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Archiv: December 2012

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

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

by Ferdi De Ville

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

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

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

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

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

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

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

Merry Christmas!

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

A Good Week for the Euro?

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

by Ferdi De Ville

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

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

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

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

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

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

Crisis Management and Integration at Gun Point

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

by Daniela Schwarzer

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

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

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

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

Technocracy versus Democracy

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

by Daniela Schwarzer

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

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

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

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

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

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

Economic Liberalism and Democracy

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

by Daniela Schwarzer

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

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

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

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

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

Launching a European debate?

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

by Ferdi De Ville

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

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

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

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

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

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

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

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

Blog Authors

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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.

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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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