On 9 December in Brussels, the Heads of Government of the 27 EU member states meet, yet again, to come forward with a solution to the escalating loss of confidence in the debts owed by European banks and governments. Each time leaders meet, and come forward with proposals that, within days, prove to be inadequate, further confidence is lost both in the leaders themselves, and in the European Union, as a functioning and competent political authority capable of managing the affairs of its peoples.
There is a limit to the number of failed government bond auctions we can endure. Many further such bond auctions are due in January and February. In February there will be a General Election in Greece, and the campaign in that election will be critically influenced by the perceived effectiveness of present EU arrangements and the steps Greeks are having to take to comply with these arrangements. If there is to be a good result in that election, the EU needs to show electors that it is in control of the situation.
The European Central Bank needs to take note of the situation. It has a mandate under EU Treaties to maintain price stability, defined as around 2% inflation. There is a growing risk that the problem Europe will face next year will be deflation, not inflation.
If industrial orders and consumer confidence continue to decline, prices and incomes will start to fall, and the situation of those in debt will worsen further because, even if they pay all interest, the real value of their debts will increase as a consequence of the fall in prices and incomes relative to the unchanged level of their debts.
If these circumstances are likely to arise, the ECB has a duty, in the interests of price stability, and in full accord with its Treaty mandate, to initiate quantitative easing to prevent it. An immediate statement to that effect from the ECB would go a long way towards resolving the short term crisis.
CONSEQUENCES OF A BREAKUP OF EURO
Governments trying to establish new national currencies could face huge problems stopping outflows, which could lead to limitations on bank withdrawals, reintroduction of exchange controls, and tariff walls against their exports by other countries in the EU aimed at countering competitive devaluations of one new currency against another.
The legal order on which the EU is based could break down. We should not forget how inherently fragile that legal order has always been. If one country refuses to implement a judgement of the European Court of Justice in an important matter, and gets away with it, the EU has no meaning anymore because the EU has no police force to enforce its rules. Everything is based on consent.
Against this background, one must ask oneself if further EU Treaty change could be part of the answer. Treaty change could take, at the very least, a year to effect. But we do not have that much time. So the best we can hope for is a political commitment by Governments to seek consent to a Treaty change from their parliaments or peoples.
There has been agreement that a proposal to improve the governance of the euro zone would be presented by the President of the European Council, Hermann Van Rompuy to the EU Summit on 9 December. In advance of this, the leaders of the two biggest euro area states have set out their requirements.
In her speech today, Chancellor Merkel has called for Treaty changes that would make sanctions on states who breach debt and deficit limits automatic and capable of being enforced directly through the European Court of Justice. It would take the issue out of politics and make it a legal one. This would require a change in the Treaties.
President Sarkozy, on the other hand, said yesterday that European integration must be pursued, and the problem has to be solved , inter governmentally. This is because he believes that only elected heads of national governments have the required political legitimacy to make the necessary decisions.
These two positions are quite far apart, and there are difficulties with both of them.
The difficulty with Chancellor Merkel’s approach is that it will involve the European Court of Justice in making economic judgements.
Even economists have difficulty with these issues. So the framing of a Treaty change in this area will could be challenging.
President Sarkozy’s preference inter governmentalism will bring economic judgements into the realm of power politics, the sort of power politics that prevented any sanctions being imposed on France and Germany when they became the first to breach the original Stability and Growth Pact. His approach would diminish the role of the European Commission.
Both the Chancellor and the President are paying too little attention to what has been already agreed in the “six pack” regulations. These, which require no Treaty change, will already make it more likely that a state, with and excessive deficit ,will be fined, because a qualified majority (66%) would have to be found to agree NOT to impose a fine.
Neither the Chancellor nor the President pay enough attention to the huge failure of EU wide banking supervision that allowed all this foolish cross border lending to take place within the single currency area. Neither of them addressed the lack of implementation, from the very outset of the euro, of the ECB’s responsibilities in the Treaties , to supervise the activities of banks and the impact those activities have had on the stability of the European economy. Both of them spoke as if the problem today was solely one of Government finances ,when it is also a problem of bank finances
THE GERMAN AND DUTCH PROPOSALS TO CHANGE THE EU TREATIES – HOW RELEVANT ARE THEY TO THE PROBLEMS WE FACE?
But what of the more detailed proposals for Treaty change advanced so far. How relevant and helpful are they? It is suggested that we must amend the EU Treaties, because it is argued that the existing Treaties either
a) prevent us doing what is necessary to resolve the situation, or
b) provide us with insufficient assurance that we will not get into the same difficulties again.
- automatic sanctions for breaches of the Stability and Growth Pact( 3% deficit and 60% debt/GDP ratio),
- a procedure for insolvency of EU states,
- the direct election by the people of the EU of the President of the European Commission,
- taking away the exclusive right to initiate EU legislation from the Commission, and allowing the Parliament and the Council an equal right with the Commission to initiate legislation,
- more seats for bigger countries in the European Parliament based on their bigger populations.
