A theory of (euro)improbabilities

Ralitsa Kovacheva, August 31, 2011

“When you eliminate the impossible you are left with the improbable, no matter how unlikely that seems.” With these words of detective Sherlock Holmes, Chairwoman Sharon Bowles (ALDE, UK) opened the extraordinary meeting of the economic committee in the European Parliament, devoted to the debt crisis in the eurozone. In the few hours long debates the MEPs exchanged views with the President of the European Central Bank President, Jean-Claude Trichet, the Eurogroup President (the finance ministers of the euro area), Jean-Claude Juncker, the Polish finance minister and ECOFIN President, Jacek Rostowski, and EU Economic and Monetary Affairs Commissioner Olli Rehn .

In Holmes's style Mrs Bowles said: “Now there are various improbables for us to consider, some like eurobonds have received a lot of attention. Unlike Sherlock Holmes we do not have to find just one improbable as the solution, we may need several improbables in varying degrees”.

“The impossible is the fragmentation of the euro," she said, warning that “saving the euro must not cost us the Union.” During the debate, however, it became clear that at that stage there was no consensus in the EU even on the possible solutions of the crisis and nobody seemed willing to discuss the improbable ones.

ECB - the saviour of the euro

The MEPs unanimously backed the European Central Bank which, according to them, was the only one that acted appropriately and responsibly in response to the crisis, including with its strongly criticised decision to buy out Italian and Spanish debt. “It is thanks to the ECB that we have not fallen victim to the big problems which have hit us recently,” Werner Langen (Germany) said on behalf of the largest parliamentary group – that of the European People's Party. Sylvie Goulard (ALDE, France) highlighted that the ECB could not constantly make up for the weaknesses of national politicians and the answer was to abolish the intergovernmental approach. Her colleague Olle Schmidt (ALDE, Sweden) said that one of the reasons for the problems of the EU and the euro area in particular was the lack of leadership in the Member States and Ms Elisa Ferreira (S&D, Portugal) added that it was not only about the lack of political will, but the lack of vision.

Responding to parliamentary questions about the call of IMF Managing Director Christine Lagarde for emergency recapitalisation of European banks, Jean-Claude Trichet was adamant that “there is no liquidity or collateral shortage for the European banking system”.

The economic governance

The ECB President urged the European Parliament and the Council to rapidly conclude the negotiations on EU's economic governance package. We are on the Parliament's side, he stressed. Negotiations on the so called “six-pack” are blocked because of disputes concerning the application of the reversed qualified majority voting rule in the Council. We must go further and do more in terms of the common economic governance, Mr Trichet said. Some time ago he expressed view that it was possible in the future the EU to have its own Ministry of Finance. Many MEPs then strongly supported the idea, but at this stage this is one of the European improbabilities given the resistance of member states to cede more of their national sovereignty to Brussels.

For the same reasons the eurobonds are another improbable option, although there is a lot of noise around them. The reason is not simply the resistance of France and Germany, but the long way to go - as pointed out by French President Nicolas Sarkozy, the eurobonds are the end of the European integration process, not the beginning.

Similar opinion was expressed also by EU Commissioner for Economic and Monetary Affairs Olli Rehn: “… There are currently rather high expectations on how eurobonds could help solve the debt crisis by pooling the debt issuance of euro-area member states. However, it is clear that eurobonds, in whatever form they were to be introduced, would have to be accompanied by a substantially reinforced fiscal surveillance and policy coordination as an essential counterpart, so as to avoid moral hazard and ensure sustainable public finances. This would have unavoidable implications for fiscal sovereignty, which calls for a substantive debate in euro area member states to see if they would be ready to accept it.”

Until then, the top priority is the adoption of the economic governance package, which "is not only important in its own right, but it is a necessary foundation for any more ambitious pooling of fiscal sovereignty”.

Polish Finance Minister Jacek Rostowski warned that the six-pack must be adopted, otherwise the member states would be forced to seek other solutions. This will test us whether we are able to use the community method and act rapidly and effectively to overcome the current political uncertainty, Mr Rostowski said. He believes that further integration of the euro area at a macroeconomic level is absolutely essential to the greatest extent possible and based on the community principle.

“The Sarkozy-Merkel economic government is not a replacement to the 'six pack',” Corien Wortmann-Kool (EPP, the Netherlands) said, referring to the proposal of France and Germany made at the latest meeting of their leaders. Eurogroup President Jean-Claude Juncker commented eloquently: “Let us not think even for an instant that a eurozone government which holds two summits per year is credible.” As euinside wrote, the creation of a euro area government headed by the President of the European Council, Herman Van Rompuy, will significantly reduce the role and influence of Jean-Claude Juncker.

Regarding the deadlock in the negotiations on granting a second loan to Greece, Mr Juncker said he was not happy with the request for a collateral set by Finland and supported by other countries, as well as with bilateral agreements between the eurozone countries and Athens. “We are looking for another solution and you shouldn't think that the collateral guarantee will stop us implementing the various elements of the 21 July decisions,” Juncker said. That other solution should be ready by the meeting of eurozone finance ministers on 16 September.

By the end of September the national parliaments of the eurozone countries should ratify the decision of their leaders to change functions of the rescue fund for the euro area, so the EFSF to be able to buy debt on secondary markets and recapitalise banks through government loans, including in no-programme countries. In some member states, however, including Germany, there are clear signs that the procedure will not pass smoothly.

Such developments would jeopardise any future loans and will force the ECB to continue to buy eurozone debt, which, however, cannot be done indefinitely. Moreover, it would seriously discredit the process of decision-making in the euro area, exacerbating to the extreme the opposition between national and European interests. Against the background of a deepening debt crisis, this is the last thing the European Union needs.