Speaking with one voice. Singing from the same song sheet. Communicating clearly with financial markets. Avoiding needless disputes with governments. These are essential attributes of high-level policymakers at a modern central bank. So what are we to make of an extraordinary speech given last Friday in the Moroccan city of Rabat by Lorenzo Bini Smaghi, an executive board member of the European Central Bank?
To put it bluntly, Bini Smaghi told the German government that it had screwed up Europe’s response to the Greek debt crisis. Germany’s ineptitude meant that the final price of the emergency rescue package ended up being far higher than necessary, he complained.
Apart from wars and economic slumps, nothing divides Europeans as much as the Eurovision Song Contest.
This annual televised orgy of glitzy musical mediocrity is now in its 55th year. Good God, it is even older than the European Union’s 1957 founding Treaty of Rome! The years have truly taken their toll. Some would say the last memorable winning song was “Waterloo” by Sweden’s Abba in 1974. Still, this year’s final, to be staged in Oslo on Saturday, is as certain as previous spectacles to hold millions of viewers spellbound. It would have been no different 2,000 years ago if a multinational gladiatorial contest had been broadcast from Rome’s Colosseum to the rest of Europe.
A wall of resistance from European Union governments and industry stands in the way of the efforts of Connie Hedegaard, the EU’s climate action commissioner, to secure a pledge from the 27-nation bloc to cut its greenhouse gas emissions by even more than it is already committed to doing.
Hedegaard contends that the EU can afford to set itself higher targets, because Europe’s recent recession – the worst in its history – reduced economic activity and so slashed the cost of meeting the goals set in 2008. The EU’s basic target is a 20 per cent cut in emissions by 2020 from 1990 levels. Hedegaard would like to raise the target to 30 per cent, thereby maintaining Europe’s self-image as the frontrunner in world efforts to tackle climate change.
For anyone wondering why Europe’s leaders are so determined to avoid a restructuring of Greek sovereign debt, I recommend a remarkable piece of research published on Monday by Jacques Cailloux, the Royal Bank of Scotland’s chief European economist, and his colleagues. (Unfortunately, it seems not to be easily available on the internet, so I’m providing links to news stories that refer to the report.)
The RBS economists estimate that the total amount of debt issued by public and private sector institutions in Greece, Portugal and Spain that is held by financial institutions outside these three countries is roughly €2,000bn. This is a staggeringly large figure, equivalent to about 22 per cent of the eurozone’s gross domestic product. It is far higher than previous published estimates. It indicates that, if a Greek or Portuguese or Spanish debt default were allowed to take place, the global financial system could suffer terrible damage.
I didn’t know whether to laugh or cry when I heard the news on Tuesday that the German authorities were to impose a temporary ban on certain types of transactions – known as “naked short-selling” – in eurozone government securities. Laugh, because it seems more than a coincidence that the announcement was made just before parliament in Berlin was due to open a debate on authorising Germany’s contribution to the €750bn international rescue plan for the eurozone. The ban looks like a piece of raw meat thrown to legislators who labour under the delusion that the eurozone’s debt crisis is all the fault of “speculators” and are eager for revenge.
Cry, because the German announcement underlines how the eurozone’s leaders, after finally appearing to get on top of events with the financial stabilisation plan unveiled on May 10, are once again misjudging the dynamics of the crisis. To cite another example, Italy’s central bank has just decreed that Italian banks will not be required to adjust their capital ratios if eurozone government bonds in their portfolios fall in value. What this will mean in terms of the credibility of financial data published by the banks, I hate to think.
The first 11 years of the euro have exposed several flaws in the design of Europe’s monetary union. One is the fact that, contrary to expectations, the experience of sharing a common currency with advanced, northern European economies did not spur but held back structural reform in weaker, southern member-states. Another was the ineffectiveness of the stability and growth pact, the eurozone’s so-called fiscal rulebook. In a nutshell, too many governments ran up large budget deficits and didn’t bother to cut public debt when they felt like it – and this, by the way, includes Germany, the self-styled paragon of fiscal discipline, under former chancellor Gerhard Schröder.
Well, did he say it or didn’t he? I am referring to President Nicolas Sarkozy of France. According to El País, Spain’s most reputable newspaper, Sarkozy told his fellow eurozone leaders at a May 7 summit that France would “reconsider its situation in the euro” unless they took emergency collective measures to overcome Europe’s sovereign debt crisis. The source? Officials in Spain’s ruling socialist party, quoting remarks purportedly made after the summit by José Luis Rodríguez Zapatero, prime minister.
It would be extraordinary, if true – for two reasons. First, if France were to leave the euro area, European monetary union would have no reason to continue. It would collapse. And that would be like dropping a financial nuclear bomb on Europe. Secondly, it is inconceivable that France would consider it to be in its national interests to take such a drastic step. We are left to conclude that if Sarkozy really did utter these words, it was just a bluff to get Chancellor Angela Merkel of Germany to sign up to the eurozone rescue plan that was ultimately agreed in the early hours of May 10.
As you’d expect, European Union leaders were quick to congratulate David Cameron on his appointment as British prime minister. But for all the warm words, they will be watching his first moves on the European stage like hawks.
An important test will come next week at a meeting of EU finance ministers in Brussels. There the UK will find itself under pressure from a majority of countries to agree to new arrangements tightening the regulation of hedge funds and private equity. Spain, which holds the EU’s rotating presidency, is desperate to get the deal done next week, having helped out Gordon Brown’s Labour government by delaying it until the British election was out of the way. But will the new Conservative-Liberal Democrat coalition be inclined to sign up to such an important measure so soon into its period of office?
With all eyes on Europe’s last-ditch efforts to save the eurozone from collapse, it is hardly surprising that a thoughtful, 46-page report on the European Union’s long-term future has gone almost completely unnoticed. But the study, commissioned by EU heads of state and government in 2007 and published last weekend, is worth taking a look at.
It was written by a group of 12 experts led by Felipe González, the former Spanish premier, and including Mario Monti, the distinguished former EU commissioner, Jorma Ollila, chairman of Finland’s Nokia mobile phone company, and Lech Walesa, the ex-Polish president and hero of the opposition Solidarity movement in communist times. There was a good mix of northern, southern, western and eastern Europe on the panel.
They begin with a disturbing observation: “Our findings are neither reassuring to the Union nor to our citizens: a global economic crisis; states coming to the rescue of banks; ageing populations threatening the competitiveness of our economies and the sustainability of our social models; downward pressure on costs and wages; the challenges of climate change and increasing energy dependence; and the eastward shift in the global distribution of production and savings. And on top of this, the threats of terrorism, organised crime and the proliferation of weapons of mass destruction hang over us.”