They also want Europe to unilaterally introduce a tax on financial transactions.
The Dutch Prime Minister has suggested Treaty changes that would
- allow a European Commissioner for budgetary discipline to force states running excessive deficits adjust their policies and
- to impose sanctions including reduced payments from Cohesion and Structural Funds, national budgets requiring EU approval before introduction, suspension of voting rights in EU institutions, and ultimately expulsion from the Euro zone.
On the specifics of the CDU and Dutch proposals, I would respond as follows.
THE CDU PROPOSALS
A treaty provision for the insolvency of states, as suggested by the CDU, will be very difficult to draft and will be highly controversial. There may be some merit in establishing rules in this field, but I wonder if this is the time to be doing it. The issue will not be being debated in an academic setting, but in the midst of febrile market conditions. There is a strong risk that the twists and turns in a public debate on the state insolvency will have a negative and unintended influence on the markets.
We should not forget that ,when the issue of so called private sector involvement in resolving the Greek debt crisis was first mooted by Germany , it had an immediately damaging effect on the capacity of some other smaller countries to borrow.
CDU PROPOSAL FOR DIRECT ELECTION OF EU PRESIDENT MOST WELCOME
A direct election of this kind is what we need to create a genuine European demos, or sense of shared destiny, among EU citizens whatever their nationality or language . Without such a demos or shared identity, we will be unable to persuade Europeans to make sacrifices for one another, and that is something we need if Economic and Monetary work.
BUT CDU ATTACK ON COMMISSION VERY DANGEROUS
It would weaken the Commission even further than the rampant intergovernmentalism of Europe’s response to the financial crisis has already done.
If the Parliament and the Council could table competing legislative proposlas on the same subjects as the Commission, this would make the search for subtle compromises much more difficult. It would enhance the power of the bigger delegations of the bigger countries in the European Parliament and would encourage crude nationalistic majoritarianism in that body.
The CDU should remember that ,even if the United States which is a fiscal union, all states have equal representation in the Senate while populations have equal weight in the House of Representatives.
Under the Lisbon Treaty, the EU has struck a similar compromise. Bigger states have bigger representation in both the Parliament and the Council, but there is a system of “degressive proportionality” which compensates smaller states by giving the proportionately bigger representation than their population would strictly justify.
I cannot understand why the CDU wants to reopen this difficult matter, unless of course it want to use the proposal as a negotiating weight to gain traction on some other issue. Frankly, I think our situation is serious enough without that sort of gamesmanship being introduced.
But It would also lead to financial sector activities moving out of Europe, and the tax revenues that those activities generate for EU states going into the treasuries of non EU countries. Given that unanimity must be obtained for this proposal to go through, I wonder if it is not, like the proposal to redistribute seats in the European Parliament, being put forward as a negotiating ploy . Again, one must ask if this displays the sort of seriousness that out parlous situation requires.
But one might wonder how urgent the proposal is.
Financial markets are already imposing very harsh discipline, through demanding higher interest rates of countries with excessive deficits.
It will be a long time before any EU country will ever again be able to borrow money at easy rates of interest unless their fiscal policies are demonstrably sound. Do we really need to reinforce what the markets are already doing with Treaty changes at this stage?
It is also worth noting that the reverse majority procedure now applies to both the Excessive Deficit and the Excessive Imbalance procedure. So a country, that is liable to be fined for running an excessive budget deficit, or an excessive balance of payments surplus or deficit, will automatically have to pay a fine, unless it can persuade a qualified majority in the Council NOT to let the fine go ahead. Perhaps we should see how that new procedure works before going for Treaty change?
In any event, levying a fine on a country, that is already in financial difficulty , will add to the difficulties. It will be too late to be an effective deterrent
Excessive deficits or economic imbalances in richer countries can be just as damaging as they can be in poorer countries, perhaps more so. For example, the Netherlands is less reliant on structural funds than is Estonia, so a proposal to reduce structural would hurt Estonia proportionately more than it would the Netherlands, even though their excessive deficits might be of the same proportionate scale. That is unbalanced.
The proposal that budgets of deficit countries require advance EU approval is also potentially unbalanced.
One country can only run a trade surplus if another country runs a deficit. If a country is deliberately managing its economy in order run consistent surpluses, it is contributing to deficit problems of other countries. That needs to subject to EU surveillance too.
DUTCH PROPOSAL TO SUSPEND VOTING RIGHTS IS NEO COLONIALIST
I am unclear about the merit of changing the Treaty to allow for the expulsion of a country from the euro zone. It would imply that the euro itself is a temporary expedient. It would aggravate speculative pressure, without any compensating benefits.
