Tag Archives: Nicolas Sarkozy

Europe’s fiscal pact: The final irony?

Illustration by Manos Symeonakis

Last Friday, December 9 — the day when 26 of the European Union’s 27 leaders agreed on a “fiscal compact” designed to save the euro and place the bloc on a sounder economic footing — marked exactly 20 years since Germany and France presided over a similar meeting that led to the drafting of the Maastricht Treaty, which became the cornerstone of the single currency.

Among the euro entry conditions agreed in 1991, a country’s public debt would have to be limited to 60 percent of gross domestic product and its deficit to 3 percent of GDP. The first countries to breach the deficit rule were France and Germany in 2003 but they voted to let each other off, thereby undermining the rules that they had been instrumental in drawing up. So, there is more than a hint of irony in the fact that two decades on, France and Germany are again at the forefront of pushing for strict budget discipline, this time as a way of keeping the euro from falling apart.

Continue reading

It’s a mad, mad, mad, mad world

Illustration by Manos Symeonakis

It’s been a long time since the military doctrine of mutually assured destruction, or MAD, has been relevant to international affairs and even longer since US Secretary of State John Foster Dulles coined the term. Greek and European politicians, however, have proved that the principle is alive and kicking and once again poised to destroy the lives of millions.

Observing the machinations of Greece’s parties over the last few days as we wavered between prime-ministerial appointments — from former European Central Bank Vice President Lucas Papademos to Parliament Speaker Filippos Petsalnikos — has been like watching the trashiest of reality shows. People who you had suspected of being pretty shallow have now been exposed as empty pools of self-interest. Facing the most bitter of paybacks for all its past sins, the political system chose not to stare straight ahead and tackle the issue but to turn its back on the outside world.

Continue reading

How Greece inadvertently ducked under the rollover bullet

Ilustration by Manos Symeonakis

When French President Nicolas Sarkozy announced two weeks ago that French banks had agreed to participate in a rollover of Greek debt, it seemed a rare moment of relief in the country’s strained efforts to tackle its fiscal crisis. “The idea is that we won’t let down Greece and that we’ll defend the euro, which is in the interest of us all,” said Sarkozy, reflecting a sense of purpose and unity that the European Union has often lacked over the last 18 months.

However, the French proposal — which we will come to — soared briefly on the wings of hope before crashing into the immovable obstacle of reality. Two days of talks between bankers and insurers last week led to the Paris blueprint largely being discarded. However, the rejection of the French scheme appears to have helped Greece dodge a debt bullet. The more experts scrutinized the French plan, the more they realized it was a seriously flawed proposal that would worsen Greece’s debt problems.

Continue reading

Is Greece drowning in Europe’s fruit salad?

Illustration by Manos Symeonakis

“Europe is like a fruit salad,” says Frank Schwalba-Hoth, perched on the edge of his seat at the European Parliament’s cafe in Brussels. Normally, our surroundings would be a hive of activity but this week the MEPs have buzzed off to Strasbourg, the Parliament’s other home. But even if there had been a throng of politicians from the 27 member states around, the topic of discussion — Will Greece survive? Will the EU survive? — would have been too absorbing for us to notice.

Schwalba-Hoth, a German politician who was a founding member of the country’s Green Party and served as an MEP in the 1980s, is engaging company. He now works as a networker and consultant in Brussels and his knowledge of the workings and history of Europe’s institutions is unrivaled. He believes the Greek debt crisis and the threat it poses to the euro is just the latest in a long list of challenges that the EU, which traces its roots back to the European Coal and Steel Community founded in 1951, has faced in its long history.

Continue reading

Independence Day

Illustration by Manos Symeonakis

Every year, Greece celebrates its independence on March 25. It marks the date when the revolution against Ottoman rule began in 1821. This March 25, though, the proposition of Greece standing on its own will not seem so attractive. Should the European Union leaders’ summit on March 24-25 end in disappointment — as many expect it to — debt-stricken Greece will be left dangerously isolated.

