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
For the first time a governor of a central bank of a Member State has criticized the policy of the European Central Bank. It was no other than Axel Weber, the president of the German Bundesbank. He said that he was critical of the new direction of the ECB monetary policy given the underlying risks. Weber criticized in particular the purchase of government bonds by the ECB, and advocated for quick exit from this purchase. Italian central bank governor Mario Draghi also called for an end of such purchases as quickly as possible, but without openly criticizing ECB policy.
The thing is, both Mr. Weber and Mr. Draghi are candidates for the post of President of the ECB. So the criticism of Mr. Weber can be explained by his differing vision for the future policy of the ECB. However, monetary policy of the eurozone is not decided unilaterally by the President of the ECB, and Mr. Weber is actually criticizing all his fellow governors that have collectively taken the decision to purchase those bonds. Even if we set aside the concerns expressed by Jean Quatremer about the breach of confidentiality, it is apparent that Mr. Weber is frustrated with his colleagues and attempts to shift the debate to the public arena. This is dangerous. The ECB must at all cost remain independent in its deliberations in order to guarantee that professional, and not political considerations, guide its decision-making.
The eurozone crisis caused by the Greek debt problems is now taking a significant turn.The ECOFIN Council agreed on the creation of a European Financial Stabilisation mechanism with a total volume of up to € 500 billion and €250 billion from the IMF. The facility will be organised in two schemes.
The first will fall under Art. 122, para. 2 TFEU and will amount to €60bn. Its activation is subject to strong conditionality, in the context of a joint EU/IMF support. The second part will be based on an intergovernmental basis among eurozone members although Sweden and Poland have volunteered to take part, and will amount to up to €440 billion. It will be organized as a Special Purpose Vehicle on a pro rata basis by participating Member States in a coordinated manner and that will expire after three years.
Meanwhile the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities. The ECB also decided to conduct interventions in the euro area public and private debt securities markets to ensure depth and liquidity in those market segments which it believes are currently dysfunctional.
Bloomberg quotes Marco Annunziata, chief economist at UniCredit Group in London, saying that the measures should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion.
A strong statement by Olli Rehn: “We shall defend the euro whatever it takes”.
But how is this going to work out in reality? We don’t know yet.
Posted in Budget and Finance, EU Reform, Institutional Affairs, Internal Market
Tagged Council, debt securities markets, dollar liquidity swap, ECOFIN, Euro, European Central Bank, European Financial Stabilisation Mechanism, eurozone
The Greek bailout is here, and we have the details:
The financial package makes available € 110 billion to help Greece meet its financing needs, with euro area Member States ready to contribute for their part € 80 billion, and the rest provided by the IMF. The first disbursements will be made available before the payment obligations of the Greek government fall due on 19 May.
Euro area financial support will be provided under strong policy conditionality, on the basis of a programme which has been negotiated with the Greek authorities by the Commission and the IMF, in liaison with the ECB.
The programme will include the following measures:
- Greece is subject to a check by IMF/EU each quarter;
- 5pc point reduction in fiscal deficit in 2010;
- Goal is to drive deficit down to 3% of GDP by end-2014;
- Debt-to-GDP ratio is forecast to grow from 115% to 140% (but these are the Maastricht numbers. Add some 10pc point to get the total debt);
- Individual measures include, another increase in VAT from 21 to 23% (plus increase for smaller VAT rates), 10% increase in excise taxes on fuel, cigarettes and drinks, a windfall tax, a property tax, near abolition of 13 and 14th month pay in the public sector, cut of Christmas and Easter bonuses, cuts in pensions, reducing early retirement.
The shortcomings of the plan according to Eurointelligence:
- No public sector layoffs, or change of status of public sector job;
- No complete removal of 13/14th month salary in public sector;
- No removal of 13/14th month salary in private sector, meaning more unemployment;
- No immediate privatisation of state companies;
- No change to rule that caps dismissals to 4% of workforce, and no change to firing costs;
- No anti tax-evasion mechanism.
I would also recommend reading an interview with one of my favourite philosophers, Jürgen Habermas, on the Greek bailout, the institutional challenges, and the German intransigence.
Posted in Budget and Finance, EU Reform, Institutional Affairs, Internal Market
Tagged agreement, bail-out, conditionality, details, European Central Bank, eurozone, Greece, IMF, Jürgen Habermas, loans
Greece has formally asked for financial assistance under the EU-IMF joint financial package.
The Greek finance minister, George Papaconstantinou, has sent a letter to Eurogroup President Jean-Claude Juncker, EU economy commissioner Olli Rehn and European Central Bank President Jean-Claude Trichet, requesting the activation of the support mechanism.
The request for aid must first be approved by the ECB and the European Commission. Then it must be approved unilaterally by all eurozone Member States.
We now have some details on the bailout package for Greece. The program will be managed jointly by the European Commission, the European Central Bank, and the International Monetary Fund. The program will cover a three-year period. The euro area Member States are ready to contribute up to € 30 billion in the first year to cover financing needs. Financial support for the following years will be decided upon the agreement of the joint program. In order to set incentives for Greece to return to market financing, Euro area Members States loans will be granted on non-concessional interest rates. The pricing formula used by the IMF will be used benchmark for setting Euro area Members States bilateral loan conditions with some correction. The initial price of credit will be around 5% p.a. for a three year fixed-rate loan.
But what will be the effect of this program? One thing is certain: it will alleviate current pressures on the eurozone. But at least two commentators (Wolfgang Münchau and The Pragmatic Capitalist) say that this will only kick the can down the road. Wolfgang Münchau is more specific: he believes that Greece will eventually default. He criticizes the EU for not providing a generalised crisis resolution regime.
Justin Vaïsse from the Brookings Institution analyses in a new article the implications of the economic crisis for the European Union. He consecutively renounces ideas about the surge of nationalism and populism, the death of the internal market, the disintegration of the eurozone, a new iron curtain between the West and East in the EU.
Vaïsse thinks that the main threat is a “soft partition” of the EU. This threat may be realized if the Stability and growth pact is trumped, and if EU leadership remains weak and fragmented.
The author sees much more opportunities for the EU stemming out of the crisis. He thinks there is strong motivation for EU candidate countries to join the Union, and for member states to join the eurozone. According to him EU has serious advantages in specific areas, such as climate change mitigation and adaptation.
He acclaims the ECB record on the crisis, and is very critical of the leadership of Commission’s president Barroso and the Czech EU presidency.
His main argument is that the EU is “too interdependent to fail” due to the crisis.
Posted in Budget and Finance, Environment, EU Reform, Institutional Affairs, Internal Market
Tagged analysis, disintegration, European Central Bank, European Commission, European Union, eurozone, Financial Crisis, measures
Angela Merkel, Chancellor of Germany, has strongly criticized the Federal Reserve, the European Central Bank and the Bank of England for their action against the financial crisis. This is what she had to say:
“What other central banks have been doing must be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe.
(…) Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds.
(…) We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.”
This is extraordinary, since the independence of the central banks, and the ECB in particular, is guarded by law.