John Bruton

Opinions & Ideas

Category: Eurozone

HOW DIFFICULT WILL IT BE TO KEEP THE UK IN THE EU?

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Prime Minister David Cameron’s letter, to   European Council President Donald Tusk , about  the renegotiation of the  terms of UK membership of the EU, shows that he has invested time in trying to understand the perspective of other EU states. This is good.
 
That said, the timing of this renegotiation is bad, because the EU has so many other politically difficult problems on its plate just now, problems from which the UK has excluded itself, namely
 
+ the refugee crisis and the threat  it poses to free movement within the Schengen zone and 
+ the fact that a number of EU states are at risk of breaching the terms of the fiscal compact on debt reduction and fiscal deficits.
 
A supportive attitude by the UK on the resolution of these EU wide problems would  help create the impression that the UK is, potentially at least, in the EU for the long haul, which would make it worthwhile for other members to go all the way to their bottom lines in attempting to meet the UK’s requests.
 
It is welcome that David Cameron’s letter says that he is open to “different ways of achieving the result” he sets out in his letter.
 
It is also welcome that he seeks to put his proposals in a context of “reforms that would benefit the European Union as a whole”.
 
He further says that it “matters to all of us that the Eurozone succeeds”.
 
Although David Cameron has expressed similar sentiments himself before, these sentiments have not been prominent in much of the general UK debate on the EU, which has often tended to treat the EU as something alien, and a matter of indifference to the UK, which objectively it is not. Occasionally in the UK debate, “schadenfreude” has trumped UK interests.
 
David Cameron’s approach is shaped by the contents of the Conservative Party Manifesto. It is a response to an expression of identity politics, which is a form of politics on which compromise is inherently very difficult indeed, as we know from Irish history.
 
David Cameron’s letter deals with four sets of issue, and I will deal with each in turn.
 
ECONOMIC GOVERNANCE
 
On Economic Governance of the EU, David Cameron  says that
 
+ the integrity of the Single Market for non Eurozone countries must be protected,
+  that non Eurozone countries must not be liable for operations to support the Euro as a currency,
+ that the financial supervision of banks must remain a matter exclusively for national institutions in the non Eurozone countries and that
+  any issues that affect all member states must be decided by all member states.
 
I am not sure that these issues can be as neatly separated, as David Cameron suggests. 
 
For example, the bailout of Greece by the EU and the IMF was not just an operation in “support of the euro as a currency”. 
 
If Greece had gone under, UK banks would have been hit hard.
 
Furthermore it is arguable that, even if it is not in the euro, the UK had a greater obligation to help a fellow EU member, in the situation Greece was in, than had (say) the United States.  
 
After all, the UK, even if not in the euro,  as a member of the EU, had agreed to treat economic policy as a “matter of common concern” with all other EU states, including Greece, under Article 121 of the EU Treaty. 
 
Furthermore, the UK has had power to join fellow members in warning member states like Greece if they were deviating from agreed economic policies under Articles 121 (4), and under Article 126 . Non EU states were not in that position.
 
In light of those articles, it is hard to see that the UK, as an EU non euro member, could say it has no more responsibility for helping Greece, than has a country that is not in the EU at all.
 
If the UK wants that to be the position, its role in EU economic governance under article 120, 121 and subsequent articles of the Treaty should be changed. 
 
David Cameron also asks in his letter that the EU “do more to fulfil its commitment to the free flow of capital”, presumably across the whole of the EU and not just within the Eurozone.  
 
That sits uncomfortably beside his insistence that the Bank of England alone be involved in supervising UK banks lending across borders into the rest of the EU, including the Eurozone. 
 
As we in Ireland know, unsupervised flows of capital can contribute to bubbles in another country, and if those bubbles were to burst, none of the countries involved would escape the pain, including the countries whose banks had been lending the money, even if those countries were not members of the Eurozone.
 
His principle that “any issues that affect all member states must be decided by all member states” is very widely drawn.  Few EU decisions affect all members in precisely the same way.
 
