Eurozone 2013 « Euro

Will France Become like the Netherlands or the Netherlands like France?

28. May 2013, von Adriaan Schout, Comments (1)

To understand the euro project we need to go back to 1989 and the frustrations over exchange rate adaptations under the European Exchange Rate Mechanism (ERM). France was frustrated by the hard Deutsch Mark and, occasionally, lost billions on aligning the FF to the DM. Mitterrand used the German unification as a lever to get Kohl to accept the euro. This was regarded by the Dutch with grave worries for various reasons. In essence, the euro is a French project.

For one, the Dutch, together with the Germans, wanted at least to ensure that the euro would be a hard currency and demanded the Maastricht criteria, the SGP and an independent ECB. The demand for rules to reinforce economic institutions continues and resulted of late in an ‘independent Commissioner’ and semi-automatic sanctions. The euro may have a French pedigree but was supposed to become German/Dutch and, with that, ‘southern’ Europeans would/should become like the Germans/Dutch. One of the most recent steps in this effort was the line in the six pack that all countries should have an independent budgetary authority. The Dutch have such a prestigious economic analysis bureau but in France this function has been part of the Ministry of Finance. Strong economic governance goes together with strong, independent, rule-bound and transparent institutions.

The Netherlands is now in a recession and economic prospects seem to be gloomy for some time to come. To be able to reform, the Dutch need to rely on their proven social ‘polder-model’ and recently a social pact between employers and employees was agreed on and supported by the government. However, the government did not want the independent budgetary control office to examine the consequences of this social pact nor its implications for the 3% rule. Moreover, this control office recently had a shift in leadership and a top civil from the ministry of finance was appointed. The new director may be extremely competent but the image of independence is endangered. Moreover, Prime Minister Rutte spoke out to be optimistic about economic prospects. Yet, over-optimism has been one of the most annoying characteristic of politicians when it comes to reliable statements about the SGP criteria. Recently Hollande also presented a brighter economic future for France than Olli Rehn. In the debate for EP on 7 May, Dijsselbloem ̶ albeit it as chair of the Eurogroup ̶ emphasised that we should not examine the weakness of banks until the eurozone has the resolution mechanisms in place. Hence, the message seems to be, let us postpone the facts until we think we are ready. Is it wise to circumvent facts, to thwart the image of independence and not to analyse major reform proposals?

Rumsfeld once stated that there are known unknowns and unknown unknowns, but the eurozone has invented the ‘unknowns we’d rather not know’. The French had a political perspective on the fiscal policy whereas the Germans and Dutch stood for rationality. As it now seems, the euro is not changing Hollande into Kohl, but it might make the Netherlands more French.

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Help the Bruised French out of the Corner!

23. May 2013, von Almut Möller, Comments (1)

There has been a lot of bad news last week: the Eurozone is further contracting, France is moving into recession and the EU has been dramatically losing support all across Europe according to figures published in a Pew poll.

Watching President Hollande’s Élysée address one year into his presidency one saw a cornered head of state fighting for his survival at home and against a growing mistrust in Europe towards the French willingness and ability to reform. Not surprisingly, President Hollande, in a desperate attempt to lift the spirits of his fellow Frenchmen, started off his speech with the French leadership in Mali. Not surprisingly, the French president then tried to gain ground vis-à-vis the dominant German neighbour by coming up with a ‘European initiative’: a real economic government, a strategy for investment, a European Energy Community and a eurozone budget. While there might be doubts about the depth and the impact of his proposals one has to acknowledge that the French president did come out of the corner.

In Berlin, however, one hears a lot of derisive commentary about France these days and there are indeed clearly different views about the future architecture of the eurozone. But I saw a man who believed in what he said, who warned that the recession caused by austerity was threatening the very identity of Europe. A President who insisted that his country had made its choice for Europe right from the start, who in the course of the crisis has been trying to “shake things up in Europe” and who is increasingly frustrated about the lack of response from Berlin. A frustration that is likely to expand also to his social democratic friends in the SPD, despite Hollande’s presence during the celebrations of the SPD’s 150th birthday this week. Hollande is watching his country being put into the camp of the ‘poor southerners’ and being publicly accused by the President of the European Commission of not understanding the opportunities of globalisation. What a humiliation for a proud nation to being graciously awarded an extra two years to cut down its deficit – in terms of communication I found this a disaster.
We have got to the point where a public blame game is going on that undermines and disempowers even the most potent leaders in Europe – how does this create the urgently needed trust among citizens that their politicians will eventually manage to find a way out of the crisis?