Prime Minister George Papandreou has spent the last few weeks furiously trying to cultivate contacts with his European counterparts — including German Chancellor Angela Merkel, French President Nicolas Sarkozy and European Council President Herman Van Rompuy — in the hope they might be able to sway opinions ahead of the March 25 summit and a meeting of leaders from eurozone countries on Friday, March 11.

Continue reading

Long live Europe, but which one?

Illustration by Manos Symeonakis

Europe is dead. Long live Europe. The demise of the political and economic union, as we knew it, became evident at the recent meeting of European Union leaders in Brussels. What is less apparent is which Europe will replace it. A rapidly changing world has forced the once-untroubled Europeans to think again about where their continent is heading and how it will get there. The decisions taken over the next few weeks and months will determine whether a brave new world lies ahead or whether we will be left clutching the remnants of a flawed past.

The February 4 summit confirmed that the European project, built on the expectations of decent salaries, respectable retirement ages and an abundance of jobs, mostly in the service sector, has reached its expiry debt. The “social Europe” envisioned by, among others, former European Commission President Jacques Delors, where workers’ rights were protected and adequate public services were available to all, has fallen victim to circumstances. The sovereign debt crisis has been a major catalyst in this, but the Union faces much wider challenges than just how to deal with debt and deficit problems.

Although one EU government after another has been cutting its spending and trimming the fat from its public sector over the past couple of years, February 4 proved a watershed in the process of sacrificing the old Europe at the altar of the new economic reality. French President Nicolas Sarkozy and German Chancellor Angela Merkel unveiled their “pact of competitiveness” as a strategy to help the eurozone out of the crisis and to harmonize economic and social policies between the 17 members. The six-point package includes proposals to increase each country’s retirement age to reflect its demography, abolishing automatic inflation-linked wage increases and setting an across-the-board minimum corporate tax rate.

The proposals have divided Europe, not just because Merkel and Sarkozy continue to forego consensus in favor of maintaining an agenda-setting momentum, but because some of their suggestions go against the European grain. “I can’t really detect a reason why abolishing the indexation of wages should improve the competitiveness of my country,” said Luxembourg Prime Minister and head of the Eurogroup, Jean-Claude Juncker. “This is not a competitiveness pact, it’s a perverse pact toward lower living standards, greater inequalities and more precarious employment conditions,” said John Monks, head of the European Trade Union Confederation.

The six-point plan is cast in the mold of the EU’s two dominant economies: the French and German — particularly the latter. But those who oppose the competitiveness pact argue that in a Europe that is not homogeneous, creating more economies in the image of Germany’s is unfeasible and undesirable. “The German model, which relies on a permanent trade surplus is neither sustainable, nor transferable,” wrote the left-leaning German daily Berliner Zeitung. “It works as a model for a selfish nation that floods the neighborhood with its goods and services and exports unemployment at the expense of others.”

“What the chancellor is proposing is a pact of insanity,” concludes the newspaper. “Europe doesn’t need more Germany, rather it needs more cooperation and community.”

However, there are many within Europe who think that Merkel and Sarkozy are on the right track and that although their proposals may reflect a grim reality, it’s reality nonetheless. “The competitiveness pact is a step in the right direction because it means that we are not discussing just narrow economic governance — having more rules — but the broader approach about what competitiveness is as well, and how we will ensure that what has happened over the last two years does not happen again,” Karel Lannoo, CEO of the Center for European Policy Studies told Kathimerini English Edition.

“It is much more important to have disagreement on issues of competitiveness, such as real unit labor costs and how to run public finances, than to have even more rules in the Growth and Stability Pact or balancing the budget. It’s much better to have agreement on broader principles and have them effectively applied.”

