UK and Poland. It also poses questions for countries eligible to or on their way to membership such as Serbia and the other non-EU Balkan states or Turkey for that matter. While the pre-crisis European Union was by no means the monolithic bloc as which it was often portrayed the notion of membership got even less clear cut in the course of the crisis.

Why does this matter? Has the union not been dealing with different layers (a colleague once branded it the “European Onion”) for quite some time, the euro and Schengen being the most prominent examples? From an outside point of view, the demarcation between Europe as a continent, the European Union of 28 members and the eurozone of 17 – 18 with Latvia joining in 2014 – is not that clear anyway and not so important. For EU Member States, however, the degree to which they participate in the union’s policies clearly matters. It determines the rules that countries have to adopt, their rights and obligations, their access to policies, institutions, decision-making and resources. It matters to the daily reality of citizens in the EU’s Member States – think, for example, of borderless travel granted only to Schengen members. And, one aspect that gained particular relevance in the course of the crisis: the degree of participation in the EU’s policies, in particular EMU, influences the overall clout of Member states in the Union. The power question is back.

Arguably the direction of the Union is defined by the members of the eurozone nowadays. True, most non-Euro members signed up to the new legal arrangements that were adopted since the beginning of the crisis, and countries within the eurozone tried to keep the ‘outs’ close to their bosom. A fragmented Union is risky for all Member States, and realising this has so far been the glue for cohesiveness. But will it hold as the eurozone continues to move ahead next year?

The notion of membership has also been challenged when it comes to the Union’s values. What role do Member States still attribute to the values of their founding treaties? How could Member States invite Greece to join the Eurozone with such obvious deficiencies in its state functions and its market economy? A question that not only the union’s newest member Croatia might ask after having been through a detailed and demanding fitness regime in preparation for accession. Then, how on earth was it possible that the most important countries of the eurozone, Germany and France, both on several occasions violated the Stability and Growth Pact ten years ago without being sanctioned by the European Commission – arguably the early kiss of death for the euro in its current shape? What makes the Hungarian Prime Minister Victor Orbán so confident in pushing his luck with fellow EU countries, turning his back on fundamental rights and freedoms at home?

While the EU has developed a sophisticated set of instruments to encourage good behaviour and to punish when its rules and values are disrespected in its enlargement policy, it struggles to pull similar carrots and sticks with fellow EU members. Overall, the respect of rules and values has been watered down – consequently, member states take a certain freedom in interpreting them these days. This is a most damaging side effect of the crisis that member states will have to deal with in years to come.

The upcoming elections to the European parliament will demonstrate how vulnerable the Union has become with regard to its values. Parties and movements that claim they want a different Union but that in reality don’t want the Union to work will manage to capitalize from this worrying development.

There are two lessons from 2013 that policymakers should bear in mind in 2014: EU membership must not be divisive, and it must bring values to the fore again.

Europe For Citizens

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

Are we Living in a Post-EU Society?

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

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

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

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

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

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

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

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

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

Europe For Citizens

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

Parallel Currencies are no Alternative for the Euro

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

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

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

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

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

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

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

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

Europe For Citizens

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

Barroso Stretches the Limits of Subsidiarity

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

By Adriaan Schout and Judith Hoevenaars (Instituut Clingendael)

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

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

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

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

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

Dangerous Fantasies and Really Existing ‘Adjustment’

15. May 2013, von Alexandre Abreu, Comments (1)

It has been two years to the month since the original Memorandum of Understanding (MoU) was signed between the ECB-EC-IMF Troika and the Portuguese Government. Elections followed shortly after, bringing into power a new conservative coalition government, which proceeded to implement the structural adjustment programme with unbridled enthusiasm. In the words of Prime Minister Passos Coelho in June 2011, the newly-elected government was “keen to surpass the Troika”.

And, as a matter of fact, it has: successive cuts in government spending, affecting in particular the health, education and social security areas (albeit not the police budget, as befits the ‘austeritarian’ model); sharp increases in user fees, VAT and income taxes; radical changes in labour laws (including slashing unemployment benefits, longer working hours and raising the age of retirement – significant choices at a time of hyper-unemployment); the ongoing privatisation of the remainder of the state-owned sector and numerous other measures in accordance with the austerity/privatisation/deregulation model. In sum, the full neoliberal package in compressed form, of which the economic and social effects have long been well-known from the experience of the global South in the 1980s, though it has to be kept in mind that the first-wave of Structural Adjustment Programmes (SAPs), unlike the current ones, at least made allowance for currency devaluations.

The results speak for themselves. In Portugal, U-3 unemployment shot up from 12% to 17.5% in the last two years, while broad unemployment is currently around 27% and unemployment protection coverage has been significantly reduced. Consumption, investment and therefore GDP have all been freefalling: in the case of GDP, the total reduction since the MoU entered into effect has been around -5%. The current account deficit has been significantly narrowed (in fact, almost eliminated), but that was due to the effect upon imports of the sharp compression of domestic demand and the closure of tens of thousands of SMEs (the brief spike in exports in 2012 was caused by the temporary external depreciation of the euro and was quickly reversed in mid-2012). And most tellingly of all, public debt has kept increasing in both absolute and relative terms (from 108% of GDP in 2011 to 126% at present); for the most part because fiscal revenues kept falling as a consequence of the (largely self-induced) recession. Not yet as catastrophic as the Greek case, but well on its way there – and with a fully compliant government in power.

Now, this is not quite how it was supposed to turn out, was it? Wasn’t the whole idea to bring public debt under control and to unleash the economy’s growth potential by getting rid of excessive regulation, protection and government interference? Wasn’t the slashing of ‘unit labour costs’ (that persistent fallacy, to which I shall return in my next post) supposed to have boosted competitiveness and brought about sustained growth? Well, maybe so in the fantasy world of expansionary austerity and supply-side economics. But of course we all know that austerity is not expansionary and by now we should all know that this crisis (not just in Portugal, but more generally in Europe and across advanced economies as a whole) is being driven by demand, not supply. So why do the Troika and governments across Europe keep insisting on the same recipe? Why have all seven revisions of the Portuguese MoU involved the acknowledgement of a complete failure to attain the targets that were previously set, while carrying on prescribing the same measures yet predicting an imminent recovery? Is it stupidity or malice?

Well, I certainly don’t think that either these decision-makers or their technical staff are stupid people. So, as Sherlock Holmes would put it, that leaves malice as the only plausible explanation. And we have good grounds for pinpointing exactly what malice means here. Studies of the effects of the first-wave SAPs (see here and here, for example) have shown that neoliberal structural adjustment has consistently failed to bring about growth, vastly increased poverty, but, crucially, significantly increased the capital share of national income at the expense of labour. In the Portuguese case and in 2012 alone, the labour share of income dropped from 65% to 62% ̶ and all the gains were concentrated in larger corporations, not SMEs.

This is really about getting a larger piece of a smaller pie and that is why you get a coalition of international and domestic interests pushing forth this agenda. Large capital is bent on increasing its power – even if it destroys the entire European project. There’s not much time left to rein it in and avoid such an outcome.

Europe For Citizens

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

Why Economists Should not always Ask for Centralisation

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

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

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

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

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

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

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

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

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

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

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

Europe For Citizens

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

Europe – Absent?

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

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

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

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

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

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

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

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

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

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

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

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

Europe For Citizens

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

The European Periphery: Between a Rock and a Hard Place

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

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

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

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

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

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

Europe For Citizens

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

Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

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