19 March 2012

Paul N Goldschmidt: François Hollande and Europe - An unconvincing presentation Saturday in Paris!

In his speech, meant to demonstrate his European commitment in front of the EU's socialist elite, François Hollande demonstrated his rather superficial knowledge of financial markets and of the European institutional mechanisms that regulate them, comments Goldschmidt.

On the face of it, his appeal to renegotiate the Treaty on budgetary discipline, to add new measures aimed at fostering growth, does not appear outlandish and his opponents are wrong to aim their main criticisms at the fact that it has been already “signed” since March 1st.

This is all the more true that it is perfectly legitimate to question the pertinence of the Treaty itself, in light of other recent measures agreed at EU/EMU level (strengthening of the SGP, “six pack”, “two pack”, MES etc.) The latest treaty adds considerable institutional opaqueness and complexity in the articulation of these agreements undertaken by different groupings of signatories (EMU/24 or 25 Member States/EU). In particular, subordinating the activation of the EMS to the ratification of the budgetary Treaty weakens the EU’s financial defences during the nine months interval, needed even without a renegotiation.

If the required amendments are limited to adding some well meaning declarations including objectives of economic growth, social justice, governance and solidarity (the psychological value of which should not be underestimated), without reopening the agreements on budgetary discipline – as the candidate is apparently suggesting – then there is really no reason to make a big deal out of his request.

However, François Hollande did make suggestions that imply far more than a mere drafting exercise when he put forward proposals concerning the issuance of “euro project bonds” to fund major infrastructure projects or concerning the direct access of the EMS to the ECB’s financing facilities.

As far as “project bonds” are concerned, if one casts aside the media aspects aimed at underpinning his European activism, the candidate faces an alternative: either he wishes merely to encourage the EIB, whose work in this area is exemplary, to promote this type of financing as a priority, an option which does not necessitate any particular institutional change; or he has in mind the creation of a separate mechanism whose financing would have to be be guaranteed directly or indirectly by the EU budget.

In the second case, the financing capacity will need to be included in the forthcoming negotiations on the EU financial perspectives where securing additional financial capacity will prove highly contentious. An EU budget guarantee is of course a backdoor way of obtaining – by construction – a joint and several guarantee of the 27 Member States, a situation likely to be opposed by several of them.

In addition, it will be necessary to agree on a procedure for selecting projects and monitoring them: either this can be entrusted to the Commission (over the unavoidable objections of several MS) or sub-contracted to the EIB. In either case it is difficult to see what advantage would benefit France in particular.

Similarly, giving the EMS direct access to ECB funding is another opaque manoeuvre to engineer the mutualisation of a part of EMU Members' debts. Indeed, when lending to the EMS, the ECB is assuming the credit risk of the borrower whose resources are limited to €500 billion (or €750 billion, if the remaining resources of the EFSF are taken into account). As the purpose of ECB access is to “increase” the firepower of the EMS, the shareholders will have to authorise such borrowings which should not be taken for granted.

In case of EMS default, there are two possible remedies: a recapitalisation of the EMS or of the ECB. Recapitalising the EMS would prove difficult because its failure to meet its obligations would most likely result from financial difficulties facing one of its important Members (Spain, Italy), which would not encourage the remaining solvent members to assume responsibility in excess of their “several” commitments. The alternative is reconstituting the capital base of the ECB which enjoys – by construction – the benefit of the “joint and several” guarantee of its shareholders (the same as the MES). In the end the result may be the same, but it is understandable that the countries that are most exposed to recapitalising either of the institutions are precisely those who are insisting on enforceable budgetary discipline, accompanied by the threat of credible sanctions.

In conclusion, the greater budgetary flexibility that François Hollande is calling for is only conceivable within the framework of deeper EMU integration along “federal” lines. Then the ECB could assume fully the role of lender of last resort and, in addition, conduct the EU’s foreign exchange policy on an equal footing with its main competitors. Allowing the exchange rate to absorb a part of the adjustment process that currently is weighing exclusively on the budgetary process, opens new growth possibilities, limiting in the near term the efforts required of the less well off.

If he wishes to appear credible, François Hollande (and the same applies to President Sarkozy) should clearly state whether he is ready to privilege, in his future European policy, the “community” over the “intergovernmental” method. This constitutes a sine qua non precondition to amend meaningfully the Treaty on budgetary discipline that he is calling for. Orderly solidarity as well as charity begins at home!

Paul N Goldschmidt, Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute.

---

Tel: +32 (02) 6475310               +33 (04) 94732015                 Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be                                           Web:www.paulngoldschmidt.eu

© Paul Goldschmidt