In all this – and it feels almost absurd living and working here – Berlin still feels like an island of peace. Recession? Didn’t the most recent numbers suggest that the German economy continued to grow, albeit mildly? And doesn’t the minor growth rate support the chancellor’s argument made continuously during the crisis that Germany cannot lift the rest of the eurozone on its own? A lack of citizens’ support? Doesn’t Germany score best in the Pew poll, with 60 per cent of Germans still in favour of the EU despite taxpayers’ money being used for the bailouts?

I wonder if Angela Merkel sometimes wakes up in the morning and asks herself whether she is Alice in Wonderland. Like Alice’s fantasy world, Merkel’s Berlin is full of absurdities these days. As the crisis is threatening to tear the union apart, Frau Merkel enjoys a never ending round dance around herself and an abundance of what I would like to call ‘conversations of comfort’. Not that it is her who actively triggers them – they just seem to happen. Just last month she conversed with the Polish Prime Minister Donald Tusk in the proud representation of Deutsche Bank in Berlin. Just having published a biography on Merkel’s foreign policy Stefan Kornelius, the foreign editor of Süddeutsche Zeitung, led the conversation: no drama, no real challenge, just pleasure and comfort and agreement, and the Polish Prime Minister doing the job for Merkel by raving about pretty much anything Merkel and German. The venue was packed on this occasion and politics, business and the media gathering all seemed to be a bit in love with the lady that holds court in the most non-courting way: she just sat there and enjoyed it as seemingly everybody else. A few days later, it felt like the whole of Europe was hanging on her every word when Frau Merkel conversed with the editors of a women’s magazine in a trendy Berlin theatre, chatting about cooking and what she likes in men.

When are the media starting to do their job properly? I really hope for German and French national televisions to gang up and convince Merkel and Hollande to battle it out openly in a TV duel. One of Merkel’s ways of dealing with potentially uncomfortable adversaries is by simply ignoring them – a strategy that seems to work and make her look even stronger. With a few exceptions, she hasn’t even given her social democratic challenger Peer Steinbrück the dignity of a direct address yet. The worst thing that can happen to Hollande in his attempt to contribute to the future architecture of the eurozone now is to be ignored by the German Chancellor. Berlin should know its responsibilities.

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.”

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.”

Doubts about Rehn’s Position as Independent Commissioner

7. May 2013, von Adriaan Schout, Comments (0)

Rehn has spoken. Friday 3 May, the independent Commissioner for economic and monetary affairs gave his verdict on the state of the national economies in the EU. His statements were remarkable in several ways and come at a time when he has to prove his worth as an independent Commissioner. France, which has been dragging its feet regarding the necessary reforms, has received two extra years to bring its budget in order although its deficit is 4,2% and its public debt is moving towards an incredible 96,2% next year. The Dutch are in a better position but received a one year delay while allowing the public burden to increase instead of pushing for reforms. Newspapers and civil servants point to heavy lobbying of, in particular, France.

How do we know whether Rehn has spoken words of wisdom? Whatever Rehn says, he will always be criticised by many. If he criticises, for example, Berlusconi for having failed to reform, even his Italian colleague Antonio Tajani (Commissioner for industry) openly speaks out against him. If he cautions over austerity, he is criticised by EPP MEPs for failing to keep Member States to stick to the rules of the Stability and Growth Pact (SGP). Even Barroso has been going over Rehn’s head by stating that austerity has reached the limits of popular support – displaying evidently that Barroso is primarily a politician. Barroso may not have contradicted Rehn over the need for some slack, but his comments have placed Rehn’s work as independent Commissioner in a political light and Barroso has hinted at differences in the Commission. Other attacks come from economists and Nobel-prize winner Paul Krugman made fun of Rehn’s over-optimistic growth forecasts in the Financial Times and slashed his emphasis on austerity (‘Rehn of Terror’). Hence many, including his colleagues in the College, disagree with whatever Rehn concludes.

