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The current European Central Bank (ECB) inflation strategy is predicated on the belief that current inflation levels (5% in the Eurozone) are a temporary occurrence.  A transitionary phase underpinned by what ECB Chief Economist Phillip Lane recently called a “pandemic cycle of inflation”. This narrative assumes that supply side shortages and energy price fluctuations will moderate in 2022, returning the Eurozone to the optimum land of 2% price stability.

But there is another important factor driving ECB policy. A reasoning that has nothing to do with debatable economic forecasts. That’s because the ECB is determined to atone for past monetary policy mistakes; namely, its ill-timed and growth killing interest rate rises of 2011.

The legacy of its 2011 actions are now a central underpinning of its current strategy. ECB President Christine Lagarde acknowledged as much in July 2021 when she pledged that Frankfurt had “learned from history” and would facilitate ongoing monetary policy support, regardless of elevated short-term price levels. Now facilitated by a revised strategic framework, the ECB is deliberately running the economy hot in an effort to permanently raise price levels across the single currency area. 

Unfortunately for Eurozone consumers, Frankfurt seems oblivious to the difference of being informed by history rather than being held prisoner by it. In a sense, the overly restrictive actions of the ECB in 2011 have their mirror image in 2022. Today, the determination to avoid past mistakes has given rise to an overly accommodative monetary policy stance, which is willing to forsake its basic obligation to maintain price stability. The results are starting to look no less catastrophic than the aftermath of the 2011 interest rate rises.

In seeking to atone for past mistakes, the ECB may unwittingly usher in a new period of permanently higher prices. Prices that look increasingly likely to become embedded in the daily costs facing hundreds of millions of Europeans. The constant refrain from Frankfurt is that the easing of energy prices and supply chain blockages will result in moderating prices in 2022. This may be the case, but such a model also fails to acknowledge two key factors which will contribute significantly to elevated prices levels in the longer term.

The first are the inflationary impacts of Europe’s investments in its Green Deal. One third of the 1.8 trillion euro in the EU’s Recovery Plan, and the EU’s current seven-year budget will finance the transition to a carbon-neutral economy. Many trillions more of further investment will be required in the coming years. These are trillions of euro of investment that will exacerbate the skills and capacity constraints already existing in many of these areas.

Yet, the impact of these huge ongoing investments upon inflation are not adequately reflected in the ECB’s current forecasts. This was a point highlighted in January 2022 by ECB Executive Board member Isabel Schnabel, who explicitly noted that the energy transition “poses measurable upside risks to our baseline projection of inflation over the medium-term”.

So while energy prices may decline as projected over the next 12 months, the ECB remains behind the curve in factoring in the true inflationary effects of the EU’s climate ambitions.

The second factor undermining the ECB’s strategy is that its inflation estimates, quite remarkably, continue to ignore housing as a driver of rising living costs. This is a Eurozone economy where housing costs remain a critical component of real expenditure patterns. According to Eurostat, an average of 20% of a household’s disposable income is dedicated to housing costs across the EU. Yet, housing costs, as admitted by the ECB itself, are not yet adequately accounted for in its inflation estimates.

The reality is that the longer term-inflationary impacts of the EU’s Green Deal and housing costs will more than offset any temporary slowdown in price pressures evident in 2022.  By pursuing an agenda driven by history, the ECB is underplaying the longer-term risks.

One other point should also be considered in addressing the ECB’s current positioning; and that is the importance of personal experience in framing future strategic actions. Here, President Lagarde’s tenure as Economy Minister of France between 2007 and 2011 is relevant. Because “learning from history” can be read as seeking to avoid making the same mistakes twice.

But repeating past mistakes is exactly what the ECB has sleepwalked into. In 2011, its orthodox zeal was driven by an instinctive Northern European monetary memory; experiences based on the hyperinflations of the 1920s across much of Central Europe. In 2022, its accommodative enthusiasm is driven by a desire to avoid the mistakes of 2011 at all costs.

Neither strategy took (or is taking) account of broader macroeconomic realities or of the day-to-day experience of millions of Eurozone citizens. Price stability is, at its core, all about maintaining balance.

Unfortunately, the ECB continues to wobble from one extreme to the other. 

Eoin Drea Economy Eurozone Macroeconomics

Suddenly Brussels has a shiny new eco-system. Europe’s Recovery Fund (ERF) has given rise to a new posse of member states and companies setting out their commitments to greater sustainability and digitalisation. With the European Commission as the ultimate arbiter of where the money flows, Brussels is agog with how the ERF is going to lead Europe’s economic renaissance. 

However, this endless focus on the procedures and timescales of the ERF risks distracting EU decision makers from the more immediate economic challenges. Namely, how to translate the gradual lifting of pandemic restrictions into creating new jobs and building a lasting economic revival. 

Although initially conceived as a fast-track response to the initial wave of COVID-19, both the ERF (and its considerable administrative machine) will take time to filter down to national level. It will take longer still to make a meaningful impact in domestic economies. Even the most productive proposals for physical infrastructure, digitalisation projects, and increased sustainability initiatives may take years to fully design, tender, and implement. 

The ERF is a long-term game, not a short-term answer. 

In addition, packaging the attempt to rectify Europe’s core long-term challenges (climate change, lack of digital skills) as part of the wider pandemic response brings with it three further considerable risks. 

The first is the increasing likelihood of conflict between member states and the Commission over National Recovery Plans, structural reforms, and the wider economic integration of the EU. As the panic of the pandemic recedes (a lot quicker than originally forecast), national capitals will realise that ERF spending brings with it a lot more than just another layer of oversight from Brussels.  

For those states in the Eurozone, the resumption of the application of Europe’s fiscal rules from 2023 will also restrict the ability of states to respond to unforeseen economic shocks (such as a pandemic!). The moves towards harmonising corporate tax rates will further reduce the ability of member states to compete against each other to attract investment and promote innovation. 

The broader point here is that the ERF is a centralising funding tool, deliberately designed to move the EU towards a more integrated economic unit. The conflicts over the future level of economic integration required for the EU are far from resolved. These disagreements will likely resurface as Europe’s economies recover in the short to medium term. 

The second big risk emanating from the ERF is the fact that it is a debt instrument, not a programme funded directly by the existing EU budget. It’s not that the overall size of the Recovery Fund (750 billion euros) poses a significant financial risk or that future repayments will be a significant burden, rather it is the fact that Brussels is now required to raise new EU level taxes to pay for the ERF’s expenditures over the coming decades. 

The risk here is that while ERF spending may last a couple of years at best, the new taxes will likely last a lifetime.  Here, the challenge will be to gain public support for the new taxes and to sustain that support long after the ERF is a distant memory. It is naïve to think that the introduction of new EU level taxes may not impact negatively on broader public support for the wider integration process. 

The problem here is that new taxes – the current menu includes a plastics charge, a carbon border adjustment mechanism, a digital tax, revenues from emissions trading, and a financial transactions tax – will result in a long litany of disagreements between member states, even before they are finally agreed and introduced. Eventually, some national capitals may feel forced to accept these new taxes, regardless of the spending that has gone before.  The potential for such member states to then stoke anti-Brussels sentiment over the perceived financial burden of EU membership (such as Thatcher did in 1980s Britain) should not be overlooked. 

The third risk (which also encompasses both preceding ones) is that the disbursement of ERF funds is marred by significant corruption, a lack of transparency, and misuse of capital. This risk has the potential to undermine public support for further EU integration and dramatically reduce the public acceptance of further EU taxes in the future. 

For the ERF to really succeed, it must be transparent down to the last Euro. Anything other than this will simply drain away public support. It’s important to remember that the repayment of ERF funds will persist for many decades into the future.  How the ERF funds are spent now will determine if a deepened European integration really has a chance to succeed in the future.

Eoin Drea COVID-19 Economy Eurozone

It is often maintained that the euro debt crisis showed that the Economic and Monetary Union (EMU) was not sustainable without more fiscal integration. However, important causes of the crisis were extraordinary and are highly unlikely to occur again. While the legacy problems of the crisis have been grave, they can be deemed temporary.

Therefore, these problems should be combated pragmatically, but with temporary instruments only. A systematic analysis shows that the root causes have been tackled with a wide variety of reforms, both to the EMU itself and by way of structural reforms of the member states. In particular, evidence is presented that the adjustment capacities of the EMU countries are better than commonly recognised.

Additional reforms are suggested, especially in the financial sector. With these reforms in place, future crises would have less serious effects. A reformed EMU should be able to withstand such crises without further fiscal integration.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Jürgen Matthes Anna Iara Eurozone Macroeconomics

Although the final number of seats obtained by each political party won’t be finalized for several days, the results of the Irish election indicate a marked shift in Ireland’s staid political landscape. Dominated by two centrist political parties since the foundation of the state in 1922 – Fine Gael (EPP) and Fianna Fáil (Renew Europe) – the recent election marks a significant milestone in Irish politics.

Although Europe was almost entirely absent from the recent campaign, Sinn Féin (GUE/NGL) represents a clear challenge to Ireland’s traditional, pro-European stance at a policy and decision-making level. While Sinn Féin’s historic “anti-Europe” policy has moderated in recent years, this is mostly attributable to very high Irish public support for Brussels and to the EU’s support for Ireland during the Brexit process. However, Sinn Féin remains a deeply Eurosceptic party far removed from positions of influence in the European institutions. After a very disappointing European election campaign in 2019, Sinn Féin retains only one MEP in the European Parliament. Their 2020 election manifesto retains a commitment to “radically reform” the EU.

The policies of Sinn Féin in power – likely as an equal partner (almost) in coalition with the more centrist Fianna Fáil – sets an uncertain context for Ireland’s future relationship with the EU. In particular, there are three areas – the Eurozone, taxation and trade – where Sinn Féin’s priorities could seriously impact on Ireland’s traditional national consensus (and relationship with Brussels).

Sinn Féin’s policies regarding the Eurozone are copied from the standard hard left response to the global financial crisis starting in 2008. They are based around vague notions of ending “the Eurozone straitjacket” through flouting European fiscal rules and reforming the European Central Bank. The overall objective appears to be the “direct transfer of newly created money to governments so they can engage in green investment and by quantitative easing for the people”. These proposals highlight a party completely out of touch with both the realities of Brussels based decision making and the operational structure of the Eurozone (not to mention the pro-market economics which underpin it).  They also evidence scant understanding with the complexities of Ireland’s existing public debt and its obligations under existing agreements.

It is in the areas of the Eurozone and Trade policy that Sinn Féin’s policies have the potential to seriously undermine Ireland’s position in Brussels

On taxation, Sinn Féin’s positions are more nuanced and not completely out of tune with the Brussels establishment or companies investing (or invested) in Ireland. Although, they call for the continuation of national vetoes on taxation matters in the European Council and the retention of the 12.5% Corporation Tax rate, they support global efforts (presumably at OECD level) to update the global tax system. Sinn Féin wants Ireland to adopt a more transparent approach to dealing with foreign multinationals including ending the appeal against the European Commission’s Apple ruling on alleged unlawful tax arrangements with Ireland. 

In recent years Sinn Féin’s policies on the Irish economic model (and its attraction of FDI) has moderated considerably. As noted, they now support both national tax vetoes at EU level and Ireland’s present rate of Corporation Tax. Their focus lies more on their traditional wish to create a state agency “to support the growth of indigenous small businesses”. Sinn Féin’s policies, in this area, will continue the longstanding Irish consensus of advocating for national competence on tax matters (including Corporation Tax) while helping to alleviate some EU (predominantly French) concerns regarding the transparency of the Irish tax system.

On trade, Sinn Féin’s policies conflict directly with both EU objectives and traditional Irish policymaking. Their plan to veto the EU-Canada Comprehensive Economic and Trade Agreement (CETA) follows the example of other hard-left movements throughout Europe. As with their disjointed Eurozone policies, their promise to promote “fair global trade rules and policies” seems to deliberately ignore the fact that the EU has emerged as the global leader in delivering transparent and accountable trade deals since 2014. Sinn Féin’s stance could also prove problematic given the ongoing negotiations between the EU-UK on future trading arrangements given that it’s  Sinn Féin’s raison d’être to achieve a United Ireland.

This brief analysis highlights that it is in the areas of the Eurozone and Trade policy that Sinn Féin’s policies have the potential to seriously undermine Ireland’s position in Brussels.  However, a number of factors mitigate these dangers.

First, Sinn Féin will, at best, form just half a coalition government. Its ability to deliver its more extreme policy pledges will be significantly constrained by the political realities. Second, and as noted, Sinn Féin’s overarching objectives are national – namely trying to attain a United Ireland and increasing public involvement in housing to remedy the current domestic crisis – so its primary gaze will be fixed in places other than Brussels.  Third, Ireland remains a very pro-EU country and Sinn Féin understands this explicitly. This limits their potential to adopt anti-Brussels positions consistently. Fourth, the recent example of Syriza in Greece highlights the real constraints imposed on radical left parties that assume political power. The compromise of power will challenge directly Sinn Féin’s mantra of being the radical alternative.

Eoin Drea Brexit Centre-Right Elections EU Member States Eurozone Trade

In a reflection paper intended to generate debate among euro-area governments, the European Commission has put forward ideas on what could be done to deepen the Economic and Monetary Union by 2025. One of the ideas outlined by the Commission is the creation of a euro-area budget.

This article reviews the key issues that are relevant in the discussion on establishing such a budget; outlines the possible functions of such a budget, such as incentivising structural reforms or ensuring macro-stabilisation; and discusses the issues of size, funding, moral hazard and governance, while touching upon the role of non-euro-area member states.

The article concludes with the assertion that the answer to this question is essentially political in nature and could constitute an example of how member states are ready to integrate further, while giving non-euro-area member states the opportunity to participate.

Read the full article in the December 2017 issue of the European View, the Martens Centre policy journal.

Siegfried Mureşan European Union Eurozone Macroeconomics

The Economic and Monetary Union remains incomplete and vulnerable. The current economic and political climate offers a window of opportunity to further deepen this Union in 2018. Completing the banking union and creating a roadmap for a capital markets union are both essential.

One of the missing building blocks is a minister of finance and economic reform for the eurozone. This minister should have the powers and democratic legitimacy to better enforce the rules on budgetary and macroeconomic discipline. He or she should also be responsible for managing a budget line for the eurozone that can act as a countercyclical buffer when monetary policy and national fiscal policy are insufficient.

This budget line, together with the European Structural Investment Funds, should also act as an instrument for enforcing and supporting structural economic reforms aimed at making the national economies more resilient to external shocks.

Read the full article in the December 2017 issue of the European View, the Martens Centre policy journal.

Hans Geeroms European Union Eurozone Macroeconomics

President Macron in his sweeping vision of the Future of Europe (delivered on the 26th of September) correctly identifies the centrality of the Euro to the long term economic power of Europe. Through Economic and Monetary Union (EMU) he argues “we can create the heart of an integrated Europe”. His goal is increased economic power to allow Europe better compete on a global scale with China and the United States.

His overarching plan for the Euro involves the creation of a Eurozone budget overseen by a common Finance Minister under European Parliamentary control.  Such a budget would be used as a stabilising mechanism in the face of economic shocks. 

This is a vision for the Euro based on increased convergence across all aspects of the economic model – from harmonised corporate taxation to single regulatory frameworks in areas such as the digital economy. It is from an economist’s viewpoint, the traditional view of turning the Eurozone into an Optimum Currency Area (OCA) complete with what many term a “fiscal union”.

Such a vision for Europe is both welcome and timely, particularly in the absence of a long term political framework from other member states.  However, his proposals for the Eurozone risk repeating two of the biggest mistakes made by European policymakers in the move towards monetary union thirty years ago. 

Firstly, in the late 1980s, the desire to spur deeper political integration resulted in the construction of a monetary union whose institutional design flaws were painfully exposed from 2007 on. President Macron’s vision – “the German taboo is financial transfers; the French taboo is treaty change. Ultimately, if we want Europe, both will happen” – again assumes that more integration, more harmonisation will drive EMU forward.

