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Wednesday, 27 June 2012

The “Mother of all Summits” (MoaS) revisited in Europe. It is 5 minutes before 12 (once again).

Tomorrow, once again a European 'Mother of all Summits' is held. As always during the last three years of European Summits, ‘it is five minutes before twelve; the stakes are extremely high, as the Euro-zone as we know it, is about to implode’, or more bombastic texts like that.

While a few leading protagonists ( Nicolas Sarkozy, Giorgios Papandreou) already have been replaced and some other leading actors might be replaced before the end of next year (Angela Merkel, Mark Rutte), the scenario for this summit remains largely the same as before: 

  • The PIIGS have been and still are in deep trouble:
    • Greece is almost totally down and out; 
    • The same fate threatens to happen to Spain, due to a residential and commercial real estate crisis of epic proportions and the circumstance that Spanish banks (i.e. the former cajas and their successor, the new superbank Bankia) are at the brink of bankruptcy;
    • Portugal and Ireland, as well as Italy know they could be the next countries to be at the crosshairs of the financial markets;
    • Mariano Rajoy, the PM of Spain is busy with disclosing piece-by-piece how deep the financial rabbit hole in Spain is; a lot deeper than much analysts expected, unfortunately;
    • While Mario Monti is developing himself as the financial conscience of Europe and Italy is actually doing very good, the interest rate of Italy is still heavily correlated with that of Spain. When the rate of Spain goes up, so does Italy's rate; 
  • Germany is still holding the money and is therefore calling the shots in Europe.
    • Chancellor Angela Merkel has her hand firmly on the emergency brake and threatens to veto every resolution that puts the bill of the sovereign debt crisis mainly in the hand of Germany;
    • She is only willing to come to the rescue if a fiscal union will emerge and she can have influence on the future usage of European tax money;
  • France is stuck between a rock and a hard place:
    • President François Hollande wants room to execute his socialist agenda to keep his grassroots at home happy and is strongly in favor of Eurobonds, while being strongly opposed against Merkel’s fiscal union;
    • Merkel is very much against the concept of Eurobonds as a blank check for countries in need and against the socialist agenda of Hollande;
    • At the other hand: he doesn’t want to risk a war of words with Merkel, as both countries need eachother at the helm of the European Union. The pre-summit meeting of Hollande and Merkel will therefore take place in a very tense atmosphere;
  • PM Mark Rutte of The Netherlands, the former bully of the PIIGS countries, is currently also in a difficult situation: 
    • The Netherlands is struggling with a stalling economy and with its forecasted budget deficit of 4.5% of GDP for 2013, well above the 3% of the Stability and Growth Pact;
    • Rutte himself is PM under resignation and must send a desirable profile to his grassroots in The Netherlands, well before the elections in September. Europe is not a popular word in such a profile, currently;
    • Rutte is therefore very much opposed against handing over sovereignty to Brussels, not in the least because Geert Wilders (PVV) and the other party-leaders are ready to attack every weakness of Rutte, concerning Europe and the Euro-zone;
    • On the other hand, Rutte is afraid of losing his last friends in Europe. This was the reason for the heartbreaking display of Dutch-German friendship last week when Merkel and Rutte publicly declared their love for eachother on national German and Dutch television;
  • PM David Cameron of the London City, excuse me… the United Kingdom is trying to reel in as much as possible for the financial industry in the City, while being prepared to veto every financial EU regulation that narrows down the unlimited possibilities for the bankers and insurers in London;
  • Cyprus is part of Greece and therefore unfortunately also part of the Greek misery. Due to its large investments in Greece and the Greek banking system, the country needs a financial rescue package of about half the Cypriotic GDP: €10 bln;
  • The stance of the remaining (smaller) Euro-zone countries is not so clear:
    • Belgium’s PM Di Rupo is in favor of more Europe, but ‘doesn’t want the European Commission to decide for all European citizens’;
    • Austria, on the other hand, requires ‘a big and visible action that really solves the current issues in Europe’. In other words, Austria seems in favor of a fiscal union;
    • Of the remaining (small) Euro-zone countries, Finland is probably against a closer cooperation within the Euro-zone, due to the influence of the populist True Finns;
    • The stance of the other countries is unknown to me. 
Herman van Rompuy, the somewhat colorless, but brave and diplomatic Belgian President of the European Union tried to shoot a perfect pass at the forwards of the pro-European integration / pro-burden sharing team, hoping that one of them would score against Merkel.

The latter, however, won’t give in against this team, as long as Germany mainly picks up the check for rescuing the EU. Van Rompuy tried to reach his goal by stripping an earlier proposal from all the issues that were considered too controversial.

Here are the most important snips of Van Rompuy’s proposal, advocating a quick integration of the Euro-zone. The full text can be found behind the link:

The economic and monetary union (EMU) was established to bring prosperity and stability across Europe. It is a cornerstone of the European Union. Today the EMU is facing a fundamental challenge. It needs to be strengthened to ensure economic and social welfare. 

An effective vision has to confront the long-term challenges that the EMU faces. The euro area is diverse and policy-making at the national level is the most effective method for many economic decisions. Yet, national policies cannot be decided in isolation if their effects quickly propagate to the euro area as a whole. Therefore, such national policies must reflect fully the realities of being in a monetary union. 

Maintaining an appropriate level of competitiveness, coordination and convergence to ensure sustainable growth without large imbalances is essential. This should allow for the appropriate policy mix with the single monetary policy in pursuit of price stability. 

But to ensure stability and growth in the euro area, Member States have to act and coordinate according to common rules. There have to be ways on ensuring compliance when there are negative effects on other EMU members. This is necessary to guarantee the minimum level of convergence required for the EMU to function effectively.

