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Tough home truths in IMF report

Tuesday, June 8th, 2010

It was evident from the beginning of the eurozone crisis that the only way to discipline recalcitrant member states in the face of enormous budget deficits was to involve the International Monetary Fund, an independent, external organization which was definitely not part of the family, a body which could lay down tough conditions for winning its support, and could pull the rug out if necessary.

So it was little surprise to see the forthright tone of the IMF team when they left Luxembourg on June 7, having completed their analysis of the situation. Their report makes quite a contrast to the gentle reassurances of the eurozone ministers at their meeting on the same day.

The IMF report doesn’t mince its words. It may be familiar language for failing economies in Latin America, but for the eurozone! Take a few phrases: “Policies need to move urgently from crisis management to fundamental reforms”, “strengthen economic governance of EMU” “longstanding problem of anaemic growth in the euro area must now be addressed”, “the euro area fiscal framework needs to be substantially strengthened”, “more ambitious changes are needed”. And so on, with detail. The fundamental theme is that European countries must transform their economies, slash government spending and drive for economic growth.

The eurozone ministers did formally launch the €440bn European Financial Stability Facility at their June 7 meeting, but that’s definitely “crisis management”. The EFSF has been established as a limited company under Luxembourg law and will work in conjunction with the IMF to guarantee support for eurozone members if their credit position should weaken.

The question still remains as to what the eurozone can do to strengthen its effectiveness and meet at least some of those IMF demands. An intriguing game of smoke and mirrors has been played since the Special Purpose Vehicle and the associated IMF support were announced on May 9, a game designed to convince the markets that Europe is getting a grip of its profound economic crisis. The reality is that everyone has a different idea of what needs to be done and what can be done in the longer term.

Economic government for the eurozone. That’s the catch phrase. President Van Rompuy has used it, French Economy Minister Christine Lagarde has used it and Chancellor Angela Merkel has almost used it – “economic governance” is the closest she has come (also a phrase used by the IMF). President Sarkozy has spoken of a Eurozone Council. But a closer look at how it would work reveals something like a beefed-up version of what already exists.

The argument that a European single currency can only survive if there exists a common economic policy, common fiscal policy and common budget policy may prove to be correct in the long run, but it is clear that this is not what Europe’s present leaders mean when they talk of economic government.

France wants a formal decision-making structure where heads of state and government agree on fiscal discipline and maybe impose sanctions on recalcitrant member countries. Germany in effect argues for a stronger commitment to the stability and growth pact (and has announced budget cuts of €30bn over the next four years to do its part). Luxembourg Prime Minister Jean-Claude Juncker, president of the eurozone group of countries, believes that eurozone governments should vet each other’s budget plans. But nobody contemplates the transfer of fundamental tools of economic management to a supranational European policy-maker. Maybe the IMF is a different matter?

So what of the euro crisis? At least the decline of the euro is seen as a positive, making European goods more competitive and – perhaps – boosting domestic demand within the crucial German economy. What is also evident is an increased determination to cut government spending sooner rather than later, reflected in the G-20 meeting. And of course these are not challenges faced only by the eurozone; the UK’s new coalition government has a massive challenge ahead in reducing spending and boosting growth. A poisoned chalice indeed!

Posted in European politics, Eurozone, Finance | No Comments »

Concerted action replaces platitudes and empty promises

Monday, May 10th, 2010

The markets have been bowled over by the scale of the eurozone bail-out package announced this morning, after agreement by G-7 finance ministers, the ECB, the European Commission, the 16 eurozone governments and the International Monetary Fund. An emergency funding facility of up to €720 billion is designed to protect weaker eurozone members and save the integrity of the euro. At last the swathe of platitudes, reassurances and empty promises which have characterised the year to date has been replaced by concerted action.

The package is a dramatic reminder of the inter-relationships between global economies. Last week we seemed on the brink of a new Lehman-style banking crisis, this time created in the land of the euro but spreading across the world. Inter-bank lending threatened to dry up at the prospect of Greece defaulting, with banks across Europe and beyond hit by the consequent loss of confidence – especially those with substantial holdings of Greek bonds.

The ECB, the IMF, the US Federal Reserve and other central banks are all implicated in the measures to improve liquidity.

The IMF has now become a full partner in the support mechanisms for the eurozone – not a partner much welcomed by those purists who wanted to keep eurozone troubles within the family, but a better agent for enforcing disciplines than the European Commission or the Council of Ministers could ever be. The Fund will provide up to €220 billion of the new facility – one-third of the total, as in the deal to support Greece.

