14 July 2015

Goldschmidt: The Brussels Summit - Versailles? Munich? Or Breton Woods?

The summit of the Heads of State and Governments of the Eurozone, held on Sunday 12th July, was crowned by a “unanimous agreement” which, for the time being, keeps Greece within the Eurozone and preserves the integrity of the EMU. To succeed, all parties were asked to make compromises; nevertheless, the most difficult challenges are still to ahead: the ratification of the agreement by several parliamentary bodies; the implementation of a “bridge” financing mechanism, the negotiations surrounding the specific terms and conditions of the “third aid package” and, last but not least, the implementation and monitoring of the reform measures – so often promised but never enforced – which will condition the progressive disbursement of the aid.
 
Exiting the crisis is therefore dependent on a considerable number of imponderables, each of which could put le equilibrium of the agreement into jeopardy and lead to the collapse of Greece and/or of EMU itself. One should, nevertheless, commend the efforts of all those who contributed to the accord and in particular those of the French President, François Hollande.
 
If the immediate steps are overcome successfully, the Eurozone will have bought itself a new window of opportunity in order to reform itself.  It is, however far from evident that it will prove capable of seizing it, having already twice in the past ignored the appeals of the ECB President to accompany his own efforts, first when he declared that he would “do all what it takes to preserve the €” and again when he announced the program of “quantitative easing”.
 
History will tell whether this Summit turned out to be a new “Versailles” where 18 countries, holding all the trump cards, imposed their will on the 19th Member with demands which will reveal themselves to be untenable in the long run. When this becomes apparent, the seeds of a new crisis will have been sown, comforting nationalist and populist parties and considerably increasing the likelihood of an implosion of the Euro and of the EU. Within this scenario, it would not be surprising to see France – which is ferociously opposed to further “transfers of sovereignty” – take its distances from EMU, imitating the refusal by the USA to join the League of Nations that was initiated by its own President.
 
An alternative would be a “remake” of the conference of “Munich”. The actors in Brussels have come to an apparent agreement, which is reminiscent of the famous “Peace in our time”, as expressed by President Juncker and Alexis Tsipras when they assert that “Grexit is now definitively behind us”. When it becomes clear that this was indeed a “fool’s bargain” it will be too late to avoid the catastrophic consequences which will extend to the entire world.
 
Finally, there is a third scenario in which the Brussels summit is the starting point of a complete restructuring of the institutional and operational framework of the Eurozone. The “Breton Woods” conference established the financial architecture of the world which presided over the reconstruction of the economies ravaged by the crisis of the 30’s and WWII and allowed vigorous growth, stimulated in part by the solidarity of the Marshall Plan. In turn, in the aftermath of the current financial and economic crisis, the Eurozone should implement reforms that will ensure the compatibility of a Monetary Union with the requirement of a shared management of important aspects of budgetary, fiscal and economic policy. This implies acceptance by Member States of a discipline which, in turn, will allow solidarity (transfers) to be deployed through a “federal” budget managed by an Authority that will be the “political” counterweight to the ECB which today finds itself deprived of a legitimate interlocutor. It entails also securing sufficient “own resources” so that EMU can enjoy an autonomous “borrowing capacity” (Eurobonds).

Armed with these indispensable attributes, EMU will be able to defend the interests of its citizens and act as a magnet for other EU Members, which are committed to join under the terms of the Maastricht Treaty. In a multipolar world, such an architecture leads by construction to a gain rather than a loss of effective (as opposed to nominal) sovereignty and allows solidarity to be expressed at European rather than at national level, as is currently the case.
 
In conclusion, one should recognise that the possibility of Grexit is far removed. The spectre of the chaos that such an issue would entail for the Greeks should encourage all EMU governments to convince their respective public opinions that further Eurozone integration is the only possible policy that can effectively protect them from a similar risk; it is clearly in the interests of each Member State to support it. 
 
In particular, public opinion should be informed about the sterile debate opposing those in favour of “austerity” and those advocating “economic stimulus” which is undermining unnecessarily the cohesion of the EMU. If it is true that an excess of austerity can kill efforts to stimulate the economy, the latter is not an option within the current institutional framework where the governance is determined by the rules embedded in the treaties that the Commission is charged with enforcing. Only a “federal” political Authority at EMU level could allow one to escape these constraints, as was demonstrated by the success of the stimulus programs carried out by the American and British governments in the aftermath of the financial crisis.

One should note that in the USA, the “federal” solidarity and the accommodative monetary policies were deployed within a framework of strict budgetary discipline and the level of the 50 federated States. The full economic sovereignty at the level of the 19 Eurozone Members is structurally incompatible with the smooth functioning of EMU because it exposes all Members to “moral hazard” in the case of excesses by one or the other, as was cruelly demonstrated by the Greek crisis.
 
The Eurozone is confronted with a radical choice: either moving rapidly towards a federal structure or dismantling EMU. The political risks are enormous: will our leaders be up to the challenge?
 

© Paul Goldschmidt