Category Archives: Internal Market

Trichet States the Obvious

The President of the ECB, Jean-Claude Trichet, has called for a “quasi-budget federation” in front of the Economic and Monetary Affairs Committee of the European Parliament. The “f” word, however, is ominously missing from the EP’s press release. Mr. Trichet went on to say that “pundits are tending to underestimate the determination of [EU] governments”.

The determination of EU to rescue the euro notwithstanding, things continue to look bad. The interest rate spread between Italian bonds and benchmark German Bunds have come to a euro-lifetime high. Belgian 10-year bonds spread to German bunds of similar maturity widened to the highest levels since at least 1993. In other words, markets are not buying the “determination” stunt, at least for now.

Hence Mr. Trichet’s comments. He is quite aware that in the long term the current institutional framework of the eurozone is NOT sustainable. Even if the ECB manages to calm the markets for the moment (which is by no means certain), new, more powerful crises may follow in the next decade, vastly undermining economic growth in the whole European Union.

So Mr. Trichet is doing two things. First, he is trying to calm the markets, which is a very sensible thing to do. Second, he is telling European politicians that the complacency on the eurozone institutional framework is no longer possible and discussions must start now. Now the question is are they listening?

 

 

The Irish Bailout: the Details and the Bigger Picture

The details of the Irish bailout are now set:

EU countries and the International Monetary Fund will provide up to €85bn in total, which may be drawn down over a period of up to 7½ years. About €50bn is aimed at bolstering Ireland’s public finances while it implements a €15bn austerity package over the next four years. Of the remaining €35bn, €10bn will be used to recapitalise Ireland’s stricken banks, while another €25bn will be a contingency fund to help support the banking system if necessary. The Irish government itself will contribute €17.5bn towards the bank contingency fund, while the IMF will put €22.5bn towards the overall package. This will also include three bilateral loans from the UK, Sweden and Denmark, with the British contribution being around €3.8bn. Ireland will pay average interest of 5.8 percent on the loans.

More importantly, the Council agreed on speedy introduction of a permanent European Stability Mechanism (ESM). An ESM loan will enjoy preferred creditor status, junior only to the IMF loan. The most important feature are the so-called collective action clauses (CACs). These clauses allow a large majority of bondholders to agree a debt restructuring that is legally binding on all bondholders. CACs are meant to ease the process of debt restructuring. The CACS will be introduced in mid-2013.

The proposal for ESM is supported by the president of the ECB, Jean-Claude Trichet. The president of the European Council, Herman van Rompuy, will present proposals for amendment of the Treaties in December.

There is, however, a problem. The financial markets seem unconvinced. As Eurointelligence notes, the problem is that the market demand for peripheral debt is weak, and from 2013 demand for peripheral bonds may dry up completely due to the bail-in rules. And the 6% interest on bailout loans may be too high for Ireland to stay solvent.

There are some ideas how to handle this. Wolfgang Münchau proposes to separate national debt from financial debt and to turn all outstanding sovereign bonds, existing and new, into a common European treasury bond. He does admit that his proposal is not actually feasible, though.

So a more practical approach is to see whether, after all, the EU rescue system can survive the waves of uncertainty. Spiegel International does just that, and notes that of all the possible next bailouts, one is a no-brainer. If Spain falls, so does the euro.

 

 

The Technicalities of Eurozone Breakup

The concept of eurozone breakup is not new, and I have mentioned it before. But now more and more voices warn of this threat. One important observer of European affairs, Gideon Rachman, says that the single currency will indeed eventually break up – and that the euro’s executioner will be Germany. On the other hand a prominent US economist, Barry Eichengreen, says that the euro is an example of a path-dependent historical process that is unlikely to be reversed. None other than Angela Merkel said that “if the euro fails, then Europe fails”. But is this really true?

The markets signal mistrust. Even Mrs. Merkel admits that the eurozone is facing “an exceptionally serious situation”. In any case the possible breakup of the eurozone is a matter of speculation.

That being said, there’s not much discussion on the technicalities of the eurozone breakup, and that is a hugely important aspect. It is very important mainly because of the legal basis of the eurozone and its structural place in the legal framework of the European Union.

