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Curt -

It would be interesting to see how much leeway Chancellor Merkel has
to address the crisis.

Michael


The EU must step toward fiscal and political union Peter Mandelson

More than a year after the eurozone first announced support for
Greece, the country’s trauma and the eventual fate of the euro itself
remains unresolved.
When the euro was launched, I remember relatively objective
commentators arguing that, to be successful, the economic side of
economic and monetary union needed a much stronger political framework
within which to manage the eurozone’s fiscal policies. They have been
proved right.

This is not the moment, however, nor is there good reason to abandon
seven decades of building union in Europe. It undoubtedly remains a
huge challenge to complete the project. We are attempting to
reconfigure the largest economic space in the world since the United
States of America was created. But in a world that is fast tilting
away from its postwar Atlantic centre of gravity, Europe needs more
than ever to come together and maximise its competitive strength and
market power.

While it has not been easy to discern the strategy of Europe’s high
command in putting out the fire on its periphery, a three-stage
response is emerging: first, to stop the immediate haemorrhaging by
means of further transfusions of liquidity to the eurozone’s insolvent
members; second, accept, finally, that the fundamental problem,
certainly in the case of Greece, is one of solvency not liquidity and
prepare for an orderly reconstruction of their sovereign debt that is
viewed as inevitable by private debt holders and preferable to a
disorderly default which would halve Greek living standards overnight
and remove any early prospect of economic reform and growth in the
country; and, third, once the immediate crisis has passed, build on
the tighter fiscal rules, early warning of macro imbalances, greater
financial regulation and analysis of systemic risk of the past year
and introduce more far-reaching fiscal interventions and controls
across the whole area that, in effect, will amount to a significant
step towards fiscal and political union.

None of this is going to be easy or straightforward to manage for the
simple reason that Europe is facing not one but four interrelated
crises.
There is the immediate crisis of insolvency among the eurozone’s
weaker members but this is complicated by a continuing banking
crisis. Many European banks are still carrying real or potential
significant losses and are heavily exposed to the sovereign debt of
the eurozone’s insolvent members. We are familiar with Germany’s deep
hostility to the costs of bailing out these states falling on the
taxpayer alone. But the fact that is rarely mentioned in this debate
is that it is a choice between bailing out these states, or bailing
out the German, as well as other, banks that are their creditors.
These two interwoven elements – insolvency and vulnerable banks – have
brought to a head the structural competitiveness crisis built into the
eurozone from the start – the head start that the early member
northern states had in productivity over the so-called periphery
states such as Greece, Portugal and Spain. Before the crisis this
could be papered over with a Europe-wide “structural reform” agenda –
honoured more in name than action – that aimed to encourage
convergence in productivity and competitiveness through tough
industrial and other changes in product and labour markets. There was
also a hope that a continuing rising tide of economic growth in Europe
would “lift all boats”.

In practice much of the “lifting” of the economies of Greece, Spain,
Portugal and Ireland over the past decade was driven by what was
demonstrably an unsustainable credit-driven boom. A boom that lessened
the pressure on these economies to address underlying structural
issues, while lack of adequate financial regulation facilitated the
recycling of financial surpluses in the form of imprudent lending in
Ireland and the southern member states. The end of the boom left them
severely weakened and exposed, with no freedom over their interest
rates and currency to make any correction.

Challenging as all these problems might be, they would be soluble
through strong political management and policy decisions, but for
Europe’s fourth crisis: that developing over the European Union’s
political legitimacy. And here is the rub. The major step towards
economic and fiscal union – what the European Central Bank president
Jean-Claude Trichet has called a “quantum leap” in euro area economic
governance – however desirable in principle, would take the EU into
new and highly problematic political territory. It would mean, in
effect, giving European authorities the right to veto member state
fiscal and competitiveness plans that fail to match up to what is need
to deliver “adjustment”. Looking even further ahead, Mr Trichet
envisages a ministry of finance for the EU.

Whatever the merits of such an approach – and logically the ECB
president is right – I don’t see such moves easily winning public
support. In national elections or further referendums, Europe’s
current “integration fatigue” would almost certainly prevail. The
German electorate, notably, would be hard to persuade. It could
certainly be argued that Germany’s whole economic success depends on
an integrated European economy that is the base for their global
competitiveness and political stability, and the recreation of a
soaring D-Mark would be disastrous for its export sector. But having
experienced a decade of squeezed living standards and labour market
reforms, following their belt-tightening to bring reunification about,
Germans will not be keen on being tethered even closer to Europe’s
underperforming periphery, in particular Greece where real wages have
gone up 40 per cent in the past decade and yet tax evasion and corrupt
and restrictive practices are rife. And the German public will not be
alone.

So what is going to happen? The EU’s response, stretched over the next
couple of years, is inevitably going to be a messy compromise between
the urgent need for collective action and the huge political
difficulty of taking the further explicit steps needed to fiscal union.

In my view, the basic logic and European belief in union will prevail.
But it is going to be a rocky and hard fought road and advocates of
greater union will need to be more honest with the public, and more
sure of their arguments, than they have been in the past. It is
possible that Europe’s political nerve will fail. But I would not put
money on it. Few share the British prime minister’s apparent view that
others can make as big a mess of it as they wish as long as the UK
does not have to pay anything more – a shortsighted position that
fails to recognise Britain’s wider economic interests.
There is a strong resolve in Brussels to do whatever it takes and get
through all the current crises because economic failure would hurt a
huge amount more than Europe’s amour propre. Politics has a way of
conforming to political necessity.
The writer is a former UK business secretary and EU trade commissioner