Tag Archives: EU support mechanism

The wrong battle

Illustration in linocut by Manos Symeonakis

“There is no Greek-German war,” government spokesman Giorgos Petalotis said last week. “Greece and Germany are not on collision course,” said Foreign Minister Dimitris Droutsas. All these statements can only mean one thing: Greece and Germany are very much at loggerheads. But their dispute is not just a bilateral squabble; at its heart it’s about divergent views on how to respond to the crisis threatening the euro and, beyond that, on the very purpose of the European Union.

The frantic attempts by the government to play down any rift between Athens and Berlin came after Greek Prime Minister George Papandreou decided on November 15 to dust himself off, stand on the ruins of the Greek economy and hit back at German Chancellor Angela Merkel with a rebellious passion. Speaking in Paris, Papandreou accused Merkel of driving up bond yields for weaker eurozone members by insisting that private investors should foot part of the bill for a permanent mechanism to support countries with failing economies, like Greece’s. “This could create a self-fulfilling prophecy,” said Papandreou. “This could break backs, this could force some economies into bankruptcy.”

On the face of it, there seems little wrong with Merkel’s insistence that private bondholders should accept losses, or a “haircut,” on their investment as part of a debt crisis mechanism to be adopted by 2013. Most Europeans would accept that this would create a fairer system although, clearly, German taxpayers would benefit the most as they’re the ones who would be called on more often to bail out failing eurozone members. But the self-serving element to Merkel’s position is not what should be of most concern to Europeans. Instead, it’s the way Berlin has tried to steamroller other EU countries into accepting the inclusion of the “haircut” clause ahead of a decisive EU leaders summit in Brussels next month. It’s this lack of consultation and the absence of consideration for struggling eurozone members that is undermining the Union.

Papandreou argued that making such a big fuss about investors having to pay their share simply gave jumpy bondholders a seriously aggravated case of the jitters, pushing up the yields on government bonds for Ireland, Portugal and Spain to dangerous levels. Few EU leaders backed Papandreou openly but there is great concern about Germany’s stubbornness. “When the history of the eurozone is written, last month’s German-driven EU summit agreement to devise a crisis resolution mechanism for countries to service their debts may well be cited as the event that pushed Ireland over a cliff,” Bloxham, Ireland’s oldest stocbrockers, said last week, a few days before Dublin turned to the EU and the International Monetary Fund for emergency loans.

In Germany, though, there is a different view. “If Merkel were to abandon her plans, then it would be paradise for investors and weak governments,” wrote the Suddeutsche Zeitung newspaper last week. “The speculators could charge higher interests on Irish or Greek bonds without any risk of losses. And the Greeks could continue with their record indebtedness because they would have no more pressure from the financial markets and in an emergency would be rescued by their euro partners.” However, this ignores that when Greece tries to go back to the international bond markets in 2013, its borrowing costs will be pushed up anyway, as investors will be wary of having to take a haircut should Athens have to revert to the permanent EU mechanism for further loans.

The Greco-German dispute is symptomatic of the differing views emerging within the EU about how to combat the debt crisis. There is a tendency for the EU to speak with two voices and to pull in two different directions. “The euro, which was supposed to make European integration irreversible, could become its undertaker,” wrote the Frankfurter Allgemeine Zeitung daily last week. Every day the debt crisis gnaws away at the EU’s confidence, making the Union seem an exhausted shadow of its former sprightly self. This dissipation of energy and will is leading to division and, whether through bad luck or design, Merkel is at the forefront of creating ever-deeper rifts.

Speaking at a rally of her Christian Democratic Union (CDU) in Karlsruhe on November 15, the same day that Papandreou challenged her scheme for private investors, Merkel said her predecessor as chancellor, Social Democrat Gerhard Schroeder and his Finance Minister Hans Eichel had blundered when they allowed Greece to join the eurozone. “In 2000, Schroeder and Eichel couldn’t let Greece join the euro fast enough and they ignored all the warnings,” she said. “It was a political decision… political decisions are important but those which ignore the facts are irresponsible.”

