A stress test for the Europeans

By offering greater control over national budgets and banks, the heads of EU institutions are taking up the federalist challenge launched by Germany. But this solution risks provoking resistance from some member states – without weakening the attacks from the markets.

Published on 27 June 2012 at 15:34

All throughout the European crisis – and suddenly it has been with us for years – Germany has displayed small-minded leadership plagued by political calculations, by ideological dogmatism, and by negativity on both right and left.

The recession has been long entrenched in the South, partly due to efforts to digest the last years of the uncontrolled boom, partly due to these bailouts based on second-class solidarity, and partly due to the policies of severe cuts (dangerously severe), which Berlin has been pushing with the broomstick of sweeping austerity.

The magic of austerity was meant to restore confidence in the eurozone but it has thrown the euro into an existential crisis. Still, times are changing.

Chancellor Angela Merkel, Finance minister Wolfgang Schäuble and the German central bank president, Jens Weidmann, have recently cooked up a new version of an old proposal.

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Reviving the euro project

Never in the past 20 years has Berlin spoken so loudly and clearly of political union. Yesterday Brussels picked up the gauntlet with an ambitious document that seeks to rebuild the European project.

It launched a proposal that, in view of the paralysis that has dangerously weakened the euro, tests the limits of the EU. In return, if clear steps towards that political union are given, it removes obstacles for Germany to begin to open its hand in some matters.

This path, though – nothing unusual when it comes to Europe – is strewn with unknowns.

Two unknowns stand out. One is the role that a France led by President François Hollande wishes to play - Paris isn’t going to play second violin to Germany. It also must fight the intergovernmental drift towards the federal model, which normally causes the French to break out in a rash.

The second unknown is how the great euro-crisis can be managed over the short term to avoid a catastrophic implosion.

Unanswered questions

In the proposal drawn up by the four presidents – the president of the Council, Herman Van Rompuy, of the Commission, José Manuel Barroso, of the ECB, Mario Draghi, and of the Eurogroup, Jean-Claude Juncker – both questions remain totally unanswered, and will begin to be resolved in Brussels starting on June 28 at another summit of heads of state and governments. The only expectation of the summit is that it will live up to past failures.

Whether the proposal moves forward or whether it remains a mere rhetorical exercise, without any precise timetable, will be decided by the leaders. At the same time, they must find a quick exit for countries that are already up to their necks in water.

With a vision inspired by the wishes of Germany, version 2.0 of the EU is to get a tighter grip on each country. According to the document, which sets this coming December as a key date, Brussels would not only set a ceiling of expenditure and public debt; if a member state wishes to issue debt securities above that ceiling, it should “be justified and receive” prior approval from the European institutions.

This decision would in fact imply a handover of the key to the strongbox to something resembling a “super ministry of finance” and lead ultimately to the creation of a Treasury.

This would constitute a triumph for Berlin’s idea of moving towards a fiscal union as soon as possible. What Germany would put on the table as a counter-offer would be something considered taboo until now: accepting some degree of debt pooling – in stages – in search of the usual formula of European compromise.

"In a medium term perspective, the issuance of common debt could be explored as an element of such a fiscal union and subject to progress on fiscal integration,” adds the proposal, with a cautious nod toward eurobonds. In addition, the proposal contains moves towards a banking union: a common supervisory authority, the ECB, with a common guarantee fund and a bank liquidity fund (deposit insurance).

No clear timetable

Those best placed to translate the European gobbledygook are the markets. “These are the first steps towards a political and fiscal union, which are essential to get Merkel to accept something like eurobonds”, explain sources in the financial world. The same sources also point to loopholes that investors can seize in order to keep betting against the euro:

There is no clear timetable. Nor is the proposal specific enough, which suggests that deep disagreements persist. The good news is that Europe is moving forward. The trouble is that they still keep leaving everything for later: there are elections in Germany in autumn, and despite the severity of the crisis, Berlin has amply demonstrated the importance of electoral calculations.

The summit, in short, is focussing minds. This time the ball is in François Hollande’s court; he has given new life to the European project but needs to clarify how far he wants to go. Some will raise their eyebrows. Less than 48 hours before the summit, Chancellor Angela Merkel released a terse statement. “We will not fully share debts, so long as I live.”

Eurozone crisis

Van Rompuy’s soft EU plan

European Council President Herman Van Rompuy’s highly anticipated new plan to secure the future of the eurozone is “less ambitious” and “significantly scaled back” compared to previous versions, The Financial Times reports. The plan, which effectively calls for eurozone bonds and the eventual establishment of a central EU treasury, will be debated at the June 28/29 summit, the London business daily reports. The draft:

... proposed giving EU institutions the power to rewrite national budgets and urged eurozone leaders to use their €500bn rescue fund to recapitalise European banks. While earlier drafts of the report also contained detailed short-term measures that could be taken to address the current market upheaval, the draft published by Mr Van Rompuy on the website of the European Council contains far fewer details and suggests no timetable for implementation.

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