Merkel and Sarkozy, some believe, are trying to drag an aging Europe toward economic pragmatism; the lofty ambitions that accompanied the euro for the past decade and the dreams of social security and stability that have formed the cornerstone of the EU will have to be tempered, if not completely abandoned. The debt crisis triggered by Greece’s spectacular unravelling lit the blue touch paper for this dramatic reconceptualization but there is more to it than that. China is the dragon in the room that Europeans are only starting to talk about it now.

China has become a key trading partner for the EU and, in cases such as its purchase of Portuguese, Spanish and Greek bonds, is actively trying to help Europe through this crisis because it values having a reliable trading partner and a counterbalance to the influence of the USA. However, China has also become a competitor because of its meteoric rise in the production sector. The market dominance that has come with it has reminded Europe, that its service-based economy is not strong or versatile enough to withstand the force of the crisis, that it no longer makes things, that its industries are in decline and that it has little capacity for creating new jobs at a time when they are needed most.

Last December, China said that it had created 57 million manufacturing jobs between 2006 and 2010. Between 2008 and 2010, the EU shed almost 5 million jobs in industry while seeing its unemployment rate grow to an average of more than 10 percent and an increasing number of people (40 percent of the EU’s young) working in temporary jobs.

“A little while ago we declared that we were in the post-industrial age and this had a huge impact on such things as the structure of education: we didn’t have any engineers — it was more in vogue to become a psychologist than an engineer,” former Regional Policy Commissioner and current MEP Danuta Hubner told Kathimerini English Edition. “There were a lot of factors that made industry much less important in our economy. And then there is China, which is a completely new factor, which is competing with us mostly in industry and agriculture but not yet in the services. So, now we have to think about creating jobs in the real economy.”

Merkel and Sarkozy’s “competitiveness pact” suggests what underlying conditions, such as low debt and a more flexible and cheaper workforce, might be needed for growth to return to Europe but it still doesn’t propose how jobs will be created. This is an issue that the EU is only beginning to grapple with and the proposals on the table still seem nebulous. It is not clear if the focus has to be on better education, more research or gearing up industrial production. Will the new jobs be in laboratories, on factory floors or in design studios? If the plan is to improve the skills and knowledge of the next generation to give Europe the edge over China, India, Brazil and any other competitors, will Europe be able to survive a lean period in the intervening years? These are quandaries that the EU, collectively and individually, has yet to really address.

At a central level, the European Commission unveiled last October its plans in a communication titled “An industrial policy for the globalization era,” which called for initiatives to create more favorable conditions for industry, including simplifying legislation and offering financial incentives. However, this was somewhat contradicted by EU Research Commissioner Maire Geoghegan-Quinn, who at the beginning of this month said that Europe has to focus more on innovation, which would involve reforming education and investing more in research and development. Last year, the EU adopted the 2020 strategy as a successor to the Lisbon Agenda, which had sought to make Europe a “knowledge-based” economy. The 2020 strategy aims to set targets for reducing the number of early school leavers, increasing the number of people in employment and boosting investment in research and development. The chances of these targets being met in Greece, Ireland or debt-burdened Portugal, for instance, seem slim. Beyond this, the strategies and goals of the individual states have to be taken into account as well. Europe, it seems, is lost in the fog created by the debt crisis, unsure of which way to turn.

“There are still people in important European institutions who believe that just by training people you can create jobs, which I don’t think is really true,” said Hubner. “You still need investment, not just any investment; you need investment that is not just allowing us to compensate for what we lost in the crisis but to have a new type of production that will let us compete with everyone else.

“That’s why we want to focus on the knowledge that comes from education and innovation. We also have to look for jobs in combating climate change. You have to use the European budget to help with this because it has a strong catalytic function, and you must have national budgets working. We have to push for the European Investment Bank to have a greater role. But it is still not enough; we cannot create jobs without private capital,” said Hubner.

The Europe of the future, it seems, will have to turn back the clock by rebuilding a production base, albeit one that will rely on small and medium-sized enterprises pumping out innovative ideas and products rather than large factories pumping out carbon emissions.

