17 June 2012

Paul N Goldschmidt: The crisis of the EU - President Hollande confirms his ambition to have his cake and eat it!

The declaration of President Hollande during his press conference with Prime Minister Monti is a new masterpiece of ambiguity which can be interpreted in many ways. Let us review the three main topics that France wishes to impose on the agenda of the forthcoming June European Summit.

1. Growth

On the desirability of growth there is a broad worldwide consensus. One should, nevertheless, take note that an increasing number of personalities and experts question the compatibility of an economic model based exclusively on “growth” with environmental imperatives and constraints imposed by the exhaustion of resources, demographic explosion or a fair distribution of wealth, etc.

It is, therefore, necessary to give a more precise definition to the concept of “growth”: from a purely economic point of view is the President talking of a purely Keynesian approach or is he emphasising “structural” reform? At this point the vaunted “unanimity” has already collapsed, opposing those who advocate sidestepping austerity to those who believe that limiting indebtedness and budget deficits are preconditions to any form of stimulus.

The French President seems to want everything as well as its contrary: he asserts that growth will not flow from increasing public expenditure, aiming to reassure that France is intent on meeting its European obligations, while, at the same time, recommending that the EU be endowed with significant additional resources – exceeding by far the emerging consensus on strengthening the EIB, introducing “Project Bonds" and redeploying uncommitted structural funds. He admits, in passing, that the introduction of eurobonds and/or euro bills must be postponed. 

To implement such a programme, coherence demands an unequivocal support by France of the broadening of the Union’s “own resources” within the framework of a significant increase in both the budgets and the “financial perspectives” for the period 2014-2020. Needless to say that there is absolutely no consensus on these matters, many Member States insisting on the application to the Union of the same strict austerity measures imposed on them by the “European Semester”. 

2. Stability

The French President wishes to introduce, at EU level, new “permanent” instruments that would allow intervention to “counter speculation that penalises a Member State unjustly”. Among items on his wish list, he calls for a “Banking Union” as well as a strengthening of the ECB’s powers. Let us take a closer look at these proposals.

First, the affirmation that States have become the victims of unjust speculative movements: this seems to imply that there are also – a contrario - “just” speculative movements! Who does he suggest as a referee? Rather, is the current volatile environment not the outcome of the indecisiveness of politicians in their handling of the crisis both at national and European level? Are the “speculators” responsible for budget deficits, excessive sovereign or private indebtedness, of excessive risks accumulated by the banking sector including the accumulation of sovereign debt encouraged by the States themselves? This provocative rhetoric – useful for an election campaign – will only feed the mistrust of markets and expose Member States even more to the opinions of Rating Agencies or Institutional Investors who seek to protect the pension, insurance funds and savings that they manage.

The creation of a “Banking Union” has been recently put forward by President Barroso; it encompasses three main aspects: the integration at EU level of the regulatory and supervisory functions in the banking sector; the creation of an EU wide deposit insurance scheme and the establishment of a uniform resolution/restructuring procedure for the banking industry.

Whatever the obvious advantages of such a banking union, its implementation is tributary to the parallel reinforcement of political and economic integration which implies significant further transfers of sovereignty from Member States to the EU. Such an orientation is strongly opposed, notably by populist and nationalist parties and is contaminating those, more moderate, who fear they are losing touch with the electorate. The crisis, and the fears it engenders, is strengthening the appeal of extremist parties for anxious citizens lured by the simplistic nationalistic rhetoric.

Within this context, an initial clarification of the Commission proposals is necessary. It would be highly preferable that a banking Union be, initially, limited to EMU Members (with the possibility for other Member States to “opt in”) rather than a union of 27 (with a possibility to “opt out”). It is indeed hard to imagine that the ECB, as currently proposed, should act as Regulator/Supervisor for institutions outside the eurozone unless it is unequivocally accepted (opt-in). This would also facilitate questions raised by mutualising the guarantees of deposits which should prove less difficult among countries sharing the same currency and the same regulator.

With regard to the intervention powers of the ECB, the request of the French President entails a revision of the Treaty as well as the reformulation of the ECB’s mandate; in the event, it should be broadened over and beyond its current scope which is limited to carrying out independently monetary policy for the eurozone and ensuring price stability. Granting it powers of “lender of last resort” as well as entrusting it with the responsibility for foreign exchange policy would put the ECB on par with other Central Banks; it implies however a more “federal” European Union.

3. The Roadmap

The difficulties mentioned here above point clearly to the need for significant institutional reform. Despite the important progress already achieved towards economic integration, it is essential that, very rapidly, a political consensus emerges on a common and updated vision for the future of the EMU/EU. It should serve as a blueprint for a credible and enforceable roadmap that will provide for the time needed to carry out unavoidably lengthy negotiations. The current system, relying on cooperation and coordination has clearly reached if not exceeded its limits.

Conclusion

It is in the face of the inescapable necessity to transform the EMU/EU towards a more “federalist” model that each Member State will have to determine its position.

For France, it is precisely guiding public opinion towards the appropriate choice that may prove very difficult for the new President. Indeed, the political landscape, after the recent elections, reflects the strongly reinforced bipolar cleavage between left and right, dashing any hope of the emergence of a new majority coalescing around the Centre, so dear to the heart of François Bayrou. In this frontal clash, majority support for a “federal Europe” in the new Parliament becomes structurally highly compromised because the two main parties are each tributary to their own left and right wings whose “nationalistic” bias are more closely aligned on the Left Front and the National Front respectively than on the President’s views promoted on the European stage.

Because of the strong reluctance of the French to contemplate further transfers of sovereignty to the EU, it appears difficult for the President to appear more European than Chancellor Merkel in supporting a “federalist” vision that she has fully endorsed. The courageous actions of Italian and Spanish to tackle the deep routed causes of the crisis are at the antipode of the first give away measures initiated in France by the new Government. To believe that France can escape the consequences of excessive budgetary deficits and indebtedness by accessing “new” European resources is at best naïve and at worst bad faith.

Whatever the catastrophic consequences of an implosion of the euro (and subsequently of the EU), of which Germany would be one of the main victims, it would be highly dangerous to bet on the fear created by such a scenario as a credible “escape” route. Indeed, there is every reason to believe that the “unjust” markets will once again prevail over the vain hopes of those who have proved to be incapable of shouldering their responsibilities in time.

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

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© Paul Goldschmidt