This principle could be interpreted to mean that the UK should have a vote on all Eurozone decisions. Virtually all Euro zone decisions will affect the UK to some limited and indirect extent , not least because the UK does so much business with the Eurozone. This is so even though David Cameron insists the UK will not be financially liable for any of those decisions. 
 
In a sense, his request could amount to the Boston Tea Party demand in reverse, namely as  a demand for “representation without taxation”.
 
COMPETITIVENESS
 
David Cameron makes an interesting proposal under the heading of Competitiveness. It is potentially a big opportunity for Europe. I hope it will be strengthened and emphasised in the negotiations.
 
His proposal  is that the EU should “bring together all the different  proposals , promises and agreements on the Single Market,  on trade and on cutting regulation, into a clear long term commitment to boost the competitiveness of the EU, and drive jobs and growth for all”.
 
This idea of a big competitiveness package, as a price for continuing UK membership of the EU, could be used to drive through changes that have been stalled for years by inertia in individual member states.  In Germany, for example, the implementation of Single Market rules is often blocked at the level of the Lander. France is another country that could do more to open its market to EU competition, to the advantage of French consumers. 
 
If the British are to get a credible package on competitiveness, it may be necessary to demand prior enactment package of measures at national level, in all member states, in the same way as the Greeks had to pass certain laws, before they could get access to bailout funds.
 
There is, however, one aspect of David Cameron’s letter which could potentially run directly counter to his desire to complete the Single Market. 
 
This is a proposal he makes under the heading of  “Sovereignty”.
 
SOVEREIGNTY
 
Under this heading, David Cameron proposes that a group of national parliaments, presumably a minority , should be able to come together to stop what he calls “unwanted” (EU) legislative proposals.
 
This idea that a minority could block a majority would alter the entire dynamic of EU decision making. It would make it hostage to the vagaries of national electoral politics in a new and unpredictable way.  We should not forget that Lord Cockfield, the UK Commissioner, would never have been able to create the EU Single goods market, without the majority voting created by the Single European Act.
 
This proposal is actually as likely to be used against UK interests, as in favour of what the UK wants under the heading of Competiveness.
 
It is easy to envisage such a veto mechanism being used by a sufficient number of national Parliaments of other EU states to block legislative proposals to complete the Single Services Market or the Single Digital Market, both of which David Cameron wants, to protect some national vested interest. 
 
A  solution might be to exempt all Single Market related legislation from this blocking mechanism. 
 
Another solution might be to associate all national parliaments with the EU legislative process in a manner similar to the involvement of the Economic and Social Council or the Committee of the Regions, but without creating a new veto point.
 
David Cameron also wants the UK exempted from the commitment to “ever closer union”. This phrase  has been in all EU Treaties since the UK joined, and was in the EU Treaty when the people of Great Britain and Northern Ireland  voted in a referendum to stay in the EU in 1975. 
 
Essentially the UK wants to “constitutionalise” the idea that there are two types of EU member, 
 

   + those committed to “closer union”, and    + those who are not committed to it. 

 
This is a formal recognition that there is a “two speed” EU. This idea may be welcome by some big states but not by smaller ones. If Britain is exempted from the commitment to ever closer union, it is not hard to imagine that other EU countries will demand a similar exemption.
 
He says he wants this distinction to be “irreversible”, which implies that a future UK government could not decide to commit itself to ever closer union in future, without getting the permission of all other EU states, by means of  a Treaty change, or the amendment of a protocol(which is the same thing legally speaking).
 
This runs counter to David Cameron’s own expressed wish for flexibility in the UKs relationship with the EU. 
 
The notion of legal irreversibility is contrary to the British constitutional tradition itself, which declares that Parliament is not trammelled by external legal constraints.
A legal device can probably be found to accommodate this request but it does raise a wider question of whether the UK will ever be satisfied. 
 
The UK already has special arrangements on the euro, on passport controls, and on Justice and Home Affairs.  The more exemptions it gets, the more exemptions it seems to want. 
 