Rehn’s advice is easily distrusted. Therefore, the analyses and recommendations of the European semester commissioner should be widely recognised as the result of careful examination of long term trends in national and European economies. The weight of his words depends in many ways on the respect peers in governments, journalist and financial analysts have for the independent Commissioner as institution. His prestige depends on the analytical quality of the reports of DG EcFin, on the reputation of this staff and on the extent to which procedures are trusted to guarantee quality and independence.

Much has been achieved in terms of ensuring the quality of the work of DG EcFin, but not enough. First of all, there are trends that are incompatible with the role of an independent Commissioner. The Commission is increasingly presenting itself as a political body, searching political support from the European parliament and calling itself a ‘government’. This seems to be a worrying step away from the traditional focus of the Commission on content as envisaged by Jean Monnet. An ‘independent Commissioner’ as part of a political ‘government’ seems to be a paradox if not a straightforward contradiction. Pleas in Barroso’s State of the Union (2012) to operate ‘independently under the supervision’ of the European Parliament are equally confusing.

Secondly, the process through which the independent Commissioner formulates conclusions and economic advice to Member States needs to live up to standards such as independence from political influence from both within the Commission and from Member States, quality (size and expertise) of the staff of DG EcFin and transparency. However, if we try to piece together how DG Ecfin operates within the Commission, we cannot conclude that quality and independence are guaranteed.

To start with, reliable statistics are the basis of any economic report. It was already known to insiders that European statistics were unreliable but the Greek crisis in 2009 proved that some countries provided rubbish if not lies. No economic system in the 21st century should aspire to function on the basis of a suspicious statistical system. Moreover, if only for its prestige, Eurostat should not fall under the College of Commissioners but should be an independent agency.

Moreover, although major improvements are to report in terms of economic governance resulting from the 2- and 6-pack, the European semester is still not supported by a transparent depoliticised analytical process. DG EcFin has been enlarged but it is still unclear what is being done with its staff reports. The parts of DG EcFin that are independent remain in any case dependent on other – political – DGs for sector input. Also, the staff papers are forwarded to the College. The staff papers are ‘the sole responsibility’ of the independent Commissioner although officially other Commissioners may pose questions and other DGs are consulted in the writing of SGP reports and of conclusions of the macroeconomic imbalances procedure. Furthermore, the President of the Commission is supported by a Chief Economic Analyst in the process of the drafting of the recommendations. It is unclear why Barroso has an additional analyst if reports are produced by Rehn and DG EcFin. Finally, there are actually confirmations that the recent statements by Rehn have been strongly influenced by national lobbying.

Hence, also the production of the country reports and recommendations should be set aside in an independent agency – just as the 6-pack dictates that Member States should have independent budgetary authorities. If there is an ‘independent Commissioner’ he should not be part of a College. This would also improve the transparency of the process.

As it stands, the legitimacy of the Commission’s role in the renewed European semester remains weakened by compounded functions and procedures. One thing economic governance requires is reliable and transparent institutions. The Commission, of course, will be strongly opposed to any discussion of redesigning its tasks and powers. A pity for those who hoped that the European semester was the start of something new.

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.”

On Axes and Party Politics: the End of Europe’s Predictability

30. April 2013, von Almut Möller, Comments (0)

In a commentary last year on the eve of the celebrations of the 50th anniversary of the Élysée Treaty I wondered to what extent the notion of ‘the Franco-German axis’ was still a useful framework to analyse politics in Europe. I argued that in the course of the euro crisis, economic and monetary policies in Europe have become an issue of political majorities along party families rather than of axes such as the Franco-German. Much was at stake in rescuing the euro, I argued, and political leaders travelling to European summits were forced to be increasingly responsive to their electorates—which I believed was good news for democracy. Forget about the Franco-German axis and embrace party politics as a sign of political maturity of the European Union.

I have been challenging myself on this point over the past months on various occasions and, what can I say, I am not at all convinced. As much as those small pockets of europeanised party strategists would like to see it, there is no real alignment of the European left yet, determined to jointly win back majorities to shape a ‘social Europe’ as the new eurozone is in the making. Neither is there a solid conservative bulwark led by the German chancellor to europeanise the notorious Swabian housewife. Rather, the strategies that governments embrace these days in navigating the crisis reflect a much wider repertoire. And while it seems that the old and rather predictable game of summits, axes and treaty reforms is over, the rules of the new game are yet to be written.

