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

ARE THE U.S. AND THE EU BUILDING A TRANSATLANTIC EMPIRE?

The US-EURO flag as designed by Petrus

Military Integration

The idea that the U.S. and the EU together are building a Transatlantic Empire started with two observations coming together. On one side I read some critical articles on trade negotiations between the European Union and the U.S. started this year on the 14th of June. On the other side I was surprised by the magnitude of the building site of the new NATO Headquarters in Brussels. This did not look like a building of a military alliance that was not important anymore since the end of the Cold War by the downfall of the Soviet Imperium. On the contrary it looks like a renewal of NATO by extending and modernizing its Headquarters.

The construction site of the new NATO building opposite to "the old one" in Brussels, Belgium.

Wikipedia (Dutch version: NAVO)  informs that in the autumn of 2010, the Dutch construction company BAM started the construction of a new headquarters for NATO on the other side of the Avenue du Bourget in Brussels, so to say opposite the old NATO headquarter. The contract has a value of approximately 460 million euros (more than a half billion US$). The new building is of about 250,000 sqm and will host about 4,500 employees. Such an effort suggests more a strengthening of the NATO than the supposed reduction of the importance of this transatlantic military alliance. Such an investment indicates that NATO is planning to stay for another long time.

NATO is build on the "Three Musketeers Principle" which reads "All for One, One for All"

Since 1948, 4 years after the Second World War, West European countries cooperated military in the strongest way possible between free and independent nations, that is to say in the North Atlantic Treaty Organization NATO as an answer to Stalin's policy in Eastern and Central Europe. The core of the treaty is Article 5, what I would call “The 3 Musketeers Principle" that reads "All for One, One for All”, which means that in the event of an attack on one of the states north of the Tropic of Cancer, it will be perceived as an attack on all, and that all countries will cooperate to ward off the attacker.

It is clear that nearly all West European countries became a member of the NATO including also Turkey. It was a very successful alliance for the West European countries because it guaranteed peace and stability for about 50 years, years in which West Europa could not only rebuild but also create the so called welfare states. After the fall of the Berlin Wall in 1989, the former member states of the Russian dominated Warschau Pact became gradually member of the NATO, countries like Czech Republic, Poland, Hungary, Lithuania, Estonia, Letonia, Slovakia, Slovenia, Romania and Bulgaria and even a country like Albania. Today NATO is going as far as the borders of Russia itself. These days an internal political struggle is even still going in Ukraina about which side it should choose, the European Union or Russia?

According to the common opinion, NATO had become less important after the end of the Cold War. Member States conceded the peace dividend and reduced their armed forces. But NATO has since been in a phase of transformation, in which new tasks such as combating terrorism, proliferation and anarchy on the agenda came. In the Prague Summit in 2002 and the Istanbul Summit in 2004 agreed on this. Article 5 has been declared to date once applied: after the attacks in New York and Washington on September 11, 2001. NATO, the United States shortly after the attacks supported by AWACS radar aircraft.

So it seems ironical but it was probably the Al Qaida attack on the Twin Towers in New York and the Pentagon in Washington that started the idea to rebuild the NATO as a global military alliance against terrorism in stead to be dedicated only to the defence of West Europe. Probably this is the reason why France more or less surprisingly decided to reintegrate the Nato command structure in 2009. In the time of the presidency of General de Gaulle France went away from NATO (1966) with the aim to develop its own independent nucleair capabilities, called Force de Frappe. However under the presidency of Sarkozy France started to reintegrate into NATO. The recent elected socialist president Hollande did not change this policy. On the contrary, he continues the French Africa policy of military interventions in Libya, Mali and recently in the Central African Republic. Great Britain coordinates its military operations worldwide already a long time with the U.S. It seems to me that in the next decades Europeans will continue to cooperate military with the U.S., whereby the U.S. will be the most powerfull and decisive military force.

The Transatlantic Trade and Investment Partnership

On the economic level we see the same development: more economic intergration between the USA and Europe. “On 14 June (2013), Member States gave the European Commission the green light to start trade and investment talks with the United States. The launch builds on the report of a High-Level Working Group on Jobs and Growth, published in February 2013.”

Inmediately after this report was published, USA and Europe issued a common statement: “We, the Leaders of the United States and the European Union, are pleased to announce that, based on recommendations from the U.S.-EU High Level Working Group on Jobs and Growth co-chaired by United States Trade Representative Kirk and European Trade Commissioner De Gucht, the United States and the European Union will each initiate the internal procedures necessary to launch negotiations on a Transatlantic Trade and Investment Partnership.

