He believes that from a credible and audacious response to the Greek crisis should emerge a basis for improved economic coordination (government) within the EU, as well as an efficient mobilisation of the resources of the ECB and EIB for the benefit of all European citizens.
In the aftermath of the European parliamentary vote confirming the new Commission, President Barroso and his team have a unique opportunity to translate the fine words enunciated within the Strasburg hemicycle into acts. It is particularly urgent that the Commission shows the promised “audacity” and seizes the initiative in the management of the financial crisis.
The initial positive market reaction to the rumours of a possible German rescue operation in favour of Greece shows to what extent the credibility of that country remains superior to that of the EU. However, being a question of vital importance for the Eurozone and the Union as a whole, it would be a serious mistake to entrust its management to a single Member State; it would put into jeopardy the credibility of the ECB, the Commission and, ultimately of the Union itself.
The manner in which this first real test of the single currency will be handled (other tests will inevitably follow), will create a precedent that will be difficult to ignore. To allow, at this stage, for the possibility of a bilateral solution between two Member States - after the way the Union reacted in October 2008 to the financial crisis – would be a new significant step towards the “intergovernmental” bias of the Union which would further reduce the Commission’s ability to act.
As goes the English saying: “Who pays the piper calls the tune”. If, therefore, Germany acts unilaterally (which would be sufficient to reassure Greek bondholders), it will set alone the conditionality attached to its support and its partners in EMU and the EU will have no say.
As it is likely that similar situations will develop (Portugal – Ireland – Spain) it is of great importance that a coherent approach be adopted so that this first intervention can serve as a ten plate. Nothing could be more disastrous or able to cause enormous prejudice to the Euro than a case by case approach which could lead to unequal treatment, competitive bidding, as well as encourage further speculative attacks.
The EU has all the necessary experience in this area having intervened (before EMU) in favour of member States experiencing balance of payments difficulties (Italy, Greece..), borrowing in the name of the European Community and on-lending the proceeds to the beneficiary under strict conditionality. It is this well oiled mechanism that should be privileged under the current circumstances.
To allow a single Member state, Germany in this instance, to dictate its conditions would open up the possibility of giving it a preponderant voice that could affect the independence of the ECB in monetary affairs, recreating the overbearing influence that the Bundesbank used to exert. Thus, one of the main benefits of the Euro, which is the sharing of monetary sovereignty, would be compromised.
This new crisis, that is superimposed on the financial and economic ones that some thought was receding, calls for some additional commentary:
1. It is urgent to move forward on the reform of the financial system both at EU and G20 level.
2. It is necessary to amend the proposals concerning the creation of new entities charged with the surveillance of systemic risks, recommended both by the de Larosière report and the American Congress, to include the (delicate) monitoring of risks induced by “Sovereign borrowers”. The Greek crisis – after the Fannie Mae and Freddie Mac episode in the USA – demonstrates the interdependence of the solvency of the banking sector and that of Sovereign States; this aspect, however, has been completely overlooked in the legislative proposals that are currently being considered in the EU and USA.
3. The Greek episode has generated a new spate of criticisms designating hedge funds as the new scapegoats for popular anger. They are accused of “speculating” against Greek bonds and attention is drawn of the level of remuneration of managers linking them to the opprobrium with which traders have been tarnished. The real danger of hedge funds to the financial system is to allow them to build excessive leverage by borrowing to much from credit institutions. On that subject, I direct the reader to my recent article “President Obama and the Bankers” (http://institut-thomas-more.org/showNews/404.) in which I suggest limiting risks assumed by banks as well as extending taxation of bonuses in excess of USD 38,000 to all economic agents, by ending their tax deductibility. Such a general measure preserves the tax sovereignty of the State, avoids discrimination between taxpayers and ensures a far more adequate alignment of the interests of workers, shareholders and the State.
An informal EU Summit will take place tomorrow in Brussels at the initiative of the new President, Herman van Rompuy. He should be commended for this initiative. One should hope that this meeting will demonstrate the solidarity of the Union’s 27 Members. It is particularly desirable that it will also be a first and emblematic example of the deeper cooperation between the Council and the Commission that is expected from the implementation of the Lisbon Treaty. From a credible and audacious response to this new crisis should emerge a basis for improved economic coordination (government) within the EU as well as an efficient mobilisation – within the limits set by the Treaty – of the resources of the ECB and EIB for the benefit of all European citizen.
Brussels, 10th February 2010
Paul N. Goldschmidt
Director, European Commission (ret); Member of the Advisory Board of the Thomas More Institute.
© Paul Goldschmidt
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