Will this renegotiation /referendum process result in a full and final settlement, or will it just be an instalment?  This is not a mere debating point. If the UK will keep coming back for more, the EU will never settle down. Indeed other member states may not be prepared to go all the way to their bottom line, if they feel whatever they offer could never satisfy UK public opinion.
 
IMMIGRATION
 
Immigration is the area in David Cameron’s letter which has attracted the most comment.
 
There is no doubt that the UK has been more open to immigration in the past than have many other EU states.  This is partly because English is a second language for people from all over the world. The restraint David Cameron is proposing will not change that.
 
Clearly, if one does not like immigration, the fact that English is a second language for so many of the world’s population has disadvantages, as well as advantages.
 
On the other hand, the cost of living in London and the south east of England is already a strong deterrent to immigration to that part of the UK.
David Cameron wants, if the UK remains in the EU, to be able to require that people, coming to the UK from other EU states (presumably including from Ireland,) must have lived in the UK for four years, before they qualify for in work benefits or social housing.
 
If this four year principle is accepted, it could be implemented in all other EU states for other purposes as well.
 
David Cameron also wants to “end the practice of sending child benefit overseas”, which presumably means that an Irish worker in the UK could no longer get child benefit for his children, if the children are living in Ireland .
 
The principle of not “sending benefits overseas”, if accepted , could conceivably be applied to pensions, which would affect the UK pensioners living in Spain.
 
If one has to live four years in another EU country to get benefits, access to health services could also be denied to people living in another EU country.
 
David Cameron then acknowledges that these issues are “difficult for other member states”.
 
This is a revealingly narrow way of putting it.
 
In his speech, David Cameron mentions “other member states” but does NOT mention Article 45 of the EU Treaty, which covers free movement of workers within the EU. 
 
Article 45 bans
 
“any discrimination based on nationality as regards employment, remuneration and other conditions of work and employment”. 
 
There is no reference in this Treaty Article to any qualifying period of residence to be free of such discrimination.
 
In the UK, tax credit payments are dependent on worker’s hours worked and income, and whether they have children.
 
So restricting them would amount to discrimination in income, between a UK citizen and  EU immigrant, doing the  same job in the UK.  It would presumably apply to Irish workers in the UK who have been there for less than 4 years. It will be difficult for an Irish Government to consent to this.
 
I would have expected David Cameron to have directly addressed the interpretation of Article 45 of the EU Treaties, rather than pretending the difficulty is with “other member states”.
 
By targeting in work benefits so explicitly, David Cameron has left himself very little room for manoeuvre in light of the provisions of that Article.
 
Indeed there were reports on the BBC this morning that the UK Government is now considering applying the 4 year rule to UK residents as well, which could mean that young, new UK born entrants to the UK labour market may not qualify for in work benefits until they have been working for 4 years. That would create a whole new swathe of people inclined to vote for the UK to leave the EU.
 
CONCLUSION
 
This negotiation will not be easy. 
 
Sides have already been taken in the UK , regardless of what may be conceded in response to David Cameron’s letter. 
 
The impact on the EU itself, of a possible UK exit, is incalculable.
 
So also are the effects of the precedent the UK is setting, and the consequences for the EU, of conceding some the UK requests.
Solving this politically generated problem will require statesmanship and imagination of a very high order indeed.  Keeping the UK in the EU is a vital matter for Ireland and for Europe. 
 
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Speech by John Bruton, former Taoiseach and former EU Ambassador to the United States, at a seminar on “Free Movement and Labour Mobility in the European Union”  organised by the Institute of European Democrats, in NUI Maynooth, at 12.20 pm on Friday 13 November .
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FRANCE….SOLVING THE PROBLEMS OF THE EUROZONE’S SECOND BIGGEST ECONOMY

I attended a conference last week that looked at France’s domestic economic situation and at the impact that has on France’s global and European role.