Overall, closer EMU integration will require a stronger democratic basis and broad support from citizens

The report proposes a vision for a stable and prosperous EMU based on four essential building blocks:  

§ An integrated financial framework to ensure financial stability in particular in the euro area and minimise the cost of bank failures to European citizens. Such a framework elevates responsibility for supervision to the European level, and provides for common mechanisms to resolve banks and guarantee customer deposits. 

§ An integrated budgetary framework to ensure sound fiscal policy making at the national and European levels, encompassing coordination, joint decision-making, greater enforcement and commensurate steps towards common debt issuance. This framework could include also different forms of fiscal solidarity.  

§ An integrated economic policy framework which has sufficient mechanisms to ensure that national and European policies are in place that promote sustainable growth, employment and competitiveness, and are compatible with the smooth functioning of EMU. 

§ Ensuring the necessary  democratic legitimacy and accountability  of decision-making within the EMU, based on the joint exercise of sovereignty for common policies and solidarity.  

1. An integrated financial framework
The financial crisis has revealed structural shortcomings in the institutional framework for financial stability. Addressing these shortcomings is particularly important for the euro area given the deep interdependences resulting from the single currency. However, this needs to be done whilst preserving the unity and integrity of the single market in the field of financial services. Therefore, an integrated financial framework should cover all EU Member States, whilst allowing for specific differentiations between euro and non-euro area Member States on certain parts of the new framework that are preponderantly linked to the functioning of the monetary union and the stability of the euro area rather than to the single market.

Building on the single rulebook, an integrated financial framework should have two central elements: single European banking supervision and a common deposit insurance and resolution framework.

2. Towards an integrated budgetary framework 
The financial and debt crisis has underlined high levels of interdependence particularly within the euro area. The smooth functioning of the EMU requires not only the swift and vigorous implementation of the measures already agreed under the reinforced economic governance framework (notably the Stability and Growth Pact and the Treaty on Stability, Coordination and Governance), but also a qualitative move towards a fiscal union. 

In the context, within the euro area, of greater pooling of decision making on budgets commensurate with the pooling of risks, effective mechanisms to prevent and correct unsustainable fiscal policies in each Member State are essential. Towards this end, upper limits on the annual budget balance and on government debt levels of individual Member States could be agreed in common. Under these rules, the issuance of government debt beyond the level agreed in common would have to be justified and receive prior approval.

Subsequently, the euro area level would be in a position to require changes to budgetary envelopes if they are in violation of fiscal rules, keeping in mind the need to ensure social fairness. 

In a medium term perspective, the issuance of common debt could be explored as an element of such a fiscal union and subject to progress on fiscal integration.

3.  Towards an integrated economic policy framework
In an economic union, national policies should be orientated towards strong and sustainable economic growth and employment while promoting social cohesion. Stronger economic integration is also needed to foster coordination and convergence in different domains of policy between euro area countries, address imbalances, and ensure the capacity to adjust to shocks and compete in a globalised world economy. This is essential for the smooth functioning of the EMU and is an essential counterpart to the financial and fiscal frameworks.

4.  Strengthening democratic legitimacy and accountability
Decisions on national budgets are at the heart of Europe's parliamentary democracies.

Moving towards more integrated fiscal and economic decision-making between countries will therefore require strong mechanisms for legitimate and accountable joint decisionmaking. Building public support for European-wide decisions with a far-reaching impact on the everyday lives of citizens is essential. 

In my opinion, this proposal of Herman van Rompuy is a very good one, that spells out exactly what needs to be done within Europe.

This is not a popular statement currently, as the look and societal mood of European citizens is currently pointed inside, away from the neighbors and other Euro-zone countries: our people at the first place! 

Europe is seen as an undemocratic, spending-happy monster that 'is only paying for bankrupt banks in corrupted countries, while using up billions and billions of North-European taxpayer's money'. People feel victimized by the Euro, the PIIGS and the credit crisis. National politicians in Northern European countries fully abuse this distrust of the European citizens, to bang the nationalistic / populistic drum and accuse Europe of everything that is wrong in the world, while promising falsely that they can solve all European problems by stepping out of the Euro-zone.

Often these are the same parties and politicians that voted in favor of the Euro-experiment in the nineties, when Europe and European integration were still hot.

Of course, I don’t blame Germany (and Merkel in particular) that it doesn’t want to pay for the crisis alone. Also, I understand Mark Rutte that he doesn’t have a brave stance on Europe in The Hague (understanding does not mean approving).

However, European citizens and politicians should understand that when the Euro-integration started in 1999, there was no way back. There was also no way back, when Greece and Spain were allowed into the Euro-zone. 

All politicians that voted against the entry of these countries into the Euro-zone have the doubtful pleasure of being right at the wrong time, when nobody listened to them.

To use the cheesiest of cheesy management statements: to get there (hence: at the other end of the European crisis tunnel), Europe needs to be together. There is simply no alternative.

Unfortunately, this is probably not what will come out of tomorrow’s summit. The chance that Van Rompuy’s proposal or a similar one will be accepted by all EU members, is very, very small. 

The dwarves in the European Union will put the giants under too much pressure to really achieve their goals, concerning more integration. This turns Europe’s Mother of all Summits probably into: ‘dead on arrival’. The final conclusion of the summit will be the same ol’ same ol’ that we are used to from the EU.

One fortunate thing is that a failure of this meeting will not bring the Euro to its knees. It has been 5 before 12 more often. In spite of all Doctor Doom’s of this world, the Euro-zone and the Euro will also survive this crisis.

On the other hand, the crisis in Europe will continue and deepen when this summit fails. This is likely to happen. So strap on your safety belts, as the ride continues…

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