The fact that a possible contender for the French presidency now heads the IMF adds an extra frisson of interest. Dominique Strauss-Kahn and Nicolas Sarkozy are not the best of friends.

For Chancellor Merkel it was a particularly tough weekend. She had hoped to delay any commitments at least until after the elections in North Rhine Westphalia, but the scale and urgency of the crisis and the impact of a Greek default on many German banks made immediate action vital. NRW took its revenge, voting out the CDU – FDP coalition.

As usual it’s the “speculators” who are fingered as the guilty parties for driving down the euro and threatening contagion for Spain, Portugal and others. It’s an easy cop-out to shift the blame for political and economic failure to the malign forces of what former British prime minister Harold Wilson called “the gnomes of Zurich” when the pound was forced to devalue in the 1960s. T’was ever thus.

The waves from the eurozone storm hit Britain’s shores with some force. It was not the prospect of a hung parliament which drove down the London stock market last week, but fears that the Greek crisis would shatter the UK’s recovery prospects. As soon as the stability package was announced this morning, London share prices shot up by three per cent.

The prospect of a coalition government for Britain grows by the hour. It would be the first real coalition since Churchill’s wartime government was dissolved in 1945, but a likely outcome given the Conservatives’ failure to win an outright majority. The Conservatives took 306 seats in Parliament, 20 short of a clear majority, with Labour at 258 and the Liberals at 57.

On May 8 the Conservatives’ David Cameron formally invited the Liberal Democrats to join him in government. It may prove to be a watershed of historic proportions. That is if the Lib Dems dare to take the plunge and if there is enough flexibility on the Conservative side. Talks between Cameron and the Lib Dems’ Nick Clegg have been under way all weekend. Early indications are that agreement would concentrate on measures to tackle the massive UK budget deficit, but would include enough common policies to create a coalition fit for at least two years of stable government. The future of the voting system may be the most intractable issue.

For Nick Clegg, leader of the Lib Dems, the outcome of the British general election was the stuff of dreams, even if it began with disappointment at losing parliamentary seats when all the opinion polls suggested a surge in support. At least Clegg can take the credit for changing the game, for stimulating interest and boosting turnout. The cynicism which many of us thought would sour the elections and cut participation was swept away in a much more positive electoral picture.

Britain’s EU policy seems unlikely to be a major problem in formation of a Conservative – Lib Dem coalition. Although the rhetoric on Europe is different the practical obstacles seem to me to be minimal. Certainly Clegg could not hope to take the foreign affairs job in a coalition government, but no major EU decisions are imminent to upset any partnership. The failure of the UK Independence Party to secure more than 4 per cent of the national vote has probably justified Cameron’s euro-sceptic tone. It may well have seen off europhobia as a major force in British politics.

Posted in Elections, European politics, Eurozone, Finance, UK politics | No Comments »

Ten year strategy must be blueprint for change

Sunday, January 10th, 2010

In his first major initiative since taking up his new role on January 1 2010, European Council president Herman Van Rompuy has convened a summit for February 11 to prepare for the 2020 Strategy, a ten year programme for creating a more competitive Europe. But can these plans really achieve anything? Only if they lay the groundwork for far-reaching change and adaptation.

It was of course the 2000 Lisbon Agenda which set out the first Ten Year Plan for the economic regeneration of the European Union. Who can forget the famous hostage to fortune, that Europe should become the world’s most competitive and dynamic knowledge-based economy by 2010?

The Lisbon Agenda was a creature of its time. The millennium dot-com boom was still booming, the digital revolution was expected to transform society. There was much talk of a new paradigm. Just as soaring stock markets ignored traditional industries in favour of the new, so the Lisbon Agenda envisaged old industries giving way to a new economy of high-tech research-based business creating employment and opening unbounded opportunities for the people.

It was not to be. The collapse of the dot-com dream was a disastrous start for Lisbon. The anticipated growth in output and jobs from the “new economy” proved an illusion. The industries which were expected to deliver a new world foundered in mountains of debt and disillusionment. No surprise then that all those early hopes were dashed.

Yet by the start of 2008 Europe’s economy had picked up. Enlargement had given a great boost and there were signs that governments were bringing more flexibility to their economies, for instance on tax policy and entrepreneurship, where the Lisbon process encouraged many member states to facilitate the creation and expansion of small firms.