It’s now obvious that Greece was not ready in 2000 to stick to the single currency’s fiscal guidelines, as prescribed by Germany. It’s also clear that allowing Greece into the eurozone was a political decision — one aimed at giving the nascent single currency numerical, if not necessarily economic strength, but also the opportunity to encourage economic reform and German-style efficiency in a sluggish European state. A decade ago, it was a convenient political decision for Germany — Greece, after all, became another market in the eurozone for its exports — but now it’s a terrible inconvenience for Berlin. But that’s the thing about political decisions: You take a risk. Sometimes you ignore the facts because you have a conviction that something greater is at stake, even if the numbers don’t back you up.

Merkel might consider, for instance, that the Marshall Plan, which ensured Germany’s post-war reconstruction and helped it become the economic powerhouse it is today, was a political decision. The United States, which led the effort, could have decided that paying to help rebuild Germany did not make economic sense but Washington chose to look at the bigger picture — the opportunity to fight “hunger, poverty, desperation and chaos” as US Secretary of State George C. Marshall said when he unveiled his plan in June 1947. Using words that are eerily relevant to today’s Europe, Marshall said: “The United States should do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and no assured peace.” Peace in Europe is not under threat in 2010 but the EU’s faltering economic health is putting its unity at risk.

While leaders argue over bond yields, haircuts, bailouts, deficit and debt, one very important factor is being overlooked. As was the case in the Europe of 1947 before the Marshall Plan, it’s the people that are suffering. They are the ones that pay the cost of failed economic policies and soaring bond yields — people who have fulfilled the wishes of politicians and bankers by mortgaging their futures to buy houses and cars and who believed the euro would bring the permanent stability they were promised. This is why unity must be restored.

Somewhere between Papandreou’s rebelliousness and Merkel’s intransigence, we’ve forgotten that the EU and its institutions were created to improve people’s lives. Many of these people are now losing their jobs, homes and hope. That’s why, even though Greece and Germany may not be at war, their dispute is confirmation that Europe is fighting battle, but the wrong one.

This commentary was written by Nick Malkoutzis and was published in Athens Plus on November 26, 2010.

No countries for old ideas

Illustration in linocut by Manos Symeonakis

Brussels – There’s a homeless man who sits with his back against the wall of Gare du Nord railway station in Brussels and begs for money. He chooses a spot near the station’s side exit, where few people pass. It also rains a lot in the Belgian capital, so he doesn’t look like a happy man. But by the end of Friday, when European Union leaders will have finished negotiating on new, stricter budget rules for member states just a couple of kilometers from where the beggar sits, they could make him look like the happiest guy in town.

Such has been the intensity of disagreement over how to take economic governance up a notch in the 27-nation bloc that there will be a lot of fraught faces in Brussels this week. Of course, if a deal is reached, the smiles will break out – until people start questioning the implications of what has been agreed.

The negotiations leading up to the summit, which began on Thursday, have been overshadowed by events on October 17: Just as a task force of EU finance ministers led by European Council President Herman Van Rompuy and assisted by the head of the European Central Bank, Jean-Claude Trichet, was putting the finishing touches to proposals designed to stop member states like Greece from overspending, Germany and France decided they would save everyone the trouble and decide on the final scheme on their behalf.

The task force had come up with a system of issuing sanctions against countries that violate the 3 percent of gross domestic product (GDP) limit on their public deficits and the 60 percent of GDP limit on debt, as set out in the EU’s Stability and Growth Pact. Countries that fail to conform would face the prospect of being fined. Both the ECB and the European Monetary Affairs Commissioner Olli Rehn had wanted this process to be semi-automatic, in other words not to be open to political interpretation or manipulation.

Before the mechanism – which for now will only apply to countries that use the euro – was even properly conceived, German Chancellor Angela Merkel and French President Nicolas Sarkozy announced they had agreed on a different method. In a two-way compromise, Merkel agreed that a qualified majority of eurozone governments would be required to start disciplinary action (including political sanctions such as withdrawal of a state’s voting rights) and that a permanent emergency fund should be created for members that can’t balance their books, while Sarkozy conceded that any changes to budget rules should be included in an amended EU treaty.

