How Far Are We Willing to Go?
Ralitsa Kovacheva, 2 September 2012
The new political season in the European Union started at top speed with a series of bilateral summits. Greek Prime Minister Antonis Samaras launched a diplomatic marathon, followed by his Italian counterpart Mario Monti. He stopped in Brussels late on Tuesday, August 28, for a "coffee" chat (according to an EC spokesman) with European Commission President Jose Manuel Barroso. And the next day Monti went to Berlin to meet German Chancellor Angela Merkel. Meanwhile, European Council President Herman Van Rompuy had talks with Spanish Prime Minister Mariano Rajoy in Madrid. In the first week of September, Van Rompuy will visit Berlin and Paris, Mario Monti will meet the French President Francois Hollande, and Angela Merkel will see Mariano Rajoy in Madrid.
This increased activity of European leaders is completely understandable because September emerges as a month full of important events: on 6 September the ECB Governing Council is expected to clarify the anticipated new sovereign bond buying programme; on 12 September the European Commission is expected to propose creation of a banking union in the eurozone; also on 12 September the German Constitutional Court is going to rule on the Fiscal Compact and the European Stability Mechanism; by the end of September the Troika report on the implementation of the second Greek bailout program must be ready, on the basis of which it will be decided whether Greece should receive the next tranche of its loan, together with an extension of time wanted by Athens.
All these events are interrelated, they depend on each other and will have long-term consequences not only on the solving of the current crisis but also on the future architecture of the Economic and Monetary Union (EMU) and the European Union as a whole. This new architecture, as outlined in the 'Report of the Four Presidents' (of the European Council, the European Commission, the European Central Bank and the Eurogroup), is based on four pillars: a banking union, a fiscal union, an economic union and a political union. The ambition is to reform the governance of the eurozone within ten years, as the first pillar - the banking union - should be built as soon as possible. The reason is the need to break the vicious circle between the sovereign debt crisis and a banking crisis, as the European Commission wrote.
To that end, the ECB will obtain supervisory powers over banks in the euro area. What exactly these powers would be and over which banks, it will become clear in the Commission proposal. Meanwhile, France and Germany established a working group to prepare plans for the banking union, as well as for the future fiscal union. The banking union is a precondition for the eurozone rescue funds to be used for direct bank recapitalisation, without going through the governments thus increasing their indebtedness. All this, however, makes the European leaders face difficult, even unpopular decisions, some of which require radical rethinking of ideas and principles. For example, the role of the European Central Bank, including its connection with the eurozone rescue mechanisms - an extremely sensitive point, given the constraints in its mandate and the prohibition to finance governments.
In the last year, calls have increased from the European Parliament, the troubled eurozone countries and the new French president, socialist Francois Hollande, the ECB to intervene decisively to tackle the crisis. Often, however, it was not entirely clear what is expected from the ECB. The bank injected cheap money into banks and bought limited amounts of debt of peripheral countries but this has not brought the expected magic solution of the crisis and return of market confidence. Which, as Germany maintains, can be won only by sticking to budget discipline and reforms as by the individual countries, so at European level.
The expectations for an ECB intervention have increased sharply in recent months, after attention has shifted from Greece to Spain and Italy, and also as a result of several, both full of pathos and contradictory, statements of President Mario Draghi. What is expected now is the ECB to resume the government debt buying programme on a large scale and under different conditions than before in order to ease the interest pressure on Spain and Italy. One of the options discussed in the public domain is the ECB to set ceilings for the yields on individual countries' bonds, over which to intervene in the market. In parallel, the idea the permanent bailout fund ESM (European Stability Mechanism) to obtain a banking license and therefore access to unlimited ECB funding is again on the agenda. In July, the German Süddeutsche Zeitung reported, quoted by Der Spiegel, that the new element in the idea was the ESM to use the purchased bonds as collateral to obtain fresh money from the ECB to support struggling countries.
