THE FUTURE OF THE EURO

The Bertelsmann Stiftung organized on the 10th of March a Brussels Briefing*, a meeting for Eurocrats, Europoliticians and Eurolobbyists , about “The future of the Euro: more discipline or more solidarity?” This is not an easy subject because of its complexity. The Euro is  a single currency for countries with different economies, different economic rules, different systems of government, different social and tax systems and different histories.

As long as the Euro-economies were growing, which was the case before 2008, everybody was happy, no questions asked about the Euro except by those whose profession is to be skeptical, as for example monetary experts and economists. When a crisis starts to develop more people become skeptical and critical, especially those who never liked much the Euro and the European Union. People started to look for who should be blamed for the problems. But blaming does not give solutions. In such a situation, it takes a lot of political courage to continue the dialogue for searching a solution. In this sense, the Euro countries have proven, to have sufficient political will and solidarity to solve the crisis together.

During the debt crisis of the last years have been developed new instruments and institutions to stabilize the Euro currency. But as professor Hendrik Enderlein explained on the Brussels Briefing “the crisis is not over”.  It is his opinion that if there are no changes, the Euro will not be viable in the long run because of more divergence instead of convergence between the Euro-countries, unclear competences in EU economic governance and a waning EU legitimacy as for example shows the coming referendum on a possible Brexit.

Europe is still suffering of high debt levels and low investment rates, low economic growth ( a lost decennium since 2008), a reform gap and distrust between the EU members. Besides all this, the EU is confronted with another crisis;  the massive influx of refugees from the Middle East what puts under pressure the Schengen agreement as one of the most practical and concrete results of the EU for Europeans.   

Enderlein therefore advocates a 'Repair and Prepare Strategy' based on the following principles:

As much integration as necessary, as little as possible

EMU level as part of multi-level governance ( EMU: European Monetary Union)

More sovereignty sharing together with more risk sharing.

Although, it was expected as a result of the Euro that the European countries would converge, the opposite happened, the Euro did bring divergence. “This divergence was not really surprising in view of the fact that the euro-area was a heterogenous economic space from the very beginning. Structural differences, such as labor market and product market structures, social security and welfare policies, and the banking and financial systems persisted. They reflect a history of different political choices and economic strategies." (page 13, What kind of convergence does the euro need?, edited by the Jacques Delors Institut and the Bertelsmann Stiftung). 

How do you keep so many different economies in one Eurobasket to guarantee a minimum of Euro Stability? The solution should be more convergence in prices. For example today we are confronted with a single interest rate based on the average inflation rate. “However, inflation rates diverse significantly within the euro area. Thus interest rates will be too low for countries with a high inflation rate, and vice versa. This means that the single interest rate destabilizes the euro. For this reason, inflation differentials should be as small as possible.” (page 13) 

The second requirement for convergence in the euro-area is to make sure that they are on a par with other countries in competitiveness and therefore keep wage growth pace with productivity. “Third, countries in the euro area ought to avoid permanent external imbalances. Both, excessive surpluses as well as excessive deficits, can cause problems for other member states.”

Professor Enderlein prescribes another set of measures to strengthen the single market as to stabilize more the euro: complete the single market for services (in the past strong contested by the European trade unions), improve labor mobility, portability of pension rights, recognition of professional qualifications, cooperation across employment agencies, domestic reforms facilitating price and wage adjustments. It is easy to see that all these measures will lead to much political debate on all levels, including the European trade unions.

Another proposal is to create an European Monetary Fund and the function of European Finance Minister. Both proposals suppose a transfer of  national sovereignty to Brussels and as we know, on this point more people feel  very uncomfortable and are even opposed to loss of more national sovereignty to Brussels. Britain is preparing a referendum on a possible Brexit, in the Netherlands a referendum will be held on the Association Treaty between Ukraine and the EU, in France the nationalist and anti Europe party Front National is becoming stronger and so on.

The 4th proposal is to complete the Banking Union. Although a lot has been done since the debt crisis much remains to be done. An important step would be the creation of a deposit insurance scheme and to organize macro prudential supervision.

In summary, Europe needs more convergence to improve monetary transmission, more risk-sharing to fight fragmentation and sovereignty-sharing to fight moral hazard. This should be based on the basic principle of “as much integration as needed, but as little as possible.” Therefore there is no need for a European super state and room for subsidiarity, in other words “Europe as part of multi-level governance.” Will this be enough to convince the anti Europeans, as well as the international financial markets and the political powers on world level? The answers are hidden in the future.

* Brussels Briefing of Prof. Dr. Hendrik Underlain, Jacques Delors Institut-Berlin & Hertie School of Governance and Dr. Katharina Gnath, Bertelsmann Stiftung, Brussels 10 March 2016

CHRONOLOGY OF THE EURO CRISIS

 The New Europe

1. In December 2009 the Eurozone countries discovered that the Greek government debt amounts 300 billion Euros, ie almost 113% of the total government budget.