In the German context, Peer Steinbrück, the social democratic candidate for the 2013 general elections, is far from leading Europe’s socialists in the reconstruction of the eurozone. Indeed for tactical reasons he chose not to even try and challenge Angela Merkel in what has become her domaine réservé. Or might he be pulling the strings behind Hollande, and the French Left is doing the messy job for him now? (Trying to undermine Merkel from the outside is likely to have the opposite effect, but quite frankly I don’t believe in the existence of such witty tactics anyway). Martin Schulz, recently branded “an extension of Adenauer by social democratic means” with a whiff of respect by, of all papers, the conservative daily Frankfurter Allgemeine Zeitung is in his ambition to become the joint candidate of Europe’s social democrats for the next president of the European Commission, doing a much better job. However, Schulz has just disappointed those looking for order on the Paris angle by seconding Angela Merkel when she was personally accused by leading French socialists of dominating and ultimately destroying Europe.

I still stick to the observation that in the course of the crisis, European Union affairs have been politicised to an unprecedented degree. Party politics matter. But for those (including myself) who predicted that the rather predictable old order (‘the Franco-German axis’ ‘the net contributors versus the recipients’, ‘the Weimar Triangle’ etc.) would make way to a similarly predictable order formed along political colours and ideologies have been proven wrong.

The truth is: things have become utterly mazy and therefore rather unpredictable. Now it is for Europe’s great minds to make sense of the new rules of the European power game, of political colours and ideologies, of institutional quarrels (prominently featuring the Commission president these days), of reflexes of national pride, of the new power of domestic constraints, of old balance-of-power thinking, of the shadow of history returning, and of a longing for rationality that is expressed in Europe’s elites turning to scholarly knowledge (and, not surprisingly, failing to find answers). Welcome to the politics of unpredictability.

One thing is for sure: Those who hold the key to understanding the new game will be shaping and, ultimately, winning it.

Europe For Citizens

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

Dijsselbloem or DijsselDoom – a Dutch Perspective

9. April 2013, von Adriaan Schout, Comments (0)

I already presented my reservations against the appointment of Dutch Minister of Finance, Jeroen Dijsselbloem (Labour Party) as President of the Eurogroup. The public outrage following the bankruptcy of the banking sector in Cyprus has raised new questions concerning his ‘presidency’ (for which in Dutch the more modest ‘chairmanship’ is used). My initial doubts concerned the question whether this prestigious position would be in the interest of the Netherlands – and I was bold enough to propose Olli Rehn as possible candidate for a permanent chair after his departure from the European Commission in 2014.

The Cypriot turbulence in March immediately tested Dijsselbloem’s ability as a chair. He had become minister of finance in the Netherlands only in November 2012 and his appointment was almost immediately followed by rumours about his candidacy as president of the Eurogroup. In that respect, the criticism of his lack of experience and authority during the Cyprus crisis came as no surprise. For his two rescue proposals for Cyprus the media treated him on nicknames such as “DieselBoom”, “DijsselDoom” and “EuroBaldrick” (borrowed from the series Blackadder) as well as on appeals for his resignation. The fierce debates he provoked centre on the question as to whether the deposit holders are really completely safe. ‘True’ EU believers – and bankers who long for stability – would have preferred a banking resolution including European deposit guarantees in order to prevent bank runs whereas EU sceptics wished for the dismantling of the euro. Moreover, as was to be expected, Dijsselbloem was scorned as a Dutch puppet of Germany and blamed for defending the Dutch position instead of being a neutral chair.

Yet, in view of political realities like the upcoming elections in Germany and the public reservations against saving zombie banks and eurozone countries, the decisions of the Eurogroup to dismantle the Cypriot banks and to bail in seem inevitable. Moreover, given the lack of money in any country, it is highly unlikely that former Eurogroup President Juncker would have been able to orchestrate a different outcome. Approximately € 3 trillion is needed to stabilise banks in the eurozone. It is simply impossible to avoid more haircuts. Still, Dijsselbloem’s presentation of the measures appeared cold and his alleged Dutch bluntness provoked comments like the one by Juncker that you sometimes have to lie as chairman of the Eurogroup – as if financial markets preferred unreliability instead of predictability.