Employment participation had gone up from 62.2 per cent of the potential workforce to 65.9 per cent, not yet to the 70 per cent Lisbon target, but certainly an improvement. The growth rate was improving, at 3.2 per cent in 2006 and 2.9 per cent in 2007 – compared with the 3 per cent Lisbon aim.

EU policy-making had made progress too, opening up sectors like telecoms and financial services. The new technologies had become deeply entrenched in traditional industries.

Then came the banking crisis. Collapsing output and rising unemployment have been the consequence and it is clear that the Lisbon targets have been hopelessly missed. Growth slumped to 0.8 per cent in 2008. Economic prospects for 2010 and 2011 look pretty gloomy.

So can Ten Year Plans really achieve anything? I see that Spanish prime minister José Luis Rodriguez Zapatero believes the Lisbon Agenda to be too soft. He wants the adoption of new policies which are binding on the member states, with power for the European Commission to penalise countries which fail to apply them.

This is tough talk, which would be linked with a formalised European economic policy, maybe beginning within the Euro Group. President Sarkozy is a keen supporter of this approach. Angela Merkel is definitely not. It contrasts with the soft policy philosophy of Lisbon which relied on peer pressure, search for best practice and an emphasis on opening up markets and stimulating research.

There is no doubting the challenge which Europe faces as it emerges from the recession. It strikes me that the biggest priority for a 2020 Strategy is to spell out the need for change and identify the hard choices for achieving it. Wealth creation must be the absolute priority. Europe’s industries face huge competitive pressures from countries like China and India at the same time that public spending faces increasing demands from an ageing population. It won’t be easy to find common ground. A good test for Mr Van Rompuy indeed!

Posted in Competition, Digital, European politics, Eurozone, Finance, Telecoms | No Comments »

Iceland’s path to EU membership may be a rocky one

Monday, July 27th, 2009

I see that the EU Council of Ministers has asked the European Commission to deliver an opinion on Iceland’s application to join the EU, just 10 days after Reykjavik submitted its formal request for membership. The Swedish presidency wants the report by the end of the year, and foreign minister Carl Bildt has implied that Iceland’s status as an EEA country could speed the process of the application, in contrast to the slow progress for the Balkan applicants.

The Icelanders no doubt remain shell-shocked by the collapse of their banking system and the consequent halving in the value of the krona, and crave the stability of the eurozone, but it strikes me that the path to membership may be far from smooth. At the end of the process – say in 2011 – lurks a referendum: by then the mood of the country may have changed.

Fisheries could be a major stumbling block. Seafood accounts for almost half of Iceland’s exports and 10 per cent of its gross domestic product, which is quite something when another chunk of the country’s economy – the banking system – has disintegrated. The cod wars of the 1970s, when Iceland extended its territorial limits to 200 miles and the Royal Navy sent frigates to protect British fishing vessels, showed the depth of national feeling on this issue.

Even now international relations on fisheries policy remain poor. I gather for instance that Iceland has been excluded from negotiations on the management of mackerel stocks in the North Atlantic and has therefore opted out of catch allocations. The country is very concerned to rebuild cod stocks, which is a key economic asset. Stocks may be recovering but there will be intense opposition to surrendering quota to EU fishermen under the common fisheries policy. Just to add to the sensitivities, Iceland still has a whaling industry.

At least the review of the EU common fisheries policy is timely, with signs that ministers have accepted the need for fundamental change (just as well, as many fish stocks in European waters are on the point of collapse – and see Sarkozy’s change of heart). However, the fisheries chapter in the Commission’s Iceland report will be one of the most difficult to compose. Could it be the catalyst for the creation of a new fisheries policy, or will it hark back to the disastrous EU policy which has been pursued since 1973?

Becoming part of the eurozone is the big driver for Iceland, but there could be difficult issues here as well, given the level of Iceland’s public debt (about 100 per cent of gdp). For Iceland to qualify for eurozone membership could be an even greater challenge than is faced by the Baltic states and Hungary.

The vote in the Althing to apply for membership was a close run thing – 33 in favour, 28 against – and it would certainly be wrong to underestimate the negotiating difficulties which lie ahead. If the Irish vote “no” on Lisbon then the prospects for any enlargement would be gloomier still.

Meanwhile Britain’s Conservative shadow foreign secretary William Hague continues to inveigh against Lisbon. But whatever you think of his views, he is a consummate speaker. You may like to savour his recent performance in the House of Commons on the possibility of Tony Blair becoming president of the European Council under a ratified Lisbon Treaty. No wonder Gordon Brown needs a holiday!

