December 8/9, 2011: What was, what is, what will be, what should be?

 The most spectacular outcome was the UK veto to a new EU treaty: Cameron’s gambit did not work out. It sidelined the UK from further EU decisions, without “protecting the interest of the City of London” (how popular was that in the crisis-hit UK population as an objective?). But one thing after the other:

  1. 1.       26 EU states agreed to conclude an intergovernmental treaty by March 2012, with the aim of strengthening the architecture of the Eurozone and the EU, nearly exclusively with respect to tighter budget discipline (see previous blog). It is still hard to foresee what this might mean with respect to the already very convoluted EU governance structure: will new, parallel institutions have to be established, will the “new 26” have to conclude cooperation agreements with the Commission and other EU services? One thing  is clear: EU decision making will not become easier. But was it not the decision-making dysfunctionality of EU procedures which drove up the borrowing costs of Eurozone member states?
  2. 2.       David Cameron lost on all counts, except with respect to popularity among his party’s right  wing. Since after his election he pulled the Tories out of Europe’s Conservative Party caucus (and joined up with obscure europhobics, homophobics and xenophobics without influence in the European Parliament) he was also not invited to the pre-summit Conservative party leaders meeting in Marseille – where he might have pre-informed Merkel and Sarkozy about his wishlist and garnered their support (?). Instead, a 2 o’clock in the morning, he sprung on the combined heads of state a list of rather technical regulatory points as a “agree, or we are out” ultimatum. He showed the required (by his Eurosceptic friends) bulldog spirit, to saw the others turn away in disgust and get on with their business of saving the euro.
    What his decision and his behaviour will mean for future UK influence on decision-making, what it will mean for the vast Eurozone business London conducts, what it will mean for the location of the European Banking Authority (at present in London), future will tell. One thing is certain: Cameron has not increased UK clout in Europe.
  3. 3.       Merkel and Sarkozy, in the event, got what they wanted: commitment to stricter budget control, semi-automatic sanctions, the competence of the European Court to decide on compliance, etc. All this not – as Merkel wanted – enshrined in a new EU treaty, but as a treaty among 26. Whether this will pacify financial markets, is doubtful, as their first reactions during the weekend show. I still find the final word on economic policy issues to be handed to the judiciary an absolute absurdity, and a perversion of democratic division of powers. How can you turn eminently political decisions, the prerogative of parliaments and their governments, over to a judicial authority? This has – from a democracy point-of-view – similarities with rule by authoritarian decree, and is an abdication of political rights and prerogatives to the judiciary. How flexible, how responsive to global and regional conditions can judgements by the (highly respectable) European Court of Justice be? The legal system should set and guarantee the framework for policy decisions, which are always decisions between alternatives and options; but courts cannot make these (political) choices, at least not in democracies.
  4. 4.       The summit succeeded in setting up and pulling  forward the effectiveness of the European Stability Mechanism, with around 500 bill €; until then (Jul7 2012), the existing EFSF will be strengthened. And it was decided (with or without the UK?) to increase the funding of the IMF by 200 bill € from EU countries. Whether all this money can be used to bail out Eurozone countries, will have to be decided by all the 184 member states of the IMF, not the EU countries alone.
  5. 5.       It is unclear whether the results of the summit, which were welcomed by ECB president Mario Draghi, will lead to the ECB doing (officially) more for government financing. While the ECB sees its task to stabilize the financial system (ie extends very cheap money to the banks), it steadfastly refuses to officially engage in “monetary financing of government debt” (also forbidden by the existing EU treaty). A number of observes maintain that this position is contrary to what originally National Banks were founded for, i.e. government financing, and which many National Banks around the world (among them the Bank of Japan, the US Fed, the UK Bank of England) do routinely. The (conspiracy) argument goes that over the last decades private banks have used their lobbying power to wrest government finance away from National Banks and to do this lucrative and until recently risk-free business themselves. And this thinking has become official European policy enshrined in the successive EU treaties (see e.g. Michael Hudson in FAZ Dec.3, 2011). Be that as it may, it would be high time to rein in the financial sector and turn government financing back over to the ECB.
  6. 6.       The Summit achieved what Germany and France intended – minus the UK veto. The relatively muted reaction by the financial markets shows that these predominant actors would have expected more, probably a commitment to a scheme to finance solvency and liquidity issues of member states, a la Eurobonds. I would have combined that with an action plan to take this financing away from private markets.
  7. 7.       The summit did not pronounce on financial market regulation and the future role of the banking sector in the EU, and did not produce any new commitments towards strengthening European supervision (future of the EBA?).
  8. 8.       IT most famously and deplorably did not devise a new architecture for a comprehensive European economic policy, which goes beyond the obsession with budgetary discipline. Where is the growth programme which gives hope to the European populations that there will be light on the end of the tunnel? Such a “vision” might be able to persuade the long-suffering populations to bear unemployment and reduced incomes, if they see a brighter future ahead. The dreadful alternative is more violence, demonstrations, destruction of property and a breakdown of social and political cohesion with all its dire consequences.

The populations not only require the prospect of growth, but also fairer burden-sharing and the taming of the financial sector. These tasks lie still ahead and need urgent attention by the leaders.


Whether the UK veto will lead to the eventual break-up of the EU, whether “only” to a multi-speed Europe with unforeseeable consequences, or in the optimal case to a sounder economic and political architecture of the Eurozone, is unclear. Whether this veto will lead the LIbDems out of the coalition (where to?), it has put its leader Nick Clegg in a very difficult position. He has had to renege already on his campaign promises of not raising university fees, obtaining a fairer election system and not raising VAT – which has left many of their voters to ask why they voted for them. If he quietly accepts Cameron’s absurd EU behaviour, he will not even be a “poodle on Cameron’s lap”. As a fervent pro-European, he is in a tight spot. And so is Cameron who has pleased his Euro-sceptic right wing, only to lose influence in world politics and to endanger the pre-eminence of the City of London. Labour so far has not been able to profit from this disarray within the ruling coalition, but will desperately attempt to sharpen the leadership profile of Ed Milliband with the help of this vital issue.
In the meantime, step by step, the Euro “will be saved”, if the right additional steps will be taken. Let us be optimistic.



Filed under Crisis Response, European Union, Financial Market Regulation, Fiscal Policy, Global Governance

3 responses to “December 8/9, 2011: What was, what is, what will be, what should be?

  1. All true, financially speaking.
    If I may, I would say that the U.K has a long history of political betrayal. The General de Gaulle would agree with the statement, having Yalta in mind, not to mention other great flaws.
    More to the point, is the fact that the UK is the only EU member who plays internationally “solo” using its partnership with the United States, for one thing, and using its Commonwealth network for another.
    The truth is, one can’t have it both ways, you are either in or out.

  2. Jane Calvert-Lee

    PM Cameron’s negotiating stance may have been flawed, but does anyone seriously believe that the 26 states who have signed this Treaty will adhere to the austerity measures that are implied? If so, they should look back over the history of the euro and see who were the first to break the stability pact. It will take a miracle to save the euro, for even the next two years.

    • kurtbayer

      Well, adherence to the commitment is what all this was about. I am the first to remember that it was Germany which breaches the Stability Pact first – with the help of France which did the same shortly afterwards. But these were different times…
      In my assessment, all this reliance on budget discipline is misguided, or at least deeply flawed and incomplete. However, close economic policy coordination is an absolute must for a common monetary policy – even apart from the current crisis.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s