Yet, this vision fails to appreciate that the EU, and in particular the Eurozone, is still dealing with the results of the last decade of economic and financial crises.  While very real progress has been made across a suite of relevant issues (including Banking Union and ECB credibility as an independent actor) further vital work remains to be completed.

In particular, Banking Union must be completed through the finalisation of a European Deposit Insurance Scheme, the Single Capital Markets programme progressed and the link between sovereign debt and domestic banks further weakened.

In addition, a sense of economic realism must be brought to the political discussion on legacy debt issues, particularly with regard to Greece.  These are the practical issues that will determine the viability of the Euro over the next decade, not a much broader political vision of Europe as an OCA.

Second, President Macron’s vision is based on an explicit belief that a fiscal union is required for the long run sustainability of the Eurozone. However, such a view is not based on the operational experience of the largest monetary union currently in operation, the United States. 

As has been highlighted by many American economists and economic historians the development of the American monetary union was not characterised by automatic stabilisers or significant fiscal transfers. 

Such characteristics took nearly two centuries to be developed. Rather, the existence of a credible “no bailout” clause underpinned credibility and allowed the monetary system in the U.S. to evolve into the Federal Reserve System which operates today.  A system which even since its establishment in 1913 continues to change and evolve.

President Macron’s vision for Europe chimes nicely with broader debates on the “Future of Europe” currently being aired in all member states.  However, when it come to the Euro, a more realistic approach will help preserve its stability for us all.

Eoin Drea EU Member States Eurozone Macroeconomics

The State of the European Union address by European Commission President Jean-Claude Juncker contains five takeaways for Romania which prove, once again, that the country has an important role in the Commission’s plans to reform the European Union. Romania has a unique chance to be amongst the member states that will take the next step towards European integration.

1. The Sibiu summit: linking Romania to the future of the EU

One of the most important takeaways for Romania announced by President Juncker is the proposal to hold an EU summit in Sibiu on the 30th of March 2019, the day after the UK leaves the European Union. This summit, which will take place during the Romanian presidency of the Council of the EU, will constitute a means for EU leaders to reflect and make decisions about the future of the EU. It is a great opportunity for Romania, as all future steps of European reform and integration will be linked to our country and the city of Sibiu.

In addition to this historic summit opportunity, Romania can also use the fact that it holds the Presidency to explain to Romanian citizens what the European Union means and what joining the EU has meant for the country. Related to this, I believe the decision to hold all informal meetings at ministerial level of the EU Council in the Palace of the Parliament in Bucharest is a mistake. Romania is more than Bucharest and the Parliament Palace: it holds the seventh largest population in the EU and has large, well-developed cities with a modern hotel, administrative and air transport infrastructure, capable of providing all the conditions for such an international event. 

I would propose instead to organise the ministerial meetings in several cities of the country. Why not have the Defence Ministers’ meeting in Constanta, near the military base in Kogalniceanu where we could talk about security in Europe? Moreover, why should we not organise the meetings on education in a university centre with tradition and prestige such as Cluj-Napoca or Timisoara? Why should we not organise the meeting of Foreign Affairs Ministers in Iasi, near the border with Moldova, where we could also talk about the Eastern Neighbourhood and about Russian threats?

2. and 3. Renewed support for our strategic priorities: the eurozone and Schengen

President Juncker also announced the launch of a European Commission instrument that will provide technical support to Member States which are not yet members of the euro area, but that will have to join in the near future, as is the case for Romania. It will be a very useful tool for our country, as it is certain that euro area Member States will continue to integrate further and there would be a risk for countries that have not yet adopted the single currency to remain on the outside.

President Juncker’s message is clear: when we take future steps in the direction of European integration, the countries that are not yet in the euro area will not be disregarded. This is the same request that I made earlier this year as rapporteur on the fiscal capacity for the euro area.

This budget must be open to all EU Member States, including those that are not yet members of the euro area, but who have the obligation to adopt the single currency in the future. They must receive full participation rights, contribute and benefit financially and be part of euro area governance in order to be fully prepared when they adopt the single currency.

Beyond technical support for joining the euro area, President Jean-Claude Juncker has asked European politicians to allow Romania and Bulgaria to join the Schengen area. His message was clear: if we want the EU to have stronger external borders, Romania and Bulgaria must join the Schengen area immediately. It is time for other European political leaders to understand that our country’s place is in Schengen, that our country’s borders are part of the solution, not part of the problem. 

4. Brexit will not reduce European funds for Romania

The budget of the European Union after the exit of the UK will have to be even bigger than before: this was one of the key messages of the President of the European Commission. The truth is that we cannot have a strong Union with a weak budget. This is the case especially since we see that a new traditional priority of the European Union has been added alongside growth and job creation, namely security challenges.

Thus, President Juncker’s announcement means that the level of European structural funds allocated to Romania will not be influenced directly by the exit of the UK, since we will not be talking about a reduced budget, but on the contrary, about a larger budget.

However, for Romania to benefit from the same high level of EU funds beyond 2020, it has to convince other Member States that allocations for our country are being used efficiently. The only way to prove this is to have an absorption rate close to 100% during the current multiannual financial framework (2014-2020).

5. Respect for the rule of law remains an obligation

President Juncker’s statement on the rule of law, which according to him is binding for all Member States, is bad news for all politicians in Romania who think they can control justice. This is however good news for the many honest citizens who advocate for the respect of the rule of law.

The rationale is clear: it is simply not possible to enjoy the benefits of joining the European Union (free movement, billions of euros in non-reimbursable funds, etc.) and at the same time try to control justice and state institutions. The Commission will not tolerate even the slightest deviation from the rule of law – this is the firm commitment given by President Juncker.

The speech by President Jean-Claude Juncker contrasts with all the gloomy scenarios that were predicting a Union in which our country would be disregarded or on the outside. The message is clear: there is no predefined group of countries, a core nucleus. Romania, like all other Member States, will have the chance to participate in all steps of European reform and integration.

Moreover, because we will hold the Council Presidency during Brexit and because we will host the first summit on the future of the post-Brexit EU, Romania has a unique opportunity to be amongst the member states that will lead the future steps of European integration. It depends only on us, especially on the Government and other state authorities to take advantage of this truly historic opportunity. 

Siegfried Mureşan EU Member States Eurozone Leadership

This article argues that maintaining the status quo is not an option for the euro area. The euro has functional and existential weaknesses that force us to take drastic action if we want to become resilient enough to withstand the next banking crisis. The article argues that the existential weaknesses of the euro stem from the D/Y ratio (debt-to-GDP). Euro-area members have only limited scope for using traditional mechanisms to deal with D/Y problems.

What makes this especially worrying for the overall stability of the euro area is the ownership of the debt issued by the euro-area member states. It is absolutely vital to separate banks and sovereigns and to slash debt-to-GDP levels. The question is whether the political decision-making processes in the member states can deliver these structural changes.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Juha-Pekka Nurvala Economy EU Member States Eurozone Macroeconomics

At present the biggest threat to the monetary union is posed by the anti-European political parties. These parties call for their countries to leave the union. They are thriving especially in countries with slower economic growth and high unemployment rates. The best remedy against them is to increase economic growth and thus reduce the unemployment rate in their home countries.

The measures taken to achieve this need to be systematic, rather than merely temporary patches. In peripheral and semi-peripheral economies, undercapitalised banks and the lower competitiveness of domestic producers are slowing down growth. The correct measures to address these problems include banning dividend payouts by undercapitalised banks and creating minimum standards for competitiveness.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Ivan Štefanec Eurozone Growth Jobs

Events in recent years have put the European economic integration project and the euro under pressure. The main cause of the euro crisis is loss of competitiveness, particularly on the periphery of the Economic and Monetary Union. To reverse this, Union members must promote structural reforms that increase long-term employment, productivity and external competitiveness.

The successful implementation of reforms, however, requires sufficient public support, which in turn presupposes measures that support demand during the implementation of reforms. To that end, important steps include taking an expenditure-based approach to fiscal adjustment and the introduction of the European Deposit Insurance Scheme.

And for Greece in particular, the set of necessary steps includes taking ownership of reforms, the downward revision of fiscal targets, and medium- and long-term measures of debt relief conditional upon meeting fiscal/reform targets. Finally, the stability of the euro hinges on the moderation of all fiscal and external imbalances across all member states, regardless of whether these imbalances are apparent or not.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Michael G. Arghyrou EU Member States Eurozone Growth Macroeconomics

For the first time the EU has reached not just a stopping point, but a possible turning point. The Brexit decision has only made this more evident. Using the current crisis for a ‘great leap forward’ towards ever closer ‘political union’ hardly seems realistic, even in the absence of the notorious British opposition.

Even the member states that are most ardently calling for a ‘political union’ do not agree on what that should actually mean. Using the examples of France and Germany and their seemingly identical calls for a ‘fiscal union’ of the eurozone, this article shows that the two countries have contrasting interpretations of what such a union should do, and how.

Both the French ideal of a voluntarist ‘economic government’ of the eurozone and the German model of a rules-based ‘economic constitution’ would require substantial changes to the EU treaties, for which there is no real hope of democratic consent. The legitimacy challenge has thus become both more urgent and more difficult to overcome.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Michael Wohlgemuth Democracy European Union Eurozone Integration

The architecture of the original euro was flawed, and so was the commitment of the EU member states to abide by fiscal orthodoxy. However, both did convey sound monetary principles, these being (1) to preserve the purchasing power of the euro and (2) to isolate it as much as possible from political pressures.

As evidenced in the euro crisis, both EU member states and European institutions have committed to maintaining the euro via further integration and the growing centralisation of monetary and fiscal powers in EU institutions. The European Banking Union is one example of this commitment.

This article argues that these changes have paved the way for the creation of another modern-state currency: a currency that belongs to a supranational state and that is ultimately linked to an ever-growing supranational treasury that works hand in hand with the central bank. This article offers a more market-friendly monetary alternative to such an arrangement.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Juan E. Castañeda Banking Crisis Eurozone

The need for a fiscal union in the EU is an issue which has been debated many times and about which much has been written. However, the economic and financial crisis we have experienced in recent years has cast doubt on whether we have taken this debate in the right direction. Sometimes we tend to focus the debate on marginal issues and unrealistic proposals. Rather than helping us to move forward, this paralyses the EU and distances us from feasible targets. This article aims to give a general overview of the debate on a fiscal union to find out where we are in the process of fiscal integration and what we can really expect from it.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Miguel Marín Crisis Eurozone Integration Macroeconomics

This article argues that the traditional European narrative based on the rhetoric of progress, openness, ‘an ever closer union’ and the ever greater sharing of sovereignty has lost traction with a significant percentage of the European electorate, who are gripped by frustration, insecurity and disarray. It sketches the broad lines of a new Europeanism, arguably one that would be better equipped to deal with populism and identity politics. It makes the case for a ‘leaner Europe’, less bureaucratic and intrusive, but also more openly political and culturally grounded.

Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

Federico Ottavio Reho EU Member States European Union Eurozone Integration

1. France and Europe are still troubled by political extremism and populism

And also by a growing hostility towards traditional institutions. Traditional political parties and politicians were and are afraid to address the problems which worry people the most. The reason for it is that their resolution is usually painful. Some leaders are afraid that embracing such solutions would cost them voters’ support. However, the failure to address those problems strengthens the extremists, and standard politicians lose ground anyway. It is imperative to break this vicious circle. This can only be achieved through undertaking concrete actions, and delivering concrete results.

2. France suffers from massive youth unemployment, but also from illegal immigration

Whereas, when addressing economic problems, the President needs the involvement of parliament (key reforms have generally the form of laws), this is much less the case in the area of security. The President can act with a relatively high degree of autonomy, regardless of the outcome of the June parliamentary elections and the September elections for the Senate.

3. Immigration from Africa is mainly Europe’s problem

Europe will have to deal with massive migration waves of people from Africa; they are heading mainly towards Europe, and will continue do so also in the future. Allegedly, 30% of inhabitants of sub-Saharan Africa are considering emigration already now.

4. The EU struggles with internal divisions

Due primarily, but not only, to the divergence of approaches of individual countries to the issue of migration. A reinforced franco-german axis will be capital to refuel the engine of European integration

5. The EU has been psychologically impacted by the UK’s exit from the Union

Unity, prudence, and European leadership will be essential in the tough negotiation process ahead.

6. The transatlantic partnership is and will be essential for the global order

The EU must take concrete steps to convince the United States that it has the capability to become and actually stand in the future as a proactive partner of the US in the transatlantic alliance, irrespective of who is the president of the United States.

7. The world, and Europe in particular, must address the alarming humanitarian situation in Libya and Syria

Libya has become not only a funnel for African migrants into Europe; it is also an area of political and thus of security vacuum. That vacuum has been taken advantage of by gangster groups that are apprehending migrants and then subject them to ill-treatment in close communities.

Concentration camps were recently mentioned also by Pope Francis. While the EU theoretically considers setting up safe zones, terrorists and gangsters have already created them, albeit with much less noble intentions.

The civilised world cannot and must not continue watching this humanitarian disaster to unfold. Libya is also riddled with internal divisions. Its renewal can only be achieved with active assistance of the international community. Europe and the world have supreme interest in a renewed Libya with plural political system.

Libya, under the regime of Muammar Gaddafi, was militarily ‘cracked’ in 2011 by a French-led coalition. It would be more than symbolic if the transformation of the country was led to a successful conclusion by a French-mediated action.

From this very first day of your mandate, President Macron, the clock is ticking. The failure to undertake clear measures and courageous reforms would mean that the situation in Europe would only keep getting worse and, in the next presidential elections in France, Marine Le Pen could wipe her opponents off their feet..

Here’s my proposal for a powerful foreign policy measure: to swiftly proceed with setting up the first, pilot safe zone in Libya. The area where the refugees and asylum seekers will be able to not only wait out the conclusion of their asylum proceedings, but also live for as long as necessary before the situation in their country settles down or is resolved.

The safe zone would naturally be used also to place unsuccessful asylum applicants returned from the European countries in those cases where the readmission agreement with the relevant country is not working.

Such safe zone will clearly require military protection, and its creation would not only have to be negotiated in political terms, but also secured in military terms; this offers an opportunity for enhanced EU cooperation in the field of security and defence.

Initiating and developing such enhanced cooperation, based on a concrete operation and concrete action, will show in full light who is serious about such cooperation. I also think that it will show whether there is a brighter future for the European Union.

President Macron, En marche! It’s time to take action!

Mikuláš Dzurinda European Union Eurozone Extremism

The economic and financial crises evident since 2007 have refocused the debate as to the future structure of the European Economic and Monetary Union (EMU). This article looks at the issue from the perspective of economic history and identifies that current proposals for fiscal union are based on an over-reliance on Optimum Currency Area theory and are not realistic in the current political environment.

In addition, European fiscal rules have become over-complicated, inefficient and open to widespread manipulation. In the medium term, rather than risk the lessening of political commitment to the EMU through divisive fiscal union proposals, the EU should focus on developing unique governance mechanisms that better reflect the current characteristics of the EMU.

In this context, this article proposes four actions to complement existing initiatives such as the Banking Union: (1) simplified EU budgetary rules, (2) the creation of an independent European Fiscal Board to assess and enforce national compliance, (3) a commitment to retaining core national fiscal autonomy with a strict ‘no bailout’ rule, and (4) increased levels of investment through an expanded European Fund for Strategic Investments. Only following the successful completion of these measures should fiscal deepening be discussed at a political level.

Read the full article in the December 2016 issue of the European View, the Martens Centre policy journal.

Eoin Drea Banking Eurozone Macroeconomics

Prime Minister David Cameron’s letter to European Council President Donald Tusk about the renegotiation of the terms of UK membership of the EU shows that he has invested time in trying to understand the perspective of other EU states. This is good. 

That said, the timing of this renegotiation is bad, because the EU has so many other politically difficult problems on its plate just now, problems from which the UK has excluded itself, namely: 

• the refugee crisis and the threat it poses to free movement within the Schengen zone
• the fact that a number of EU states are at risk of breaching the terms of the fiscal compact on debt reduction and fiscal deficits.