In early August, ECB President Mario Draghi once again rejected this option arguing that granting banking license to the ESM was not compatible with the EU treaties since it would violate the ban on the ECB to finance governments (Article 123 of the TFEU). The same position was shared by German Chancellor Angela Merkel, too, after her meeting with Mario Monti on 29 August. But the Italian Prime Minister made it clear that he had a different view on the matter. He said the issue should not be dramatised, that it should be seen as part of the bigger picture of the reform of the eurozone governance, which may pass through a revision of the treaties. "Some things cannot be achieved under certain circumstances, but in the future these things can be achieved under different circumstances," Monti said.
The fact is that namely Germany insists on the urgent start of preparations of a new EU treaty. However, it hardly shares Monti's presumption for easier saving of troubled countries. As usual, the German Chancellor refrained from commenting on the ECB's actions, although she repeatedly mentioned the decisions expected on 6 September. But Angela Merkel made it clear that she believed there was another way to reduce interest rates. She gave the example of a successful auction by Italy on Tuesday (28 August), and expressed confidence that, indeed, reforms made by the government of Mario Monti were the main reason the interest rates to fall. On 28 August Italy and Spain managed to place short and medium debt at much lower rates compared to the past months. Unlike Merkel, many explained the reduction namely with expectations of a future ECB intervention.
But the Chancellor admitted that the uncertainties stemming from other countries - Spain, where currently the banking system is being assessed and Greece, expecting the Troika report - "certainly have an effect on interest rates." That, Merkel said, encourages us to continue to cooperate to improve the eurozone because "problems in different countries have to be solved quickly at the same time." These words indicate that the position of Ms Merkel on the ECB's role is much more balanced than that of Bundesbank President Jens Weidmann, who is the most vehement opponent of the ECB buying government debt.
"Such a policy is too close to state financing via the money press for me. The central bank cannot fundamentally solve the problems this way," Mr Weidmann said in an interview with Der Spiegel magazine on 27 August. He said that determining interest rates for sovereign bonds in the ECB Governing Council would be "a controversial idea" and that he was not the only member of the Governing Council "who feels uncomfortable with this". There is a danger, even if temporary, this measure to become "addictive like a drug," Jens Weidmann noted. Like Chancellor Merkel, he also believes that "the best way to reduce interest rates over the long term is to decisively implement promises and agreements." However, coordinated actions between the government rescue fund and the central bank "results in a linking of fiscal and monetary policy," the Bundesbank president warned.
According to him, it's not about simply blind adherence to some dogma, but about respecting democratic principles: "When the central banks of the euro zone purchase the sovereign bonds of individual countries, these bonds end up on the Eurosystem's balance sheet. Ultimately the taxpayers of all other countries have to take responsibility for this. In democracies, it's the parliaments that should decide on such a far-reaching collectivisation of risks, and not the central banks." It is the issue of risk sharing that is one of the most controversial points, as in searching for urgent solutions of the crisis, so in discussions on the long-term vision for the European project. Whether it is about buying debt by the ECB or issuing common eurobonds, the issue has always provoked sharp disputes and clearly demonstrates the north-south division of the eurozone. Because in fact, behind the question of risk sharing, the main question stands: how far should (could) the European integration go in economic and political terms.
To answer this question, we do not need to choose between extremes: "either we must go back to the past, or we must move to a United States of Europe", ECB President Mario Draghi wrote in an article published in the German newspaper Die Zeit on 29 August. In his view, the common supervision of the national budgets and the banks is needed, but "we do not need a centralisation of all economic policies" and only in certain areas to complete the Economic and Monetary Union. Political integration will develop in parallel, associated with sharing of powers and greater democratic legitimacy.
"A more solid political foundation should allow for agreement on a basic principle: that it is neither sustainable nor legitimate for countries to pursue national policies that can cause economic harm for others," Mario Draghi wrote. If we remove the word "economic" this may be the basis of a future new EU treaty. Paradoxically at first glance, but more than 60 years after its creation and having already 27 member states, the EU should again recall the very reason for its existence - to ensure that hereafter no one would cause any harm to others. Compared to the usual perspective - who benefits how much from the EU membership - changing the angle this way would have a sobering effect and in this sense it is a good starting point to negotiate on a new EU treaty.