“The transatlantic economic relationship is already the world’s largest, accounting for half of global economic output and nearly one trillion dollars in goods and services trade, and supporting millions of jobs on both sides of the Atlantic. We are committed to making this relationship an even stronger driver of our prosperity. In that regard, we welcome the High Level Working Group’s recommendations on how we can expand further our transatlantic trade and investment partnership, promoting greater growth and supporting more jobs.

A high-standard Transatlantic Trade and Investment Partnership would advance trade and investment liberalization and address regulatory and other non-tariff barriers.”

To emphasize the importance of the negotiations of this Convention, the European Commission made in March 2013 for its member states an impact assesment on the future of the EU-US trade relations and an in-depth analysis on the potential effects of the EU-US Treaty.

”When negotiations are completed, this EU-US agreement would be the biggest bilateral trade deal ever negotiated – and it could add around 0.5% to the EU's annual economic output.

– The European Union and the United States have the largest bilateral trade relationship and enjoy the most integrated economic relationship in the world....

– Total US investment in the EU is three times higher than in all of Asia.

EU investment in the US is around eight times the amount of EU investment in India and China together.

– EU and US investments are the real driver of the transatlantic relationship, contributing to growth and jobs on both sides of the Atlantic. It is estimated that a third of the trade across the Atlantic actually consists of intra-company transfers.

– The transatlantic relationship also defines the shape of the global economy as a whole. Either the EU or the US is the largest trade and investment partner for almost all other countries in the global economy.

– The EU and the US economies account together for about half the entire world GDP and for nearly a third of world trade flows.”

That these negotiations are about a further integration between the USA and Europe we can read in the following statements of the European Commission: “Given the low average tariffs (under 3%), the key to unlocking this potential lies in the tackling of non-tariff barriers. These consist mainly of customs procedures and behind the border regulatory restrictions. The non-tariff barriers come from diverging regulatory systems (standards definitions notably), but also other non-tariff measures, such as those related to certain aspects of security or consumer protection.”

How deep the integration between Europe and the USA will be is indicated by the fact that the recent negotiations were prepared by a so called High Level Working Group of the Transatlantic Economic Council that published the above mentioned report in February this year. “The Transatlantic Economic Council was set up in 2006 guide and stimulate the work on transatlantic economic convergence. The TEC is currently the only EU-US high level forum in which economic issues can be discussed in a coherent and coordinated manner. It brings together a wide range of ongoing economic cooperation activities in issues of mutual interest and provides for a platform to give political guidance and direction to this work. At the same time, the TEC provides for a political forum for discussing strategic global economic questions. The TEC brings together those Members of the European Commission and US Cabinet Members who carry the political responsibility for closer economic ties. Three "advisory" groups have been set up to help guide the work of the TEC:

the Transatlantic Legislators' Dialogue

the Transatlantic Consumer Dialogue

the Transatlantic Business Dialogue

In addition, civil society at large is consulted on the TEC's objectives and debriefed after its annual meetings.”

The barriers that must be demolished in this new major agreement include different standards and laws that both continents have on for example public health, public procurement, copyright and the like. It is much more difficult to harmonize these kind of standards and laws because they are often the result of deep cultural traditions and beliefs. These are the laws that until now ban gene food from Europe, gives protection to data and arrange to keep out of European hands the shipping to U.S. ports. That is why France wanted to exclude from these negotiations all aspects related to culture. After a lot of talks the other 26 EU countries agreed to leave aside all what has to do with culture, but if the European Commission during the negotiations decides the matter has to be discussed with the U.S., it can present the question again to the EU member States. "Then we'll say no again, as now," French Trade Minister Bricq said.

But today there is more criticism. The heart of this criticism is a strong anti Europe attitude that in recent years is gaining political ground in all West European countries including France, the Netherlands, Germany and of course also Great Britain. It is a new wave of conservative nationalism that was thought to be politically dead after World War II. For many European workers things have gone too fast. They feel threatened by the cheap labor force coming from the new EU members, not only undermining their level of wages but also other social security services. At the same time the global competition makes disappear industrial activities to other parts of the world, especially to China. Add to this the Bank and Eurocrisis which had as a result that many West European countries had such huge debts, they had to cut their national budgets, that in turn created more unemployed. For the average wage earner in Western Europe, the future has never been as uncertain as today. And as we know such an uncertainty is the breeding ground for political experiments that could destabilize Europe

The above information is coming from public sources like Wikipedia, the website of the European Commission, the NATO websit and papers.