A supportive attitude by the UK on the resolution of these EU wide problems would help create the impression that the UK is, potentially at least, in the EU for the long haul, which would make it worthwhile for other members to go all the way to their bottom lines in attempting to meet the UK’s requests.

It is welcome that David Cameron’s letter says that he is open to “different ways of achieving the result” he sets out in his letter. It is also welcome that he seeks to put his proposals in a context of “reforms that would benefit the European Union as a whole”. He further says that it “matters to all of us that the Eurozone succeeds”.

Although David Cameron has expressed similar sentiments himself before, these sentiments have not been prominent in much of the general UK debate on the EU, which has often tended to treat the EU as something alien and a matter of indifference to the UK, which objectively it is not. Occasionally in the UK debate, “schadenfreude” has trumped UK interests.

David Cameron’s approach is shaped by the contents of the Conservative Party Manifesto. It is a response to an expression of identity politics, which is a form of politics on which compromise is inherently very difficult indeed, as we know from Irish history. David Cameron’s letter deals with four sets of issue, and I will deal with each in turn.

ECONOMIC GOVERNANCE

On Economic Governance of the EU, David Cameron  says that: 

• the integrity of the Single Market for non Eurozone countries must be protected
• that non Eurozone countries must not be liable for operations to support the Euro as a currency
• that the financial supervision of banks must remain a matter exclusively for national institutions in the non Eurozone countries and that
• any issues that affect all member states must be decided by all member states.

I am not sure that these issues can be as neatly separated as David Cameron suggests. For example, the bailout of Greece by the EU and the IMF was not just an operation in “support of the euro as a currency”. If Greece had gone under, UK banks would have been hit hard.

Furthermore, it is arguable that, even if it is not in the euro, the UK had a greater obligation to help a fellow EU member, in the situation Greece was in, than had (say) the United States. After all, the UK, even if not in the euro,  as a member of the EU, had agreed to treat economic policy as a “matter of common concern” with all other EU states, including Greece, under Article 121 of the EU Treaty.

Furthermore, the UK has had power to join fellow members in warning member states like Greece if they were deviating from agreed economic policies under Articles 121 (4), and under Article 126 . Non EU states were not in that position. In light of those articles, it is hard to see that the UK, as an EU non euro member, could say it has no more responsibility for helping Greece, than has a country that is not in the EU at all. If the UK wants that to be the position, its role in EU economic governance under article 120, 121 and subsequent articles of the Treaty should be changed. 

David Cameron also asks in his letter that the EU “do more to fulfil its commitment to the free flow of capital”, presumably across the whole of the EU and not just within the Eurozone. That sits uncomfortably beside his insistence that the Bank of England alone be involved in supervising UK banks lending across borders into the rest of the EU, including the Eurozone.

As we in Ireland know, unsupervised flows of capital can contribute to bubbles in another country, and if those bubbles were to burst, none of the countries involved would escape the pain, including the countries whose banks had been lending the money, even if those countries were not members of the Eurozone.

His principle that “any issues that affect all member states must be decided by all member states” is very widely drawn. Few EU decisions affect all members in precisely the same way. This principle could be interpreted to mean that the UK should have a vote on all Eurozone decisions. Virtually all Euro zone decisions will affect the UK to some limited and indirect extent , not least because the UK does so much business with the Eurozone. This is so even though David Cameron insists the UK will not be financially liable for any of those decisions.

In a sense, his request could amount to the Boston Tea Party demand in reverse, namely as  a demand for “representation without taxation”.

COMPETITIVENESS

David Cameron makes an interesting proposal under the heading of Competitiveness. It is potentially a big opportunity for Europe. I hope it will be strengthened and emphasised in the negotiations. His proposal  is that the EU should “bring together all the different  proposals , promises and agreements on the Single Market,  on trade and on cutting regulation, into a clear long term commitment to boost the competitiveness of the EU, and drive jobs and growth for all”.

This idea of a big competitiveness package, as a price for continuing UK membership of the EU, could be used to drive through changes that have been stalled for years by inertia in individual member states.  In Germany, for example, the implementation of Single Market rules is often blocked at the level of the Lander. France is another country that could do more to open its market to EU competition, to the advantage of French consumers.

If the British are to get a credible package on competitiveness, it may be necessary to demand prior enactment package of measures at national level, in all member states, in the same way as the Greeks had to pass certain laws, before they could get access to bailout funds. There is, however, one aspect of David Cameron’s letter which could potentially run directly counter to his desire to complete the Single Market.

This is a proposal he makes under the heading of  “Sovereignty”.

SOVEREIGNTY

Under this heading, David Cameron proposes that a group of national parliaments, presumably a minority, should be able to come together to stop what he calls “unwanted” (EU) legislative proposals.

This idea that a minority could block a majority would alter the entire dynamic of EU decision making. It would make it hostage to the vagaries of national electoral politics in a new and unpredictable way.  We should not forget that Lord Cockfield, the UK Commissioner, would never have been able to create the EU Single goods market, without the majority voting created by the Single European Act.

 his proposal is actually as likely to be used against UK interests as in favour of what the UK wants under the heading of Competiveness. It is easy to envisage such a veto mechanism being used by a sufficient number of national Parliaments of other EU states to block legislative proposals to complete the Single Services Market or the Single Digital Market, both of which David Cameron wants, to protect some national vested interest.

A  solution might be to exempt all Single Market related legislation from this blocking mechanism. Another solution might be to associate all national parliaments with the EU legislative process in a manner similar to the involvement of the Economic and Social Council or the Committee of the Regions, but without creating a new veto point.

David Cameron also wants the UK exempted from the commitment to “ever closer union”. This phrase  has been in all EU Treaties since the UK joined and was in the EU Treaty when the people of Great Britain and Northern Ireland  voted in a referendum to stay in the EU in 1975. Essentially the UK wants to “constitutionalise” the idea that there are two types of EU members: those committed to “closer union” and those who are not committed to it.

This is a formal recognition that there is a “two speed” EU. This idea may be welcome by some big states but not by smaller ones. If Britain is exempted from the commitment to ever closer union, it is not hard to imagine that other EU countries will demand a similar exemption. He says he wants this distinction to be “irreversible”, which implies that a future UK government could not decide to commit itself to ever closer union in future, without getting the permission of all other EU states, by means of a Treaty change, or the amendment of a protocol (which is the same thing legally speaking).

This runs counter to David Cameron’s own expressed wish for flexibility in the UKs relationship with the EU. The notion of legal irreversibility is contrary to the British constitutional tradition itself, which declares that Parliament is not trammelled by external legal constraints. A legal device can probably be found to accommodate this request but it does raise a wider question of whether the UK will ever be satisfied.

The UK already has special arrangements on the euro, on passport controls and on Justice and Home Affairs. The more exemptions it gets, the more exemptions it seems to want. Will this renegotiation/referendum process result in a full and final settlement, or will it just be an instalment This is not a mere debating point. If the UK will keep coming back for more, the EU will never settle down. Indeed other member states may not be prepared to go all the way to their bottom line, if they feel whatever they offer could never satisfy UK public opinion.

IMMIGRATION

Immigration is the area in David Cameron’s letter which has attracted the most comment. There is no doubt that the UK has been more open to immigration in the past than have many other EU states. This is partly because English is a second language for people from all over the world. The restraint David Cameron is proposing will not change that.

Clearly, if one does not like immigration, the fact that English is a second language for so many of the world’s population has disadvantages, as well as advantages. On the other hand, the cost of living in London and the south east of England is already a strong deterrent to immigration to that part of the UK.

David Cameron wants, if the UK remains in the EU, to be able to require that people coming to the UK from other EU states (presumably including from Ireland) must have lived in the UK for four years before they qualify for in work benefits or social housing. If this four year principle is accepted, it could be implemented in all other EU states for other purposes as well.

David Cameron also wants to “end the practice of sending child benefit overseas”, which presumably means that an Irish worker in the UK could no longer get child benefit for his children, if the children are living in Ireland. The principle of not “sending benefits overseas”, if accepted , could conceivably be applied to pensions, which would affect the UK pensioners living in Spain.

If one has to live four years in another EU country to get benefits, access to health services could also be denied to people living in another EU country. David Cameron then acknowledges that these issues are “difficult for other member states”. This is a revealingly narrow way of putting it. In his speech, David Cameron mentions “other member states” but does NOT mention Article 45 of the EU Treaty, which covers free movement of workers within the EU.

Article 45 bans “any discrimination based on nationality as regards employment, remuneration and other conditions of work and employment”. There is no reference in this Treaty Article to any qualifying period of residence to be free of such discrimination. In the UK, tax credit payments are dependent on worker’s hours worked and income, and whether they have children.

So restricting them would amount to discrimination in income, between a UK citizen and  EU immigrant, doing the  same job in the UK.  It would presumably apply to Irish workers in the UK who have been there for less than 4 years. It will be difficult for an Irish Government to consent to this. I would have expected David Cameron to have directly addressed the interpretation of Article 45 of the EU Treaties, rather than pretending the difficulty is with “other member states”. By targeting in work benefits so explicitly, David Cameron has left himself very little room for manoeuvre in light of the provisions of that Article.

Indeed there were reports on the BBC this morning that the UK Government is now considering applying the 4 year rule to UK residents as well, which could mean that young, new UK born entrants to the UK labour market may not qualify for in work benefits until they have been working for 4 years. That would create a whole new swathe of people inclined to vote for the UK to leave the EU.

CONCLUSION

This negotiation will not be easy. Sides have already been taken in the UK , regardless of what may be conceded in response to David Cameron’s letter. The impact on the EU itself, of a possible UK exit, is incalculable. So also are the effects of the precedent the UK is setting, and the consequences for the EU, of conceding some the UK requests. Solving this politically generated problem will require statesmanship and imagination of a very high order indeed.  Keeping the UK in the EU is a vital matter for Ireland and for Europe. 

Speech by John Bruton, former Taoiseach and former EU Ambassador to the United States at a seminar on “Free Movement and Labour Mobility in the European Union” organised by the Institute of European Democrats on Friday 13 November 2015.

John Bruton EU Member States Euroscepticism Eurozone Leadership

The present Greek debacle is the result of a clash of political cultures.

On the one hand is the culture of the European Union, where every decision has to be mediated through complex institutions representing 28 different countries, each with its own political culture, and then often has to win the assent of the European Parliament and of an independent European Central Bank. Theatrical gestures and moments of brilliant eloquence count for little in this world. Building a good track record, with good civil service staff work to back it up is what counts in the EU political culture.

EU bailout decisions also have to be approved by the IMF, a global body, most of whose members and clients are far poorer than the Greeks. This creates an additional layer of interests which Greece must try to satisfy, additonally to its EU partners. In this setting, credibility and patience are vital to success. The new Greek government did not have patience and soon it lost credibility as well.

In stark contrast with what was needed, it seems to me that the Greek Government is made up of people who come from a revolutionary tradition, who believe that progress will come from a harsh rupture with the past, and whose proponents envisage a nationalist or socialist utopia once that rupture is complete.

The Greek government are also people who have little or no previous experience of government. They have thrived politically by agitating against the existing order, without the necessity of explaining how things would work after they obtain power, and how they would survive and govern in the complex interconnected reality that is the global economy of today.

That the Greek electorate would elect such people to office is explained by the desperation into which they have been led by the irresponsible policies pursued by successive Greek governments since the 1980’s, who tried to win the votes of Greeks by promising them a standard of living that was not matched by their productive capacity, and by the mistaken decision to take Greece into the euro before the results of these bad policies had been properly rectified. 

The problem is that the activities of the new government made things much worse than they were when they took office.

By creating doubt about whether they would honour the debts incurred by their predecessors, the new government created a crisis of confidence, and this loss of confidence led to a suspension of normal commercial activity. By looking for debt relief before reforms were implemented they put the cart before the horse.

The underlying problem of Greece is a lack of productivity and export potential, but the Greek government, and to a great extent the EU authorities too continue to ignore this. Greece’s productivity problem will take years to solve, not least because Greece is an elderly society. The structural reforms urged by the EU will help, because they will clear the clogged arteries of the Greek economy and allow talent to be reallocated to where it can do something productive. But the ageing of the Greek society will remain an intractable problem.

As a result of the drama generated by their new Government, Greeks, instead of focussing on ways to invest to make more money, became in recent months obsessed instead with protecting what they already had. Whereas the economy was on a path towards modest growth when the old government left office, it quickly plunged back into recession as money was withdrawn from the Greek banks, thereby further weakening Greece’s ability to meet its ongoing expenses, and to pay its debts as they fell due.

The timing of the Referendum, AFTER Greece has already run out of money, and on a proposal that has already been withdrawn, could not be worse. It compounds the panic and uncertainty. It is probably in breach of the Greek constitution. Apparently the Greek constitution does not allow referenda on fiscal issues, and the bailout offer contains many elements that are fiscal.

If ever there was a case study that shows how important it is to have political leaders who understand and face up to their responsibilities, and who deal with the world as it is rather than as they might wish it to be, it is to be found in Greece today. The lessons for Ireland are too obvious to require to be spelt out.

John Bruton EU Member States Eurozone Leadership

Paul Krugman, in the New York Times, urges the Greeks to vote “No” in the referendum next Sunday. So does Joe Stiglitz in another article in the Guardian. Is this serious advice, or an unhelpful extension to Europe of an ongoing American polemic?

Paul Krugman says the Euro was a “terrible mistake” because he claims it failed to insulate the public finances of the states of the euro zone from bubbles in particular countries, like he says the US system does. In fact, the US only does this to a limited extent, and, unlike the EU, it has no general bailout fund  for states.

 If I recall things correctly, our present collapse in confidence originated in the United States, in a housing bubble in a small number of US states, that eventually engulfed the whole world! The US system did not prevent that.

 Puerto Rico, a US dependency which is in the dollar zone, has got itself into a Greek style debt trap, without the US monetary union, which is much older and stronger than the EU one, being able to prevent it.

 Krugman says that “most of what you hear about Greek profligacy is false”.

 He makes this bizarre claim on the basis that Greece has made cuts and tax increases since 2010. He completely ignores the profligacy, poor tax collection and the debt accumulation that went on for decades before that, when Greece erected a completely unsustainable pension regime, on the strength of borrowed money.

He says that since 2010, the Greek economy has collapsed because of “austerity”.

He fails to outline what the Greeks might have used for money since 2010 if, as he seems to advocate, they had continued with their previous “non austere” spending policies. They would not have been able to borrow the difference on commercial markets. Where would they have got the money? Just because a country is in the eurozone it does not mean it can have an unlimited call on the taxes  or loans of other euro members.

While there is more to do, like euro area wide deposit insurance, the EU has remedied many of the initial design flaws in the euro, something Paul Krugman does not acknowledge .

He says that “even harsher austerity is a dead end”, as if cuts and tax increases were all that the EU has been urging unsuccessfully on the Greeks.

Product and labour market reforms, opening up the professions, better tax collection, and privatisations, have been an important part of the recipe urged on Greece by the EU, and these would greatly improve the allocative efficiency of the Greek economy, and promote growth. Greece needs to move its human resources out of unproductive activities, into areas that will earn money from abroad and the EU reforms will assist that.

Another Nobel Prize winning economist, Joe Stiglitz, in his article in the Guardian also calls for a “No” vote, but is more extreme.

He claims the eurozone was ”never a democratic project”. He seems to have completely forgotten that the Maastricht Treaty, which created the legal basis for the euro, was approved by the elected parliaments of every state that is currently a member. It was approved in referenda in several countries, including France and Ireland.

Furthermore, each of  the Eurogroup of Finance Ministers, who make all the key decisions, represent democratically elected governments.

Greece was not forced to join the euro in the conditions and at the time that it did. This was a free choice of the Greek government.  Now, governments everywhere would sometimes like to repudiate some decisions of their predecessors, but if that luxury is to be afforded it would destroy the basis for credit and inter state relations.