I believe the proposals from the CDU and from the Dutch Governments to change the Treaties are not adequate to the problems we face, and in some cases are a distraction.
The so called six pack proposals, recently agreed go a long way to strengthen disciplines on fiscal policy, and do not need Treaty change. They should be given a chance to work, before we contemplate additional Treaty changes for control of national budgets.
But the CDU proposal for a direct election of the President of the Commission does deal with an important problem that underlies our present problem, namely the lack of a sense ,on the part of ordinary Europeans, that they can, through their vote, influence the direction of EU policy.
If citizens could directly vote the President of the EU in or out of office , that will give them a much more direct sense of control of the direction of the EU than they get now from just voting for their local or national MEPs.
None of the proposals on the table so far deal with the issue of banking, which is at the heart of our economic difficulties today. It was foolish lending decisions be banks that caused our problem.
The original Maastricht Treaty of 1992 envisaged the ECB taking an overall role in overseeing the prudential supervision of banks, especially banks that were lending across borders within the euro zone. This provision in the Maastricht Treaty was never brought into effect , because activating the ECB’s powers in this matter required unanimity. Some countries did want not anyone else enquiring into their banks, and that reluctance continues even to this day.
Any Treaty change now should include
2.) restriction on the size of banks, and
THE JOB POTENTIAL OF FINANCIAL SERVICES IN IRELAND
I am looking forward to helping the international financial services industry in Ireland make an even greater impact on job creation in this country, when I take up my role as Chairman of IFSC Ireland in September. In the meantime, I am reading and listening.
The industry already provides about 25000 jobs directly in banking, funds management and insurance, and supports many more jobs indirectly in back up services like accounting, law, and hospitality.
Wholesale financial intermediation creates about 7% of the GDP in Ireland as against 2% on average throughout the EU, and 4.5% in Britain.
About 10% of all EU funds under management , are managed here in Ireland ,a country with only 1.4% % of the EU’s GDP.
This is a highly competitive industry. Modern communications mean that these services can be provided in any number of places or time zones. They will continue to be provided in increasing quantity in Ireland but only if Ireland continues to offer a top quality financial, social and regulatory environment. This is a people based industry, so a supply of well educated and motivated young people, who want to work in Ireland ,is crucial.
A key figure in the industry, Willie Slattery, pointed out last weekend that the economic downturn has had a side effect of making Ireland more competitive because it has led to a significant reduction in relative labour , office accommodation, and other costs in the past two years. The reduction in housing costs will also have helped in attracting staff here from overseas.
I believe it is critical that Ireland have a reputation as a thorough, rigorous, and pragmatic regulator of the industry. These three characteristics complement one another. Nothing is to be gained either by laxity or rigid formalism. At the end of the day, it is all about winning and holding trust, and in that there is no divergence of interest between regulator and regulated.
RESTORING ECONOMIC GROWTH
The success of the endeavour depends very much on Europe’s success in restoring economic growth. The financial crisis affecting banks and Governments is no more than a symptom of a deeper problem. That problem is a loss in relative competitiveness of both Europe and North America vis a vis the emerging economies of China, India, Brazil and others over the past twenty years. The loss of competitiveness was accompanied by an unwillingness to face up to long term problems like the eventual cost of ageing societies, and the ephemeral nature of some of the innovations of the so called “new economy”.
The boom- driven expansion of credit was like an anaesthetic that concealed an underlying loss in competitiveness from us until 2008. Now that the anaesthetic has been withdrawn, after such a long time, the pain is acute. The human cost is all too real.
The answer to this for all European countries is, I believe, to work to increase what economists would call the total factor productivity of our economy, the productivity of the way in which we use all our resources, public and private, capital and labour, tangible and intangible. We need a new way of thinking , an enhanced orientation towards finding ways to earn a living from meeting the needs of the rest of the world.
PUTTING THE EURO BACK ON A SOUND FOOTING
As many of you will know, I am a strong believer in the European Union, the world’s only historical example of an entirely voluntary, and democratically sanctioned, pooling of sovereignty between different nations, many of whom were at war with one another in living memory. No other part of sthe world has attempted anything as ambitious, or as successful as the European Union.
I know that there is not a little concern at the difficulties of the euro and complaints that the EU’s policy makers have been slow in rectifying what may be seen as substantial omissions in the original design of European Monetary Union.
But all of this should be kept in proportion. In January 2001, the euro was worth 92 US cents. It subsequently rose as high as $1.59, thereby affecting euro zone exports as anyone living along the border with Northern Ireland can confirm. It has recently fallen back from that to a lower, and perhaps more sustainable, level. But that is a level well above where it was in 2001.
