European monetary union

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. 

The €500bn eurozone stabilisation package agreed in the early hours of Monday, to be topped up by as much as €250bn from the International Monetary Fund, represents the first time since the Greek debt crisis erupted in October that European political leaders have moved decisively ”ahead of the curve”.  All along, the only way of calming financial markets was to produce an initiative that would exceed their expectations and convince them that Europe would do whatever was necessary to save its monetary union. 

One reason why the eurozone is sliding into ever deeper trouble is because its political and bureaucratic elites do not like, do not understand and have no wish to understand financial markets.  This is an attitude embedded in European history and culture.  Think of the 1793 Law of the General Maximum, an arbitrary attempt to fix prices at the height of the French Revolution.  Or think of the social status attached for the past 150 years to being a state-employed soldier, teacher, office clerk or railway worker rather than a banker in Germany. 

One frequently aired proposal for overcoming the ever more dangerous strains in European monetary union is to encourage Germany, which enjoys a large current account surplus, to buy more from Greece and other southern European countries struggling with large deficits.  This, so the argument goes, would rectify the imbalances that are destabilising the eurozone and would demonstrate Germany’s sense of responsibility and solidarity with its 15 euro area partners. 

The financial rescue plan devised by eurozone governments for Greece doesn’t look like a rescue plan in the classic sense.  Like a thermonuclear weapon, it appears intended never to be used at all.  The idea is that the Greek government itself, backed by calmer financial markets, will succeed in overcoming its debt crisis without ever drawing on assistance from its 15 euro area partners. 

I take it that everyone has seen the insulting picture on the cover of the February 22 edition of Focus, a lightweight German news magazine?  Under the headline ”Swindlers in the euro family”, it shows the Venus de Milo statue, a monument of ancient Greek civilisation, sticking up a middle finger at Germany.  In this way the magazine’s editors convey, as offensively as possible, the idea that debt-ridden Greece is robbing Germany blind by forcing it to come to Greece’s financial rescue.

The Greek response has been predictably furious.  The Greek consumers’ federation has called for a boycott of German goods, commenting that Greeks were creating timeless works of art like the Venus de Milo at a time when Germans were “eating bananas in the trees”. 

You know that the European Union is in trouble when Russia offers more intelligent advice on the eurozone’s debt crisis than Spain, the country that holds the EU’s rotating presidency.  Dmitry Medvedev, Russia’s president, disclosed the other day that he had recommended to George Papandreou, Greece’s prime minister, that the Greek government should request assistance from the International Monetary Fund to sort out its problems.

This is exactly the course of action advocated by several non-eurozone EU countries as well as a host of distinguished economists and, dare I say it, the editorial writers of the Financial Times.  As it happens, I don’t agree – if by IMF assistance we mean financial help.  The IMF will be involved, along with the European Central Bank, the European Commission and eurozone finance ministers, in monitoring Greece’s public finances and providing technical aid as required. 

An unambiguous message of solidarity among eurozone states will come from Thursday’s European Union summit in Brussels, but it is still unclear if this will translate into a specific financial rescue plan for Greece.  Debate among governments is continuing.  However, expectations in financial markets have been raised so high over the past 24 hours, what with European Central Bank president Jean-Claude Trichet flying in for the summit from Sydney and officials in Berlin hinting at a German-led rescue, that it would be risky for the EU leaders not to commit themselves to some sort of initiative.

There are various possibilities: bilateral loans from Germany and France, with perhaps Italy and the Netherlands chipping in; an International Monetary Fund-style standby facility, organised among the 16 eurozone countries; or an EU-wide loan, involving a show of support from all 27 member-states.  It is quite likely that the IMF will be asked to continue providing Greece with expert technical advice, but I don’t think the eurozone countries will go further and call on IMF financial resources.  Apart from anything else, there is a fear that the US may raise objections on the grounds that the IMF’s firepower should be reserved for fighting emergencies not in prosperous Europe but in other, more disadvantaged financial hotspots. 

Europe’s leaders are getting radical.  On Thursday the presidents, prime ministers and chancellors of the European Union will meet for a day of economic policy discussions in Brussels – but not in their normal location, the marble-and-glass Council of Ministers building, famous for its charmless, disinfected atmosphere and its 24km of headache-inducing corridors.  No, this time they will get together in a nearby building called the Bibliothèque Solvay, which is a pleasant old library rented out for dinners and receptions.

The switch of location was the brainwave of Herman Van Rompuy, the EU’s first full-time president, who thought it would encourage a more creative, informal exchange of views.  He has introduced another innovation: each leader is to be restricted to just one adviser at the talks.  This isn’t a problem for countries with leaders who are masters of economic policy detail.  But others are less happy about the arrangement.  It is whispered that the Italians are swallowing especially hard, wondering what on earth Prime Minister Silvio Berlusconi will say once he’s on his own. 

From a European Union perspective, it’s somewhat surprising that the extraordinary financial crisis we’ve been living through has not generated more pressure for another big push at EU integration – if not in the political sphere, then at least in the economic one.  According to conventional EU wisdom, it usually takes a crisis to make Europeans understand why closer integration is a good thing.  But on this occasion, it’s not happening – or at least, not yet.

For the perfect explanation as to why this should be so, I recommend an article by Otmar Issing, the European Central Bank’s former chief economist, in the latest issue of the journal Europe’s World.  Issing’s article discusses the merits of issuing common bonds for the 16-nation eurozone – an initiative that would, in theory, mark a major step forward in European integration – and comes down firmly against the proposal.