Barry Eichengreen again is probably the only person who wrote a whole scientific paper on the subject, claiming that the technical difficulties would be quite formidable. He notes that redenomination in national currencies may pose some real difficulties, especially in determining the scope of redenomination. But his analysis focuses mainly on the exit of a single country or a group of countries from the eurozone, and not on the breakup of the eurozone as a whole.

More recently Wolfgang Münchau and Susanne Mundschenk have written an analysis for Eurointelligence that considers the legal implications of both the exit of a single country from the eurozone, and the breakup of the eurozone altogether. The authors note that the European Treaties have no provision for an exit clause from the euro area, just as there is no provision for an exit from the CAP. They claim that it is virtually impossible for a member state to leave the euro area, devalue, and remain in the EU. They also dismiss the argument that Germany’s persistent trade surplus will eventually cause the collapse of the euro area. But in their paper they do not consider the technicalities of a possible breakup if it occurs.

The truth is that the breakup of the eurozone goes through a Treaty amendment. This may be a simplified procedure (art. 48, para. 6 TEU) since the provisions on economic and monetary policy are in part III of TFEU, and the breakup of the eurozone does not increase the competences conferred on the EU. Such a breakup is only possible through a unanimous decision of the European Council, though. That means that all member States must agree on the dissolution of the Economic and Monetary Union in its present form. The real challenge will be to agree on initial redenomination rates.

However unlikely that is, I would like to point out that there is, indeed, a legal mechanism for the breakup of the eurozone. This breakup will only happen if all Member States agree that the euro is not a sustainable currency. To me it sounds much easier to prevent this breakup from happening in the first place. But should Member States fail to act on the euro crisis, a breakup of the eurozone remains legally and technically possible.

As for the claims that if the euro fails, then Europe fails, I disagree. It is better to have limited, but consensual integration process, than to have secession or atrophy.

 

 

Three Options for the Future of the Common Agricultural Policy

The European Commission has adopted its communication on “the Common Agricultural Policy (CAP) towards 2020 – Meeting the food, natural resources and territorial challenges of the future”.

The Commission outlines three main options for reform.

  1. adjusting most pressing shortcomings in the CAP through gradual changes;
  2. making the CAP greener, fairer, more efficient, and more effective; and
  3. moving away from income support and market measures and focusing on environmental and climate change objectives.

In all 3 options, the Commission foresees the maintenance of the current system of 2 Pillars – a 1st Pillar (covering direct payments and market measures, where rules are clearly defined at EU level) and a 2nd Pillar (comprising multi-annual rural development measures, where the framework of options is set at EU level, but the final choice of schemes is left to member states or regions under joint management). Another common element to all 3 options is the idea that the future system of direct payments cannot be based on historical reference periods, but should be linked to objective criteria.

The CAP blog cites the initial critical reaction of the UK’s National Farmers Union and promises more analysis in the following days.

 

 

EU Energy Infrastructure Priorities for 2020

The Commission has adopted its communication “Energy infrastructure priorities for 2020 and beyond – A Blueprint for an integrated European energy network”. The main issues:

Electricity grids must be upgraded and modernised to meet increasing demand due to a major shift in the overall energy value chain and mix. Electricity generated from renewable sources, which is expected to more than double in the period 2007-2020. High-voltage long distance and new electricity storage technologies must be implemented which can accommodate ever-increasing shares of renewable energy, from the EU and beyond.

The priority projects re:

1. Offshore grid in the Northern Seas and connection to Northern as well as Central Europe.

2. Interconnections in South Western Europe to accommodate wind, hydro and solar.

3. Connections in Central Eastern and South Eastern Europe

4. Completion of the BEMIP (Baltic Energy Market Interconnection Plan.

Natural gas will gain importance as the back-up fuel for variable electricity generation. A diversified portfolio of physical gas sources and routes and a fully interconnected and bidirectional gas network are needed.

The priority projects are:

1. Southern Corridor to bring gas from the Caspian Basin, Central Asia and the Middle East to the EU.

2. Linking the Baltic, Black, Adriatic and Aegean Seas through in particular:

– the implementation of BEMIP and

– the North-South Corridor in Central Eastern and South-East Europe.

3. North-South Corridor in Western Europe.

The development and modernisation of district heating and cooling networks should be promoted as a matter of priority in all larger agglomerations.

