The good news first: Declaring the Crisis Mechanism permanent from 2013 on is a (partial) success story – but: given the turmoil in “the markets” (viz. the subsequent downscaling of Ireland and Slovenia by 5 notches just above junk bond status) shows that with this step not even the bare minimum had been achieved. It is an old story: correct steps are taken by the EU authorities, but too late and often too timid, and after rather lengthy and controversial discussions. If the objective had been to calm the jittery financial markets, this does not seem to have been achieved.
The bad news are more in number and substance:
a) Concrete details of how in the future the crisis mechanism will be triggered and if and when private creditors will be included in restructuring operations, are still to be agreed, thus le ft to future (again controversial?) decisions
b) One of the necessary future arrangements, i.e. the introduction of (partial) Eurobonds in exchange for national bonds (e.g. up to 60% of GDP in order not to destroy incentives against irresponsible lending) was flatly ruled out by the Franco-German alliance. The argument that this would “reward” profligate governments at the expense of “responsible” ones, and that this would not only lower interest rates for the first category, but increase them for the virtuous one, are untested: the larger liquidity might mitigate against higher rates for Germany, Austria, et.al, as happened as a result of the introduction of EMU. Besides: if financial markets’ assessment that Ireland (and maybe other countries) will not be able to repay their bonds and will have their debt restructured, these costs to the Eurozone must be evaluated against the benefits of avoiding defaults by lowering their interest rates.
c) The recognition, manifest as a result of this crisis, that a monetary union needs also a fiscal union, i.e. a degree of tax harmonization, stronger coordination of fiscal and financial policies and a joint European growth strategy, where implicit “beggar-thy-neighbor” policies via tax rates, via tax policies, via subsidies and via wage dumping are ruled out, is only slowly (too slowly) gaining ground. In its narrow Franco-German and to some extent Commission version of a strengthened Stability and Growth Pact it remains incomplete and dangerously neglect of recognizing that the drifting apart of EMU members during the last few years has deleterious effects on the viability of the Monetary Union. A stronger “economic government” with harmonized tax, growth and wage policies, promoting similar productivities, is called for, if the next crisis should be avoided.
d) To some extent, the flooding of the Eurozone with liquidity by the ECB was successful, to a larger extent hurtful: cheap ECB money for banks has not lead to a pick-up in lending to the real economy, but to a new carry trade where money is channeled to high-yielding financial investments instead, thus sowing the seeds of the next crisis (the increases in raw materials prices, in gold, in some stock markets are ominous signs). Instead, nationalized banks and private banks should have given directives (by their supervisory authorities and/or new owners) to loan to SME, to firms willing to renew or expand their productive capacity, to invest in green energy, in public transport, and the like.
e) There was no further talk about dislodging sovereign debt from the whims of financial market jitters: the least should be forbidding Europe-wide (as Germany and Austria did) “empty trading” of government bonds, which has driven up their prices enormously byt the actions of reviving hedge funds; a further-going ban on short-term trading of government bonds, or introducing wholesale ECB financing of government debt should at least be discussed.
f) The introduction of a larger EU budget, financed not by government transfers, but rather by own EU taxes on assets or activities, not (sufficiently) taxed at national level, could increase the counter-cyclical arsenal of the EU Commission: a tax on financial transactions, on kerosene or flights would be a possibility. A larger than the present 1% of GDP EU budget should be used for EU automatic stabilizers, in order to even out cyclical divergencies between EU and Euro member states.
The European Union moves forward in tiny baby steps. But to deal with the most severe crisis for 75 years, a systemic solution to some of the structural problems of the EU economy, and especially of the Eurozone, needs to be found. Otherwise, unleashed financial market actors will continue to drive EU policy makers in front of themselves, thereby gaining (the financial actors) large incomes and assets for themselves. It is high time that EU policy makers recognize this challenge. Otherwise, piecemeal brinkmanship will cause the EU to tumble from one crisis to the next, impoverishing citizens, causing ever more problems for social and political cohesion and – very important – losing any influence the ageing European society has in the world to determine its own fate. Europe may be losing influence in the global economy, but is not finished yet, by any measure. But: it takes bold political action to convince Europe’s citizens that Europe’s fate is their own destiny.