He makes a more substantial point when he says that a good deal of the money lent to Greece by the taxpayers of other EU countries and the IMF has gone to help them pay debts they owe to private creditors. But he fails to point out that, unlike those of Ireland and Portugal, Greece’s private creditors have been obliged to take a haircut.

It is true that the money from the EU has  been used in part to repay banks money they had put into Greek government bonds. Some of these banks were indeed French and German. But some were from outside the euro zone altogether, including from Professor Stiglitz’s own country and from the UK, in one of whose newspapers he is writing.

Back in the 2010/2012 period, thanks the crisis which started after Lehman Brothers went south, there was a legitimate public interest, a public good, in preventing a run on ANY of these banks. 

There remains a justifiable argument, however, that it was unfair that the taxpayers of a few countries should now be bearing a disproportionate share of the cost of this public good, which the whole world has enjoyed.

 Yes, the taxpayers of the rest of the euro zone should, in moral terms, bear more of the burden.

 But if that is so, so also should the taxpayers of non euro zone countries like the US and the UK, whose banks were also saved when Ireland, Greece and Portugal got help . 

Why should German taxpayers, whose personal incomes have grown more slowly than elsewhere in Europe, and who face substantial extra costs in the near future due to ageing, be the focus of all the wrath?

But then neither Professor Krugman, nor Professor Stiglitz are writing for German, Slovak, Latvian public opinion.

They are writing in journals, published in countries, whose governments are not being asked to write more and more cheques for a Greek Government, that seems to blame everyone else for home grown problems.

There is, I believe, an argument for a comprehensive debt conference to consider whether the burdens of dealing with the aftermath of the Lehman collapse, have been fairly distributed between the governments of the world.

But the convening of any such conference, and eligibility for any help from it, should be something that might happen five years from now, and be conditional on growth promoting reforms, and budget balancing, already having been fully implemented by governments seeking debt relief from it. Perhaps a Third Party might put such a proposal forward, as a way of getting out of the terrible situation Greece is bringing upon itself.

John Bruton Crisis Economy European Union Eurozone

In an act of irresponsibility and opportunism, Alexis Tsipras put on the shoulders of the Greek people the burden of the decision about the country’s destiny. The referendum, scheduled for next Sunday, 5 July, rests on shaky grounds for several reasons.

1. Is it legal? It is questionable whether it is in conformity with the Greek Constitution as it concerns an issue of fiscal economics. There are also serious procedural deficiencies.
2. Is it late? The referendum is untimely as it will be waged five days following the date on which Greece failed to make a debt payment to the IMF. The Tsipras government has planned to receive the people’s verdict when it might be too late.
3. Is it fair? The Greek people are asked a very cunning question. They are called to say whether they approve or not a program consisting of a series of austerity measures, following five years of recession. The ‘Yes’ vote is set to signify approval of some version (as negotiations were never completed) of the bailout program. The ‘No’ vote, that carries the endorsement of the government, indicates disapproval for the program and, allegedly, nothing more. Although the crux of the matter is the country’s position in the Eurozone, Tsipras deceitfully tries to conceal or downplay the true consequences of the people’s choice.

The Greek government has admittedly committed a series of mistakes since its election in January. To be fair, the creditors too have underestimated the socio-economic consequences of a long array of austerity measures that have been applied since 2010. There is widespread ‘austerity fatigue’ in the country and despair for the lack of a clear vision for the return to growth.

Yet, the overwhelming majority of the Greek people unequivocally supports the country’s EU membership. The most vicious part of this campaign is that the government uses a deeply divisive nationalistic rhetoric that seeks to alienate and separate the Greek from the European identity. But this is a nonstarter.

• Are the ‘Yes’ voters less Greek?  On the contrary. In the referendum, most Greeks are expected to vote ‘Yes’ in order to protect their country’s place in the European family. In an unprecedented demonstration of wisdom and bravery, thousands of low-income pensioners and employees may vote themselves (in the place of their government and contrary to the latter’s suggestion) in favor of a bailout plan containing measures that will affect their lives directly.
• Are the ‘No’ voters less European? Far from the truth. Those who will vote ‘No’, do not collectively form an anti-European constituency. Many pro-European forces may buy into the rhetoric of Tsipras that Greece’s position in the Eurozone is not in jeopardy and cast a vote for ‘No’ out of fear of prolonged austerity.

The outcome of a referendum revolving around a complex and nastily articulated question that additionally takes place within just a week in a climate of fear and uncertainty is hard to predict. Although the country’s European future is at stake, we should not hastily read the referendum result as a vote containing a genuine answer to the question, in or out of the EU. Remember, the government has not dared to articulate such a clear-cut question.

Irrespectively of the referendum outcome, the EU is urged not to turn its back to the Greek people. For every Greek, being European is not a matter of choice. It is self-referential. And the EU should not lose sight of the insidious way Tsipras attempts to extract the ‘No’ vote. In all circumstances, the EU partners should be ready to help the country to overcome a hardship that has lasted for too long. If the ‘Yes’ vote prevails as I am expecting, the referendum will be studied in the future as a paradigmatic case of a demos that defied its government in times of crisis and put its European identity above and beyond any other discussion. 

[Photo source:www.bloomberg.com]

Nikolaos Tzifakis Crisis Democracy European Union Eurozone

The response to Syriza’s election in Greece has been marked by much comment on the impending conflict between the new government and the EU, European Central Bank (ECB) and the International Monetary Fund (IMF).  ‘Greece and global creditors dig in for fresh struggle over austerity’ headlined the Financial Times.  In this narrative, Syriza in Greece, Podemos in Spain and Sinn Fein in Ireland are new forces in European politics, a left wing phalanx with a harder edge and a radical path to economic rejuvenation.  This path to salvation will be achieved, in the short run at least, by increasing public expenditure (everything from pensions to salaries) and casting off the perceived shackles of the existing agreements with the EU, ECB and IMF.

However, as noted recently by my colleague Angelos Angelou, Syriza itself is characterised by deep rooted divisions over its long term economic goals.  The recent moderation of Alexis Tsipras is matched by a substantial internal opposition who view the Euro (and the EU) as symbols of capitalist oppression and real impediments to the creation of a fairer Greek society.  However, now confronting the realities of power, Syriza is faced with a fundamental choice – engage with the wider economic system as it is, or attempt a full blown restructuring of Greek society based on isolating Athens from her European partners.

These internal contradictions within Syriza also form part of the wider strategic shift to left-wing political movements in many member states, particularly in those states subject to bailout programmes since 2009.  For these movements (which are more diffuse than traditional political groupings and generally bring together a diverse range of left wing interest groups) the campaign to end ‘austerity’ represents an opportunity to refashion classic socialist (and even communist) mantras for the twenty first century.

This strategic shift to the left does not just represent a campaign against the bailout agreements  Rather, movements like Syriza are acting as lightning rods for public discontent at dire economic conditions, mistrust in centre-right political elites and a sharp decline in the public’s belief in the EU as a mechanism for achieving higher standards of living.  The populist appeal of Syriza is based on the classical socialist approach of more public spending.  Apart from a laudable commitment to tackle tax evasion the Thessaloniki Programme is very high on aspiration, but very short on hard economic realities or definite timescales. 

For the centre-right in Europe the challenge now is to provide a more coherent vision of the social market economic model in the twenty first century:  An updated model that places private enterprise at the centre of Europe’s return to growth.  A model that gives all people – from start-ups to well established firms – equal opportunities to succeed and flourish.    And of course, we need to keep working on the most effective way to provide countries in distress with a sustainable reform path based on our guiding principle of solidarity.

Eoin Drea Crisis Elections Euroscepticism Eurozone Growth

 the pension reforms and tax system changes made. These policies would not be advisable in the country’s current economic environment. In fact, they are the same measures that got Greece into trouble in the first place, risking the deepening of the country’s debt burden and economic and social fragility. Pardoning the debt without changing the economic fundamentals will lead Greece into a next crisis soon.

The New Democracy’s programme proposes to continue with economic reforms to boost the country’s growth and competitiveness. Granted, many argue that the party could have done more to reduce the burden of the crisis on the private sector and to protect SMEs from going bust by improving the framework conditions for businesses to be able to continue operations in more efficient ways. However, their promise to support economically sound measures should be given an act of faith.

Greece will stay in the Europzone; sceptics will be proven wrong

Greece needs to elect leaders that have the credibility in front of Member States and towards private investors to govern the country responsibly. If Syriza wins, there is no certainty that the country stays in the Euro area, in spite of what it promises in the elections. Syriza will not be able to deliver only the attractive part of its programme. If they are left to apply economic utopia, people will burden the cost. Since their programme is not realistically able to bring the country back to growth, Greece will become even less credible for international lenders and unattractive to investors.  

With the economy in its current state, it is unlikely that a Grexit would devalue the country’s debt; it might actually increase it. An exit of Greece from the euro would create even higher political instability, significant market turbulences and would actually increase borrowing costs for Greek businesses. Ultimately, the society as a whole would have to bear further costs and the sacrifices already made by the people are put at risk.

Therefore, in spite of what Eurosceptics believe, it is in Greece’s interest to stay in Eurozone. Given the current debt situation topping 175% of GDP, the re-scheduling of the debt repayment from 30 to 50 years would be a possible scenario under these circumstances. In addition, Greece would be on track to finalise the current bailout programme and get ready to enter international markets with more favourable interest rates in the longer term.

The population needs to be better informed about the possible consequences of voting for Syriza. Not taking the route of structural reforms, as Syriza proposes by reversing the already achieved results, poses a high risk to the country’s future welfare.

Siegfried Mureşan Elections EU Member States Eurozone Political Parties

Greece is heading into what may well be its most important election this decade. I think the real difference between the two major Greek parties vying to lead the next government, New Democracy (ND) and SYRIZA, is not, as often assumed, whether Greece should continue with the economic oversight programme drafted by the Troika. Rather, this is but a symptom of their underlying fundamental divergence in terms of how they perceive European politics and the way they evaluate Greece being a part of the Eurozone.

The party that is currently leading in the polls, SYRIZA, offers a complicated narrative. Given the fact that it began as a coalition of parties positioned at the extreme left of the political spectrum and that it could count on only 4-6 % of the vote before the crisis, this is to be expected. The party has undergone a radical structural and political change the last three years and yet remains different from the monolithic parties that we usually observe in Greece.

There are two observable and differing narratives present within the SYRIZA organisation.

Firstly the narrative sponsored by the internal opposition, meaning the group of party officials that is still very much attached to the idea of a socialistic transformation of the state and society. For these party members, SYRIZA, on its way to power, must keep its radical left credentials intact. Hence, a government led by SYRIZA should inevitably apply policies that are destined to achieve a general redistribution of wealth in favour of lower income earners. Moreover if the Troika is unwilling to accept such a programme, then it is inevitable that a SYRIZA government will break loose from the countries prior commitments leading Greece out of the Eurozone.

All in all, for a substantial minority of SYRIZA’s membership, the Euro is a symbol of capitalistic oppression- a barricade that hinders Greece’s path towards a more just and equal society. Therefore if this hypothesis is ‘proven’, after the elections, then SYRIZA’s left platform will certainly suggest that the country should break ranks from the Eurozone establishment.

On the other hand SYRIZA’s ruling majority is structured around the party’s president, Alexis Tsipras. This faction has been at the forefront of the effort to moderate the party’s position and broaden its base of support. SYRIZA’s leadership has tried to water down its leftist rhetoric by taking moderate positions regarding public order and national security. Nonetheless, SYRIZA’s stance towards the EU remains quite radical and utopian.  For SYRIZA’s ruling officials, the EU is considered an entity that needs to be transformed radically in order to serve the people of Europe. Thus they see their ascendance to power as the ideal opportunity to initiate a popular wave that will transform the European establishment.

SYRIZA sees parties like Podemos in Spain and similar social movements in Italy as the first signs of a new order that will start taking over Europe after Tsipra’s election as Greek PM. Driven by this mindset, SYRIZA’s official political stance is that Europe’s popular dynamics will effectively abolish the current austerity programs and that the governance of the Eurozone will be effectively reoriented towards the goal of a fairer society. Within this context, SYRIZA believes that dilemmas like whether Greece will sign a new memorandum in order to stay in the Eurozone will become irrelevant.

The contradictory narratives inside SYRIZA have become more obvious as the election campaign has unfolded. The presidential team around Tsipras has spent much time and energy, during the campaign month, on trying to water down the rhetoric of the most radical members of the party. Given that there are only a few days left to the elections, such an incoherent narrative is very problematic. A party that may soon be called to form a government and take difficult decisions is expected to be more comprehensible when it comes to basic questions of economic and monetary policy. All this is to say that SYRIZA is failing to answer the billion dollar question: what will happen if the social movements, that they predict will unfold after Tsipra’s election, do not surge to power across Europe?

Then Tsipras will find himself having to choose between two distasteful alternatives. He can renege from his previous commitments and sign up for a renewed round of austerity and economic oversight – triggering a series of intra-party rifts that may lead to his eventual ousting from power. Or else, he must act unilaterally and declare his disobedience to the agreements previously signed by the Greek state.  Such a decision would, de facto, lead Greece out of the Eurozone and into economic demise. All in all SYRIZA, especially its ruling elite, is once again faced with a fundamental question that has occupied the Left for a prolonged period of time: what if the history is not on their side after all?

Moving forward, the only alternative to SYRIZA and the second party in the polls right now is the centre-right New Democracy (ND) (the Greek EPP member party and the majority coalition partner in government). ND’s position on the above issues is far simpler and clearer.  For them having the Euro is not only an economic and political necessity but also an existential one. Thus ND accepts that Greece may have to accept some type of economic oversight in order to ensure its place inside the Euro. All in all the main centre-right party in Greece sees the euro and the country’s European status as  non-negotiable assets that grace the country with prestige and benefits and set it apart from the rest of the Balkans.

Such a perception is not limited to the centre-right but shared by the majority of the Greek voters. Although this may not be the major criterion that will decide the winner of the elections it is for sure that the next government will have to guarantee the country’s position inside the European edifice. Whoever fails to do so will certainly have history against him.

Angelos Angelou Elections EU Member States Eurozone Political Parties Populism

According to budgets they published this month, France and Italy are failing to meet the Euro area requirements for reducing Government debts and deficits to sustainable levels. Italy has given an indication that it will meet the European Commission half way and make some  further adjustment, but France is taking a harder line.

If France, as a big country making up 20% of the Euro area’s  GDP, were to be exempted from the EU debt and deficit rules, in ways that were not open to smaller  euro area countries, this would do great damage to the credibility of the euro, and  could drive up to the interest rate euro area governments must pay to borrow. It is thus very important to all EU states that France overcomes it’s problems.

In recent years, France has lost competitiveness, and  is  running a balance of payments deficit. In other words its people are spending more abroad, that than they are earning from abroad.

The French economy is projected to grow by only 1% in 2015, as against a projected growth of 2% in Germany and Spain, 2.7% in the UK, and almost 3% in Greece and Sweden.

The loss of competitiveness of France is due to several factors

   +  Fewer people  are working fewer hours for fewer years. For example, of people between 55 and 64 years of age, only 44% are  still working in France, as against 73% in Sweden, 65% in Japan, 60% in the US and  58% in the UK.
   +  There is substantial youth unemployment, because young people find it hard to get on the career ladder because of an over regulated labour market that protects existing jobs at the cost of discouraging the creation of new ones.  Last year 80% of all new jobs created in France were on temporary contracts.
   + The bigger a company grows, the more rigid are the rules that apply to it in terms of the right to hire and fire.  So, while France has some of the most successful big companies in the world, it lacks a large corps of middle sized export oriented companies, like Germany has.  90% of all French companies have fewer than 10 employees and they have strong incentives to stay small.
   + Monopolistic practices exist in a number of sectors controlled by the state and in some private professions. The vested interests protecting these monopolistic practices are very strong. These inefficiencies contribute to extra costs and  loss of exports by French companies.