Posted in Agriculture, Enlargement, Eurozone, Fisheries, Treaty of Lisbon, UK politics | No Comments »

Barroso on the spot before European Council nomination

Monday, June 15th, 2009

People have been grumbling over the last year or so that Barroso’s presidency of the European Commission has been too much influenced by hope of a second term, and that he has leant over backwards not to upset the big member states. I’m not convinced of the evidence for that, but the Commission president has certainly been put on the spot now.

The European Council is expected to give its provisional endorsement for Barroso’s reappointment later this week, but President Sarkozy has threatened that this decision is conditional on the candidate’s good behaviour. Indeed, the French president says that the appointment might need further confirmation after the coming into force of the Lisbon Treaty, when ratification in the European Parliament would require a majority of members and not just a simple majority of those voting.

When Sarkozy and Chancellor Angela Merkel gave their conditional approval to Barroso on June 11 they were speaking from a position of strength following their strong showing in the European Parliament elections, in dramatic contrast to British prime minister Gordon Brown who could hardly be weaker and whose party suffered a bitter defeat in the polls.

So what does Sarkozy want? Tighter regulation of financial markets for one thing, with stricter regulation, for instance of hedge funds, derivatives markets and rating agencies. He wants policies which at least purport to show that the era of Anglo-Saxon dominance of these markets, which many perceive as the root cause of the recession, has been weakened for good.

Commission proposals based on the Larosière Report may not go far enough for Sarkozy, although the Brits are fiercely opposed to giving responsibility to the European Central Bank for the European Systemic Risk Council, while firms in the City of London run an intense campaign claiming that new rules will impose unacceptable constraints on their business and force them to move outside the EU.

The broader concern of the French president will relate to the nominations and portfolios of commissioners. The internal market job, including financial services, is a key one. Competition policy is another. Neither Charlie McCreevy nor Neelie Kroes are favourites of Sarkozy. Barroso will have to tread carefully in selecting candidates for a new college.

The approach of the newly elected European Parliament raises other doubts. Will MEPs choose to await ratification of Lisbon before endorsing anyone as Commission president? Will Barroso achieve the simple majority he needs if there’s a July vote? And where will the Conservatives stand with their 25 GB plus two Ulster seats? If they don’t vote for Barroso, for whom will they vote?
The Conservative position could be especially crucial in the debates over the new financial services legislation, when the Commission’s new proposals come to the Parliament during the forthcoming autumn and through 2010.

As a group outside the EPP the Conservatives are likely to forfeit any influence they might have had in shaping policy towards light touch regulation – an influence which was extremely strong in the previous Parliament. There will no doubt be those within the EPP who will be inclined towards tougher regulation. Without the presence of the Conservatives their views may well prevail, carrying the group with them. It would certainly be a strange irony if the defection of the Conservatives from the EPP played directly into the hands of the French President!

Posted in Better regulation, Competition, Elections, European politics, Eurozone, Finance, Treaty of Lisbon, UK politics | No Comments »

Trichet adopts a measured pace

Monday, April 20th, 2009

Don’t pile up new decisions, but execute what has already been decided. That’s the basic approach of ECB President Trichet as expressed in Sunday’s interviews with Japanese newspapers. He thinks the policy-makers have done what it takes to restore global growth, but, he warns, it won’t happen until 2010.

Some commentators had complained that the ECB did not cut enough when it reduced interest rates by a quarter per cent early this month to 1.25, but Trichet is keen to keep his powder dry. He talks of a measured pace. Another quarter per cent is possible in May, together with other “non-conventional measures”.

So what measures are they? Money markets are apparently waiting with bated breath to see whether the European Central Bank resorts to buying up corporate debt and government bonds to release more liquidity on to European markets.

This process of so-called quantitative easing, already introduced by the Bank of England and the Fed, could have some sensitive political overtones for the ECB. Where should they target the action? Do they buy up Portuguese, Irish, Greek and Spanish bonds to help the weakest national markets, or concentrate on the biggest economies such as Germany which act as drivers for the EU as a whole? Or maybe they can buy up bonds issued by the European institutions like the EIB.

These quandaries nicely illustrate the complexities of the eurozone, where measures necessary to support the general eurozone interest could benefit one member country more than others.

