The leaders of the eurozone have approved the second bailout of Greece that is supposed to finally overcome the debt crisis in this country. The total official financing will amount to an estimated 109 billion euro. The European Financial Stability Facility (EFSF) will be used, but the maturity of the loans will be extended from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. Lending rates will be around 3,5%, close to the costs of borrowing for the EFSF. The maturities of existing loans from the first Greek bailout will be extended. The private sector will contribute with up to 37 billion euro. Financial institutions will be offered a set of optional forms of contribution, including the buy-back of Greek debt, the extension of bond maturities and the rollover of existing debts. Greek banks will be recapitalized “if needed”.
The EFSF and the European Stability Mechanism (ESM) will be allowed to:
- act on the basis of a precautionary programme;
- finance recapitalisation of financial institutions through loans to governments including in non programme countries ;
- intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability.
The EFSF lending rates and maturities for Greece will also be applied for Portugal and Ireland.
So will the new bailout be effective? It’s hard to say. The economic commentators are somewhat sceptical. Felix Salmon notes that this deal is not enough on its own to bring Greece into solvency. He believes that this is not a one-off event and that the same instruments will have to be used for Portugal and/or Ireland.
It’s clear that the deal will alleviate fears for a financial meltdown in the eurozone. However, the deal does not efficiently address the growth problem for Greece (and by extension for Portugal, Ireland, Spain, etc.). The fundamental problem of the eurozone persists. Until we manage macroeconomic imbalances and structural impediments to growth, we will not be able to overcome the reasons for the current debt crisis.
Posted in Budget and Finance, EU Reform, Institutional Affairs
Tagged Bailout, bonds, buy-back, details, European Financial Stability Facility, European Stability Mechanism, Greece, Ireland, lending rates, maturities, Portugal, rollover
The contemporary European history is often overlooked by many. It sounds so intuitive, so well-known and even a little bit boring. But the devil is in the details, and not knowing our past can hinder our future.
This is where the new book by Hanneke Siebelink – The 50 Days that Changed Europe, comes to help. The book is a concise, well-written story of the European integration process that presents the most important events that really changed Europe. It’s well suited for students and academics alike, since Siebelink has done some detailed research and the text includes some very interesting insights. The book is written in a very accessible style and language, which is always a benefit.
I have done some calculations based on the selection of events in the book. Below you can see the dynamics of the main events throughout the recent decades. A clear trend of increasing intensity of the integration process is obvious. Let’s hope that the new decade that we’re in will not end with the infamous turkey chart.
There has been a lot of discussion recently about the alleged undemocratic character of the austerity programs and bailout agreements for peripheral eurozone Member States. This is not the fundamental problem of the eurozone. Trade imbalances are not resolved, and this will render all rescue efforts futile.
I have followed with great interest the discussion among EU bloggers on the implications of the austerity programs for the level of democracy in peripheral eurozone Member States (see in particular the contributions by Leigh Phillips, Ron Patz, and John Worth). They all raise important questions and are definitely worth reading. What they miss, however, is the true cause of the eurozone crisis and the implications it has for any future efforts to rescue the euro.
The real problem is the trade imbalances of eurozone Member States. One group of Northern countries enjoys significant trade surpluses, while the Southern countries have deteriorating trade deficits. This process of economic divergence has worsened with the introduction of the euro (see the figure below).
Eurozone Current Account Balances as % GDP (source: Political Economy 101)
This has led to all kinds of negative outcomes for Southern economies, including excessive sovereign debt levels. But the current approach to resolving the eurozone crisis has been one-sided. We only try to repair one side of the equation – that is, the excessive spending in peripheral eurozone Member States. We do not take any measures to address the excessive saving in Northern countries like Germany or Netherlands. In addition to this we do not allow Southern countries to devalue their currencies in order to become competitive again.
This approach will not work. The treatment of excessive saving as a “virtue” will only worsen the current divergences. The lack of a devaluation option for Southern countries will bring them literally to the wall.
In this narrative the method for devising unsuccessful measures is of secondary importance.
Voluntary debt rollovers will not do the trick, nor will austerity programs. Bolder and much more balanced action is needed if we really want to repair the damage. If Northern countries continue to overlook their contribution to the crisis, the eurozone will fall under its own weight.