The current Socialist Government of Manuel Valls was making a serious effort to tackle these underlying weaknesses, but that the dividends of some the reforms, while very substantial, may be slow in coming, perhaps not in time for the 2017 elections.

There is a risk Prime Minister Valls will lose his majority because of defections in his own party. Meanwhile the opposition UMP is split on personality questions. The Front National is making huge strides in the polls, but its economic policy would break up the EU and introduce heavy state controls which would be incompatible with France’s global economic success. Meanwhile business leaders are afraid to speak up about the global realities France must face.

Faster growth is crucial, and the margin between success and disaster is very narrow.  If the French economy grows at only 1% per annum over coming years, France could be on the  road to ultimate default and a social crisis, but if it can manage a growth rate of 1.6% or better, it will work its way out of its difficulties.
The stimulus for French growth will have to come to come both from inside and  outside France. French people save a lot, and if they could get the confidence to spend a little more of their savings, that would help. Likewise if Germany, which has been neglecting its infrastructure, stated to invest more that would help French exports.

The trouble is that French and Germany economists and politicians have very different intellectual assumptions, and dialogue between them can become a dialogue of the deaf. German economists may accept the Keynesian idea that one should spend extra in a down turn but they doubt if the other, essential, side of Keynes’s theory-running surpluses during the good times is politically realistic, and the historic evidence supports them.

Meanwhile, partly because it was wise enough to stay out of the Iraq debacle in 2003, France alone of the western powers, has the confidence to intervene directly in places like Mali, Libya and the Central African Republic.

France retains a strong nuclear deterrent and a civil nuclear industry that does not do the sort of climate damage that other EU countries’ energy industries do.

Politics are important. Its Presidential system enables France to be strong and decisive in international affairs.
But that strength does not extend to domestic economic policymaking, where factionalism and introspective thinking are preventing the creation of any kind of “Grand Coalition for Reform”, of the kind that has enabled countries like Germany and Mexico to deal decisively with long standing blockages to growth. France needs a new politics, even more than it needs a new economic model.

John Bruton Crisis Economy EU Member States Eurozone

Italy is experiencing the first tepid signs of recovery after years of pain and crisis. According to the IMF, Italian GDP will increase by 0.6% in 2014 and will supposedly reach 1.1% in 2015. Nevertheless, all that glitters is not gold. Unemployment is still high (currently 12.4%) and public debt in January reached a frightening height of 2.089,5 million, more than 133% of GDP. According to Unioncamere, the organization that supervises the Italian Chambers of Commerce, in the first three months of 2014 about 3,600 businesses declared bankruptcy – which equates to an average of forty per day, two per hour.

The decline of the Italian economy started at the end of the 1970s, well before the launch of the monetary union in 1999. The single currency on the contrary gave Rome greater room to manoeuvre by giving Italy access to cheap credit. Instead of using the euro dividend to restructure the economy in the first year of the new millennium the parties in power resorted to an increase in government spending – about €141.7 billion between 2000 and 2010, an increase of 24% – this created a false sense of growth while Italian industry was losing competitiveness in the face of growing global competition. Currently, public spending in Italy accounts for almost €800 billion, which is equivalent to about 50% of the GDP.

In the summer of 2011 the ECB clearly identified the woes of the Italian economy and urged the Italian government to take “bold and immediate action” to balance the budget by reducing taxes, cutting government spending and liberalizing the job market by making it more flexible. However, more than two years later almost none of the abovementioned problems have been addressed.

On the contrary, the incredible tax rises (the fiscal pressure has increased from 41.9% in the early 2000 to 44.1% in 2013) coupled with almost non-existent spending cuts in recent years was a mortal blow to the real economy and plunged the country into recession. According to the World Bank Data, the Total Tax Rate (the amount of taxes and mandatory contributions payable by businesses) in Italy reached the frightening level of 65.6% in 2013 compared to 49.4% in Germany, 34% in the UK and 25.7% in Ireland. If we couple high taxation with slow justice and inefficient bureaucracy, it should come as no surprise that Italy falls behind other big economies, according to the Doing Business ranking – it is in 65th position compared to France 38th and Germany 21th.

After the failure of the previous governments, great hope has been invested in Matteo Renzi, former mayor of Florence and head of the current coalition government. It’s still questionable whether Renzi will be able to reign in the opposition inside his own party, the Democratic Party, and make the necessary reforms. Any action to unravel the current economic crisis will face strong resistance from bureaucrats inside the ministries, who may fear losing their jobs, and from the trade unions, who still enjoy a privileged relationship with some key figures of the ruling élite and who will almost certainly use their power to sabotage the reforms. One example of this is the recent measures aimed at liberalizing the job market, the so called Jobs Act, which faced strong opposition from the leftist side of the Democratic Party that is making every effort to stop or radically change the reform process. Therefore, the chances of success are low.

A failure by the current government would embolden the populist movements and political parties who blame the EU institutions, the common currency and the “eurocrats” for the economic decline. For instance the Five Star Movement, despite being able to uncover and denounce bad practices and corruption cases in politics, still lacks a strategic vision of the future and tends to be easily influenced by conspiracy theories which are of little use in interpreting, let alone solving, the current problems.

Every step to embrace change is going to be delicate and probably painful in the short term. Furthermore, it’s not going to succeed without a clear long-term plan and a new social contract between the citizens, the economic actors, the political élite and the EU institutions. Whoever is at the helm of the country during the current tempest needs to have exceptional leadership qualities and great courage to lead the country towards a better future without being afraid to challenge potential enemies along the way and of opposing populist tendencies for the sake of Italy’s future.

[Photo: European Parliament; Flickr]

Davide Meinero Crisis Economy EU Member States Eurozone Leadership

As the eurozone starts to emerge from the deep financial crisis of the last three years we should maintain a sense of economic urgency. The fact that Europe had a growth problem before the financial crisis was common knowledge. This is still the case. The growth trend, in total factor productivity, has been negative for quite some time and the performance of the European Union’s economy relative to the United States’ economy has been deteriorating for at least twenty years.

This is all the more striking in light of the fact that the EU has undertaken a number of growth initiatives and reforms since 1992, which promised to deliver a significant growth boost, as well as welfare gains. Does this mean that structural reform has not worked in Europe and that some other factor must explain why we still have a growth problem?

I was recently asked to answer this question. My answer was simple: structural reform must be supported and promoted, otherwise it will fail to deliver. It is this element — the political and institutional framework for reform — that we need to focus on as we return once more to Europe’s growth puzzle. The best example we have of structural reform in Europe, the reform agenda of the last ten new member states, was actively promoted by institutional arrangements whose main goal was to expand the policy range of governments during the reform process.

In brief, there is an obvious contradiction between affirming the crucial role of structural reform for economic prosperity while doing far from enough to create the right framework and the right instruments to support and encourage it.

Often structural reform is so difficult because it pits governments against organised interest groups that have a lot to lose from a more open and competitive economic environment. Other times, severe financial constraints force governments to undertake reforms in less than optimal conditions and may even render them entirely unfeasible. Clearly the best way to involve national stakeholders such as social partners and national parliaments is to smooth the rough edges around structural reform and make it much easier to carry out than it is at present.

The good news is that an increasing number of people in Europe have come to realise that there is a better way. Both the European Commission and Council have put forward proposals that aim to mobilise the public for reform, strengthening the hand of governments against organised interest groups and providing financial support where it is needed.

In its December meeting the European Council defended the need for a system of mutually agreed arrangements and associated financial support mechanisms designed to support a broad range of growth and job-enhancing policies and measures. This was a good start, but the conclusions did not sufficiently emphasise the structural reform element. This is above all a political issue. Structural reform partnerships are elements of what I would call a political union. They would help countries become politically closer, allowing them to overcome social and political standstill in order to learn from each other and from the policy dialogue going on between them. Political fragmentation (by which I mean complete path dependence, the inability countries have to break from their habitual way of doing things) is just as dangerous as financial fragmentation.

At the current moment we face a paradoxical situation. Either structural reform is implemented in an emergency, when the right conditions for it are mostly absent, or then it is simply postponed. These structural reform partnerships would introduce a much needed preventive logic into European economic policy making. It makes little sense to wait for structural economic problems to develop into a fully-fledged economic and fiscal crisis before putting together the instruments and political will to address them. At the same time, favourable conditions for reform cannot be wasted if we want to seriously tackle Europe’s growth problem.

[Note: a previous paper on how to create the right framework for structural reform can be found here: http://ces.tc/1fLa7nJ ]

Bruno Maçães Crisis Economy European Union Eurozone Macroeconomics

To many observers outside of Brussels the recent ratification of Banking Union by the European Parliament represents the final step in the EUs fractured response to the economic crisis. To some, the Banking Union, as is now being implemented, represents nothing more than a superfluous project which will make no practicable difference to weaker member states faced with collapsing banks in the future.

However, as noted by Geeroms and Karbownik (2014), the economic consequences of a euro zone without a Banking Union are significant. They illustrate that a Banking Union will help ensure the long term sustainability of the euro through a mechanism for dealing with asymmetric shocks. Citing the US experience they note that a Banking Union is a more important absorber of economic shocks than a fiscal union.

In this context, the development of the ECB as a single banking supervisor will play a key role in shaping the euro zones long term financial architecture. Although arguments continue as to the actual robustness of the forthcoming stress tests, the very existence of such a supervisory framework has already had an impact on banking operations. The raising of additional capital by many banks has been complemented by the raising of statutory capital requirements by national authorities. The ‘coco’ bond market (i.e bonds that either convert to equity or simply write down investors’ principal when a certain threshold is reached) has expanded dramatically as banks seek to absorb losses while simultaneously increasing their capital reserves.

Banking Union, specifically the creation of a meaningful European banking supervisor, has shown that financial regulation can have a direct impact on how major financial institutions operate. In this context, at least, it is clear that financial regulation can have a role in ensuring that the weak regulatory practices followed by Ireland and other member states in the past will not reoccur in the future.

However, an overlooked aspect of the European Parliament’s recent legislative package concerns the imposition of strict rules on high frequency traders (i.e. financial traders that use sophisticated technology to execute orders in fractions of a second). This practice has been the subject of recent controversy in the US where characterisations of these traders as ‘flash boys’ has been accompanied by serious accusations that such trading allows better access to information, thereby prejudicing traditional investors. These accusations are currently under investigation by relevant US authorities and follows the so called ‘flash crash’ in 2010 when a sudden drop in the value of the Dow Jones was at least partially attributable to high frequency trades.

The recently passed EU legislation also aims to prevent a repeat of these problems in Europe. Commissioner Barnier has noted that the recent regulations are among the strictest set of rules for high frequency trading anywhere in the world. Such rules will serve to protect the integrity of the European financial markets while maintaining the effective use of technology in financial market innovation. Combined with the coming into operation of the resolution mechanism of the Banking Union and the ‘bail-in’ concept regarding failing banks, the EU has significantly strengthened consumer (and national government) protections against collapsing financial institutions.

Financial regulation may be an overused term in the post-2008 political landscape, but the EU – through its recent regulatory package – has ensured that the mistakes of the past will stay consigned to history as Europe continues to build a stronger and more efficient regulatory environment.

Eoin Drea Banking Economy EU Institutions Eurozone

In 2001 the well-known American economist Rudi Dornbusch summed up the attitudes of U.S. economists to the euro with the phrase “It can’t happen, it’s a bad idea, it won’t last”. For Dornbusch, as for many economists at that time, the euro represented a misplaced political project without the required economic rationale. The outbreak of the global financial crisis in 2008 at first seemed to corroborate Dornbusch’s negative assessment of the euro’s prospects. It has added to populist arguments that the euro is reducing the competitiveness of national economies and is somehow contributing to the difficult economic conditions facing member states.

However, these arguments fail to recognise the real achievements of the euro since its introduction into public circulation in 2002. In 2014 the euro remains an enlarging global currency with an important role across the financial markets. In the period since the outbreak of the financial crisis in 2008, the euro and European Monetary Union (EMU) have provided a framework for supporting struggling economies while putting in place an institutional framework designed to strengthen the economic co-ordination of member states. Political parties advocating a euro breakup remain in a minority across euro zone members.

Overall, populist rhetoric against the euro are fuelled by frustration at the slow pace of institutional reform within the European Union (EU) rather than entrenched public opposition to a common currency. The debate on the euro in 2014 needs to be moved from a static, ahistorical analysis of the weaknesses of EMU to a forward looking debate on banking and currency structures in a post-crisis environment.

The actions of the European Central Bank since 2011 have been vital in convincing the financial markets that the EU will act to establish an institutional architecture capable of strengthening EMU. Although significant achievements have already been made in this context, particularly with regard to budgetary and economic surveillance processes, much more work remains to be completed.

In the short term it is vital that the first two pillars of a robust banking union – a single European banking supervisor and a single mechanism for dealing with failing banks – are both brought into operation as dual supports to the euro. Any delays beyond the end of 2014 in implementing a mechanism for dealing with failing banks will increase market uncertainty, reduce private sector investment and act as further drag on employment growth. Internal EU disagreements as to the exact structure of a bank resolution mechanism should not be allowed to distract from the imperative of acting speedily to introduce such a mechanism.

The history of monetary unions, particularly in the United States, highlights that institutional reform (and policy innovation) is a required element of responding to a banking crisis. In this context it is up to the EU itself to meet the challenges of monetary and banking reform. If this is successfully progressed in 2014 Dornbusch’s negative assessment of the euro’s prospects will be long forgotten.

Eoin Drea Banking Economy Eurozone Macroeconomics

Speech by John Bruton, Former Prime Minister (Taoiseach) of Ireland (1994 to 1997), to a meeting of Zhejiang Chamber of Commerce at the Guangzhou Baiyun International Convention Centre, at 9am on Sunday 1 September.

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A COUNTRY TRANSFORMED

The last time I was here in Guangzhou was in 1978 when, as a relatively young member of the Irish legislature, I came here to observe the beginning of the modernisation of China , under the leadership of the late Chairman Deng.
My impression, at the time, was that everybody travelled by bicycle, and wore uniform clothes. The sound of China for me, was the tinkle of a thousand bicycle bells. China struck me, then, as a sensibly frugal society, which let nothing go to waste. There was a sense of order, a sense that people knew where they were going.

I also found a people who were was immensely welcoming towards a European like myself, who came from a continent whose interactions with China, over the previous 150 years, had often been marked, on the European side, by exploitation and racism.
I even saw the remnants of the European concessions here in this city, where, until 1949, European nations had applied their own rules, even though on Chinese sovereign territory. In the French concession I came across a disused Catholic church, that had been converted into a clothing factory. I sometimes wonder if it has since been restored to its former use.

I also had a strong sense, then, that China was a society on the move.

Now, 35 years later, I am back in a very different city. In one of the great commercial centres of the world, to see the results of the modernisation initiated 35 year ago.

Most people in the west did not really understand what China was doing then.

THE FOUR MODERNISATIONS

Many may have thought that the Four Modernisations were only rhetoric.

I came across a phrase recently that will probably be familiar to many here, that sums up the Four Modernisations policy initiated here in 1978.

It was that the country was “wading across a river, by feeling for stones underfoot”.In other words, it was a policy of experimentation, of trial and error, of allowing mistakes to be made, of trying different approaches in different regions, and allowing competition between the different approaches and the different regions.This flexibility explains the difference between Chinese and Soviet economic policy at that time, and explains why the first succeeded, and the other failed.Indeed, the strength of the western capitalist economic model, is that it, too, encourages experimentation and trial and error, but uses different methods to do so.

China has made huge strides since 1978. It is now well established, on an income per head basis, as a middle income country according to World Bank classifications.

FROM A MIDDLE INCOME COUNTRY TO A HIGH INCOME COUNTRY

In 1960, there were 100 middle income countries in the world. Ireland was one of them.By 2008, only 13 of those 100 countries had reached high income status. Ireland was one of the 13 that made it, along with Hong Kong, Japan, South Korea, Mauritius, Spain, Equatorial Guinea, Portugal and Greece. The remaining 87 countries, which were middle income countries in 1960, have undoubtedly made progress since, but they are still middle income countries, and some of those who attained high income status by 2008, may now be falling back into the middle income category.Nothing stands still. Progress to the next stage is not automatic.