Trichet has argued that ECB action to boost liquidity has already had an impact, reducing euro interest rates below those of the dollar and relaxing constraints on borrowing. He is not in favour of more dramatic action.

It seems that we are now moving into a new phase of this crisis, where governments must struggle to fight the fires of recession, the social unrest and political turbulence which come with rising job losses and soaring budget deficits, but can really do little more than hold on while world trade picks up again (desperately important for Germany, for instance) and confidence returns.

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Larosière report to bring comfort to the Commission?

Thursday, February 26th, 2009

In the next few days the European Commission will tell us how Europe’s regulatory regime for financial services should be reformed in the aftermath of the credit crisis. As a starting point the Commission has the report from Jacques de Larosière’s taskforce, which was commissioned by President Barroso last October and published earlier this week.

No doubt this report will give comfort to the Commission, for it spells evolution not revolution, recognises the limited competence of EU institutions in financial supervision and does not seek to impose new pan-European powers for regulating the sector. It will be a useful antidote against those (including governments) who want a much more aggressive approach to financial services regulation.

Alan Greenspan recently admitted that as chairman of the Fed his basic assumption was that the self interest of banks and bankers ensured that they would never do anything which ran counter to their own long-term commercial advantage. This assumption was key to Greenspan’s light-handed approach to regulation, as it was for most governments and regulators across the globe.

How wrong they were! The general assumption these days seems to be quite the opposite. That’s hardly surprising, given the fine mess which financial engineering has got us into. Both the regulators and the practitioners failed because each depended on the other.

Just take the example of the individual misjudgements revealed in the $50bn collapse of the Madoff funds. Investment firms trusted the regulators to guarantee compliance, while the regulators trusted the investors to do their due diligence. (How Charles Dickens would have jumped at the chance to create a Mr Madoff as one of his characters!).

Everyone is now seeking a new model for financial supervision and regulation. President Obama is pressing Congress to approve a tougher regulatory framework to protect consumers and investors; the April G-20 meeting in London will discuss a stricter global regulatory regime; and Europe is wrestling with the perennial question: should financial regulation be managed nationally or at the European level?

Lamfalussy and the Financial Services Action Plan sought to close this argument, constructing a sharing of the burden between EU legislation and national implementation. Jacques de Larosière’s taskforce goes down a similar road. It rejects the idea of a pan-European regulator, but would create a European Systemic Risk Council (ESRC) chaired by the ECB president and consisting of the ECB general council, one Commissioner and the chairs of each pan-EU committee on banking, insurance and investment services.

The ESRC’s fundamental task would be “macro-prudential supervision” – essentially to keep an eye on the big picture (but not the regulation of individual firms) and to warn of troubles ahead. It might bring the ECB closer to the heart of economic policy making, with enhanced influence, but no teeth as far as I can see.

At the level of individual firm supervision, a European System of Financial Supervisors (ESFS) would give a stronger European dimension to the activities of national regulators, although it would still be the competent authorities of member states which retained the power to act, subject to the FSAP legislation. There is an interesting contrast with European competition policy, where the anti-trust powers of the Commission provide the backing to ensure coherence between national authorities in the European Competition Network.

De Larosière’s report is no root-and-branch reform. It advocates greater co-ordination and co-operation but no real transfer of power. It recommends that supervision should be extended to those currently unsupervised financial institutions with “potential systemic risk” such as some hedge funds, more clarity for dealing with cross-border banking failure (the Fortis case), greater national supervision of credit agencies and a big commitment to the IMF for dealing with the global context.

In his introduction to the report De Larosière sets out the choice: “chacun pour soi” beggar-thy-neighbour solutions; or the second – enhanced, pragmatic, sensible European co-operation for the benefit of all to preserve an open world economy” . Barroso described the report as “balanced and rich” which I guess makes it a good trailer for the Commission’s forthcoming proposals.

Posted in Competition, Eurozone, Finance | No Comments »

Economic crisis exacerbates tensions

Tuesday, February 17th, 2009

The economic crisis is exacerbating tensions across the EU. President Sarkozy has done his bit, stating on television that while French manufacturers can make cars in India which are for sale to Indians, they should not make cars in the Czech Republic which would then be sold in France. He apparently called for the repatriation of car manufacture to French soil.

Sarkozy’s remarks could not have come at a worse time for the Czechs. The last thing you want when unemployment is rising and your currency is under pressure is any threat to the new investments which are so vital for your economy. Nor is it helpful when your country still has to ratify the Lisbon Treaty and you depend on a sceptical parliament to vote it through.