Also, the role of the chairman of the Eurogroup seems to be widely overestimated, if one has a close look at the EU power structure. A lot of criticism on Dijsselbloem is politically naïve in view of the strong resistance against the Cyprus bail-out not only in Germany but also in countries such as France where EU Affairs Minister Moscovici talked about “casino banking” on Cyprus. It seems widely regarded as reasonable to bail-in bondholders and deposit owners – particularly in the absence of an effective European resolution mechanism.

Hence, Dijsselbloem seems to have withstood the criticism well so far. Yet, there are issues for which he could be criticised, which in some cases can be blamed on his lack of experience. First of all, he made himself more important than he really is by ̶ during the hearing before the European Parliament ̶ taking the blame for the bailing-in of savings below €100 000 in the first deal with the Cypriot government. Firstly, the chair (President of the Eurogroup) is not a decision maker but mainly a spokesman: it was the decision of the Eurogroup to bail in those savings. Secondly, he referred to the bail-in of Dutch bondholders. A chair should be as neutral as possible and avoid telling the world how good his native country is in dealing with a crisis. Particularly Dutch politicians should take care not to be too outspoken. Dijsselbloem’s presentation of the Netherlands as a role model fuelled the criticism that he was pursuing a national agenda. Thirdly, he talked in terms of “core” and “periphery countries” as well as “the north” and “the south” whereas a chair should avoid divisions at any cost (as he later seemed to have realised).

Even though these issues are mainly issues of style and nothing serious, the international press once again saw a reason to complain about Dutch bluntness and about pushing through the Northern austerity agenda. Similarly, when Dijsselbloem, as Dutch Minister of Finance, attacked the Commission’s request for an additional € 11.2 billion for the budget for 2013, a question basically unrelated to the euro crisis, this led to head lines such as ”Dijsselbloem, president of the Eurogroup, joining forces with the UK” (EurActiv 3 April 2013). This shows that it seems to be inevitable that the chair of the Eurogroup is not regarded as neutral but as a national politician.

If Cyprus can cause an existential euro crisis overnight, it is very likely that more and more serious crises are to be expected. Against this backdrop, complaints about Dutch bluntness, accusations of Dijsselbloem acting as a German puppet or being part of the British camp, are particularly unhelpful both for the EU and for the Netherlands. What the Eurogroup urgently needs is a professional chair!

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.”

Halftime in Cyprus

27. March 2013, von Alexandre Abreu, Comments (0)

Analysing the latest acute episode of the euro crisis, Cyprus, on March 26th is a bit like writing a match report at halftime: you’re bound to get much of the story right, but if you try to predict the final outcome, you may very well miss – by an inch or by a mile. And as it happens, this particular crisis episode is very much at halftime: after intense negotiations and some extraordinarily clumsy backing and forthing by the Eurogroup and the Cypriot authorities, a deal has finally been brokered that involves a 10€ billion emergency loan, differential treatment of the various banks, austerity (as always), a bail-in of the holders of bonds and deposits over 100,000€ (the big novelty) and no penalty on holders of deposits under that amount (albeit after an announcement to the contrary with indelible consequences, more on which below). However, the banks in Cyprus remain closed to the public as I write, with strict restrictions on movements and withdrawals in place, and no one really knows what will happen once depositors are once again allowed to access their money. My own guess, taking into account the rationality of bank runs and the stage that has been set by the political handling of this crisis, is that the Cypriot banking system may well come crumbling down in a matter of days – and it’s anyone’s guess what that could unleash. We shall soon find out, however, so rather than play the role of Cassandra here, I shall instead dwell on some of the lessons that, even at halftime, we can already draw from the Cypriot crisis – and there are some interesting ones to be drawn.

1. It ain’t over till it’s over. By now, there have probably been a hundred different speeches claiming that the worst of the euro crisis is behind us. In some instances, this has been based on wishful thinking regarding the imaginary virtuous properties of the fiscal compact and structural reform (read: permanent austerity, labour market deregulation and privatisation). In other cases, it has been supported by the peripheral countries’ ‘return’ to the bond markets (really due to the OMT) or the reduction in their current account deficits (mostly a consequence of recession). For all this magical thinking, however, the fact of the matter remains that the eurozone as a whole is in recession and looks set to plunge even deeper; the number of countries that have had to resort to emergency loans has by now reached a handful (Greece, Portugal, Ireland, Spain and Cyprus); the social and economic situation is dire across the eurozone periphery and catastrophic in the hardest-hit countries; and the question in many people’s minds is which country will be next, with several candidates in line. So really, it’s far from over.