“We have to invest in things that generate competitiveness,” said Hubner. “We don’t want just any growth but very concrete growth because we are losing jobs to India and China overnight.”

Although China is reportedly losing some labor-intensive manufacturing jobs to countries like Bangladesh, Vietnam and Cambodia because they offer even lower wages and more unskilled labor, it is still an immensely cheaper place to make things than Europe. Compensation rates for workers in China are estimated to be no more than 5 percent of those in Europe. So, even if European wages are suppressed, as Sarkozy and Merkel’s pact proposes, competing with China or India on labor costs is out of the question.

“I don’t believe that you can change Europe’s development model to compete with China,” said Hubner. “We have to invest in productivity.”

This argument is the starting point for those within the EU who say the answer to the Union’s problems is not becoming more like China, but becoming more like Europe. In other words, it must not stake its future on an export-driven economy supported by cheap, precarious labor but find a better way to harness the potential of a highly developed group of states with a combined population of more than 500 million people.

“At the moment, Europe is one of the most competitive regions in the world,” Jurgen Klute, an MEP for Germany’s leftist Die Linke party and a member of the European Parliament’s economic and monetary affairs committee told Kathimerini English Edition. “This talk [of competitiveness] is only designed to build up psychological pressure on people. It’s not reality.

“We have to look to be competitive but that is only one aspect. We should not focus just on the Chinese, we have to be focused on our own market and development. We have to organize a production sector, a service sector and a sector for delivering goods for our own population. That should be the first goal of every politician in Europe.”

The concern of many in Brussels, and other European capitals, is that Merkel and Sarkozy are pushing an agenda, which is to be reassessed at the next EU leaders’ summit on March 24 and 25, that suits them and their economies but not necessarily the rest of Europe. Their insistence on concluding their business behind closed doors and then presenting other European leaders with a fait accompli is heightening fears that rather than bringing the EU together so it can meet its new challenges with a united front, the Franco-German allies could cause irreparable differences.

“There was no democratic control over the discussion that happened,” said Klute. “Merkel and Sarkozy are trying to change the culture and procedures of the EU. In the past it was clear that you have to find compromises and balances.

“The Council [of EU leaders] is focused only on the single state, not the relationship between states. They ignore that there is a relationship between the deficit of some countries and the surplus of other countries. If there is to be solidarity, then the stronger states have to reduce their speed a little bit.”

The EU is not just facing an economic dilemma, it has an existential question to answer about how its decisions are taken and where these decisions lead, Klute suggests.

“There has been a change in the understanding of how the EU should develop, in the understanding of solidarity and of the democratic process. It’s a very big change in the direction of the EU.”

The issue of competitiveness, as set out in Merkel and Sarkozy’s proposals, therefore seems to be a misleading one. Few people have better first-hand experience of European affairs than Pierre Defraigne, the executive director of the Madariaga-College of Europe Foundation, who served as a European civil servant for 25 years. He is adamant that tweaking wages and retirement ages will not be enough to save Europe. He believes there needs to be a concerted effort to transform Europe into a much tighter-knit community with a specific economic agenda.

“The first thing I would do is to delete the word ‘competitiveness’ from the vocabulary of politicians and economists,” he told Kathimerini English Edition during a seminar organized by the European Journalism Center. “We have to climb up the technology ladder. This is a matter of public policy and small firms — start-ups and so on — and of large firms, of champions. We don’t have the right system and we are still just an economic space, a market; we are not really an integrated politico-economic system.”

Defraigne suggests that Europe can have an industrial future but that it will need to find the appropriate mix of labor market and social policies to achieve it. To reach this point though, Europe will need a level of coordination and harmonization that it has only flirted with in previous years. It seems that the EU’s political and economic viability is reliant on the bloc’s politicians and opinion-makers being able to redefine what this Union is about.

“For me, the key issue is to give Europe a sense of direction, a sense of purpose,” said Defraigne. “The half-century of effort we have carried out successfully will be legitimized in history if we move to closer political union.”

