WEEKLY COMMENT 29-09-2016
By Barry Edwards
EU-Repair and Prepare
With all the discussion about the EU and Brexit, it is nice to see a document that is suggesting positive solutions to move forward and improve on the reforms that have been made during the crisis to create a lasting and better future for the EU. Whatever anyone says about Brexit, the UK will be dependent on the economic success of the EU for business growth, security and climate improvement. The UK is deeply interconnected with Europe whether or not it is a member of the EU and it will always be necessary to maintain a very close relationship both diplomatically and economically.
A report has just been published by the Jaques Delors Institut and Bertelsmann Foundation entitled ‘Repair and Prepare-Growth and the Euro after Brexit’ (40 pages). This report is very well written and sets out achievable targets to reorganise the EU structure, and especially the Euro currency, to make it more responsive to the economic challenges that it faces and explains exactly how it can be done. It does not get bogged down with the quasi political dogma that surrounds this subject and simply analyses what has been done and how it can be extended and implemented. If you click on the link below you can read the full report;
If you do not have time to read the whole report, I would suggest you read the Preface and Executive Summary both only 4 pages; the extracts below give a flavour of the report;
“It is worth remembering that there were good reasons for introducing the euro in the first place. It was a necessary step towards completing the single market. A patchwork of multiple small currencies in a world of fast moving capital would be vulnerable and prone to speculative attacks. During the global economic crisis of 2008/09, it was the euro that initially protected troubled economies in Europe. The single currency also delivered on its promise to bring low inflation while supporting growth and employment through low interest rates for a decade. The euro is a landmark achievement in the broader process of political integration.”
“The reforms European policymakers have enacted so far are steps in the right direction. However, the individual elements are not connected in a consistent manner and generate political instability. They were not capable of bringing about sufficient stabilisation in the last crisis, and would probably be unable to do so in a potential new crisis.”
“While the ECB’s stabilisation measures were temporary in nature, they could not address the structural problem of insufficient risk sharing and sovereignty sharing at the euro-area level. It calls upon Member States’ fiscal policy, structural policies and further integration measures to complement its actions. Euro-area governments need to heed this call and accept their responsibility for stabilising European Monetary Union (EMU).”
“There will be some kind of future crisis; to keep on waiting is the wrong approach. Acting only when the crisis hits will be more costly and less effective and will still not take away the risk of a break-up of the single currency. A more robust EMU would not weaken its individual Member States. On the contrary, it would strengthen their capacity to deliver the stability and prosperity that citizens are asking for. Let us repair the EMU now and prepare it for whatever the future may bring.”
Ever since Brexit there has been a lot of reporting on how the EU should reform itself and connect more with the populace. It is clear that the referendum has shaken up the bureaucracy in Brussels and most of the leaders of the member countries have stated that there has to be change if the EU and the Euro are going to survive. No doubt, this report is the first of many that will be published by institutions from around the world making their suggestions on the reformation of the EU.
The main concern of this report is that the Euro is not capable of sustaining another deep recession and the structures in place now do not give sufficient political power to the new institutions set up to manage the currency in conjunction with the European Central Bank (ECB). The thrust of its recommendation is to complete the allocation of power to these institutions and fund them properly so they can instigate corrective solutions when member countries experience budget problems. This will involve joint and several guarantees from all Euro members which the writers now believe is achievable over time, however initially they suggest proportionate commitments could be the first stage until all members are content with the arrangement.
During the financial crisis it was the ECB alone that took on the responsibility to save the Euro, this report believes in future that it should be the sovereign states that take on that role through the EU institutions and allow the ECB to fulfil its banking responsibilities solely. The process they recommend is eminently achievable and does not require treaty changes initially, making it capable of being implemented in the near future. With the new urgency that is coming from all quarters of the EU, it appears that it is now also possible.
Many of the proposals in this report have been discussed for years by economists and commentators, including this weekly comment. The main contentious subject is Eurobonds; issuing these joint sovereign bonds has so far been rejected by most northern members. Since there is such resistance to this commitment, the report proposes again that a proportionate guarantee is implemented as a first stage eventually leading to full joint and several responsibility 10 to 15 years hence.
The principle is that these bonds are issued for countries up to a maximum of 60% of GDP and anything above that is issued directly by each country creating a two tier government bond market. Inevitably, that will create different values depending on market assessment and management of the economy which is clearly to be recommended. In effect, it imposes self-control of government expenditure and encourages restructuring of the economy to achieve the best rates of interest from the market.
The report stresses that ‘ever closer union’ does not appeal to the people but concentrating on correcting the financial structure of the EU to encourage growth will go a long way to bringing the bureaucracy and people together allowing a truly democratic renaissance to occur reversing the popularity of the populist parties. A big change to the attitude of the bureaucracy has to happen but common-sense may prevail.
That’s all for this week, more observations next week.