2. Every unhappy eurozone member is unhappy in its own way. Each troubled eurozone country has its own set of specific troubles, including the unraveling of massively bloated financial systems, busted housing bubbles, distorted specialisation patterns, loss of international competitiveness, or various combinations of the above. Make no mistake about it, however: there is one common cause underlying all of these epiphenomena, and that cause is an ultimately flawed monetary union without a sovereign to back it.

3. All creditors are equal, but some creditors are more equal than others. Throughout the Eurozone crisis, creditors (typically bondholders) have by and large been treated as sacrosanct. The argument has always been that default or suspension of debt/interest repayment is really not an option, because once you scare investors away, it’s well-nigh impossible to regain their trust. In the Portuguese case, for example, this is used to justify paying out 10 billion euros in interest on public debt in 2013 (more or less equivalent to total public spending on health), even as the economy collapses for lack of domestic demand and even as it is increasingly obvious that a default, or at least major haircut, isinevitable further down the road (public debt amounting to 120% of GDP, with an implicit average interest rate of 5%-6% and absent inflation, can never be repaid by the government of a shrinking economy). Now, what the Cyprus banking crisis has shown is that creditors are not so sacrosanct after all, and it’s alright to scare them away if most of those creditors are not financial institutions from the European core – particularly if there’s a fair chance that these creditors might be scared away from Cyprus and onto Luxembourg or the Netherlands. Indeed, taking into account how all the Cyprus-bashing as an offshore haven for Russian mobsters and oligarchs fails to recall the amount of money laundering that takes place in Luxembourg, the Isle of Man, the Netherlands – and even Germany, for that matter –, one might add that all offshore havens are equal, but some are more equal than others.

4. Once the cat is out of the bag, you probably won’t be able to catch it. The Cypriot banking crisis has been quite extraordinary not only because this is the first time that creditors are called upon to suffer losses as a pre-condition for a bail-out, but also, and especially, because the initial plan involved overriding the EU-wide insurance on deposits under 100,000€ by levying a 6,7% penalty on those deposits. This figure was subsequently reduced to 3%, and then dropped altogether, but by then the cat had already been let out of the bag: depositors in Cyprus, across the Eurozone periphery and in fact across the Eurozone as a whole now know that, under certain circumstances, the European authorities are willing to sacrifice small depositors. Now that’s what I call a sure way of triggering some major bank runs across the Eurozone. But then again, let me not play Cassandra here.

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.”

Getting Cyprus Wrong – and Germany Too?

27. March 2013, von Almut Möller, Comments (1)

The agreement on Cyprus concluded this week will turn out as a burden to policy-makers in Europe for both next steps related to Cyprus and the Eurozone rescue as a whole. The best take I have read so far is by Bruegel’s Nicolas Véron, who in his latest commentary addresses the manifold arenas in which the case of Cyprus will play out in the months to come.

Véron also discusses the role of Germany, making the point that the Cyprus agreement was held hostage by Germany’s federal electoral campaign, and Berlin as the “unquestioned central actor” in the Eurozone contributed to undermining trust won back in 2012. I agree that domestic politics played a major role for the governing coalition of Chancellor Merkel. The last thing Merkel wants is a euro controversy tainting the so far bright prospects of her re-election, and headlines in German local newspapers this week did her a favour by stating “Citizens’ deposits safe in German banks”.

The question is, despite the opposition trying to capitalise on the government’s potentially damaging slip and on the anti-Merkel mood in Cyprus and other parts of Europe: with a different government in power in Berlin, would the stance on Cyprus have looked significantly different? I doubt it.

German sociologist Ulrich Beck provided what I consider the key to understand German thinking in an interview published by the London School of Economics’ EUROPP blog this week. It is a crucial hint to understand the German soul throughout the past, present and future of the crisis, which is why I quote it in full length:

“(…) Germany’s austerity policies are not based simply on pragmatism, but also underlying values. The German objection to countries spending more money than they have is a moral issue which, from a sociological point of view, ties in with the ‘Protestant Ethic’. It’s a perspective which has Martin Luther and Max Weber in the background. But this is not seen as a moral issue in Germany, instead it’s viewed as economic rationality. They don’t see it as a German way of resolving the crisis; they see it as if they are the teachers instructing southern European countries on how to manage their economies.”