Economic growth is, as the economist Schumpeter put it, a process of constant creative destruction. Growth is about change. Change is often painful, and painful, but necessary, change can easily be confused with mindless austerity.

When a country is moving from less developed, to middle income, status, it is often able to compete by doing things , that are already being done, more cheaply than established competitors can do them. It does not have to come up with brand new technologies. it can use existing technologies, but apply at less cost and with minor improvements.

Moving a country, from middle income, to high income status, in contrast, often requires it to push at the boundaries of technology, to find a niche that no one else if filling, to invest in people and ideas as well as in concrete and metal. That is the stage into which China is now moving its 1.4 billion people, a move that promises to be one of the great transformations of human history.

ENGINES OF ECONOMIC GROWTH

The size of the transformation involved explains why China is today spending 2% of its GDP on Research and Development (R&D), which is more, as a proportion of GDP, than Ireland, Netherlands, the UK, Norway, Luxembourg, Italy, and Spain and many other European countries are spending.
Incidentally, Israel, Korea, and Finland are the biggest proportionate spenders on R & D.But R&D alone will not move a country from middle to high income status. It must be made easy for entrepreneurs to use the R&D, by setting up new businesses and to recruiting talented local people to help them do it.Here, Ireland has a strong advantage in that it is one of the easiest places in Europe to set up a new business, and one of the easiest in which to recruit young well educated people at competitive salaries.

This has already attracted 18 different Chinese companies to set up operation in Ireland. Ireland is particularly interested in Chinese companies that are in fields like Life Sciences, Clean tech, financial services and information technology.

Ireland is also active in food exports to China ,which have grown by 92% in just two years!

I believe there are aspects of the Irish educational system from which China could benefit . 5000 Chinese students study in Ireland. Numerous agreements exist between Irish and Chinese Universities. These must be built upon, especially in key areas of research ,like financial services.

REMOVING BLOCKAGES IN THE SYSTEM

If China is to exploit its investment in R&D to the full , it needs to liberalise its system of local residency permits, which discourage migration within China, and to make it easier for new Chinese companies to set up, in competition with existing state owned or established enterprises.
The European Union, with its 0.5 billion people is a much smaller entity than China with its 1.4 billion people, but in the European Union, there are still restrictions on internal migration, analogous to the Chinese residency permit scheme, in that the EU does not have full transferability of Social Security rights, and full mutual recognition of professional qualifications, for internal migrants within the EU.

THE DANGER OF PROPERTY BUBBLES….THE IRISH EXPERIENCE

But it would be unrealistic for me to come here and fail to refer to some of the recent economic difficulties Ireland has encountered. These difficulties are being overcome. Growth has been resumed, foreign investment in the country is at an all time high, and the government is following a careful plan. But it is also important to analyse objectively how Ireland got into these difficulties, and I believe that would be helpful to a country, like China, that is also undergoing rapid development and wants to avoid converting that into a destructive bubble.

Indeed, the latest IMF report on China, contains warnings that will sound familiar to those who have studied recent Irish economic history. It talks of the risks of “a steady build up of leverage eroding the strength of the financial sector”, of “a boom in non traditional sources of credit”, and of the need to take “steps to reduce moral hazard to ensure that banks do not engage in potentially destabilizing competition” in China. On the other hand, it recognises that China has very well capitalised banks.A few years ago, these risks existed in Ireland, and were not adequately addressed by the authorities in Ireland itself, or in the European Union. We have suffered for that, and these are useful lessons for China.As I see it, this is what happened in Ireland. Thanks to artificially cheap credit, and rapidly rising property prices, Ireland experienced a property bubble between 2000 and 2007. This bubble led to a radical distortion of the country’s economic structures, and to a big increase in private and government debt.The cheap credit was available because of decisions taken by the US Federal Reserve and by European Central Bank. Both favoured low interest rates. They did so to avoid dislocations to the economy, that might have arisen from the dot com burst, 9/11, and the costs of German reunification. In these goals they succeeded.But the extra credit found its way across national boundaries into housing markets in various countries, causing a bubble in prices, most notably in Ireland. In 2008, the bubbles burst.

BUBBLES DISTORT THE ECONOMY

The bubble distorted the Irish economy in ways that will take years to repair. There was distortion in the form of a doubling in the size of the construction sector, large and uncompetitive pay increases across the economy, and rapid increases in numbers of people employed in the public sector. The fact that money flowing in, temporarily, to government coffers, made it hard to resist demands to increase the size of the government sector, permanently. In just five years from 2001 to 2006, the share of the workforce in the public sector reached 29%, as against 19% in Germany. The numbers in top grade positions in the civil service grew by 86% .

Bubbles misallocate human capital. Instead of choosing careers and skills, for which there is enduring global demand, talented people were drawn, by quick rewards, into activities for which demand is inherently temporary, like construction.

WHY BUBBLES HAPPEN

In a way, it is easy to see why people made the mistake of thinking, in the 2000 to 2006 period, that house prices in Ireland (and household wealth) would never stop rising. Recent history seemed to suggest that the only way house prices could go was up. House prices had already risen by 133% between 1994 and 2000. These increases were justified by rapid economic growth, immigration, and new family formation, all of which created a genuine demand for housing. The trouble is that the increase in house prices continued after 2000, and was financed, not by improved competitiveness, but by excessive lending, and by income generated from, inherently temporary, construction spending.

The assumption of the bankers, who were lending this money, seemed to be that demand for housing could go on growing, to infinity. A moment’s thought would have shown how nonsensical that was. But, in the middle of a boom, people are often too busy, to take a moment to think. The revenue of the Government became unhealthily dependent on taxes derived from property sales such as stamp duty, capital gains tax, and VAT on house sales. Property related revenues reached 18% of all revenues in 2006, whereas they were only been 8% in 2002. But once house sales stopped or slowed down, of course, that revenue growth stopped, leaving a huge hole in the Government’s budget.

Again, a moment’s thought would have shown how dangerous it was, to build up permanent spending programmes, on the back of inherently temporary streams of revenue. But very few people, in politics or outside it, took a moment to think. For a country like China, the relevant question to ask about Ireland’s recent experience is

“How can sensible, and generally public spirited, people make mistakes like this, and how can such mistakes be avoided ?”

THE CAUSES OF BUBBLES………….SILO THINKING, AND FOLLOWING FASHION, WITHOUT REFLECTION

I would identify two tendencies of policy making in both the public and private sector, that were at the heart of the problem in Ireland
1. “Silo tendencies” within institutions, charged with mitigating risks, where people only thought about their own immediate responsibilities, and did not question wider assumptions.
2. A “consensus approach”, which encouraged a single view to be taken of any issue. Human beings are followers of fashion. We need institutions that deliberately challenge fashionable assumptions, and those institutions did not work, in Ireland or in the wider European Union.
These errors can occur in ANY country, under ANY political system. They are not unique to Ireland, Spain, Arizona, California, Florida, or any of the other parts of the world where property bubbles arose.
China must be wary that these problems do not arise here, and I know the authorities here are fully alive to these risks.

THE GLOBAL CHALLENGES…..AGEING, MIGRATION, CLIMATE CHANGE, AN ERODING TAX BASE , AND SOUND FINANCE.

These are the five big problems that the counties of the world must come together to tackle. They are all loosely related to one another. With the exception of the finance problem, they are all problems that are silently creeping up on us, so silently in fact that it is difficult to create a sufficient sense of immediate crisis, to get anything done about them. Technology will provide some of the answers, and I know China is devoting a significant proportion of its R&D to some of these issues.But sacrifices and compromises will be needed between and within nations. Pension entitlements will have to be limited in some countries, working lives extended, and elder care vastly expanded with the aid of technology. Migration will have to be accepted in ageing economies, and that is a big cultural challenge.CO2 emissions and pollution will have to be tackled by making the ultimate polluter meet the full cost of what he does.

We may eventually need some form of global taxation, to meet the cost of preserving out common global heritage, but, in the meantime, we need to restore the tax base of states, in a cooperative way. We cannot expect Governments perform functions if its revenues are artificially depleted.

And finally we need to put banking on footing that will be sound enough to allow incompetent banks to be closed down without putting the whole economy at risk. “Too big to fail” and “ too interconnected to fail” should no longer be characteristics of our banking systems.

THE EURO….WHAT IS ITS FUTURE?

The existence of the euro, the single currency, has not created the economic crisis in Europe.This was going to come anyway because of lost competitiveness, the emergence of new competitors, like China, for traditional European industries, and the progressive ageing of European societies. Expansionary monetary policy could only have postponed the emergence of the symptoms, it could NOT have prevented the illness.

What the existence of the euro has done is impose discipline and mutual solidarity on Europe.

Without the euro, countries would have pursued the route of devaluation and inflation in response to their problems. Savings would have been wiped out. This is not possible now, and that is good. Instead problems are now being tackled at their source.Without the euro, wealthier and stronger European countries would not have come, so quickly, to the aid of other European countries in difficulty. They have now done so on a systematic basis, and that too is good.The EU is moving toward a common system for winding up banks that need to be wound up, without putting the overall system at risk. It is moving toward a common system of deposit insurance. These are issues that also require attention here in China.Much better systems are now being put in place in the European Union, to ensure that, in future, public finances, and underlying competitiveness, do not get out of line again. Out of the crisis, we are now facing up to problems we had ignored for the past 20 years in Europe.

The euro will survive. Not only that, I believe it will eventually be imitated in other parts of the world.

To sum up, the euro
+ is a protection against the expropriation of savings, through inflation and devaluation.
+ is a factor for economic stability in the world, and
+ is a major political step forward for unity Europe.

John Bruton Crisis European Union Eurozone Foreign Policy

The topic of this year’s Economic Ideas Forum (EIF), organized by the CES in Helsinki, was “From Reform to Growth: a Roadmap for Europe”. We chose this title because we are convinced that it is the combination of budgetary AND structural reform that will create the conditions in which lasting growth is possible. And only lasting growth will lead to more and better jobs for Europeans. It is difficult to image a better place than Finland to organize a conference with this in mind. The country successfully reformed itself after an economic crisis 20 years ago and today it is a prime example of good economic governance.

“Both more Europe and more national responsibility”, these are the words spoken by Prime Minister Katainen when addressing the European Parliament’s plenary session in April, and I could not agree more. To the populist voices claiming that Europe cannot find common solutions: I say that’s simply not true. To the populist voices saying that European institutions are a threat to their countries I say, quoting Prime Minister Katainen, that strong rules and strong European institutions are the protectors of the member states, especially the smaller ones.

The EIF was a great opportunity to emphasize the idea of cooperation between different Member States. At the European People’s Party (EPP), we have always felt that the EU is much more than a partnership. The EU is a community, and it brings together countries of different size, economic power and wealth, and different cultures. However, the aim is to find, and strengthen, the things we have in common and to value the richness and opportunities of our diversity.

At the EPP we believe in the power of individuals and the importance of union and solidarity. We believe that a European community exists an adds value to people’s lives. It is an antidote to both egoism and populism. This is why, when citizens and states show initiative to cope with difficult times, this European community should show its solidarity. The strong have to help those who are weakened and the weakened have to make the effort to get back to economic growth. This means reaching a careful balance. We must give our members the freedom to follow their own paths to success, while maintaining a common goal and vision.

We do not believe in the artificial growth defended by other parties. We profoundly disagree with their proposals to create unsustainable, short-term growth by increasing public spending and refusing to present credible measures for fiscal consolidation. This is an irresponsible and populist approach, which will lead us deeper into the crisis.

I should make a small mention of my own country: Spain. It has been a tough few years: reforms were unpopular and often misunderstood, but we have been patient. We held the course and the economic fundamentals are starting to paint a better picture. Unemployment has decreased for three months in a row, inflation has been kept under control and the competitiveness of our exporting companies has increased non-stop. I believe that we can feel prudently encouraged, and all my colleagues in the EPP, Prime Ministers, Finance Ministers, have shown their admiration and encouragement for our reforms and efforts.

Maintaining social cohesion is a priority, but we must achieve this in a responsible, sustainable way, with emphasis on the “sustainable” part because this is where we differ most from the Socialists. We know that growth is not something that a government, or the EU, can decree. Growth is created by people: by entrepreneurs and consumers who act within a stable and predictable framework. In order to create this framework, market confidence in politics has to be restored, and that means fiscal consolidation and economic reform. In the long run, it means a stronger economic and political Union.

There is no silver bullet for resolving the current crisis. Its causes are complex and the solutions cannot be simple, which is why conferences like the EIF are necessary.

Antonio López-Istúriz White Economy European People's Party Eurozone Growth

Much vigorous debate, as well as some initial steps in response to the eurozone crisis, have established some groundwork for a more integrated economic and monetary union. But much less discussion has been devoted to how to redesign European-level political institutions, despite widespread recognition that a political reset is the other side of the coin. Aided by the widespread perception of a “democracy gap” at the European level, Eurosceptics are using this vagueness to spread uncertainty and doubt that is undermining the European project. It’s time to put some meat on the bones of what a functioning continental democracy could look like.

The eurozone crisis has stretched the European Union’s governance capacities to its limits. That’s because the E.U.’s current political institutions are those of a loose confederation of member states — but a loose confederation is inadequate for maintaining a monetary union. Yet several key E.U. member states are tenaciously resistant to the type of federalizing of power that a monetary union requires and other member states desire, so a proposal for redesigning European-level political institutions must be predicated on the reality of a “two speed Europe.”

This proposal outlines a two-tiered structure of: 1) a more federalized and integrated eurozone, and 2) maintaining a more decentralized – but also more streamlined — structure for the European Union, with these two structures co-linked in sensible ways.

A New Structure for Political Europe

As a starting point, Europe can learn something from the political and economic structures that a young America originally designed at the federal level, and how they evolved over two centuries. Granted, the American example is more of an inspiration than a blueprint, due to historical and cultural differences. But nevertheless the U.S. is a successful and longstanding monetary and political union spread over a vast geographic area, and lessons can be learned.

Initially America empowered member states’ legislatures as well as individual voters, both because each member state was sufficiently diverse to have legitimate state-based interests, but also because they needed buy-in from the political elites of each member state (and many political elites, like George Washington, John Jay and Alexander Hamilton, truly didn’t trust the average voter, much less than European elites today). So while voters directly elected the federal House of Representatives, the member states’ legislatures were given the mandate to elect the powerful upper chamber of the Senate, as well as to elect presidential electors that chose the national president. For the next century after the first government in 1789, both the member states and the elites played a significant role in selecting the political leadership of the federal government. But eventually America amended its constitutional structures to empower individual voters over the state legislatures (both with popular direct election of U.S. Senators, and with state legislatures agreeing to abide by each state’s popular vote in selecting presidential electors.

So in drafting a more federalized political structure for the eurozone, it would be wise if both a direct popular vote as well as member states’ legislatures were empowered initially in a parliament. German statesman Joschka Fischer and others have proposed a similar design. How would this look in practice?

A more democratic eurozone governance would have a parliament with two chambers, one directly elected (like the current European Parliament) by voters using a system of proportional representation, with the number of representatives per member state a close reflection of each state’s population (so the more populous member states would have more representatives). The second chamber would be selected by member state legislatures (as the European Council and Council of Ministers sort of are now), with the number of representatives being mostly proportional to the population of each member state, but with a few additional representatives granted to the low population states so that they are not easily overrun by more populous member states. It also would be wise to establish a process for amendment that would allow the second chamber to evolve over time into direct popular election as a pan-European political consciousness and culture takes root.