EUROPEAN BANKING UNION

In the night of 21 on 13 December, after fourteen hours of meeting of the European Council of the Ministers of Finance of the 27 European Union members, a compromise was reached on a European banking supervisor. Such a supervisor is needed because since 2008 many banks have been rescued by their governments. One of the main lessons of the credit crisis is that dozens of banks are to big to fail. The financial obligations of these banks are so significant that a bankruptcy threatens the entire financial system. If such a 'banking system' threatens to capsize, the government always must help. In recent years a number of governments (Spain and Ireland) have pumped so much money in their banks that they themselves have entered in payment problems. The European debt crisis was born.That is why the European governments now want to create a system for an orderly and timely remediation of unhealthy banks. This should prevent governments te be faced again with emergency situations in which they have no other choice than to put money into a bank. As a first step in June the European Government leaders decided that the European Central Bank (ECB) will be the European banking supervisor.

The principle agreement is that in the European Banking Union, the 200 European Banks with more than € 30 billion on their balance sheets (the so called 'systemic banks' that are to big to fail) and the banks receiving financial support from the state will be supervised by the European Central Bank ECB (Frankfurt, Germany). De non-euro countries Great Britain with London as a financial world centre, Sweden and the Czech Republic decided not to participate. All other non-euro countries are expected to participate in the EBC supervising system. All the involved banks together will guarantee each others savings and there will be a common procedure in case a bank is going to fall. The ultimate goal is that the taxpayers don't pay anymore for the rescue of a bank.

The € 30 billion limit is the result of a compromise between Germany and France. The latter wanted together with the European Parliament and the European Commission that all 6000 European banks would be controlled by the ECB. However, Germany did not want to put at risk the financial reserves of the about 1600 local and regional Landes- and Volksbanken. These smaller banks with their many financial reserves are influenced by local and regional authorities. It would be difficult for Federal Chancellor Agela Merkel to confront on gthis matter these local and regional politicians before elections in september 2013.

The main supervisor is thus the European Central Bank. This requires, however, the Convention for the ECB to be adjusted to make sure separation between the 'prudential supervision' on the health of the banks, and the "monetary control 'on the financial stability of the eurozone economy. The ECB in Frankfurt should hire a lot of new employees in order to perform the monitoring.

Another important measure is that at the moment the ECB indicates that the supervising system is working the so called European emergency fund EMS (European Stability Mechanism) can be authorised to give loans to banks without influencing the public debt of the country.

German Chancellor Angela Merkel called the agreement invaluable. "We will have a clear separation between the responsibilities for monetary policy and banking supervision." However, some critics are concerned that the political independence of the monitoring of the banks is not sufficiently guaranteed. They point to the need for proper procedures for this to ensure. The Cypriot Minister of Finance Vassos Shiarly Shiarly spoke of the agreement as a Christmas present for all of Europe. "According to him, the overall objective of the Bank agrees to restore confidence in the sector, he added.

25 MILLION JOBS NEEDED IN THE EUROPEAN UNION

ETUC protesters, Brussels February 2010

How should the economic crisis in Europe be addressed? The classical or conservative road is taken by German prime  minister Merkel.  She insists on a rigorous governmental financial policy with a strict budget control. The budget should not have a deficit bigger than 3%. Government debt should be limited to 60% of the GNP. These strict rules are signed by all EU Governments and laid down in EU legislation. Until now this policy has been fully supported by the Frech president Sakozy and countries like the Netherlands, Finland and Austria. Ireland, Portugal, Spain and Italy are working on it.

But there are also many opponents of this policy, mainly trade unions and leftist political parties. They believe that such a strict budget control destroys the economy resulting in massive unemployment and poverty. The European Trade Union Confederation repeatedly has stressed this point of view. The French socialist and presidential candidate Hollande supports this position of ETUC (the second round between the actual president Sarkozy and Hollande will be on May 6). If Hollande will be elected tensions on future European policy will increase again.

In the meantime the European Commission responded to this criticism  with the publication of a report called “Towards a job-rich recovery”. The report says that “Job creation is one of the EU’s most pressing concerns as it struggles to emerge from the economic crisis. Unemployment has risen to record highs – about 24.5 million people are unemployed, over 10% of the workforce.”

ETUC protesters, Brussels February 2012

The recommendations aim to provide jobseekers with more training and more job opportunities. Those in work would get help acquiring the skills they need to stay up-to-date with changing job requirements. Employers creating new jobs would also receive support. General recommendations include:

-   1. Encouraging job creation through support for businesses, entrepreneurs and self-employed persons, including decent and sustainable wages.

-   2. Targeting key industries where jobs are being generated: the green economy, health and social care sector, digital economy, etc.

-   3. Using existing EU programmes to fund job creation.