With just over a month until its leaders meet again for a crucial summit in Brussels, the EU must begin redefining itself. Visions must be reconjured, goals reset and strategies redrawn. In the meantime, the words of Delors, one of the architects of the Europe that is now crumbling like a desiccated sand castle will ring poignantly through the corridors of power. “The problem with a purely collective system,” said the Frenchman, “is not only that it requires economic growth, and the right sort of demographic trends, but that it prevents people thinking about their futures in a responsible way.” A lack of growth and the unfavorable demographic trends have forced Europe to emerge from its cozy collectivity and think about its future. Now we wait to see which Europe will emerge from this process.

Nick Malkoutzis

The Eurobonds that bind us

Illustration by Manos Symeonakis

At first they appeared to be two disparate worlds even though they were physically separated by only about 100 meters: The Communist Party supporters who gathered in front of Parliament on Tuesday to tell International Monetary Fund Managing Director Dominique Strauss-Kahn to go home; and the journalists, academics and students who took seats in a snug underground amphitheater to hear a debate on how the media in Germany and Greece have covered the economic crisis.

However, these two seemingly unconnected events had much more in common than at first glance. In essence, they formed a microcosm of the European Union today, emphasizing the unrest and dissent that exist within states but also the disagreement and tension that exist between them. The Communists represented the growing disquiet about an EU that’s moving away from the platform of security and prosperity it was built on. The differing views of the Greek and German journalists and government officials on the panel epitomized the way the crisis has laid bare the contrasting visions that Europeans have about the way forward.

Europe takes its name from the mythological figure of Europa – so beautiful that Zeus transformed himself into a bull to seduce her and carry her to Crete. The tale is depicted on the reverse of the 2-euro coin. It’s the euro that has been at the forefront of carrying the EU to what looked like a promised land of economic growth and shared values. But now Europe is lost in a wilderness of debt and national interests and there is nobody around to whisk her off to greener pastures. The euro, however, has the ability to become the Union’s driving force again – even if this week’s events made that seem as likely as Zeus coming down from Mount Olympus to wipe out Greece’s national debt.

The disagreement and division in the air around Syntagma Square this week was in keeping with the mood of disunity that followed a proposal to launch a Eurobond that would, in theory, ensure greater economic stability within the bloc. The suggestion was made by Italian Finance Minister Giulio Tremonti and Luxembourg’s Prime Minister Jean-Claude Juncker, also the head of the Eurogroup, in the Financial Times on Monday. They proposed that the members of the eurozone issue common bonds, or E-bonds, because this pooling of debt would bring greater stability, fiscal integration and create a note so attractive to investors that it would bring down the cost of borrowing for eurozone members like Greece, which are currently suffering from soaring spreads.

The Eurobond would, as Juncker and Tremonti argued, send a clear message to financial markets that European politicians are committed to political, economic and monetary union and the “irreversibility of the euro.”

On the same day, a top economist at the British Treasury told a parliamentary committee that the collapse of the euro was “possible,” sparking all kinds of consternation across the continent and on the markets. It made the significance of Juncker and Tremonti’s suggestion even greater. Beyond the economic principles behind the idea of creating the E-bond, the proposal urges togetherness at a time when the EU desperately needs it.

The Eurobond, however, was immediately and flatly rejected by German Chancellor Angela Merkel. “It is our firm conviction that the treaties do not allow joint Eurobonds; in other words, no universal interest rate for all European member states,” she said.

French President Nicolas Sarkozy, who lately has formed a policy tag-team with Merkel, also shunned the proposition, arguing it would allow the more irresponsible states to run up debts in the knowledge it would not increase the cost of their borrowing. “If it’s about increasing Europe’s debt, that would have the effect of taking responsibility away from each state,” he said after meeting the German chancellor on Friday. “We want exactly the opposite – making states more responsible.”