The arguments that are now taking place in the EU now about bail outs, about surveillance of national budgets, ECB bond purchases, about supposedly pro cyclical budget cutting, about moral hazard, about the need to devise a workable resolution mechanism for large but insolvent entities, and about the exact amount solidarity which member states of the euro owes one another, are all real arguments, concerning real choices ,on which there are legitimate grounds for disagreement . There is nothing wrong with the fact that there are vigorous arguments between countries about these issues at EU level, just as there are at national level. That is normal politics.
The criticism of the EU that has the greatest validity, in my view, is that it has waited for foreseeable problems to become acute before tackling them.
It is not so much the EU’s decisiveness, as its foresight, that has been open to criticism.
It was foreseeable that the combination of a single centralised monetary policy, with divergent and decentralised fiscal policies would create contradictions.
We must not make the same mistake again. We must show foresight, and intellectual rigour, in regard to the problems looming on the horizon.
THE GERMAN CONSTITUTION AND THE EURO
There is one matter affecting the euro, and the solidity of the European economy generally, on which foresight is now needed. That is a decision the German Constitutional Court might take on whether the proposed closer fiscal policy integration in the euro zone is compatible with the German Basic Law or constitution. For understandable historical reasons, German Courts take democratic norms and the sovereignty of the people very seriously.
Issues that may be at stake before the German Constitutional Court are whether
1. The increased EU surveillance of the German budget, or
2. The large new German contribution to the special vehicle being set up to help euro member states with funding difficulties,
run afoul of the German constitution or Basic Law. It is important for markets ,and for the economic stability of Europe and the world ,that the EU not be taken by surprise by any decision the German Court may take on these vital matters that are now underpinning the euro.
The Court has already addressed this sort of issue in 2009, in its judgement on the Lisbon Treaty. So we have a preview of its thinking. It emphasised its belief that the sovereign state is still the main vehicle presently available for democratic governance.
DEMOCRACY THE KEY TEST
It said then that “an increase in integration(in the EU) can be unconstitutional (in Germany)l if the level of democratic legitimation (in the EU) is not commensurate to the extent and weight of the supranational power or rule” at EU level
And it has added that, for it, the test of democratic legitimation is whether “the allocation of the highest ranking political offices” takes place by means of “competition of Government and opposition” in a free and equal election . Essentially the question it posed was ..can the people vote the EU government out of office? Even though the European Parliament is directly elected, it not believe that the EU yet passed that democratic test. And they are right, the people of the EU do not have an opportunity to vote the EU government out of office.
The Court was therefore very reluctant to agree to further EU integration, beyond that proposed in the Lisbon Treaty, without a qualitative improvement in democratic governance at EU level. Otherwise it favoured keeping power at the level of the states because it argued that the states of the EU have a more developed democratic practice than the EU does ,at the moment.
I am certain this issue of whether there is sufficient democracy at EU level will arise again in any appeal to the Court against the proposed closer integration of Germany in responsibilities to, and for, the rest of the euro. Such an appeal will take place and has the potential to destabilise financial markets unless something is done to forestall the problem.
I have long advocated a simple remedy to this problem.
ELECTING AN EU PRESIDENT DIRECTLY
The Stability and Growth Pact, governing the euro, was finalised at the Dublin Summit of 1996 during the Irish Presidency. During that same Presidency, I commissioned a study on the possible direct election of the President of the European Commission by the people of Europe in a free and equal election of the people of the EU.
I really do not believe that it would be wise for EU leaders to sit and wait to see what the German Court might say . Its jurisprudence is already published in its judgement on the Lisbon Treaty.
That judgement should now be studied carefully, and urgently, by The European Council, the Commission ,and the Eurogroup.
The European Union must further improve democracy at EU level, to an extent that would make whatever further EU integration is necessary to underpin the euro, acceptable to the German Constitutional Court. It is as simple as that.
This could, for example, be achieved by providing for a electoral competition, among all the people of the EU, for the posts of highest ranking political actors in the EU.
The European Council could decide, without changing the Lisbon Treaty, that in future it will only nominate as President of the European Commission, as President of the European Council, and/or as President of the Eurogroup, a person who has won a majority of votes in an EU wide election for that post, held on the same day as the European Parliament election.
That would create a similar level of democracy at European level to that we each enjoy at national level.
Finally, the idea of a direct EU wide direct election is not as radical as it might seem. In December 2002, the Laeken European Council specifically asked the European Convention to examine this matter, but that never happened . All the emphasis was put on increasing the powers of the European Parliament, but direct election of a President by people themselves was never seriously considered. Nor was any change in the electoral system to the European Parliament itself.
The present crisis is an opportunity ,not only to deal with long hidden fiscal problems, it is also an opportunity to make the European Union even more democratic.
Speech by John Bruton, former Taoiseach, at the Annual lunch of the Federation of International Banks in Ireland on Wednesday the 2nd June at 12.50 pm in the Westin Hotel, Dublin