2. In January 2010 it is determined that the Greek deficit is not 3.7% but 12,7%. In the Eurozone, Greece is invited to reduce the deficit. Corrective measures are announced. In February, an IMF/EU mission goes to Greece: it predicts more economic and financial misery, a higher deficit and a recession of the Greek economy.

3. In March 2010 the Greek government announced an austerity package: VAT goes up 2%, the bonus in the public sector goes 30% down, taxes on fuel, tobacco and alcohol go up and pensions are frozen. At the European summit, without going into details, one talks about a possible aid package to Greece.

4. In April 2010 the Eurozone presents a support package: a 30 billion loan facility from the EU and a 15 billion loan facility from the IMF. It is based on a 3-year financing with an interest charge of 5%. The same month, Greece asks for the promised loans.

5. In April 2010 the rating institute Standard & Poor's lowers again the creditworthiness of Greece, and then also of Portugal. One begins to worry about infecting other countries like Spain and Italy.

6. In May the Eurozone, the IMF and the Greek Government create an emergency plan for Greece of 110 billion euros. Greece promises to reduce its expenses by 30 billion.

The EU agrees on a package that will ensure financial stability. It agreed to a "special purpose vehicle", later called the European Financial Stability Facility (EFSF) of 440 billion euros. The EFSF should be used for, among others, recapitalization of the banks. The EFSF should be able to act on secondary markets to prevent contamination. It seemed to bring calm, but that is short lived.

The European Commission also announced measures that should prevent deficits in the national budget, the so-called six pack. Also sanctions are laid down in European legislation that makes it possible to punish the budget sinners.

7. In the same month Spain and Portugal announced budget cuts with the aim to restore the confidence of the financial markets. The European Central Bank (ECB) starts with interventions and buys bonds from weak countries for a total of 165 billion euros. Maintaining confidence in the financial sector the European Summit announces a stress test for banks. Of the 91 banks tested, 7 banks do not meet the criteria.

8. In the summer of 2010 it becomes clear that Ireland also has problems. This is mainly due to the mortgage loans from banks. A second Lehman debacle threatens.

9. In November, Ireland received an aid package of 67.5 billion Euros. A blueprint for a European Stability Mechanism ESM is designed that will start functioning from 2013 onwards and which is open for private sector participation.

10. In March 2011, the European Summit establishes rules for the ESM. Also the six pack prevention measures are decided to which President Sarkozy and Bundeskanzler Merkel are less strict than the European Parliament, the European Commission and the Finance Ministers from the Eurozone.

11. In May a rescue plan is set for Portugal of 78 billion euros.

12. In June the European Parliament approves the package of preventive measures.

13. In June 2011 the Greek Parliament votes in favor of a drastic austerity package.

14. In July 2011 another stress test for banks is held. Now eight large banks failed to meet the requirements. A new emergency plan for Greece is setteld, worth 109 billion euros. It is decided that the financial private sector should also contribute in addition to the 109 billion euro.

15. The ECB buys more and more Italian and Spanish debt (34 billion) and thus stretches its role to prevent the interest on the Spanish and Italian debt continue to widen.

16. In October 2011, the Greek problem again is larger than expected. However, the country has cut back a lot. The 1913 budget will be balanced. But the interests charged for loans are an excessive burden. The economic downturn is much larger than anticipated. Privatisations are going to slow and do not generate enough money. Instead of 109 billion euro, one need 250 billion and when things go even worse than about 444 billion will be needed on top of the 110 in July 2010. The choice now is a "haircut" of debts or a bankruptcy for Greece. But volontary amortization of financiers (banks) can bring them into trouble too.

17. The debt of Greece will be reduced to 120% of the national budget, to get there in 2020.

The EFSF with its 440 billion Euro in guarantees from which after contributions to Ireland and Portugal remains 290 billion Euros, will be increased to 1000 billion. Private investors are invited to participate in the  Stability Fund. The exact termes have to be worked out.
The banks have to write off 50% of the money loaned to Greece. This will require 106 billion Euro. Banks will initially look for this money through the market, if it is not possible, they can borrow money before the EFSF.
As of July 2013 or possibly earlier the European Emergency Fund will have an amount of 80 billion euros. The European Commission investigates the possibility the release of eurobonds.

It has been agreed that each country adheres to the Stability Pact. Italy is committed to a balanced budget in 2013 and a surplus in 2014 so government debt will be reduced to 113% of the budget.
President of the European Council Van Rompuy, President of the European Commission Barroso and President of the Eurogroup Juncker prepare treaty changes. These are aimed to guarantee more financial stability and to promote more economic cooperation.

Thanks to the European Parliament member Ria Oomen-Ruijten