The Netherlands and Austria were also against the idea. Along with Germany, these countries have lower debt levels, competitive economies and therefore pay much lower interest on their bonds than eurozone members at the other end of the scale, like Greece, Ireland and Portugal. A move to a Eurobond would lead to Germany paying higher interest as the risk of default among the weaker eurozone members would be factored into the note’s yield.

The German concerns are therefore understandable, but the alternatives to the Eurobond are equally worrying. Clearly, further steps need to be taken to bring eurozone members and their economic and fiscal policies closer together if the single currency is going to come out of this crisis with any long-term viability. If Germany rejects such moves, it opens up the possibility of creating a two-tier, two-speed euro, whereby the more stable countries introduce a “hard-currency euro.”

Such an idea was recently put forward by Hans-Olaf Henkel, former president of the Federation of German Industry, who is rumored to be considering launching an anti-euro party. The other alternative, which perhaps would not displease many Germans at the moment, would be a return to the Deutsche Mark, leaving the others to pick up the pieces of a broken euro. Either scenario would be disastrous for European unity.

Perhaps that’s why Juncker shed the cloak of diplomacy usually worn by European technocrats and gave an uncharacteristically blunt response. “Germany is thinking a little simply,” he told the weekly Die Zeit, accusing Berlin of rejecting the idea before studying it properly and of behaving in an “un-European manner.”

Who would have thought that the chief architects of a united Europe would one day be accused of being “un-European”? Even though the crisis has highlighted common weaknesses and interdependencies in Europe, it has also prompted countries to focus on their own interests more intently than before. Nowhere is this more evident than in Germany, where the national mood seems to be one of unwillingness to give up or give away what Germans have spent decades working for.

“Perhaps for the first time since the Second World War, they are allowing themselves to be defiant and proud,” Katinka Barysch, deputy director of the Center for European Reform, told the Financial Times. “Their export-oriented, stability-obsessed economic model is not up for discussion.”

At times, this has caused Germany to be shortsighted or even selfish: Its initial reluctance to bail out Greece, its insistence that the IMF be part of the rescue package, its persistence in ensuring that private bondholders share the liability for a permanent support mechanism or in its rejection of the Eurobond proposal.

But, again, the alternative of being a lone wolf rather than part of the pack is not as appealing as it might first seem. Not being involved in the single currency would have a disastrous effect on the German economy. Roughly 40 percent of German exports go to eurozone countries. These would all immediately become much more expensive if the Deutsche Mark returned. A downturn in exports would then have a series of knock-on effects, including a rise in unemployment. It would also mean the EU losing its voice in the global economy, where the USA and China would be left in a much more dominant position.

Whichever way Germany turns, its future seems inextricably linked to the EU and the euro. Ultimately, it has much more to gain from the eurozone riding out this crisis and emerging stronger on the other side than by cutting its losses now and going it alone.

Despite her recalcitrance, Merkel acknowledged as much on Friday. “If the euro fails, Europe fails,” she said. “This is a deeply serious matter for me and that’s why Germany will do everything to defend the euro jointly with the other members.”

That’s why Germany may change its mind on the Eurobond proposal. Yes, it will make the cost of borrowing a little more expensive, but the alternatives could be more damaging. “What are the risks to the German yield curve of the destruction of around half of German banks’ capital if the eurozone was broken up?” writes Joseph Cotterill in the FT’s Alphaville blog. “Or if, say, the European Financial Stability Facility’s lending capacity becomes so debased that only a direct fiscal transfer will satisfy markets, should it come to Spanish or Italian crisis?”

In the midst of the acrimony and disagreement clouding Europe’s decision-making process, one thing seems clear: The future of Europe, as well as that of Germany, rests on the ability of its policymakers to find the points where national interests meet common interests. This is the place where Zeus now has to carry Europa. It is here that she has a chance of living securely and prosperously.

This commentary was written by Nick Malkoutzis and was published in Kathimerini English Edition on December 11, 2010.