From the crumbling of the City of London during the first wave of the crises through the debt and governance failure in Greece to what is now being described as a ‘fatal business model’ in Cyprus in German papers, there has always been a moral, even moralistic undertone in the German debate, which people outside Germany are struggling with. For Germans themselves, however, it makes a lot of sense. There is a sense of unfairness felt in Germany when witnessing a growing anti-Germany mood in the streets of Cyprus, Italy, Greece and elsewhere: after all we are the good Europeans, not the bad ones, in helping others to find their way back to what we believe is a ‘good’ way of running an economy, and a government responsive to citizens’ needs. And we are even helping with our taxpayers’ money.

In government circles in Berlin this is framed positively and, with what I believe is a genuine sense of responsibility, as help in ‘forging a new social contract’ in countries affected by the crisis. In other parts of Europe, however, Germans cause increasing outrage for allegedly not tolerating any other system than their own, and for playing a moralistic blame game against “hubris, greediness and wilful negligence” (this is how a leading German conservative daily put it today, suggesting to turn the headquarters of the soon to be closed Laiki Bank into a “museum of greed”).

I understand that it is getting harder to believe in the rest of Europe when reading such commentary (and the list of similar quotes has become long in the course of the crisis) that Berlin has good intentions, and that it genuinely does not want to dominate or destroy other countries’ economic and social models. Keeping in mind the hugely formative driving force to German thinking as described by Ulrich Beck might deliver a key to understanding Germany better.

But Germans have to do their part too. In my observation there is still a lack of real understanding of how and why Germany is perceived by others as lacking empathy among policy makers in Berlin. And those who indeed are aware of these perceptions are playing an increasingly dangerous game by ignoring them or playing them down as a natural sight effect that comes with strong leadership.

If I was to revisit the findings of a set of papers that we published in mid-2012 on how Germany is viewed by other EU Member States, by now the results will certainly give much more reason for concern regarding Germany’s role in Europe. Perceptions matter in European politics, and they might turn against German leadership and narrow Berlin’s room for manoeuvre – to the detriment of Germany and Europe.

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 a Tomato Can Tell us about the Euro

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

In order to form an opinion on the effects of the euro, we could start out from a simple question: what sort of impact had the introduction of the euro on a specific product, let us say a tomato, that a country (e.g. the Netherlands) cultivates and exports? The Netherlands has a strong horticultural sector. At first sight, it seems as if the Dutch exports in horticultural products have benefitted greatly from the euro. In 2010, almost 10% of the workforce worked in the production, knowledge development and trade of vegetables and fruits. 75% of the exports of tomatoes, cucumbers, paprika, etc. were within the EU. Exports within the EU have benefitted from European integration since 1992 with the removal of trade barriers, the definition of common food laws, the protection of patent rights and the introduction of the euro. Since the introduction of the euro in 2002 the exports of vegetables and of fruits have increased massively with 90% and more depending on products and regions. Exports to southern European Member States have proven to be particularly impressive with a growth of 241% between the introduction of the euro and 2010. Does this mean that the euro was a big success?

There are many reasons for this sharp increase in exports from the Netherlands and for the increasing imports by the southern Member States. One explanation for the favourable exports between 2002 and 2010 was the introduction of the euro. Tomatoes and related products are bulk products with low margins. Hence, the export success depends on enormous volumes combined with low profits margins. As a result, small changes in costs result in major changes in trade. The introduction of the euro contributed in two ways to the export success. The euro implied lower transaction costs, and lower costs with bulk products imply more exports. In addition, the economic conditions in the southern countries was inflated due to investments in housing, the inflow of cheap capital and high consumption. There were few incentives within the eurozone to lower wages and prices. As a result, Dutch horticultural exports to southern Member States flourished and investments in production went up, meaning that the success of the Dutch production and exports was partly a sign of failing market adjustments in the south.