According to budgets they published this month, France and Italy are failing to meet the Euro area requirements for reducing Government debts and deficits to sustainable levels.

If France, as a big country making up 20% of the Euro area’s  GDP, were to be exempted from the EU debt and deficit rules, in ways that were not open to smaller  euro area countries, this would do great damage to the credibility of the euro, and potentially this could drive up to the interest rate euro area governments must pay to borrow. It is thus very important to Ireland that France overcome it’s problems.
In recent years, France has lost competitiveness, and it is consequently running a balance of payments deficit. In other words its people are spending more abroad, that than they are earning from abroad.
The French economy is projected to grow by only 1% in 2015, as against a projected growth of 2% in Germany and Spain, 2.7% in the UK, and almost 3% in Greece and Sweden.
The loss of competitiveness of France is due to several factors

+  Fewer people  are working fewer hours. For example, of people between 55 and 64 years of age, only 44% are working in France, as against 73% in Sweden, 65% in Japan, 60% in the US and  58% in the UK.

+  There is substantial youth unemployment, because young people find it hard to get on the career ladder because of an over regulated labour market that protects existing jobs at the cost of discouraging the creation of new ones. Last year 80% of all new jobs created in France were on temporary contracts.

+ The bigger a company grows, the more rigid are the rules that apply to it in terms of the right to hire and fire.  So, while France has some of the most successful big companies in the world, it lacks a large corps of middle sized export oriented companies, like Germany has.  90% of all French companies have fewer than 10 employees and they have strong incentives to stay small.

+ Monopolistic practices exist in a number of sectors controlled by the state and in some private professions. The vested interests protecting these monopolistic practices are very strong. These inefficiencies contribute to the loss of exports by French companies.


There was a strong sense among the participants at the conference that the current Socialist Government of Manuel Valls was making a serious effort to tackle these underlying weaknesses, but that the dividends of some the reforms, while very substantial, would be slow in coming, perhaps not in time for the 2017 elections.

There is a risk Prime Minister Valls will lose his majority because of defections in his own party. Meanwhile the opposition UMP is split on personality questions. The Front National is making huge strides in the polls, but its economic policy would break up the EU and introduce heavy state controls which would be incompatible with France’s global economic success.

Faster growth is crucial, and the margin between success and disaster is very narrow.  If the French economy grows at only 1% per annum over coming years, France could be on the road to default and a social crisis, but if it can manage a growth rate of 1.6% or better, it will work its way out of its difficulties. 

The stimulus for French growth will have to come to come both from inside and  outside France. French people save a lot, and if they could get the confidence to spend a little more of their savings, that would help. Likewise if Germany, which has been neglecting its infrastructure, stated to invest more that would help French exports.

The trouble is that French and Germany economists and politicians have very different intellectual assumptions, and dialogue between them can become a dialogue of the deaf.

Meanwhile, partly because it was wise enough to stay out of the Iraq debacle in 2003, France alone of the western powers, has the confidence to intervene directly in places like Mali, Libya and the Central African Republic.
France retains a strong nuclear deterrent and a civil nuclear industry that does not do the sort of climate damage that other  EU countries’ energy industries do.

Politics are important. Its Presidential system enables France to be strong and decisive in international affairs.
But that strength does not extend to domestic economic policymaking, where factionalism and introspective thinking are preventing the creation of any kind of “Grand Coalition for Reform”, of the kind that has enabled countries like Germany and Mexico to deal decisively with long standing blockages to growth.

THE EURO CRISIS—WHAT COULD GO WRONG?