An angry Czech prime minister Mirek Topolanek warned of the spectre of protectionism, which could prolong and intensify the downturn. On February 9 he announced plans for a European Council to discuss protectionism, while on the very same day Sarkozy and Chancellor Merkel issued a joint (rival) statement calling for an informal European Council “to prepare the spring summit”.

It has now been agreed that everyone will lunch together in Brussels on March 1. Will protectionism be mentioned at all, I wonder.

Protectionism can take many forms. Who can resist a headline? “British jobs for British workers” said Gordon Brown at the 2007 Labour Party conference, only to see his rallying call spelled out on strikers’ placards earlier this month as British workers complained that Italians and Portuguese were carrying out a contract at a British oil refinery (owned by Total). Right-wing parties made hay of it and we will no doubt see the slogan again during the European election campaign although not, I imagine, in the hands of Labour candidates.

The president of Italy’s Cofindustria expressed her dismay at the phrase, complaining of “protectionist tendencies and raw nationalistic instincts” in an article in the Financial Times.

The French bail-out plans for the car industry have put the European Commission on the spot. Competition Commissioner Neelie Kroes was quick to condemn Sarkozy’s original remarks. When the plan itself was unveiled, the Commission asked for further details to ascertain whether state aid conditions were being met. Commission president Barroso was rather defensive of the French, saying that if regional aid was proposed it would clearly relate to investment within France.

There is another interested party to this debate on protectionism: the United States. The €800bn emergency bill which was passing through Congress contained some significant “Buy American” clauses for public contracts, with particular relation to steel. It seems that President Obama was quick to amend this to say that any such moves must be compatible with international trade obligations, but you can be sure that the small print of the 1,000 page document will be rigorously scrutinised by trade officials across the globe.

As the April G20 meeting comes closer, where the role of international institutions such as WTO, IMF and World Bank will be discussed, everyone will be scrutinising everyone else’s actions for any moves towards the erection of trade barriers in the face of the worldwide recession. European solidarity has rarely been more essential.

Posted in Elections, European politics, Eurozone, Trade, Treaty of Lisbon, UK politics | No Comments »

Troubled year ahead for the euro?

Monday, January 19th, 2009

On January 16 the euro replaced the koruna as the official currency of Slovakia, bringing to sixteen the number of countries of the eurozone. It was the first country in the former Soviet bloc to adopt the single currency – and just 20 years after the Fall of the Wall. What a great way to mark the tenth anniversary of the launch of Europe’s new money!

But watch out! Maybe this milestone in the history of the euro will also usher in the most threatening period that the single currency has known. ECB president Trichet has warned of trouble ahead in 2009 and as member states struggle with the impact of the credit crisis some commentators are asking whether vulnerable eurozone countries will be forced to abandon the single currency – leading to a major crisis in Europe’s monetary union. It is a story which is widely discussed in the trading rooms of currency traders.

The rating agencies’ downgrading of the sovereign debt of Greece, together with the negative credit watch on Spain and Portugal are symptomatic of the doubts which the markets are having, although the agencies specifically acknowledge that membership of the eurozone is a positive factor for these economies and are mainly concentrating on the competitiveness of the countries concerned.

There is no denying that the markets are differentiating between eurozone members. Default protection insurance on German government debt runs at €54,000 per €10m whereas you must pay more than €250,000 to cover equivalent Irish debt and €260,000 for Greek debt. The yield on Greek euro bonds at 5.42 per cent is almost double the German benchmark yield of 2.93, with Ireland at nearly 2 points above Germany, Portugal at +1.24 points, Italy at +1.45 and Spain at +1.16.

These high premiums will be a serious burden for the weaker economies as they are compelled to issue bonds to cope with the credit crisis and forced to pay through the nose for the privilege. However, it’s worth considering the level of premium these countries would need to offer in order to sell their bonds if they ceased to be members of the eurozone – no doubt way above current levels because of the exchange risks which would be involved.

I suspect there is a degree of wishful thinking and a touch of schadenfreude as opponents of the eurozone cite these differentials as proof that the euro is beginning to crumble. It is also argued that the “one size fits all” nature of ECB interest rate determination and the inability of countries to devalue their individual currencies will lead to a big bust-up for the single currency.

