22 December 2011

グラハム・ビショップ：12月9日のEU（欧州連合）のHOSG（国家／政府首脳）による合意－ユーロの将来は明るい

At moments of great importance, the media reports live, the markets react in minutes, legislators act months or years afterwards but society only catches up a decade later.  Will the December 9^th Summit of the Heads of State/Government of the EU (HOSG) be seen as the moment when society finally woke up to the scale of the problem? It is widely said that a momentous change to economic governance in the euro area has been proposed. The doubters ask: Will society accept it?

On closer examination, the momentous change will not be in the relations between EU Member States, but between the citizens of each State and the governments that they elect. The basic agreements between EU States were settled in 1957 when the Treaty of Rome was signed. In monetary matters that was given far more detailed substance exactly 20 years ago when the Treaty of Maastricht was agreed.

Were the original terms of that sufficient? They specified tight public finance limits (maximum 3 per cent of GDP deficit and public debt ratios below 60 per cent - or at least heading down toward that ratio at a sufficient rate). But these were intended as indicators of “sustainable convergence” that included taking account of “the situation and development of the balances of payments on current account and an examination of the development of unit labour costs .…”. Regrettably, these competitiveness indicators were barely reviewed – until quite recently!

If these terms had been enforced, would that have avoided the current problems? This author would say Yes. However, it is now fashionable to say the design in the Maastricht Treaty was flawed at the outset. But the reality is that the major flaw has turned out to be the weakness of the elected politicians in applying economic policies that are sound in the long run, but uncomfortable ahead of the next election.

An “International Agreement on a Reinforced Economic Union” will be discussed at a Summit on 30^th January and the current plan is to agree a final text at the 1^st/2^nd March Summit. The first drafts of the Agreement underline that the big change is not the economic objectives themselves but the political method of ensuring they are achieved. Article 3(2) commits the participants to introduce these economic rules “in national binding provisions of a constitutional or equivalent nature". Moreover, that national legislation will contain an automatic correction mechanism – most importantly located at national level so that it “shall fully respect responsibilities of national parliaments”. A new “EU” element comes into play if other members feel that a State is breaching its own national rules: They may ask for an ECJ ruling that is binding. Existing rules about the introduction of penalties on States that breach the 3 per cent deficit rule would be reinforced.

This is the challenge for 2012: bind into national legislation sensible constraints on elected euro area ministers of finance, or face imminently a future that will probably be very unpleasant. 

(NOTE: ELEC has produced the concept of a temporary “EMU Bond Fund” to tide the euro area over the hopefully-short period between agreement on these measures and the first fruits appearing in the economic data- details here.)

Why should citizens want to bind their own political leaders? Some historical background

After the boom in agricultural prices, and then the First Oil Shock, of the early 1970’s, many political leaders tried to avoid the reality of reduced wealth by opening the money-printing presses. The Great Inflation inexorably resulted and inflation stayed around 10 per cent annually for a decade. During the 1980s, society responded by agreeing that control of the money-printing presses should be moved away from  politicians with an eye on “the next year’s election”  rather than the  next generation’s stable prices and politics. That process was completed in Europe by the Maastricht Treaty’s creation of the independent ECB with a remit for price stability. Annual inflation has averaged less that 2 per cent since its foundation.

Once short-sighted politicians felt obliged to give up the power of the printing press, they found a new way of wining “the next election”: increasing public debt. In the early/mid 1970s, public debt ratios of the then-EU Member States averaged around 30 per cent of economic output. Despite ritual protestations by the finance ministers about the need for prudence, that average had jumped alarmingly - to more than 50 per cent by the time the Maastricht Treaty was being negotiated in the late 1980s. Frightened by this risky development, all the signatories to the Treaty solemnly agreed to keep annual budget deficits below 3 per cent of output. That should have ensured that debt ratios declined gently in the years ahead – back down to safe levels.

Unfortunately, “the next election” kept appearing, sometimes coinciding with an inconvenient downswing in the economy. EU finance ministers soon discovered that their fellow ministers were far too polite to enforce the agreed rules – especially as each was afraid they could be next to be criticised at an electorally inconvenient moment. As the euro was introduced at the beginning of the 21^st century, debt ratios were hitting an average of about 70 per cent. France and Germany then breached the agreed rules in such a cavalier fashion that the rules had to be reinforced in 2005. Success at last for the collective of finance ministers: the ratio fell back to 67 per cent on the eve of the US sub-prime mortgage crisis in 2007.

The financial crisis that the US unleashed on the rest of the world was indeed shattering, and called for exceptional emergency responses. In the ensuing two years, public debt ratios leapt by 14 per cent of GDP (about half the amount of debt built up from the beginning of time until the 1970s!). Did the finance ministers succeed in capping this explosion?  No.  Debt ratios seem set to exceed 90 per cent of GDP in 2012 – no less than three times the levels of the 1970s – and to continue edging higher. Unsurprisingly, those who lend the money to these governments – banks and bond markets - are seriously alarmed about the outlook.

When society decided that elected politicians should not have unfettered control of the money-printing press, it removed the risk of inflation being used to reduce the real burden of public debts. The decision by some States (now 17) to join a single currency that individually they could not print substituted the inflation risk with another: default. During the Maastricht Treaty negotiations, the finance ministers of the day discounted such an unpalatable risk as they all “knew” they would stick to the agreed rules. A decade on, society is left surveying the consequences of their abject failure. But the contagion of their failure has now infected the banking system with such enormous quantities of doubtful loans that the State and the banks are locked together in an embrace that could yet prove fatal to both.

Is it now time for society to step in and remove the unfettered power of debt creation – as it did with money creation two decades ago? The 26 HOSGs have now agreed in principle to an “International Agreement” which will create a substantial technocratic buffer: an independent set of growth forecasts (and thus implicitly budget deficit forecasts) and an external check of the possible consequences of the economic choices. In an integrated trading and financial market, “no man is an island” and a State’s choices will impact not only its own citizens but all its trading partners. The mighty US has demonstrated the truth of that globally - and tiny Greece within the EU. The neighbours have a right to know - and comment as loudly as necessary to protect themselves. The citizens of a State where the neighbours complain might do well to pay attention to the complaints, as there will certainly be serious domestic consequences if the complainers turn out have cause.

Sensible economic rules were solemnly agreed at Maastricht. The process of ensuring they are adhered to was accelerated at the crisis Summit of 9/10 May 2010 (coincidentally on the 60^th anniversary of the Schuman Declaration about building a de facto solidarity amongst the nations of Europe by a series of concrete achievements). In September 2011, the EU27 finally agreed the “six-pack” of economic governance improvements. In the light of the dramatic deterioration even since then, the European Commission proposed (and was entirely ignored by the media and markets) further dramatic steps that could be achieved immediately and without Treaty change.

The HOSG have now committed to enact those two Regulations “swiftly” – in marked contrast to their one year procrastination over the “six-pack”. In particular, they have agreed that sanctions proposed by the European Commission can only be reversed by a Qualified Majority Vote (QMV) of the Member States. That is as close to automatic sanctions as is possible in a democratic system. To give complete reassurance to lenders to EU governments, the overall fiscal compact will be the subject of a solemn International Agreement.

Can society rely on the political class that has failed to reform itself for four decades? The International Agreement is likely to be “small” in the sense of short - but politically profound because it will enable the peoples of a State to bind their own political leaders so they cannot misbehave in the future.

© Graham Bishop