This week was tumultuous for the eurozone, in a string of equally tumultuous weeks that preceded it. The Greek Prime Minister proposed a referendum for the new bailout package for Greece, was promptly scolded by his fellow eurozone leaders at the G20 summit, and had to arrange his exodus from the scene. Meanwhile Italy panicked and started redesigning its own austerity programme.
What all this reveals is a new incursion into political entrepreneurship, mainly by the leaders of France and Germany, to somehow solve this crisis. This is also a sign of failure of the European governance mechanism that simply does not withstand the political pressure.
The leaders of the main EU institutions play only supporting roles in this spectacle. The governments of the Member States, aided by the IMF, are once again trying to pull themselves by their own hair.
The crisis of European political leadership notwithstanding, we are experiencing the incapability of the institutional mechanism of the European Union to deliver in this difficult moment. Important decisions are taken outside the multilateral decision-making track. This brings more instability to the system and delegitimizes the decision taken. One of the reasons is the blatant disregard for European Union law.
During the dinner in Cannes Mrs. Merkel and Mr. Sarkozy reportedly asked Mr. Papandreou whether Greece wants to stay in the eurozone or not. The problem of this question is that it has not been discussed with all 26 Member states other than Greece, and to my knowledge it would take all these 26 Member states AND Greece in order to decide on its exit from the eurozone. In other words the political entrepreneurship has neglected the very structure and substance of EU law, hiding behind the veil of urgency. Urgently taken decisions often are bad decisions, though. The European Union is much more than its currency and no economic crisis of any proportion should be used as a tool to destroy what has already been built.
While we, Europeans, remain surprisingly short-sighted, our American allies have already noticed and evaluated the huge importance of our weakness. Perhaps it is time to start thinking strategically and stop shooting in the dark.
Posted in Budget and Finance, EU Reform, Institutional Affairs
Tagged Bailout, debt, eurozone, Financial Crisis, France, Germany, Greece, IMF, Italy, referendum
France and Italy have signaled their desire to push for a reform of the Schengen framework for border control. One of the most important proposals is the procedural right to temporarily re-establish border controls between two countries. The European Commission is scheduled to present its own plans for amending the Schengen rules next week (4 May).
The Schengen border security legal framework is now part of the EU acquis. Any revision of the Schengen framework goes through a codecision procedure, where the European Parliament is a co-legislator with the Council (see art. 77, para. 2 TFEU). More, the Commission is the only body that can propose legislation on border checks, asylum and immigration (see a contrario art. 76 TFEU). Whatever France and Italy propose is of no relevance; the Member States do not have a right of initiative on these matters.
On all these accounts I am quite skeptical that Italy and France will succeed to push an amendment of the Schengen framework that seriously undermines the principles of the current regime. Any significant policy overhaul must be accompanied by a careful impact assessment and discussions not only among governments of Member States, but also with relevant stakeholders. It will take more than a bilateral summit to do that.
The news that Italy and Malta are pressing for special summits to deal with the “epic emergency” immigration resulting from the upheaval in North Africa did not surprise me. Back in 2009 I wrote to the Reflection Group on the Future of Europe 2020-2030, proposing a specific initiative for a common EU border security policy using the instruments of the Lisbon Treaty. I developed my arguments in an article that I presented at a UACES conference in the beginning of 2010, and it was published in the journal European Security.
My argument was that:
1. EU border security is not effective enough due to uneven policy implementation, and
2. Future challenges and threats may overwhelm the present institutional setting.
I went on to discuss some of the challenges based on the assumption of fundamental factors affecting human security – the changing climate (Stern 2007) and the global demographic trends (Lee 2003). I outlined a number of impending threats and concluded that the development of a true common European border security policy is urgently needed in order to develop and implement adequate holistic solutions for mitigating those threats. Sergio Carrera from CEPS has written an excellent paper on the possible creation of a common European border security service.
Now, it is true that some Member States have their own views about border security. But a strategic review of the EU’s border security policy is obviously and urgently needed. It may or may not result in a common border security service, as Carrera proposes. But it should create a comprehensive action plan that goes much beyond technological standards and ad hoc assistance.
If my analysis is even partially correct, there is no time to lose.
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?
Posted in Budget and Finance, EU Reform, Institutional Affairs, Internal Market
Tagged Belgium, budget federation, crisis, ECB, Euro, European Union, eurozone, federation, institutional framework, Ireland, Italy, Jean-Claude Trichet, Spain
The German government is on the forefront of an attempt to restrict the volatility of the euro exchange rate. First, the German financial regulator BaFin placed a unilateral ban on naked short-selling of eurozone sovereign debt instruments, with little effect. Second, Angela Merkel proposed a comprehensive reform of the stability and growth pact, with tougher rules of the game aiming to achieve one thing in particular: that member states bear the responsibility for a solid budget management. Third, Germany is hosting an international conference on financial market regulation in Berlin.
So far, so good. The markets, however, are not impressed. In fact, some analysts say that the euro may fall below parity with the dollar in the first quarter of 2011. The problem is that the decline in the euro may hurt demand for the region’s sovereign bonds in the year when new debt will be soaring.
The President of the eurogroup, Jean-Claude Juncker, says that foreign-exchange intervention isn’t an urgent issue.
One leg of the problem according to Proffessor Michel Aglietta, is that we have a solvency problem with Greece, not a liquidity problem. He says that the austerity program for Greece is a ticking bomb that could cost dearly to the whole European Union. He advocates for immediate restructuring of the Greek debt. He also says that the eurozone will not survive without a system for budgetary transfers among eurozone members. according to him the private sector is not capable to compensate for the draconian austerity measures in Portugal, Spain, Ireland and Italy.
Jan Kregel and Rob Parenteau outline the key aspects of the eurozone predicament using the financial balance approach developed by Wynne Godley. They say that the current attempt at “budgetary discipline” in peripheral eurozone members will lead to fiscal retrenchment, private income deflation, and rising private debt distress. They warn that IMF conditionality is bound to set off the twin contagion vectors of falling trade surpluses and rising bank loan losses in the core nations.
I am not an economist. But these warnings against the current EU approach towards the eurozone crisis come from too many places (for alternative ideas see Peter Bofinger and Stefan Ried, Avinash Persaud, and Paul De Grauwe). This issue is way too serious to be decided upon in a hurry.
Posted in Budget and Finance, EU Reform, Institutional Affairs, Internal Market
Tagged Angela Merkel, budgetary discipline, debt, Euro, eurozone, existential crisis, financial retrenchment, Greece, Ireland, Italy, Portugal, private sector, Spain, Stability and Growth Pact
Greek Deputy Prime Minister Theodoros Pangalos has criticised Germany’s attitude towards the ongoing Greek debt crisis, adding that Athens had never received adequate war reparations. The German foreign ministry said that a discussion about the past is not helpful at all to solve today’s problems.
Mr. Pangalos also said that the EU suffers from lack of leadership. He added to that Italy was being more inaccurate with its financial statistics.
At the same time Greece demands a debt default guarantee to calm down markets.
I am in disarray. How is Greece expecting to get support and sympathy from its peers when using such language??? The markets will not be calmed by Mr. Pangalos’ statement; that is clear. I wonder whether Kostas Simitis knew better.