The  European Union is facing a crisis because of the loss of confidence in the debts issued by several member states. This is related directly to the problems and activities of Europe’s banks.
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. 
This is corrosive. It undermines political solidarity within and between Europeans, and it encourages   reversion to 1930s style nationalism, and to  general  anti politician sentiment, which could eventually erode the tolerance that is essential to democracy itself.
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 ECB CAN ACT NOW, AND SHOULD DO SO

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
Failure to act could lead to a break  up of the euro. This could be devastating , because a lot of the debts owed by Europeans are owed  in euro to other Europeans. With the euro gone, the uncertainty about who owed how much, in what currency, to whom could lead to endless legal dispute.
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.
SPEECHES OF CHANCELLOR MERKEL AND PRESIDENT SARKOZY

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. 
In the case of a disputes, is  the Court really qualified to judge whether  a deficit is excessive by reference to the point at which a country is at in its economic cycle? Can it adjudicate on whether estimates of future revenue are valid or not?
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.
The German CDU has demanded Treaty changes to provide for

  • 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. 
It is important that any proposals for Treaty change are based on an honest appraisal of what  our problems actually are, and are not put forward  as  tokens to soothe domestic  opinion in particular countries. Our problems are too serious now for that sort of thing. 
Given that Treaty changes in the EU require all members states to ratify them, the way proposals are put forward is almost as important as the proposals themselves. 
If proposals seem to be one sided, or to emanate from a small cabal of big countries, rather than  from an inclusive process of which all member states have equal  ownership,  then the  proposed Treaty changes may be doomed from the  start, whatever their merits.
On the specifics of the CDU and Dutch proposals, I would  respond as follows.

THE CDU PROPOSALS

The difficulty with automatic sanctions for supposed breaches of the Stability and Growth Pact is that, if the country on  whom they were to be imposed objected, the dispute would go to the European Court of Justice, not to the Council of Ministers for arbitration. Breaches of the Pact would include  questions about whether  assumptions about future economic growth and thus revenue were  too optimistic, the point at which a country was on in its economic cycle, and the like.  These are questions on which economists, who are studying these matter all the time, usually  cannot agree.  There is little chance that the judges in the ECJ, many of whom have no background at all in economics, will make sensible judgements  in such cases.
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
The direct election of the President of the European Commission by the people of Europe is a vey good idea. I advocated it when I was  President of the European Council in  1996, and again when I was a member of the Praesidium of the Convention of the Future of Europe. Interestingly, the only member of the Convention who gave the proposal any support at that time was George Papandreou. It is very good that the CDU is supporting this proposal now.
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

On the other hand, the CDU proposal to take away from the Commission the exclusive right to propose legislation, and  to require it to  share that with the European Parliament and the Council of Ministers,  is a thoroughly bad idea.
It would  weaken the Commission even further than the rampant intergovernmentalism of Europe’s response to the financial crisis has already  done. 
The European Commission seeks to put forward proposals that will command  support  from  all countries , large and  small. It formulates compromises in advance.
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 Commission is the protector of the interests of  smaller  member states within the EU, and this  CDU proposal will be seen by them as provocative and subversive of the community method on  which the EU was founded.
CHANGING REPRESENTATION IN PARLIAMENT WOULD UPSET A DELICATE COMPROMISE
The CDU proposal to increase  the relative representation in the European Parliament of  countries with bigger populations, but without reducing the  extra voting weight that bigger countries enjoy in the  voting system of the Council of Ministers,  overturns one of the central compromises reached in the  drafting of the   European Constitution and the Lisbon Treaty.
 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.
A FINANCIAL TRANSACTIONS TAX
The suggestion of a financial transactions tax has populist appeal. It may slow down financial transactions and allow a little more time for reflection in the markets. It would curb automated  transaction systems by making unduly frequent buying and selling slightly more expensive. It could  provide the EU with a new source of revenue, which would be very welcome.
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.
THE DUTCH PROPOSALS
Turning to the Dutch proposal to enhance the Commission’s control over the budgets of states running excessive deficits, it is hard to argue against the principle of what they are seeking to achieve.  The CDU has argues that fines for excess borrowing should be automatic.
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
CUTTING STRUCTURAL FUNDS?
The Dutch proposal to reduce payments from the Structural Funds to  countries with excessive deficits  will  fall more heavily on poorer countries than on richer ones.
 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

The proposal  by the  Dutch Prime Minister to suspend the voting right in EU institutions of a country which has excessive debts or deficit is tantamount to reintroducing colonialism within Europe, because it  would involve imposing decisions, in which they have  had  no vote, on  countries who joined the EU precisely because they  thought it was a democratic organisation.  The existence in 21st century Europe of a mentality that would make such a proposal is deeply troubling.
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.
CONCLUSION
 
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
1.)  much tighter EU wide supervision of  banks,
2.)  restriction on the size of banks, and 
3.)  an EU  wide deposit guarantee scheme.

