Those strongly federally oriented measures will be able to solve the problem but only on a short or, at the best, on a middle-term basis. They are however only a first step, an embryo that calls for further developments. One shall not think that the decisions taken last Thursday in Brussels bear the efficient architecture for the economic governance that we are calling for. It is even less in a position to solve the main question asked to the countries of the Euro-zone, the one regarding long-term growth, and to answer the major challenges the EU will have to face such as companies’ competiveness, reduction of incomes’ differences within the Euro zone or youth unemployment.
A better plan than the ones before.
Since the beginning of the Greek crisis, the solutions taken aimed at gaining time and were unfortunately not measures on the substance. Three main elements have to be taken into consideration during the set up of a crisis answer plan. (1) Does the plan give sufficient guarantees to investors, allowing them to think Greece or the other economies having a difficult time (Portugal, Ireland) will have the means to reimburse their debts? (2) Have the decision makers set up efficient structures aiming at limiting the contagion from one European country to another? (3) Have the leaders planned measures aiming at reviving growth and employment in the concerned countries? The first plans didn’t meet those criteria – contagion to Italy, which is the third economic power of the continent, is a proof of it.
The new plan meets at least the first two in a credible way, as the positive reaction from financial markets tends to prove it. Indeed, we assisted to a significant decrease of State loans and an increase of stock exchange values all over Europe last week.
An agreement of great federalist inspiration
The fact that an agreement has been found and that this one encompasses all the actors of the Euro-zone is a vital first element. When Europe units itself, the storm calms down. The crisis went on and became worse for months because of the open divisions between European partners and because of the inability of the European Commission to federate them around a common position. The divisions and the extreme slowness of the political system have been the main factors of crisis contagion. Facts shows that investors are reassured as soon as an agreement is announced and that Euro-zone countries move forward shoulder to shoulder. We shall notice that if harmonisation systems of federal inspiration had existed, the reaction of the Euro-zone would have been much faster, firmer and the consequences would have been less painful.
This deal is also defined by an increased solidarity between member States. The first plan to save Greece had been accompanied by draconian measures of austerity. Those were even dangerous for the economic revival of the country that was however necessary. States of the Euro-zone then mobilised themselves to loan Greece but Germany was at the time talking about “punitive” interest rates. It was about punishing Greeks for their bad management. The new plan is more pragmatic and reveals a real effort of solidarity. Interest rates have been largely reconsidered (around 3,5M – 4%) and the delays left to Greece but also to Portugal and Ireland to reimburse this money have been doubled. Those modifications were largely greeted by Greek Prime Minister Georges Papandreou who admitted that these news would allow Greece to find the way to growth far more easily.
The plan thus goes in the right direction but what a loss of time! In a federal system those mechanisms of solidarity pre-exist and the EU could once again have dealt with the crisis in a more efficient way.
The reinforcement of the powers of the European Financial Stability Facility (EFSF) is another major breakthrough that has to be saluted. his Fund, financed by member States will have to prevent crisis from happening by giving investors the necessary guarantees in case of doubts regarding a member State’s ability to reimburse its sovereign debt. The Fund will thus have the possibility to buy-back government securities and to refund some banks in trouble. It will also give credibility to the weakest States and make them benefit from their neighbours’ power. This Fund, independent from the ECB, is – and there is no doubt about it – an embryo of economic government of the Euro-zone.
Obvious weaknesses calling for a fast deepening
Nonetheless and even if both the unity of heads of State and government and the quality of the measures taken have to be acknowledged this can’t be the end of it. The plan has visible weaknesses that won’t allow the EU to find its serenity back or at least not in the long term.
Firstly, the functioning of the EFSF is strictly conditioned. It won’t fall under the responsibility of the European Commission, which would have given it independence vis-à-vis member States. On the opposite, its work will be submitted to an intergovernmental way of functioning and its action will be conditioned to a positive report from the European Central Bank acknowledging for an “exceptional economic situation”. The ability to buy sovereign debt will also be linked to a unanimity voting from Euro-zone member States. This system gives a lot of room for division and state interests. Despite a positive publicity stunt this organisation might well make the Euro-zone fall back in its former shortfalls. Modifying this rule is vital in order to give the EFSF the means to really assume its stabilisation function. Without this, the institution will be dead-born. Placing it under the authority of the European Commission and a majority voting would help doing this.
Finally, one of the most objectionable measures is the decision to make private investors part of the Greek bailout. Despite the possibility given to investors to choose between various solutions, it is a restructuration and a bailout, maybe a limited one but still a bailout. This solution is the result of a compromise between France and Germany, between two state interests who have unfortunately not favoured the European interest. In spite of the strength of the publicity stunt produced by the agreement, financial markets stayed very careful and worried about the announcement of this bailout decision, as small as it can be. This choice has been made to satisfy the German electorate, is not careful and could make Europe fall back into the crisis. The bailout will have important effects in the future, mostly for Greece but also for Europe. Greece could pay a premium for years (finance itself at interest rates that are above the average) because of the memory of this bailout and because of the distrust it will imply among investors.
The Euro’s image also comes out tarnished, the international community won’t consider it as a safe value anymore and every European country could pay the price of it. It would have been wiser to avoid this bailout and create a system of Eurobonds instead. Eurobonds would have replaced state bonds and every country of the Euro-zone would have used them to finance their debt. This system would have required from powerful countries to run into debts under the same conditions that countries in trouble. The first ones would have to pay more but what a relief for the second ones (their interest rate would decrease straight away) and what a guarantee for investors! Europe could have thus been considered as a united, and in some ways hardly indivisible, economic entity, the crisis would have been solved and the image of the Euro-zone reinforced. These eurobonds would be the equivalent of US Treasury Bonds. Once again the federal solution seemed to be the most suitable.
We can be globally satisfied of this agreement and can rightfully expect that it will put an end to the crisis we are in the middle of for more than a year and a half. We must underline that the efficient solutions found two weeks ago are all of federal inspiration: unity between member States, solidarity, creation of an embryo of European economic government embodied by the EFSF and its new prerogatives. It would nonetheless be dangerous to think that the proposed solutions will be efficient in the long term. The weaknesses stressed out in this article prove it: an EFSF submitted to the will of States, the decision not to create Eurobonds and the acceptance of a bailout within the Euro-zone.
It is very important for this deal to be considered, not as a final stage but as a first step heading in the right direction and that will have to lead us towards a complete and fast integration of our economic policies. This integration will require a stronger leadership from the European Commission and calls for an institutional reform.
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