Daily Archives: June 20, 2011

At the roots of the eurozone crisis lies of course the past indiscipline of specific member states, Greece in the first place. But such indiscipline could simply not have occurred without two widespread failings by governments as they sit at the table of the European Council: an unhealthy politeness towards each other, and excessive deference to large member states.

This week will tell us whether this lesson – which is even more important for the future of the eurozone and the European Union than a “solution” to the Greek crisis – has been learnt. The events to watch are the Ecofin Council (eurozone finance ministers meeting) on Monday and the European Council meeting of EU leaders on Thursday and Friday.

As for politeness, would Greece have been able to run for years public deficits vastly above its officially published figures – until the excess became known in late 2009 – had Eurostat had the power to conduct serious investigations to check the adequacy of nationally produced statistics? Of course not.

Yet, when the European Commission proposed years ago that the European statistics office should be given those powers, most member states found the idea improperly intrusive. Led by Germany and France, they blocked it. Each government was, of course, aware that sharing a single market and even more a single currency with countries that might violate the rules would have dangerous consequences.

Nonetheless, to allow objective but indiscreet eyes to probe government accounting would definitely have gone – they thought – one step too far. Today they must all, including Greece, regret that the commission’s proposal was blocked.

More generally, an unhealthy degree of politeness has often characterised member states when it comes to peer review exercises. The understanding is that if a government is spared the domestic political embarrassment of receiving a very negative grade, it is likely to return the favour when the turn comes to assessing other governments.

As for deference to large member states, it is, in a sense, enshrined in the treaty. In fact, a large member state has more votes in Council deliberations and more members of the European Parliament than a small member state. Thus, it has more influence on the legislative process, as is perfectly justified on democratic grounds.

However, when it comes to the enforcement of EU laws or decisions, member states should all be treated as equal, and they normally are. There have been exceptions, however. They have had a lasting negative impact on the credibility of two key policy instruments of the EU over the last decade or so: the stability and growth pact and the Lisbon strategy towards greater competitiveness.

The credibility of the stability pact was severely impaired, as Chancellor Angel Merkel underlined when the Greek crisis exploded, by the decision taken by the Ecofin Council at the end of 2003. The commission had proposed issuing the prescribed warnings to France and Germany because they were on a collision course with the requirements of the pact, as it had done for Ireland and Portugal the year before.

The council, however, under the combined pressure of those two governments, helped by the Italian government which was holding the presidency, did not follow the commission’s proposal, as it had done for the two smaller countries. There was, one could say, an “excess of deference” procedure – to paraphrase the pact’s terminology.

So it can be no surprise that other countries, perhaps by tradition less keen anyway on the “culture of stability” promoted by Germany, took that almost as a licence to interpret the requirements of discipline in a more relaxed way. When the Lisbon strategy launched in 2000 was reviewed five years later, it was proposed that the commission should regularly publish a transparent scoreboard to put more pressure on member states to deliver on their commitments. Germany’s then chancellor Gerhard Schroeder strongly objected and the commission – wrongly, in my view – decided not to proceed to the “naming and shaming” of member states.

It is now recognised that a system of putting explicit pressure is needed. The “Europe 2020″ strategy stresses the need for explicit and candid monitoring. The commission published earlier this month bold recommendations for each member state, regarding both the stability pact and national reform policies.

So now for this crucial week. In the interest of an effective and disciplined enforcement of the new stability pact, the Ecofin Council should accept the two key requests of the European Parliament: first, an extended scope for the “reversed qualified majority” rule (a qualified majority would be needed to block a proposal, not to approve it) will ensure that the commission’s proposals will have a greater role, with reduced opportunities for exchanges of favours among member states.

Second, the European Parliament’s involvement as promoter of an open “economic dialogue” would, by ensuring greater transparency, make such exchanges – and indeed displays of deference – less likely. In short this would boost both the discipline and credibility of the eurozone.

The European Council should by no means dilute the recommendations for each member state. If their individual or combined resistance were to erode the commission’s recommendations, Europe 2020 would soon join the Lisbon strategy in lack of credibility and effectiveness.

When he chairs the council later this week, President Herman van Rompuy will have to be the guardian of healthy impoliteness – and lack of deference.

The writer is President of Bocconi University and a former European Commissioner.

Response by Megan Greene

Politics will break apart the euro

In the absence of fiscal union, any attempt to retain the one-size-fits-all policies required for monetary union in the euro area is doomed to fail. However, the euro area’s political leaders have demonstrated repeatedly that they lack the political will to achieve fiscal union, and this lack of political will is set to worsen over the next few years.

Stark divergences exist between eurozone countries, but these have been ignored in the European Commission’s attempts to impose formulaic fiscal and competitiveness targets on member states through the stability and growth pact and the Lisbon agenda.

By contrast, moving towards fiscal union – and introducing common banking regulation policies – would create a built-in shock absorber for such divergences. Without this buffer, monetary union cannot survive.

The reluctance of euro area leaders to move towards fiscal union reflects the political pressures they face from their electorates.

In Germany, popular opposition to the bail-out packages has seen the ruling coalition repeatedly hammered in regional elections despite a booming economy. In Greece, the prime minister has been forced into a cabinet reshuffle by persistent protests against the further austerity measures required before a second bailout can be approved.

This euro crisis has already claimed governments in Ireland, Portugal, Finland and the Netherlands. It will claim virtually every major government in the euro area before it is over.

A new political class will be brought to power by electorates in the core countries that are fed up with contributing to bail-out programmes. Following a few more years of retrenchment in the periphery, new leaders will be elected by voters even more sick of austerity and resentful of losing sovereignty to the troika than is already the case.

It is difficult to see the current eurozone leaders summoning the political will to pursue fiscal union, but it is even more difficult to imagine this looking forward a few years. In the absence of fiscal union, divergences between eurozone countries will cause the euro area to split apart.

The writer is an independent economist focusing on the euro crisis, having covered Greece, Ireland and Germany at the Economist Intelligence Unit.

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