That’s not how Danes, Swedes, Slovaks and Irish see it, to say nothing of the poor folk of Iceland. For them the eurozone is a zone of stability and security. If they are already members they bless the day they joined; if still outside they crave to be part of it. It’s no surprise that some voices in the UK are making the argument for replacing the pound with the euro, just as the Conservative Party leadership affirms its eternal opposition to membership in the run-up to European elections.

When President Barroso said that some Brits were once again debating British membership he surely had in mind the newly published pamphlet Ten years of the Euro: New Perspectives for Britain, which makes the case for the UK to join.

One of the leading contributors to this pamphlet is Willem Buiter, former chief economist at the ECB and former member of the Bank of England Monetary Policy Committee. Buiter is a long-term advocate of British euro membership, but his comments on the current crisis are especially interesting. He gladly accepts the threat of defaults on sovereign debt among eurozone members. He believes it would bring back the disciplines lost when the stability and growth pact was emasculated but would not, in his view, lead the defaulting countries to leave the eurozone. “Any sovereign eurozone quitter would be clobbered by the markets”, he says, as he asks “who would want to be in the position of New Zealand, Iceland or the UK ?”.

As a final provocative touch Buiter states that it is “more likely in my view that Scotland will leave the sterling monetary union (and the United Kingdom) and adopt the euro as its currency than that the euro itself will founder”. I wonder what odds the bookies would give on that thesis?

Posted in Eurozone, Finance, UK politics | No Comments »

Flowers for France’s presidency, brickbats for the Commission

Thursday, December 18th, 2008

It seems that France has had a good presidency. It could hardly have been a more challenging one, but despite the occasional sniff of folie de grandeur, President Nicolas Sarkozy has proved to be the man of the hour, with the élan needed to make things happen.

Foreign minister Bernard Kouchner and finance minister Christine Lagarde have also been key players. The French presidency’s handling of the Georgia crisis reinforced Europe’s diplomatic credibility, while the EU’s response to the economic crisis has been forceful and surprisingly coherent. “If people thought there was no such thing as a political Europe, well here it is” says Kouchner.

Time magazine even made Sarkozy runner-up (behind Obama) as 2008 Person of the Year – and asked Tony Blair to write an appreciation just as speculation mounts as to who might be the EU president if the Lisbon Treaty comes into effect by the end of 2009. Should we put two and two together?

The dynamism of the French presidency has apparently raised questions about the effectiveness of the European Commission. It is accused on the one hand of becoming just a secretariat of the Council and on the other of being too bureaucratic (independent?) in applying state aid policy.

I suspect that Commissioner Kroes’ insistence on the Commission’s task in controlling state aid has run up against the desperate urgency of governments to rescue their banks in the face of the credit crunch. DG Competition is always the bugbear of governments in times of economic crisis.

In fact there is bound to be a long-term rebalancing in the relative strength of the different EU institutions. As the legislative programme diminishes and the Union’s political capabilities and ambitions expand, so the Commission (and the Parliament) will lose power to the Council. The Commission’s role becomes less that of policy driver and more that of policy manager, administering the budget and acting as policeman for Community rules.

On the economic side, the Commission’s role has always been strictly limited, even within the eurozone. Let’s not forget: first it was told to develop a stability and growth pact, then it was asked to produce a fudge when France and Germany crashed through the barriers. Economic policy in the EU essentially remains the preserve of national governments.

Of course the Commission still has a key policy role. The year ends with agreement on quite a package: a European Economic Recovery Plan totalling €200 billion, which includes an extra €30 billion in ECB loans; approval of the energy and climate change bundle; the basis for new regulatory regimes for telecoms and energy; likely agreement on a European defence procurement market to replace the current chequerboard of separate national markets; and, yes, a relaxing of state aid rules on funding of SMEs.

The Commission has been the prime mover in most of these areas even if it has not always achieved all it set out to.

As for the Lisbon Treaty, Ireland has been offered a formula which might persuade the Irish to allow ratification by this time next year.

Promises, promises. Next year will test how much can really be delivered. A European recession is likely to put great strain on EU solidarity as sectors like the motor industry are threatened by collapsing sales, unemployment rises and individual countries face major crises in their economies. Global negotiations over climate change will culminate in Copenhagen next December, but will the EU still be speaking – and acting – with a single voice?

And I wonder how a divided Czech leadership will manage the presidency ahead. Can Good King Wenceslas tread in the footprints of his French predecessor as we move into the Obama era?

Posted in Competition, European politics, Eurozone, Finance, Treaty of Lisbon | No Comments »