-   4. Reforming labour markets to meet future demand

-   5. Developing programmes to encourage lifelong learning and providing young people with training to advance their careers.

-   6. Investing in skills training, anticipating future job requirements removing obstacles to finding a job in another EU country.

-   7. Fine-tuning schemes – including the EURES jobs database – that match jobseekers with jobs across Europe.

-   8. Improving coordination of employment policies across Europe.

-   9. Increasing the involvement of employers' and workers' groups in employment policy making.

However, the ETUC stays very sceptical on these proposals as we can read in the press release of April 18. “The Commission’s proposals will do nothing to help create quality jobs, if the European Union and its member states continue to implement rigid fiscal austerity rules. On the contrary, cutting deficits in the midst of a recession will produce a deeper recession and even higher unemployment rates. Labour market policies cannot compensate for failing macro-economic policies. “

The ETUC believes even less in the proposals for labor market reforms like for example “flexicurity” : “Whilst the model has worked in some Nordic countries, in other parts of Europe it has resulted in increased insecurity for workers.” The ETUC asks for more positive proposals: “strengthening the involvement of social partners in the elaboration of macroeconomic and labour market policy, the role of decent wages in securing job quality and domestic demand, increasing minimum wages to help prevent growing in-work poverty, action to support youth employment and to tackle undeclared work. To replace the ‘governance of austerity’ with the ‘governance of growth and good jobs’, the ETUC urges all European policy makers to advance on these proposals.”

TO BE OR NOT TO BE, THAT IS THE QUESTION FOR EUROPE

 

As a result of the euro-crisis the Euro is more debated than ever before. This goes hand in hand with the debate of the limits of solidarity between the European countries and whether Europe should continue to develop itself from an economic union into a more political union, inevitably resulting in a transfer, to a certain extent, of national sovereignty to Brussels. As a result Euro-skepticism, already present since the beginning of the 21^st century as a consequence of the growing uncertainty in the world (the fundamentalist attack on New York, the never ending wars in Iraq and Afghanistan, the economic rise of superpower China followed by Brazil and India), is also rising . Since its foundation the European Union has never been under such severe financial and political stress.

People in the richer northern European countries are increasingly irritated by what is called ‘the economic laziness’ of people in the southern European countries such as Greece, Italy, Portugal and Spain. Ireland, being a northern European countries, is wisely not mentioned. Populist political leaders are therefore against more guarantees for the debts in these southern European countries. Solidarity has become a dirty word, not only regarding Europe but the whole world. Call it what you may: national selfishness, short-sighted nationalism or protectionism, it is clearly an instinctive return to the national tribe that has been one of the pivotal causes for so many European wars.

Europe is like the rest of the world, a continent of national tribes or even regional ones such as the Basques and the Catalans in Spain, the Corsicans in France, the North Italians, the Balkan minorities such as the Serbs, Croatians, Macedonians, Slovenians, Albanians and Bosnian Muslims in former Yugoslavia (who have all claimed their own states), the Flemish and the Walloons in Belgium and so many others.  

We believed that with the foundation of the European Union these national instincts would come to an end. Democracy and enlightened self-interest would slowly turn Europe in some sort of Super State, a kind of United States of Europe. By lack of a blueprint nobody knew how and when, but the believe was that European powers such as France, Germany and England would finally bury their hatchets. Europe would never again be the cradle of a world war like it had been twice in the past century.

This political dream now runs the risk to collapse under the weight of the euro-crisis. In The Netherlands, a government-party engaged itself to investigate whether a return to the Guilder would be an option. In Great Britain conservatives argue for a new referendum on Europe in the hope that a massive part of the population will vote against more Europe. In Finland a populist Euro-skeptic party gained the most votes in the last elections. In Germany there is a growing resistance against Europe calling for the return of the Deutsche Mark.

Under this growing pressure from populist political adventurists, Merkel and Sarkozy so far keep steadfastly seeking for a solution for the euro-crisis. Such a European solution should of course be democratic to prevent Europe losing its credibility. European countries will not escape from the need to transfer more sovereignty to Brussels. But this takes time. New institutions should be invented. The democratic legitimacy of the EU must be strengthened by giving more power to the European Parliament, economic and financial ties should be strengthened and more coordinated and perhaps European presidential elections should be held. And lastly but most importantly, a clear and consistent story should be told to all 500 million Europeans to take away all hesitations and doubts about the ‘European Project’. Trust and tranquility are the key-words.

For financial markets, however, this is all not going fast enough. They want and are in need of quick results in the form of cash and guarantees, if necessary without democracy, without solidarity and trust. Investors are very reluctant to give more time to Europe to strengthen the foundations of their European house.