GREECE ON THE RACK….

WHERE WILL THE CHAIN REACTION LEAD?
WHAT LESSONS MUST EUROPE LEARN?
The world is watching the political and economic situation of Greece with uncomfortable fascination. There is a widespread fear that, if Greece is unable to pay its debts, there will be a chain reaction.

The first part of the chain reaction could affect the solvency of some European and American banks who lent to Greece, and who would not be getting all their money back.  Those who sold credit default swaps with those banks could also be caught.

The second part of the chain reaction would affect other Governments, who may not have quite as difficult a situation as Greece, but who, like Greece, have to borrow to cover day to day expenses because their tax revenue is insufficient to cover their outgoings. Ireland is in this category.  Lenders who lose money they had lent to the Greek Government, would be even less willing, than they are now, to lend to other Governments. A 21st century precedent of an advanced European country defaulting on its debts would have unknowable consequences in a fragile and volatile world.  

I have read a recent publication by a German economic think tank, the Ifo Institute, about Greece.
The conclusion I drew from it was that the problems, now coming to a head in Greece, have been obvious and knowable for at least twenty years, long before Greece joined the euro.

If mechanisms were not insisted upon to remedy those problems, before Greece joined the euro, then responsibility must be shared for that by all the member Governments of the euro, who admitted   Greece into the euro. The European institutions, that were supposed to be examining the  accounts of the Greek 
Government to ensure that those accounts presented an accurate picture of Greece’s real liabilities, have to answer for their omissions too.

Greece was one of the fastest growing economies in Europe from 1950 to 1973, but thereafter it stagnated. But public spending went on growing, from 23% of GDP in 1970, to 30% in 1980, and to  49% in 1990. By 2009, it was 52% of GDP.  A lot of the money went to pensions and extra public sectors jobs.   Whenever a Greek politician arrived at an international meeting, he was accompanied by an entourage that was four times as big as any other.
  
But tax revenue was not keeping pace. The Government  debt level grew  especially  quickly in the  1990s when guaranteed debt of state companies  were taken onto the Governments own  balance sheet, and  money the Government borrowed from its own  Central  Bank had to be properly accounted for.  This was known before Greece was admitted to the euro.

Greece does have a tax collection problem.

This is because it has such an exceptionally high proportion of its workforce who are self employed, or who are in the non traded sector of the economy ( ie. sectors who cannot export their services, like doctors, shopkeepers etc.).  The extent to which people pay due taxes is lower than elsewhere in these two sectors………almost everywhere in the world. Seemingly tax evasion by the Greek self employed in not much worse than by the self employed in the  US, the Greek problem is that  self employed people make up a much  bigger share of the Greek economy, than they do  of the US economy.  Greece’s tax collection problem thus has more to do with the structure of its economy, than with any uniquely Greek aversion to paying tax.

All these facts must have been  known to the European Central Bank, the Banque de France, Bafin (the German regulator), and all the other  supervisory authorities, when  the banks they were supervising  lent  vast sums to the Greek Government, during  period  since Greece joined the euro.  While its exact scale may have been concealed by accounting tricks by the last Greek Government , the fact that there was a huge problem  was knowable.
I believe that it is time to face up to the full extent of the sovereign debt and banking problem in Europe.
We need now is a ten year plan for the euro zone, not just a ten month plan!
Europe must align its income expectations to its productivity. At the moment, the first is running well ahead of the second. Productivity must catch up, or income expectations must fall back.  In some cases, the gap will take years to close.  These  social choices are unavoidable, but  have to be made in a democratic way.