The Franco-German power play prompted dismay – Trichet insisted a footnote be added to the final version of the proposals stating that he did not agree with all of them – and horror – Luxembourg’s Foreign Minister Jean Asselborn accused the French and Germans of dragging the EU back into the 19th century with the idea of removing members’ voting rights: “You are threatening states, threatening peoples, humiliating them.”

Rehn, meanwhile, insisted in Brussels on Tuesday that he would push up to the last minute for the sanctions process to be free of political intervention and disagreed openly with the prospect of denying offending members the right to vote, which he said is “not in line with the idea of an ever-closer Union.”

The Finn was speaking at the launch of a new system for monitoring the performance of eurozone economies. Dubbed the Euro Monitor 2010, the report compiled by the Lisbon Council think-tank and the Allianz financial services provider uses a range of 15 indicators in four key categories – fiscal sustainability; competitiveness and domestic demand; jobs, productivity and resource efficiency; and private and foreign debt – to evaluate performance rather than just fiscal measurements. The idea is that the Euro Monitor would provide a better early warning system of failing economies and would be a more comprehensive way of monitoring and encouraging balanced growth in the member states.

Given that he’s had more numbers thrown at him this year than a bingo hall announcer, perhaps Rehn, who expressed his support for such an analytical tool, could be excused for missing the irony of the occasion. He may well favor a more rounded approach to assessing economic progress but the measures due to be approved this week use purely fiscal indicators as their totem poles. Even though the EU is more acutely aware of its failings thanks to Greece’s spectacular implosion, the Union is about to commit to a form of “reinforced economic governance” that is predicated on the same terms that have underpinned eurozone economies for the last decade and which failed to prevent the current mess in which many member states find themselves. It uses the same debt and deficit limits that were consistently violated, not only by rulebreaker Greece but by rulemakers France and Germany as well.

Also, the proposed mechanism pounces on failure rather than encouraging success. It threatens to punish member states that fail to comply with somewhat arbitrary fiscal limits but does not suggest how they can drive their economies to stay clear of trouble. It proposes sanctions when there is no evidence that financial penalties bring states into line. Greece, for example, was the first EU country to ever be fined for an offense – for the operation of an illegal trash dump on Crete – in July 2000. It spent the following 10 years amassing fines for breaching EU environmental legislation. At the end of the decade, Greece still had one of the worst environmental records in the Union. It had neither reformed nor conformed as a result of the fines.

There is a deeper problem, though, with the proposals. They show the EU to be running short of ideas at a most crucial juncture: When countries across Europe, from Greece to Britain and Ireland to Portugal, are taking the austerity hatchet to their troubled economies, there seems to be no attempt to develop a more sophisticated and nuanced economic model to deal with the challenges of the 21st century. Europe appears to have accepted the cost-cutting, tax-hiking philosophy of the International Monetary Fund without question.

This undermines the Union much more than any disagreements or backroom politics. The EU was once about breaking through the waves; its budget proposals are only about staying afloat. The measures reek of bleakness and there is nothing there to inspire the Union’s 500 million inhabitants. As John Rentoul, a commentator for the British daily The Independent, wrote in the wake of his government’s drastic spending cuts: “This isn’t about economics – as ever, that can be argued either way – it is about a strategy for the country.” Or in this case, the Union, and there doesn’t seem to be one.

Whatever is finally agreed this week, EU leaders will not be able to escape the fact that they are talking one language — that of debt, deficit, austerity, limits and sanctions – when many of their people would like to hear them speak another – that of jobs, security, prospects, fairness and quality of life. Even the homeless man in the street would be able to tell them that avoiding financial bankruptcy does not prevent you from being morally bankrupt, balancing your budget does not mean you have an equal society and reducing your deficit does not preclude you from being short of ideas.

This commentary was written by Nick Malkoutzis and was published in Athens Plus on October 29, 2010.