The lower chamber of this eurozone legislature would then select a prime minister, who would in turn nominate her or his government cabinet, with one cabinet member each from a eurozone member state (similar to the current selection process for the Commission), to be approved by the upper legislative chamber. In addition, a largely ceremonial post of president of Europe would be directly elected on a continent-wide basis (similar to what various leaders such as Guy Verhofstadt, Wolfgang Schäuble, Tony Blair, and Radosław Sikorski have expressed support for). At some point down the road, this directly elected president could be invested with more power via the amendment process if that better matched the zeitgeist.

This kind of streamlined structure – a two chamber parliament that provides direct representation to voters as well as to eurozone states, and empowers an executive branch selected by both types of representatives, as well as a directly-elected figurehead – would do much to simplify continental governance for eurozone citizens, as well as to clarify lines of authority, make decision-making more efficient and transparent, and better connect the public with their continental government.

The Reality of Two-Speed Europe

The likeliest scenario is that the eurozone’s 17 (or so) member core will be the entity that adopts this sort of federalized structure, as the momentum of monetary union drives the need for a more cohesive and effective political union. This entity would have its own common laws, political institutions, budgetary agreements, banking union and tax policies. The eurozone states would have merged their political economies and bound their destinies together in a way that is irreversible.

This new eurozone-based entity would co-exist with a more loosely confederated European Union, composed of the current 27 (soon to be 28) member states. The EU could retain its present governance (albeit with some streamlining recommended below), and retain its degree of confederation but operate under much less pressure to integrate more than its disparate members are willing. And those who want to use the euro currency would be able to forge ahead not only with a fiscal and monetary union but also with the political institutions that are necessary to properly regulate a monetary union and to maintain democratic legitimacy.

Just as important, this two-tiered structure should be constructed so there is the possibility of individual member states moving from the non-euro EU into the eurozone when it made sense.

There are historical precedents for such a two-tiered, inside-outside arrangement, such as the 54-nation British Commonwealth (now known as the Commonwealth of Nations), or even the current United Kingdom, where there is a core Great Britain and other “members” (like Northern Ireland and some islands) that are more loosely confederated.

Note that this design has to do with the STRUCTURE of government, and less to do with the function and specific powers attached to each player within this structure, which requires a separate but parallel conversation too long for this short article. But as we have seen again and again during this eurozone crisis, in which inadequate E.U. structures have made decision-making excruciating and prolonged the crisis, function in many ways follows from form. So it’s important to get the structure right.

The E.U. also could use some streamlining. Without going into great detail in this short article, there are several institutions and practices that are ripe for a redesign. On a basic level, the E.U. should employ more originality for naming its offices and institutions. Currently the terms “president” and “council” are much overused, with a European Council and a Council of the European Union (also known as the Council of Ministers, or simply “the Council”). Outside the E.U. there is the Council of Europe. All of them have their own president, as does the European Commission and the European Parliament. With names so similar, few but the most ardent Europhile can tell them apart. The E.U. also is governed by an odd form of tricameralism (or even quad-cameralism) between the European Commission, the European Parliament, the European Council and the Council of Ministers. That’s too many branches, even for a decentralized confederacy. And the Commission being both the executive and the branch that proposes legislation fosters additional confusion and a loss of checks and balances.

Europeans have passed only the first few bends in the road of a years-long journey to overhaul their key economic and political institutions. It is important to understand that, just like a young America in its “Articles of Confederation stage” prior to its first government in 1789 – which had neither a common currency nor federalized institutions — Europe today is entangled by many contradictions and tensions as it tries to fashion its union and decide how integrated it wants to be. The integration process took decades for Americans to sort out (see http://ces.tc/14sJ6L3 for more details ); indeed, those “united” states fought a civil war over not just slavery but states’ rights and member states’ sovereignty, a full 70 years after its founding. The road toward union is a long and winding one because it takes time for people, cultures and laws to adapt. Europe is a “work in progress,” and it may require a change of a generation or two for a new identity and institutions to form and take root.

Clearly this is a big step, yet at this point it’s also clear that the demands of a monetary union require it. Either that, or abandon the euro. There appear to be no other options. And given the economic rise of population behemoths like China and India that are increasingly assertive in international markets, globalized forces will continue to put great pressure on Europe’s much smaller member states to band together or become less relevant and secure.

This essay is meant to inspire discussion and debate, not to be the final word on a very complex subject. Isn’t it time for European leaders to put forward some specific proposals and ideas about Political Europe, and push that conversation forward? Sometimes the best way to instigate debate is to provide something very concrete and simplified that people can react to. Doing so might give the public more ease over this integration process, if people could see a vision for the future, and get used to the idea of a more federalized eurozone alongside a loosely confederated E.U.

[Steven Hill (www.Steven-Hill.com) is a political writer and author of “Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age” (www.EuropesPromise.org).]

Steven Hill Democracy EU Institutions European Union Eurozone Integration

News emerged last week which contributed to a climate of confusion, fuelled by conflicting messages fantasising about unlikely scenarios.

After a series of reports suggesting that the Commission could carry out a Macroeconomic Imbalance Procedure (MIP) with Spain, some sections of the media interpreted this as a reprimand of the Government of Spain. Last week the President of the Eurogroup, Jeroen Dijsselbloem, re-affirmed his confidence in Spain, stating that Spain can be the engine of growth in the Eurozone.
These events give the feeling that some sections of the Spanish media are liable to deliberately magnify the negative when reporting economic news.

Despite of the importance that carrying out a MIP could have, one must bear in mind certain facts. Firstly, we must remember that any decision to carry out a MIP will be made on the basis of previous procedures, including an analysis of relevant data in 2011 under the government of President José Luis Rodríguez Zapatero. Subsequently, there is a final check to identify the countries with excessive macroeconomic imbalance. In this case, Spain and Slovenia.

This process involves an information gathering process and does not necessarily involve any mandatory corrective action. We must bear in mind that in order for this procedure to have consequences, like the imposition of conditions or sanctions, we would have to move to a new step of the process in which the Council, on the basis of a recommendation from the European Commission, would advise the concerned Member States to take corrective action.

Therefore, it is obvious that the controversy does not respond to reality. Moreover, I have no doubt that corrective actions will not be recommended. The Vice President of the Commission, Olli Rehn, has already hinted the fact that the Commission would give Spain two additional years to meet its deficit targets.

Data shows that Spain, despite the challenges that still have to be faced and of which its current Government is fully aware, is on the right track.

But let us not forget that is also time for Europe to act. Even if Spain is on the right track, every effort will be useless if Europe does not create a banking, economic, fiscal and ultimately political union.

Pablo Zalba Crisis Eurozone Growth

There is a tendency whenever a eurozone country gets into difficulty and needs help from its neighbours to blame Germany for the severity of the terms imposed and to say there is bullying involved. In both Greece and Cyprus, we hear references to the Second World War, as if offering Greece a low interest loan to keep its state functioning was equivalent to a military invasion of the kind Greece experienced in 1941.

There is also talk of the “solidarity” that Germans ”owe” the rest of the rest of the eurozone, even though any money Germany might pay has to be raised from German citizens, under the German tax system. This is the way it has to be done, only because there is no common eurozone tax system, applicable to all euro zonecitizens, from which the money might otherwise come. Indeed those who call most loudly for “solidarity” would probably be the first to object if a common eurozone tax system, equally applicable to all eurozone citizens, was proposed. Others criticise Germany for insisting on “austerity” in spending by countries that are spending more than they are earning, as if there was some alternative to spending less in those circumstances.

The fact is that some countries, including Ireland, are still spending more than they collect in taxation, even after one has left out of account the interest paid on past debts. Such countries have what is called a “primary deficit”. Ireland had a huge primary deficit in 2010, has a small one today, and hopefully will have a tiny primary surplus next year. But if it is to reduce its debts, and thus not be vulnerable to disaster, if there was to be a sudden increase in international interest rates of the kind that occurred in 1979/80, Ireland will have to have a primary surplus for many years to come.

That is the only way to reduce the debts it ran up through the primary deficits it ran in the recent past. This is not something “imposed by the Germans”, it is imposed by the rules of mathematics, and by compound interest in particular. Of course there is one alternative, inflation, the alternative of inflating debts away. Inflation devalues everything. It reduces the value of money, and in so doing, it also reduces the value of debts and, of course, of savings. If inflation is greater than the rate of interest, debts will reduce.

But the value of pension funds, of bank deposits and of life assurance policies would also reduce. Inflation would mean falling living standards all around, because if a country is to stay competitive, wages would have to increase at a slower rate than prices. Those on fixed incomes would see their living standards decline even more, because they could buy much less each year with their fixed income. Inflation is very hard to keep under control, once it starts to take hold.

Germany tried to inflate away its First World War debts in the 1920s, and the experience was a complete disaster. Understandably, it does not see inflation as a solution to Europe’s debt problems today, and nor should we. Some argue that Germans themselves should spend more and save less, and say this would help other countries in Europe. This is already happening to some extent.

German imports were 10% higher in 2011 than they were before the recession, whereas almost every other European country is importing less now that it was then. It is fair to say that Germany’s balance of payments surplus, at 6% of GDP, is very high indeed, too high, and that this surplus is not being used all that wisely. Germany could do more to free up its own internal market, and the OECD has been critical of it on that score, but that offers a long term, rather than a short term solution for the rest of Europe.

It is also important to deal with the myth than Germany is a terribly wealthy country, that it can afford to bail everyone else out. Germany’s present competitiveness is of recent origin. A dozen years ago it was the “sick man” of the European economy, struggling with the unexpectedly high costs of absorbing East Germany. Germany got a big bonus from the opening up of China, which imports a lot of German engineering goods, while other European countries (eg. Italy) have lost for the same reason, because Chinese consumer goods are undercutting them in their specialist markets.

Germany is an elderly country, with far more people approaching retirement age than preparing to enter the work force. Probably for this reason, its medium term growth potential, and thus its medium term debt repayment potential, is low by comparison with other countries in Europe. The OECD did an estimate of real growth potential for different countries from 2016 to 2025. Its estimate for Germany was only 1.2% pa over the ten year period, for Netherlands 1.4%, for Italy 1.5%, for Portugal 2.1%, for Spain 2.3%, and for Ireland it was projected to be 2.7% a year!

German families are apprehensive about the future, and if those OECD figures are to be believed, it is hard to blame them. German families do not FEEL wealthy. Only 44% of Germans own their own home, as against 58% of French people, 69% of Italians and 83% of Spaniards. According to a recent Bundesbank study, the average household wealth in Germany is 195,000 euros, as against 229,000 euros in France and 285,000 in Spain.

This is the reality with which German politicians have to cope. It does not mean that they are always right, but it does mean that they have to be cautious. It also means that Germany alone cannot solve Europe’s financial problems.

John Bruton Crisis European Union Eurozone

If the eurozone had a facebook page, it would have changed its status last year from single to it’s complicated. European leaders had neither time for a spring fever, nor a summer break. They fell into a spiral of emergency summits adopting immediate decisions to save their economies and the eurozone’s single status. Amid this challenging context, political leaders, leading economists, analysts and businesses met last month to discuss the future of Europe at the Tatra Summit in Bratislava; under the title “Shaping a Genuine Economic and Monetary Union“, the event was the first international conference organized by the new kid on the EU-policy scene, the Center for European Affairs, in cooperation with other like-minded organisations in Europe, including the Centre for European Studies as a main partner.

I was there and chaired a session on the upcoming edited volume of the CES and its member foundations, entitled ‘From Reform to Growth: Managing the Economic Crisis in Europe.’ This book looks at the financial and economic crisis in Europe, detailing and comparing the different measures taken to handling this crisis in different countries and regions, and providing a centre-right narrative on approaches to the crisis. The volume is due to be published in late May.

Whoever thought that Slovakia was too small to absorb two big international conferences per year proved to be wrong. The Globsec security conference, which is to take place in Bratislava this April again, has in recent years become one of the leading security conferences in Europe. Without any tradition, the Tatra Summit has also been able to attract a solid number of high-level speakers and participants to Bratislava. Here are my five key takeaway points from the conference:

1. Europe has not been hit by one crisis but by multiple, intertwined crises: financial and economic crisis, banking and debt crisis, eurozone crisis, with all these resulting in a political crisis. These crises have brought to light the “known unknowns” and the “unknown unknowns”, as one leading speaker explained at the conference. Even prior to the crisis, it was clear to everyone that there was a rather strong economic asymmetry between the individual members of the monetary union. What was however unknown, was the degree of the financial fragility of the Economic and Monetary Union (EMU).

2. Because of the always existent unknown unknowns, the future crises cannot be prevented. Nevertheless, as Professor Sklias from the University of Peloponnese in Greece underlined, there’s hope that Europe is better prepared today. We not only know that the crisis is a real thing and not a myth, but we have also improved the EU’s financial infrastructure. For example, the steps towards the creation of a banking union among the eurozone members, and possibly other EU countries, are steps in the right direction; however, its functionality has not been tested yet and belongs to the unknown unknowns.

3. There was a broad consensus among conference participants that “every crisis in Europe always ends with more Europe, never with less Europe.” However, more Europe, according to Harald Waiglein from the Austrian Ministry of Finance, needs better coordination, more flexibility of labour, capital and prices, enhanced capacity, joined liability for debt and a functioning last resort facility. Nevertheless, it remains to be seen whether a genuine EMU is a realistic scenario due to the different economic realities of its members and a general understanding that one size does not fit all.

4. Unlike widespread consensus on “more Europe”, the conference uncovered different approaches among participants towards fiscal consolidation and growth. Slovakia’s Finance Minister Peter Kažimir has been one of the strongest opponents of the growth-friendly fiscal consolidation. According to him, any fiscal consolidation is always bad for growth. On the other hand, ECB Board Member Jörg Asmussen believes that one has to look beyond a short-term perspective because a responsible fiscal consolidation leads to sustainable growth in the medium and long-term.

5. Crisis recovery is not a sprint, it is a marathon. Fiscal recovery is just the first part of the story. Only at a later stage will the improvement on the financial front gradually lead to the improvement of the real economy, the social situation and political stability. Moreover, the level of patience and trust of Europeans in their politicians has never been as low as now, so political recovery is very likely to take even longer than one would imagine. To restore people’s confidence, Europe needs to reform. Drastic spending cuts and tax increases will not do the job but the structural reforms in the healthcare, social and pension systems as well as education reform could be a solution.

A small caveat to these five points: what the conference slightly lacked was a more clear Central European dimension. I would have liked to hear Central European speakers to tell us whether there is something like a common Central European vision on the future of Europe and the economic and monetary union, and to explain whether and if so, what the old Europe can learn from the new Europe.

Nevertheless, there is no doubt that the first Tatra Summit was an icebreaker in bringing the European debate closer to European citizens by moving it from the usual Brussels’ comfort zone to another EU and eurozone capital. I am positive that the Tatra Summit will become a known brand in Europe and will, the next time and among many other issues, offer a stronger Central European perspective.

[photo source: Centre for European Affairs]

Katarina Králiková Crisis EU Member States Eurozone Macroeconomics

All resolutions of banking crises involve imposing and sharing sacrifices. As far as possible, people should know in advance how sacrifices are to be shared. No way of saving is completely risk free, but the greater the risk, the greater should be the reward and vice versa. A high yield bond should be riskier than a low interest deposit.

It is on this basis that the terms of the proposed bailout of the Cypriot banking system should be scrutinised, because it illustrates how Euro Zone policy makers are thinking. The initially proposed bailout of Cypriot banks involved imposing haircuts of the depositors in Cypriot banks who have been covered by the deposit guarantee scheme, that is depositors with amounts less than 100000 euros. Whose idea was this? Setting aside the terms of a deposit guarantee like this would be a very serious step for Euro zone policy makers to have taken. It calls into question the integrity of deposit guarantees generally. That is hardly a good idea when we are trying to restore confidence in banks and rebuild their capital bases

SENIOR BONDHOLDERS TO BE PREFERRED TO DEPOSITORS?