Voters are able to face reality, so long as everything is laid out before them.
In the countries who lent foolishly, as much as in those who borrowed foolishly, the authorities should own up to their share in the mistakes.  That has not happened yet in every case.

Once that is done, Europe can move on more convincingly

1.)   to devise a political structure to prevent irresponsible borrowing by Governments, ( One suggestion is an EU veto on national budgets)
2.)   to increase productivity and allocate scarce resources more wisely, (This is more  difficult because it requires action by the private sector, which has  misallocated time and money in the past)

3.)  to slim down the financial sector, (This is not happening, layoffs are taking place everywhere except where the problem started!)

4.)  to make banks safe to fail, rather than too big to fail, (This requires  a much higher capital ratio) and

5.) to build a large contingency fund, by contributions from all members, that will stand behind Governments who have kept the rules, but who face temporary  difficulties beyond their control.  Until a fund is built up, standing behind weaker countries involves a risk for  countries who have good credit ratings and who have to pledge that credit to help out  the weaker countries.   
  

DOES THE EURO NEED A POLITICAL UNION?

SEVEN QUESTIONS THAT NEED TO BE ANSWERED


Wolfgang Munchau wrote in the “Financial Times” last week that the problems of the eurozone show that
“A monetary union without a political union is simply not viable”
This sort of statement is being made with increasing frequency by economists, none of whom seem to go much further is explaining what they really mean, and why. The statement is left hanging there, as if it was so obvious that it needs no further elaboration.
There are genuine problems, which prompt writes to say that the eurozone needs a political union to solve them. But he problem in the Eurozone is just a smaller version of the problems of the world economy.


We have had one set of countries(the hoarders) who have been cutting costs, exporting aggressively, saving the profits, and then lending the money on to another set of countries (the spendthrifts) who have been spending the money, building up property bubbles and paying themselves improved wages.
On a global scale, China and Japan are the hoarders, and the United States and Britain have been the spendthrifts.


Within the Eurozone, Germany, the Netherlands and Austria have been the hoarders, and Greece, Ireland, Spain Portugal and some others have been the spendthrifts.
For the economy to rebalance, the spendthrifts have to become hoarders, and the hoarders spendthrifts. If there were no spendthrifts, the hoarders would never have been able to sell their exports. So we all depend on one another in the end.


The questions Wolfgang Munchau and others, who say the euro can only work if there is a political union, need to answer are


1.) Who should be in the political union? All the existing eurozone states, or only some of them?


2.) If the Eurozone becomes a political union, what do we do with the existing European Union , which contains a number of countries who will refuse to join a political union or the euro eg. Britain?


3.) What should be the content of the political union? A common tax would obviously be part of it, but what taxes would be European and what taxes would remain national?


4.) How would a political union turn spendthrifts into hoarders and vice versa? What powers would it use to achieve this, and with whose authority?


5.) How much tax would have to go to the centre and how could it be spent to mitigate the problems now being experienced without creating a permanent dependency of some states on others?
The experience of federations like Canada and the United States does not suggest that an enlarged Federal Budget automatically leads to convergence between poorer and richer regions. Mississippi and Newfoundland are still as poor, relative to the rest of the US and Canada respectively, as they ever were.


6.) How would one make a political union democratic? Would the President of the political union be directly elected or would the eurozone parliament elect the Government?
A political union that lacked real democratic legitimacy would not work. But as we saw with the Lisbon Treaty, getting agreement on that will not be easy.


7.) Given that these questions will not be answered quickly, what do we do in the meantime to save the spendthrifts from their folly in borrowing all this money, and the hoarders from their folly in lending it?


I fear that talk of a political union is really a bit of a distraction. We need a set of practical proposals, that will be accepted as fair by both hoarders and spendthrifts. Maybe these proposals need some form of democratic legitimation by a single eurozone wide referendum. A risky strategy perhaps, but we are living in times when the risks of doing nothing are getting higher all the time.

