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05 February 2011

Graham Bishop's comments on the February European Council: "Concrete talk – putty actions"


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Der Rat hat die Erwartungen des Marktes an "konkrete" Maßnahmen im März und sinnvolle Streßtests von Banken genährt. Beide Erwartungen werden wahrscheinlich enttäuscht. Es ist aber noch nicht zu spät für eine Richtungsänderung hin zu einer gemeinsamen Economic Governance mit dem Ziel einer wirksamen politischen Union in der Eurozone.


The European Council: Concrete talk – putty actions
 
Ahead of the February 4th Summit, the leading members of the European Council/Eurozone huffed and puffed about grand plans to give substance to their re-stated commitment “to do whatever is required to ensure the stability of the euro area as a whole”. The final communiqué was riddled with references to “concrete” but closer examination showed this usually referred only to the commitment to make proposals, rather than actually take the hard decisions. When tested, the concrete looked more like putty!
 
The political class only seems willing to move forward when faced with the threat of instant crisis. Without that, the detractors of act in exactly the same way: the statesmen/women respond rather like financial speculators reacting to the immediately-preceding short-term trade: they relax the moment the pressure seems to be abating. Unfortunately, they do not seem willing to recognise that markets have built in the assumption that the political class will follow through on its grand assertions. Once a course of action is fully discounted by markets and then it does not materialise, the disappointment is likely to be even greater, and political capital diminished. Next time round, the actions will need to be even more powerful to carry conviction.
 
In a recent book The EU Fiscal Crisis: Forcing Eurozone Political Union in 2011?,[1]this author set out some possible scenarios for exactly this process. Regrettably, the European Council seems to be avoiding the visionary script that gives a happy ending. Instead they are doggedly pursuing variants of the scenarios that have very unhappy endings. But it is not too late to change course.
 
At the European Union level, the following plans were announced:
·         March ECOFIN “to reach a general approach on the Commission's legislative proposals on economic governance…, so as to reach a final agreement with the EP by the end of June. This will allow strengthening the Stability and Growth Pact and implementing a new macroeconomic framework.
·          “March European Council will identify the priorities for structural reforms and fiscal consolidation for the next round of stability and convergence programmes”
·         “Member States are invited to submit in April their national reform programmes…”
·         The new European Banking Authority was called upon to conduct “ambitious” stress tests. However, the European Parliament’s ECON Committee held Hearings of the nominees for the Chairs of the new Committees last week. Regrettably the Chair of ECON had to report that “The right choice of persons to head the authorities in their first years is essential if they are to truly represent strong authorities with an important say at Europe's highest financial levels. Unfortunately, the selection procedure has so far been below par and the European Parliament's Economic and Monetary Affairs Committee has raised alarm bells about this on various occasions.  Remuneration levels are uncompetitive, resulting in too few applications, the 60 year age limit is inappropriate...” This does not bode well for the credibility of these ambitious stress tests.
 
On this timetable, credible and detailed policies are only likely to be signed off collectively (as well as nationally) in June. The economic governance package should also include sanctions but this author has already argued that the proposed sanctions are likely to be regarded as too weak. In any case, history suggests that the chances of them being enforced are negligible.  Markets will also be looking for evidence of full implementation and timely monitoring. The February European Council meeting has created market expectations of “concrete” action in March and meaningful bank stress tests.  Both expectations are likely to be disappointed.
 
At the Eurozone level, powerful historical changes are afoot.
 
Opposition to separate Eurozone Heads of Government meetings seems to have melted away and it was this group that “reviewed progress in the implementation of the comprehensive strategy to preserve financial stability and ensure that the euro area will emerge stronger from the crisis.” As “part of the global package to be finalized in March” they agreed actions that included:
·         “Assessment by the Commission, in liaison with the ECB, of progress made in euro area Member States in the implementation of measures taken to strengthen fiscal positions and growth prospects.
·         Concrete proposals by the Eurogroup on the strengthening of the EFSF so as to ensure the necessary effectiveness to provide adequate support.”
So the Eurozone members will have taken another step towards collective oversight of their own economies. Again, they will look at proposals for strengthening the ESFS, but seem to have stopped short of being certain of agreeing them. However, President van Rompuy said afterwards “We will adopt the full package in March”.
 
On the positive side, Council President van Rompuy (and noticeably not the Commission President) has been sent off – by the Eurozone Heads of Government, rather than the EU Heads - on a consultation mission of the eurozone. The task is “identifying concrete ways… to achieve a new quality of economic policy coordination in the euro area to improve competitiveness, thereby leading to a higher degree of convergence,” Interestingly, they stated specifically that such policies must be “without undermining the single market.” (This author’s book detailed the importance of the single market.) Historians will look back and say this collective governance represented the emergence of an effective political union amongst the eurozone members.
 
“Interested non-euro states” are invited to participate, though it is difficult to imagine that Britain will be active in this. The European Union Bill - commonly known as the “referendum lock” bill is wending its way through the British Parliament. Given the possibility that there will have to be a referendum even on trivial issues, enactment of this Bill is likely to ensure that Britain is completely marginalised in the process of the eurozone creating a form of political union. So one “concrete” result from the next few months may be Britain cemented to the sidelines of Europe.
 
Examining the debate about the EFSF, it is not clear that there is acceptance of the need to expand dramatically the capacity to disburse loans – or at the very least ensure that the way is left clear for a drastic expansion if the need arises. Instead, arguments rage about enabling it to buy bonds – especially in the primary market.
 
Officials who propose these ideas might wish to explain exactly what they intend to achieve. Censoring market views and rigging auctions could be highly counter-productive if market participants come to feel this is a substitute for sound economic policies. The setback in markets as it dawned that the February European Council was unable to take tough decisions may be ominous.
 


[1] Click here to view the flyer or here to purchase the book


© Graham Bishop


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