Evidently, this upswing in Dutch exports has had its flip sides. Production in the south was pushed back before 2010. At the same time, investments in the Netherlands had gone up leading to the current overcapacities. These days, Dutch export of tomatoes within the EU is dropping. At first sight, this might appear to be a logical consequence of the general economic crisis given that consumption is falling in many eurozone countries. What is much less realised is that it is also the introduction of the euro that can partly be blamed for the present economic setback in horticulture. Currently we see wages in southern eurozone countries dropping, production and export of horticultural articles from the south are increasing, and, as a result, imports from the Netherlands drop and exports to the northern countries increase. Dutch export is not only dropping towards southern countries but also towards countries like the UK due to stronger competition from southern tomatoes.

Looking back, it would have been better had the market for horticultural products remained more in balance. The success of the exports was in part the result of failing markets within the eurozone. Would markets have adapted more smoothly, exports from the Netherlands would not have grown so fast and this would have prevented overinvestments and less adjustments once the crisis set in. Similarly, production in the south would have increased earlier had markets been more flexible.

This shows that the introduction of the euro – a macroeconomic development – resulted in microeconomic imbalances in the market for horticultural products. Looking back, the increase in Dutch exports following 2002 was too high and is now followed by a reversal of trade flows. The story of the tomato tells us that the increase in exports due to the euro was also a sign of insufficient adaptations in the south and has resulted in a hard landing that could have been prevented had the euro not functioned as a ‘sleeping pill’ to postpone market adaptations. At the same time, export surpluses were not matched by adaptations in exchange rates so that adaptions in the end have been more abrupt. What goes up must come down. Paradoxically, the euro has aggravated the ups and the downs. Like it or not, the well-functioning of markets is even more important with 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.”

Is there an Alternative for Europe in Germany?

15. March 2013, von Almut Möller, Comments (1)

In my last blog I made the point that despite Germany being a major player in the reform of the eurozone and despite federal elections taking place in the fall of 2013, Germans at the moment seem rather indifferent about the eurozone’s future direction.

I found this to be rather baffling, since the decisions taken by eurozone leaders these days are not mere technical or legal adjustments, but will determine the substance of policies in the currency union and have already done so.

But is it really true that Europe is absent in the minds of German citizens? Perhaps it is a question of weeks now.

The election campaigns haven’t got into full swing yet, as the political parties are still in the process of putting together and adopting their platforms. And it was only this week that a new party with a distinctly anti-euro profile has entered the stage (to which I will come back).

Over these past two weeks, both the leaders of the Green Party (BÜNDNIS 90/DIE GRÜNEN) and the Social Democrats (SPD) have presented their draft platforms to the public. The Greens will put the draft to their party congress in Berlin in late April. In June, every party member gets the chance to cast a vote on the top ten priorities for the Green campaign. As to the Social Democrats, their party congress will convene in mid-April in the southern German city of Augsburg to adopt the 2013 platform. Those seeking for “Europe controversy” in the country notorious for its “Europe consensus” are likely to eventually find some food for commentary at these gatherings.

Leafing through the 100-pages platform of the SPD and searching for “Europe”, there was a particular thing that struck me. EU matters have usually been framed as a grand thought and duty for Germany, more of a political ritual found in intros or conclusions, or in the obligatory chapter at the end in pamphlets of this kind (sometimes together with foreign policy). For voters that made the effort to read through those pamphlets, things must have quite naturally looked as something of a separate matter (“We will work for a better Germany for you, and then there is also the EU which we, good Germans as we are, want to build.”).

Today, European affairs have become much more a matter of policy substance – and with issues such as budget and banking supervision or the tax on financial transactions, quite naturally, intertwined with the domestic context. The new message, accelerated by the past years of crisis, is “We will work for a better Germany for you, and our playing field to achieve this is also Europe”. In other words, we can only preserve our freedom, prosperity and social justice in this world when taking much more responsibility for each other. My guess is that this is a line that still won’t go down naturally with traditional SPD voters.

Needless to say that for the Greens, advocating Europe in such a way is an easier argument to make. The party’s environmental agenda, one of its main pillars since entering the formal political arena in Germany thirty years ago, is by its very nature a field in which the borders of nation-states do not matter all that much.
It is too early to tell though whether the parties challenging Angela Merkel’s return to the chancellery manage to frame their agendas to really make a difference – and to portray European affairs no longer as a matter of statecraft at EU summits, but of political choices, of political drama and of majorities.

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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