Around one trillion euros must be invested in the EU energy system between today and 2020. Out of these investments about 200 billion euros are needed for energy transmission networks alone.

One way to do that will be via regional clusters. The Commission also proposes the establishment of a contact authority (“one-stop shop”) per project of European interest, serving as a single interface between project developers and the competent authorities involved at national, regional, and/or local level. The introduction of a time limit for a final positive or negative decision to be taken by the competent authority will be explored. The Commission also proposes the development of guidelines to increase the transparency and predictability of the process for all parties involved (ministries, local and regional authorities, project developers and affected populations).

As for funding, a number of measures are suggested:

  • Leveraging private sources through improved cost allocation, including the introduction of guidelines or a legislative proposal to address cost allocation of major technologically complex or cross-border projects;
  • Combining existing and innovative financial mechanisms that are different, flexible and tailored towards the specific financial risks and needs faced by projects at the various stages of their development.

 

 

Who is the New Greece?

New clouds are gathering over the eurozone.

Ireland has turned to the European Commission to seek support for its revised budget-cutting plan. Olli Rehn, the European commissioner for economic and monetary affairs, is going to Dublin to discuss the new Irish budget cuts, amounting to 3.6 percent of GDP. The move aims at convincing the bond investors that are currently reluctant to buy Irish bonds. The word “bailout” hangs in the air.

Portugal plans a 5 percent cut of public sector wages and an increase in value-added tax (VAT) by 2 percentage points to 23 percent. Greece’s austerity plan is not working as planned, as budget revenue has grown below expectations.

On top of this the US has, with its second wave of quantitative easing (QE2), practically cornered the eurozone. QE2 should bring new upward pressure on the euro, further undercutting the competitiveness of eurozone exports.

All this tell us that the eurozone is still in serious trouble. Even if governments in the periphery manage to escape the bailout scenario for now, in the medium turn their position remains quite unsecure. That is why it’s worth reading the somewhat disruptive analysis of Samuel Brittan (free FT subscription required) on the imminent death of the euro. Mr. Brittan says that the current battle to save the euro resembles the unsuccessful struggle from 1961 to 1967 to stave off sterling devaluation. A cycle of rescues and new crises ultimately ends with acceptance of the inevitable.

Now, I have discussed the possible breakup of the euro before. This is a plausible scenario, but luckily not the only scenario. A breakup of the eurozone will deal a huge blow to the integration dynamic, and should be avoided. Hopefully all Member States understand that, but it remains to be seen whether key eurozone Member States act on this understanding.

New Insights on Possible Treaty Amendments

The idea for an amendment of the founding Treaties in order to accommodate a permanent bail-out mechanism is on the table after the last European Council meeting. Now there are new developments and opinions that touch on this subject.

CEPS has published three reports that contemplate on possible Treaty amendments – a post-mortem on the European Council, an overview of revision procedures under the Lisbon Treaty, and a more specific overview of the practicalities of the Lisbon Treaty revision(s). All documents suggest that a limited revision of the Treaties is achievable. The more specific proposals are:

  • amending art. 122 TFEU, and including a reference to financial stability (plus a permanent European Financial Stability Facility – EFSF, created on an intergovernmental basis), or
  • adding a reference to art. 143 TFEU – the legal basis to extend the existing EU support mechanism to non-euro area member countries in art. 136 TFEU – the special Treaty article for the euro area countries.

The authors note that the viability of both approaches will depend on the interpretation whether such an amendment would affect the no-bailout clause in Art. 125 TFEU, thereby changing the nature of monetary union and creating a fiscal transfer union (in German Transferunion). Additionally, it is arguable whether such an amendment would constitute a change to the “essential scope and objectives” of the EU, thus requiring an ordinary revision procedure.

Meanwhile some Dutch parties are trying to force a preliminary referendum on any pending Lisbon Treaty amendments.

It appears that any proposal for Treaty amendment must be considered very carefully in the light of possible ratification, as well as taking into account the no-bailout clause of art. 125 TFEU. My personal conviction is that any institutionalisation of a permanent bailout mechanism is legally troublesome, and in any case should be subject to ordinary revision procedure. But first of all we need to see the amendments in print before speculating on their legal essence.