Since I am not an economist I thought it would be useful to list some the sources for this post:
Stop Blaming Trade Imbalances On Lazy Greeks, Industrious Germans And Other Stereotypes by Michael Pettis
External versus domestic debt in the euro crisis by Daniel Gros
Rebalancing the Global economy: A Primer for Policymaking – Stijn Claessens, Simon J Evenett, Bernard Hoekman (eds.)
The EMU needs a stability pact for intraregional current account imbalances by Sebastian Dullien and Daniela Schwarzer
Posted in Budget and Finance, EU Reform, Institutional Affairs
Tagged austerity plans, current account imbalances, democracy, devaluation, eurozone, Germany, Greece, Ireland, Netherlands, Portugal, sovereign debt
The Commission has proposed a set of measures to address the harm that corruption causes to European societies. The Commission is setting up a new mechanism, the EU Anti-Corruption Report, to monitor and assess Member States’ efforts against corruption and encourage more political engagement. Supported by an expert group and a network of research correspondents, and the necessary EU budget, the Report will be managed by the Commission and published every two years, starting in 2013. It will identify trends and weaknesses that need to be addressed, as well as stimulate peer learning and exchange of best practices.
How effective will the report be? It’s a very good sign that the EU will have a more focused approach towards diagnosing serious corruption in Member states. But it’s far from certain that ample treatment will follow the diagnosis. If we consider the experience with the reports under the Cooperation and Verification Mechanism for Bulgaria and Romania, it appears that the Commission reports stir a lot of emotions and produce fewer practical results.
Any effort to independently monitor corruption levels in any Member state should be commended. The Commission should also consider benefiting from the existing monitoring mechanisms set up by Transparency International and OECD.
The Greek financial crisis now threatens the whole eurozone. It appears that without substantial debt restructuring Greece is likely to default, and would have to leave the eurozone. This could lead, however, to substantial collateral damage and unintended effects for the whole European banking and financial system. The other option is a very large fiscal transfer from the eurozone core. This second option will lead donor Member States to demand substantial political guarantees for fiscal discipline in Greece and other possible recipients (i.e. Ireland and Portugal).
It looks like the crisis has brought back the idea for a true European political union on the table. The president of the ECB, Jean-Claude Trichet, himself has called for the establishment of a European financial minister.
Now, the idea is not really new. Back in the 1950s there was such a project, called the European Political Community (EPC) that aimed to politically unite the Member States in the European Economic Community (read more about it in the excellent paper by Berthold Rittberger). The main institutional innovation in the EPC was the central role of the bicameral parliamentary body in adopting the budget and the legislation. The EPC project failed, but some of its ideas were later implemented by including the European Parliament in the legislative and budgetary procedures.
Going back to Mr. Trichet’s ideas, we see something completely different. In his framework, the Council would act on the basis of a proposal by the Commission, in liaison with the ECB, to take some measures directly affecting the economy of the Member State that has not implemented its fiscal stability program. There is no role for the European Parliament whatsoever. Apparently Mr. Trichet believes that the very agreement on a stability program is substantial legitimation for a direct involvement in the economic and fiscal policies of a Member State by the Council.
This is quite doubtful. It’s very difficult to imagine how the same people that violently oppose to austerity measures taken by their democratically elected governments will somehow accept direct interference by an institution of the European Union. It’s equally difficult to imagine that the European Parliament will approve such an institutional framework. I can certainly understand the reasonable motives for proposing such a second stage of austerity enforcement, but I’m afraid that such a procedure will decisively worsen the democratic deficit of the European Union.
If and when the governments of the Member States decide that a more profound Treaty revision is needed for establishing tighter fiscal coordination, they will have to consult their national parliaments and the European Parliament. Such consultations are in fact inevitable, since TEU requires the summoning of a Convention to adopt the draft text of the revision (art. 48, para. 2-5 TEU).
Posted in Budget and Finance, EU Reform, Institutional Affairs
Tagged debt, European Central Bank, European Parliament, European Political Community, European Union, eurozone, fiscal policy coordination, Greece, Jean-Claude Trichet, political union, proposal
The Commission has put forward an important proposal for the reformation of the so-called Generalised System of Preferences (GSP) which grants specific tariff preferences to developing countries in the form of reduced or zero tariff rates or quotas.
