27 February 2013

Paul N Goldschmidt: Stop shooting at the ambulance - The EU, starved of fuel, is being pilloried!

"Austerity" has become the villain responsible for all ills. From all quarters, one hears recriminations blaming "Brussels" for imposing policies that are rejected by the citizen and are judged to be thoroughly anti-democratic.

These pronouncements are not limited to Italian “populists” but extend to respected economists as well as a broad cross section of politicians in search of suitable scapegoats. They transfer to the EU the obvious failure of national governments to stimulate growth and reverse the negative trends of consumer spending, investment and unemployment which, as a result, lead to growing deficits and greater sovereign indebtedness.

But what is the make-up of this so called anti-democratic “Brussels”? The answer is simple: it is the sum of the individual wills of 27 sovereign States, whose governments are each endowed with full democratic legitimacy. Furthermore, each time the latter agree collective undertakings, they do so in full compliance with the treaties that have received the sanction of their respective constitutional processes, whose democratic credentials cannot be denied.

Thus the recent Treaty on Stability, Coordination and Governance (TSCG) was adopted recently by 25 Member States and is completed by EU legislative regulations (“six pack” and “two pack”), proposed by the Commission and adopted by the European Council and Parliament. It is the implementation of these measures, entrusted to the Commission (as guardian of the treaties) which has become the subject of criticisms, often by those who were responsible for enacting them.

It is no doubt legitimate to require the Commission to exercise its powers with discernment by making full usage of the flexibility enshrined in the texts. This seems, indeed, to be the case when analysing its recent fairly lenient verdict on French compliance with its budgetary obligations for 2013. This flexibility is however limited as it is the only real safeguard avoiding “moral hazard” or excesses by a Member State that could jeopardise the stability of EMU and the euro.

Criticisms, similar to those applied to “Brussels”, a euphemism which designates the Commission and exonerates the Council, are also levelled against the ECB – rather than “Frankfurt” – as the Bundesbank would certainly not countenance stigmatisation of the German metropolis. The ECB’s statutory “independence” from political interference is being challenged, though it is the unavoidable consequence of the lack of a centralised European political authority with which it could interface and eventually be accountable to. At present, the Central Bank is content to remain strictly within the guidelines of its mandate, though it would be hard to deny that its President hasn’t interpreted these constraints with a great deal of creativity so as to extend its policy options as far as possible (SMP/LTRO/OMT, etc.)

However remarkable the ECB’s success in establishing from scratch its credibility, in fulfilling its mandate of price stability and propelling the € to the status of second most important reserve currency, it remains that it is still short of being a fully-empowered Central Bank: the Treaty precludes it from lending to Member States (debt monetisation); the G20 forbids currency wars, a decision that only the ECB appears to abide by – not for moral reasons – but rather by default. Indeed, EMU Members have divergent interests and shelter behind the principle of the independence of the ECB to hide their incapacity of agreeing on a convergent set of economic policies which would allow them to use, like its main competitors, the foreign exchange rate as one of the tools for stimulating growth or, at least, avoid the detrimental effects of a biased playing field. Instead, the eurozone is condemned to bear the consequences of decisions taken unilaterally in Washington, Beijing, Tokyo or even London which affect the external value of their respective currencies and impact the euro accordingly.

Short of embracing vigorously the challenges ahead and sharing the high stakes involved with all EU citizens, the negative spiral, already underway and dramatically confirmed by the Italian election results, will only increase the growing disenchantment towards European con(de?)struction.

The only solution lies in moving within EMU towards a federalist model, endowed with a significant budget (own resources) and an autonomous borrowing capacity. The means available should be sufficient to allow the full weight of EU “solidarity” to be carried by the federal authorities through appropriate transfer/loan mechanisms. In exchange, federated Member States would agree to be subject to a common discipline that would include adherence to strict financial guidelines. Any thought of benefiting from solidarity while escaping from the corresponding discipline is doomed from the outset. A federal authority will enable the long-overdue completion of the EMU through the capability of executing coherent monetary and economic policies, using the full gambit of policy instruments available to our competitors. Thus the EMU will be able, at last, to reach its full potential and reap the fruits of the considerable advantages deriving from its status as the largest and wealthiest market on the planet.

A sign of the willingness to change – or not – direction will arise on the occasion of the European Parliamentary vote on the “financial perspectives”. As currently drafted, they will deprive the Union, for the seven years to come, of the required resources needed to stimulate the economy: an unambiguous and massive rejection of these proposals is to be hoped for.

The latest political developments, in particular in Italy, underscore the urgency of enforcing deep institutional, operational and governance reforms within the EU. In the absence of bold initiatives, only a renewed frontal attack, undermining the sovereign debt markets, seems capable of driving the body politic to confront the difficult choices ahead. One is driven to wish that this might materialise sooner than later to force our political masters to exit the dead-end in which they seem trapped.  

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