Are Two Days Meetings, Once a Quarter, Enough to Run Europe?

The December Summit of the EU agreed to introduce an amendment to the EU Treaties to create a permanent bail out fund for Eurozone member states, that will be activated “if indispensable to the stability of the euro area as a whole”.
This is quite a high bar to cross. Suppose there is a financial crisis affecting the majority of countries in the euro zone, but one large country has insulated itself against this economic shock by building up large savings and preventing its banks from lending more than a very conservative amount. Would the existence of that one such country in the euro zone be legally sufficient to prevent the bail out fund being used then, because the crisis was not affecting the euro area ”as a whole”?
This wording in a Treaty will be very severe and may mean that countries in difficulty will not use this fund at all but will prefer to seek help from the IMF, because the IMF will look at the situation of individual countries, not at the euro area as a whole.
It would appear that this announcement has not calmed the markets. If so, this is because it is a one sided solution. It deals with helping countries avoid collapse, but it does so by enabling them to add further to their debts by borrowing on the strength of the credit of other member states who have a better credit rating.
What it does not do is provide a vision of how economic growth will be restored , so that a flow of funds will be created to repay the debts. The EU heads of Government have produced tons of paper on this topic in the past, notably under the so called Lisbon strategy. These papers have been full of pieties about “reform” and “flexibility”, but have lacked specifics and rigorous follow up. I always had reservations about the Lisbon Process because it lent the good name of the EU to systematic evasion of responsibility in areas where the EU actually had no power to act under the Treaties, and thus no responsibility for failures.
My own view is that the European Council, which is a body consisting of 27 part timers, is not a body that is capable of the sort of rigorous, sustained, and self critical thought that is needed to restore economic growth at this critical moment in history.
27 heads of Government, all of whom are already fully employed managing their own countries , can only turn to EU affairs in their spare time, which may be on the plane on the way to the meeting in Brussels. The European Council does have a small secretariat and a fulltime Chairman, but that is not enough to make up for the fact that the people who make the actual decisions are all part time Europeans. Arguably the European Commission is available to help but its role is sidelined by its institutional rivalry with the Council.
We are facing more than a financial crisis. We are facing a crisis of the welfare state in ageing societies. We are facing a crisis of globalisation, and potentially even a crisis of the efficacy of European democracy. These subjects need to be tackled together in a sustained way, with a real sense of urgency. Decisions need to be taken now, that point the way forward for Europe for the next ten years. Leaders need to sit together until they have reached a full mutual understanding on all that needs to be done, the whole job, not just bits of it.
I believe that the members of the European Council from the 16 euro area countries should be  recalled, in the days after Christmas before the markets get going again in the New Year, and work together for a week or more with all the relevant members of the European Commission, to put together a ten year strategy for political and economic reform to facilitate the economic revival of the entire euro zone.
On the narrower issue of bank debts, the conclusions of the summit are also one sided. For example, the Irish banks owe 113 billion euros to German banks , 107 billion euros to British banks, and a large amount to Belgian banks. If mistakes were made in borrowing this money by the Irish banks, mistakes were made in lending it too. The lending banks were regulated in their home countries, not in Ireland.
While the Irish banks were regulated by Irish authorities who did not do their job properly, Irish taxpayers were not parties to either the lending decisions, nor to the borrowing decisions. Yet they are taking on the full responsibility of ensuring that the loans are repaid. They are getting new loans to help them do this, but they will have to repay those loans in full. There is a lack of symmetry here, to use a mild term.
Of course something along these lines was needed to prevent the problems of the Irish banks infecting the German , Belgian and British banks too. In protecting those banks one is protecting German, Belgian and British taxpayers. So surely this is a European responsibility, as well as an exclusively Irish one?
This is the sort of issue that it would take a lot of time to work out fairly and proportionately, time that the busy part time Europeans on the European Council do not allow themselves to take

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