According to today’s Wall Street Journal, an alternative to burning the guaranteed depositors was proposed by the IMF. This was “radically shrinking the two largest banks, including bailing in senior bondholders, and letting deposit insurance kick in. In that case, depositors in Laiki Bank and Bank of Cyprus would have faced losses of 30 to 40% above the insured 100000 euros.” It would appear therefore that an explicit legal guarantee of deposits is to be set aside so that senior bondholders and un-guaranteed deposits are to be reduced, or, in the case of senior bondholders, no haircuts. The net effect of this is that a deposit guaranteed euro in a Cypriot bank is not worth the same as a euro in a bank somewhere else in the eurozone.

This is contrary to the underlying principle of having a single currency. The philosophy behind the decision to afford protection to the position of the admittedly small number of senior bondholders of Cypriot banks at the expense of guaranteed depositors has yet to be explained. Senior bondholders are commercially well informed investors, depositors are not. Senior bondholders also earn a better interest rate than small depositors do.

SHOULD BONDHOLDERS OF BANKS BE PREFERRED TO BONDHOLDERS OF STATES?

It is also hard to understand why the EU policy imposed a haircut on the senior bondholders of the sovereign Greek state a few months ago, but it did not impose a haircut on the senior bondholders of private Cypriot banks, when that was suggested by the IMF. Indeed, part of the problem of Cypriot banks is that they were themselves senior bondholders of the Greek state, who suffered a haircut on those bonds as part of the terms of the Greek bailout. Who are the senior bondholders of Cypriot banks who are so deserving of 100% protection? Who are the big depositors whose haircuts were to be reduced by attacking the under 100,000 euro guaranteed depositors?

A credible and consistent banking system is essential to a modern economy. The EU is committed to establishing a banking union, including a single system for winding up banks and guaranteeing deposits. The precedents being set in the Cypriot case are important and, in my personal view, troubling. They do not indicate clarity or consistency of thought by either the eurozone, finance ministers, or the European Commission. The rejection of the deal by the Cypriot Parliament now gives eurozone policymakers a chance to think again about the underlying philosophy of their approach to the financial crisis.

John Bruton Banking Crisis European Union Eurozone

It has been five years since the banking crisis erupted in the United States. If, instead of boasting of having the most robust financial system in the world, the Spanish Government had immediately begun the process of restructuring its financial system, Spain would not have needed European aid to complete this arduous task. However, we should not cry over spilt milk. The important thing right now is to ensure that this type of crisis will never be repeated.

One year ago the Spanish savings banks finally acknowledged that they had serious problems after making excessive loans to the construction sector. Months later, problems with the saving banks turned into a government crisis: after injecting money into the financial system in order to save the banks, they continued to experience problems with financing because of the lack of trust of investors. This problem in countries like Spain and Ireland spread to the rest of the European Union. What started as a banking crisis ended up being a threat to the euro. It created a vicious circle between the banks, the trust in the Member States and the euro.

If we have learned anything from this crisis is that the architecture of the euro was flawed, since we created a monetary union with different economic policies and banking regulations. The result was that the citizens ended up paying for the banking disaster. Now we have the opportunity to change the structures supporting the euro which we were not able to be put in place at the time of its introduction..We are entirely committed to this task.

In order to do this, the European Parliament has been proposing to create a banking union for more than a year. The primary goal of this proposal is to protect taxpayers being forced to pay for the banking crises. Firstly, we need a single supervisor to ensure that all EU banks are supervised and they do not pose a risk to the rest of the banking system. This would guarantee that, for instance, a badly supervised saving banks in Spain or poorly supervised banks in Ireland would not pose a risk to the rest of the countries. This joint monitoring system, along with a Deposit Guarantee Fund and a common crisis resolution mechanism should be the three axes of a reform that will protect the citizens of all euro countries from another banking crisis.

The truth is that progress in the last year has been substantial. However, there is some cause for concern in relation to the speed at which European institutions are responding to the problems posed by the banking crisis. Sometimes it seems that we fail to react until we are on the brink of another crisis. Progress was made last year because Europe felt the pressure of rising bond spreads. With lower spreads, we probably would have not reacted. Therefore, this year we risk failing to take decisive action and creating the banking union that is so urgently needed as bond markets appear more stable.

These days there is a heated debate on a bailout for Cyprus which seems to be breaking the taboo of the deposit insurance fund and its consequences for the fledgling banking Union. It is important to contextualize the measure. A high percentage of deposits in Cypriot banks are foreigners, mostly Russians. This is not the case in other euro zone states. Also, whether we like it or not, we must not forget that Germany faces an election in two months. I tend to be positive and believe that the Cyprus bailout may be the price we have to pay so that the Banking Union becomes a reality.

Pablo Zalba Banking Crisis Economy EU-Russia Eurozone

The Conservative plan, as set out in David Cameron’s speech, is to try to renegotiate the terms of UK membership in the EU, if it wins the next general Election, and put the terms to a referendum. The risk is that Labour may feel under pressure to adopt a similar policy, so as to prevent a leakage of its votes to UKIP.It is very unlikely that the results of any such renegotiation, whether conducted by Labour or the Conservatives, will satisfy British popular expectations.  And if that is the case, the UK electorate may choose in a referendum to leave the EU. This renegotiation is likely to be a disappointment because the expectations in Britain are vague and unrealistic. David Cameron did not offer any clear negotiating objectives in his speech.

SINGLE MARKET IS NOT A FREESTANDING ENTITY

He seemed to think that the EU Single Market was some sort of freestanding entity separate from common EU policies on regulation, working time, transport, and education. But for other EU nations, it was in return for policies on these things, that they opened their markets to the rest of the EU, in the first place. The Single Market is a delicate political construct that cannot be easily unpicked. And while accepting that the EU needed to resolve the euro crisis, he wanted  “contrition” to be expressed  by those who created the euro, notwithstanding that  Economic and Monetary Union was on the EU agenda before a previous Conservative Prime Minister negotiated the  UK’s entry terms! He also wanted the goal of “ever closer union” dropped from the EU Treaties, even though that too was part of the Treaty before the UK joined. He is 40 years late with these ideas

RENEGOTIATION WILL BE WITH 26 OTHER GOVERNMENTS

The UK renegotiation will not be   with bureaucrats in “Brussels”. It will be with the Governments of every one of the other twenty-six states in the EU. Britain may want to pay less, but other countries may want it to pay more. Many other EU countries see the very things British negotiators would most like to be rid of – like the working time directive – as part of what they gained, in return for their opening  up to the Single Market in the first place. Concessions on these issues will, in particular, be anathema to left leaning Governments, of which there are an increasing number.
Exempting Britain from the Common Agricultural Policy (CAP), another possible British demand, will get nowhere. Repatriating regional policy will not go down well with countries who have recently joined  the EU, and  whose incomes per head are much lower than those in Britain

ALL EU RULES HAVE BEEN MADE WITH BRITISH INVOLVEMENT

British popular opinion has been constantly led to believe that the  EU is a foreign entity, with which Britain has a sort of treaty,  and not as what it actually is – a Union of which the UK has  a participating member with a vote on every decision.The role of British MEPs, British ministers, and a British Commissioner in EU decisions has been systematically ignored in the UK media and all decisions inaccurately presented as emanating from an “unelected” bureaucracy.

If possible results of a renegotiation are hyped up in the next British General election, and  lots  of “red lines” promised, the actual results of the renegotiation will prove to be paltry by comparison. That could lead to UK exit.

IMPACT ON NORTHERN IRELAND PEACE

I am particularly worried about the effect of Britain leaving the EU on the fragile situation in Northern Ireland.

Northern Ireland, and its reversible peace process, is being ignored in the debate taking place in Britain. It is also being ignored in the rest of Europe, where the impatience with the British is palpable.

Obviously if the UK leaves the EU, it will negotiate a new relationship with the EU.

But what sort of relationship will it be?

One of the big drivers of anti-EU sentiment in Britain is immigration of EU citizens from central and eastern European countries, like Romania, Bulgaria, and the Baltics. Gordon Brown famously encountered this sentiment during the last British General Election.

IMMIGRATION CONTROLS AT NEWRY?

If the UK leaves the EU, it would be free to restrict immigration from some EU countries. But, as a continuing member of the EU, the Republic of Ireland could not do so. So if the UK wanted to prevent these EU citizens entering the UK through the Republic, it would have to introduce passport controls at Newry, Aughnacloy, Strabane and on all other roads by which such EU immigrants could cross the border from the Republic into the UK.

CUSTOMS POSTS AT STRABANE?

If the UK is outside the EU, tariffs would have to be collected on UK exports entering the Republic and vice versa. Average EU tariffs are quite low, but some tariffs, on things like dairy products and clothing, are quite high. Customs posts would have to be placed on all roads leading across the border to ensure collection of these tariffs. Smuggling, with all its potential as a funding source for other forms of illegality, would become very profitable again. But the human and political cost in border counties would be the worst aspect of it. Nationalist communities would again feel cut off from the Republic by the inconvenience of passport controls, and of customs posts. Since Northern Ireland came into being as a separate entity in 1920, the large nationalist minority there has retained a very strong sense of identification with the rest of the island. The possible reintroduction of customs posts, and of immigration controls, would undermine the efforts that have been made , in the Good Friday Agreement, to reduce the divisions between North and South and between Ireland and the UK. Given that UK Prime Ministers have had to devote so much time to the so called “Irish Question” for the last 150 years, it is amazing that the current UK debate on EU membership is being conducted as if Ireland did not exist, or the UK had no interest in it. Some might say that  fears of the UK having customs posts and passport controls on the Irish border are exaggerated because they think the UK outside the EU could  easily negotiate a free trade and free movement deal with the EU

UK CANNOT BE BOTH IN, AND OUT, OF THE EU AT THE SAME TIME

There is a big snag here. To enjoy continued free access to EU markets for its goods and services, Britain would have to continue to apply EU rules, as now, but WITHOUT having had any say at all in them – something the UK does have as an EU member. David Cameron had a point yesterday when he argued that the nature of the EU is changing in response to the euro crisis, and as a non euro member the UK’s relationship with the EU will change anyway. But there was absolutely no need for him to promise an in or out  referendum, which places him in a straight jacket.

video source: www.euractiv.com

John Bruton European Union Eurozone Values

The long running crisis in the euro area is caused, at least in part, by the fact that the participants in the bond markets have little understanding of, and for a long time had little interest in how the eurozone makes its decisions at political level. In the past, these bond market participants assumed, without much enquiry as to why, that Greek government bonds were no more risky than German Government bonds, simply because Germany and Greece had the same currency. At that time, they took no interest in the internal politics, or relative competitiveness, of Greece and Germany.

This misunderstanding often also encompassed economic commentators, especially in the English language media, who, then and now, are unduly influential in the mind of bond market participants. Then, in the wake of the shock of the Lehman collapse, everything changed. The slightest political ripple now sends amplified shock waves through the bond markets, and the interest rates charged to lend to different countries within the euro zone vary greatly. Long ignored indices are now scrutinized obsessively. Both bond buyers and economists, having blithely ignored the EU political system for years, now crave complete and definitive answers from it, and they want those answers yesterday!

Of course, the markets worry about the viability of the public finances of individual countries or of their banks, but an even greater concern is to know whether a particular country will stay in the euro in all circumstances. A country leaving the euro could impose an immediate and shocking loss on lenders to that country, and to its banks. So the first priority for the markets is convincing them that, no matter what happens, nobody is going to leave the euro. That is a matter of political conviction, not macroeconomic analysis. After that, everything else can be negotiated. However, the political leaders of the euro zone come at things from a very different angle to that of the commentators and bond buyers. While the political leaders understand the bond buyers’ craving for certainty, they are engaged in a complex multidimensional political negotiation, in which they have to balance the interests of 17 different sets of national taxpayers, some of whom want to shift liabilities to someone else, and others of whom who want to take on as little liability as possible, for the debts of others. The political negotiation is further complicated by the fact that the EU does not yet have the legal power to do some of the things it needs to do, and some of its members want to withhold agreement to giving it those powers, in pursuit of national concessions.

Britain is the most outstanding example of this, but more recently Italy played that game. In Ireland, one political party wanted to veto the ESM, which is beneficial to Ireland, simply to get concessions on something else. This sort of silly thing goes on often in EU negotiations, because EU negotiations are conducted by humans, not by angels. While there is a European Union, the people who make the final decisions for the Union are national politicians, elected by national electorates, and the national electorates frequently do not understand one another very well, or choose not to do so. The cheap caricaturing of Germany in some other EU countries has been matched by equally juvenile caricatures in parts of the German press of other countries, like Greece. Sometimes the critics have a point, as when Germans complain about the possibility of extending their credit to countries like France, which is reducing its retirement age to 60, while Germany feels it has to raise its retirement age to 70 to maintain German creditworthiness. As well as making decisions, leaders have to bring their parliaments, which reflect these very diverse electorates, along. Sometimes they need a two thirds majority, as in Germany, or a referendum, as in Ireland. To use a construction analogy, the markets want the EU to produce a fully constructed and furnished building in time for next week’s bond auction. But the politicians are trying to build the foundations without having finalised the architectural drawings, while simultaneously arguing about the height of the building, investigating whether they can buy some units prefabricated, and deciding how much bricklayers are paid per hour by comparison with carpenters. That’s politics, and this is a political negotiation. It is the way it has to be. No one is going to show their full hand until the moment they are satisfied that everyone else is going to show their hand too.

Commentators criticise the outcome of individual meetings as if it was not a political negotiation, but an academic exercise, and the 17 eurozone leaders were “Platonic guardians” unconstrained by anything except the requirement to produce a theoretically symmetrical outcome. For example, one notable commentator (Wolfgang Munchau in theFinancial Times) announced recently that the crisis was going to last 20 years, just because Angela Merkel had not accepted that there would be joint euro zone insurance of deposits in euro zone banks, before she had seen the details of exactly what level of central scrutiny of their banks, the other countries would accept, so as to ensure that they would not take a free ride on the backs of German depositors. What did he really expect? Mrs Merkel will not show her hand until she absolutely has to, any more than Enda Kenny or Francois Hollande will. Likewise, it is unrealistic of people like Nouriel Roubini to demand that the size of the ESM fund be doubled or tripled at this stage, before anyone knows for sure whether the intended beneficiaries of an enlarged ESM will do all that is required of them to deserve the money. Uncertainty about the size of the fund, and doubt about whether it will be big enough in all circumstances, is essential as an incentive to get debtor governments to do the things they need to do, to be sure they do qualify for the fund, if they need it. The Euro area Summit statement of 29 June said it was “imperative to break the vicious circle between banks and sovereigns.”

But it also said that, for EU funds to be directly invested in banks, an “effective (European) supervisory mechanism” would first have to be established, and that any injection of funds would have to be accompanied by conditions that would be “institution specific, sector specific, and economy wide.” So a deal will have to be negotiated in respect of each individual bank, each national banking sector, and each country. According to a paper published recently by the highly regarded Brussels think tank Bruegel, a European Banking Union would require decisions on at least 8 big questions: 1. whether to include countries not yet in the eurozone 2. whether to bring all banks under direct EU supervision, or just the big ones 3. the scope of an EU wide deposit guarantee, as to the amount covered and whether there would have to a local contribution, without which the system might be abused 4. an EU wide system for closing banks down and distributing the losses between shareholders, different classes of creditors, taxpayers and other banks in the country in question and elsewhere.

Associated with this is the question of requiring all banks to draw up “living wills” to say what would happen if they go out of business 5. some form of limited euro zone wide taxing capacity to act as a back stop if the deposit guarantee fund proves insufficient 6. how to distinguish between past, and potential future liabilities 7. the proper focus of eurozone bank supervision. Should it be on capital ratios, liquidity ratios, business models, diversification or other variables? Should different types of banking be separated from one another, or does a mixed system make it easier to get over short term difficulties? 8. what to do about Britain, which wants nothing to do with the euro or a a European Banking Union, but still wants unfettered access to eurozone financial markets on the same terms as everyone else. These are difficult political issues and they will need to be resolved in a way that is BOTH theoretically sound AND politically balanced, between all the 27 countries in the EU.

Patience will be required.

John Bruton Crisis Eurozone