Key elements of the proposal include:
1. Concentrating GSP preferences on fewer countries. A number of countries would no longer be eligible to benefit, including:
- Countries which have achieved a high or upper middle income per capita, according to the internationally accepted World Bank classification (such as Kuwait, Russia, Saudi Arabia and Qatar).
- Countries that have preferential access to the EU which is at least as good as under GSP – for example, under a Free Trade Agreement or a special autonomous trade regime.
- A number of overseas countries and territories which have an alternative market access arrangement for developed markets.
2. Reinforcing the incentives for the respect of core human and labour rights, environmental and good governance standards through trade by facilitating access to the GSP+ scheme which grants additional, mostly duty-free preference to vulnerable countries.
3. Strengthen the effectiveness of the trade concessions for Least Developed Countries (LDCs) through the “Everything but Arms” (EBA) scheme.
4. Increasing predictability, transparency and stability.
European citizens should think more about their demands when talking about the EU. Here’s why.
These are not the best of times for the European Union. There’s a financial crisis; an immigration crisis; a crisis of trust, and who knows what else. In a nutshell, the EU is in trouble.
What is more difficult to comprehend is the malignancy and the “I-told-you-so” attitude of so many politicians, commentators and European citizens. The poignancy of the negative feelings is really remarkable. That is why I would like to do something unusual for this blog and address these skeptics. My objective is to provide a merciless, subjective and heavily normative critique of the complacency of those that seem to prefer a European future without a European Union.
In order to do that, I need to make an important observation. Homo Sapiens has not evolved substantially during the last 60 years. That being said, the claims that a new war on the European continent is impossible seem strange. It was not the tanks and airplanes that destroyed Europe during World War II, it was the people in them. What is more, our physical and genetic ancestors have waged war on one another for at least two millennia on this continent. In fact, the only longer peaceful episode in recent history has been the period of European integration. It’s true that NATO and the dynamic of nuclear deterrence also played a part. But it was the cooperation of European elites within the European Community that cemented this security pact.
Nowadays many believe that wars are part of the history, but not of the future. Others think that wars may be a useful instrument of foreign policy. What unites them is the lack of any wartime experience. This virus of complacency and ignorance is widespread. It has caught up with politicians, journalists, and all kinds of experts. The McDonalds rule is their flag, although it has already been broken. This virus makes them think that states are well equipped to solve emerging problems using the classic instruments of intergovernmental cooperation. The problem with their narratives is that this type of cooperation has recently failed spectacularly – with the UN Climate Change Conference failing to agree on new rules for climate change mitigation, WTO failing to agree on the completion of the Doha round, and the G-20 failing to agree on anything except for the summit menu. These are not just incidents; these are symptoms of the limitations of the classic forms of international cooperation.
Someone might argue that if the EU were so successful, it wouldn’t have experienced its recent crisis. That is true. The EU is not perfect, and we are now bearing the fruits of the lax rules of the Economic and Monetary Union. But it is much better than any other form of cooperation especially given the small economies of many Member States. This issue of economic efficiency is usually not discussed by euroskeptics. The truth is that without the European Union economic life in Europe would definitely slow down, and businesses know that. This is the problem of some anti-EU parties: their constituencies will actually suffer from any possible withdrawal from the Union. That is why they prefer to grumble about the EU without taking a meaningful step towards resolution of their grievances. Referendums should be held in each and every Member State that feels the need to take a different path to prosperity. The United Kingdom should be particularly encouraged to conduct a referendum on its EU membership. The European Union is not a club of convenience; its success depends on the high motivation of its members.
The European Union is not at a crossroads. It is a well-functioning and unique mechanism for political integration. It’s up to its users – the European citizens, to use it properly. It will deliver results only if we command it to do so. That is why from now on I would like to hear more demands, and less chaotic criticism when discussing the EU.
Posted in EU Reform, Foreign and Security Policy, Human Rights, Institutional Affairs, Internal Market, Justice and Internal Affairs
Tagged COP16, Europe Day, European Union, G-20, history, intergovernmental cooperation, war, WTO