Financial crisis

THE EUROPEAN ECONOMIC AND MONETARY UNION AFTER THE CRISIS: LESSONS LEARNED

Posted on by Susanna Cafaro

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My latest book is out and, yes, this is the title…. and, yes, there are some lessons we have learned, even if some of us wouldn’t have waited so long… they were clear enough since the beginning.

The Economic and Monetary Union was an unfinished project already in the Maastricht Treaty. This was the topic of my first book!

Anyway, now, the evidence is there for everybody, impossible to deny.

The simple, plain truth is that we have in the Eurozone a monetary union (or, better, it is a monetary union), but we have nowhere an economic union. Yes, we have a customs union, a common market, and some important side policies, as common regulations on consumers and environment protection (which is great), but we don’t have any European fiscal policy, just a coordination of national ones. And we have a European tiny budget not up to the task of any reallocation or redistribution of resources, almost no tax harmonization, no European welfare and even less hope to save a State risking default. Every financial intervention to rescue the states in crisis was an attempt to cope with this lack of competence and tools. Sometimes it worked, but, even then, it was too little too late.

In my new book, I try to describe – as clearly as possible – the Maastricht compromise: a monetary union without fiscal union, somehow replaced by a set of budget constraints intended to keep the budgets under control but, still, fully national. Then, I analyze the rules and regulations adopted after 2010 to face the crisis and the evolution of the role of the ECB. Finally, I explore the possible solutions: the reforms which would make the Union (or the Eurozone) a fiscal union. Some of them have been suggested by institutions, experts, and academicians, some are just my attempts to connect the dots…

This is the flyer of the book, available, for now, only in Italian

locandina libro

And this is the English translation of the TOC, I hope there will be soon an English edition:

THE EUROPEAN ECONOMIC AND MONETARY UNION AFTER THE CRISIS: LESSONS LEARNED

INTRODUCTION

The crisis of the law and the law of the crisis

Chapter I: THE UNFINISHED MONETARY UNION

  1. At the origins of the Maastricht agreements.
  2. The dichotomy of models for economic and monetary policies.
  3. The regulatory model of economic policy: reasons and limits:
  4. a) the coordination of economic policies;
  5. b) the code of conduct;
  6. c) the principle of “no bail out”.
  7. The institutional model of monetary policy:
  8. a) the reasons for monetary unification;
  9. b) the European Central Bank;
  10. c) independence and a strict mandate.

 

Chapter II: THE CRISIS AND THE EMERGENCY SOLUTIONS

  1. The global financial crisis and its European edition.
  2. The heterogeneity of policy instruments.
  3. The verticalization of politics and the intergovernmental management of the crisis.
  4. The impact on the democratic principles of the Union and of the Member States.

 

Chapter III: THE EVOLUTION OF THE ROLE OF THE ECB

  1. The European Union is not an optimal currency area
  2. The ECB’s intervention in the crisis.
  3. The controversial legitimacy of its tools and the intervention of the EU Court of Justice.
  4. The role of a central bank: technocracy vs democracy

 

Chapter IV: THE MISSING TILE: THE EXTERNAL DIMENSION OF THE MONETARY UNION

  1. Europe’s role in global economic governance;
  2. The European Union and the euro area in the Bretton Woods institutions;
  3. The European participation in the groups of states;
  4. Who represents Europe?

Chapter V: REFORMS ON THE WAY, REFORMS NEEDED

  1. Two paths for reform: Rethinking the regulatory model of economic policy and making the Eurozone an optimal currency area;
  2. A Treasury and a Minister in charge for it;
  3. A European budget;
  4. Real own resources;
  5. Adjustment mechanisms for an optimal currency area:
  6. a) taxation;
  7. b) welfare;
  8. c) free movement of people

Chapter VI: THE DIFFICULT RELATIONSHIP BETWEEN THE UNION AND THE EURO AREA

  1. common and conflicting interests and goals;
  2. The unity of the institutional framework and its limits;
  3. How to stay together while respecting different views
  4. Possible scenarios after the Brexit

CONCLUSIONS

What if an economic union is also a good reason for a supranational democracy?

APPENDIX

A proposal: the European Agency for sustainable growth.

To Brexit or Not To Brexit

Posted on by Susanna Cafaro

The nowadays famous article 50 of the EU Treaty didn’t exist before the 2009 Lisbon reform.

The founding fathers’ vision of an ever closer union didn’t contemplate a way back … or a way out. The marriage had to be for life. But then, after the big enlargments in 2004 and 2007, some practical minds decided to foresee the possibility of a divorce.

And here we are, with a divorce we didn’t expect to see.
As a British colleague made me notice, the 48% of the voters who expressed the will to remain are not parties in this divorce process, they are the victims: the children.

And the divorce is not formalized yet and this doesn’t seem to happen anytime soon.

Those who say that enacting art.50 is a competence of the British parliament are certainly right, as the  parliament ratified and enforced the European treaties in the British legal order and cannot be bypassed by the goverment, repealing these acts. By the way, both the parliament and the government  look reluctant as they didn’t really want this outcome.

Those who say that the will of the citizens cannot be ignored are right too. It is absolutely reasonable that such an important decision should require a larger majority, but there wasn’t any rule about it and a majority won.

Both the fields -the Brexit supporters and the remain supporters – have solid arguments on their side.

But there isn’t only the British membership of the European Union at stake. That would be too simple an assumption.

The remain voters are not necessarily supporters of this Union, which has its own undeniable flaws. Most of them stand for an idea: being united with our  diversities, being  stronger together, being peaceful as a family which solves its own divergences discussing at a common table.
Most of them know that the Union is a work in progress which can be improved only from the inside. And they know there is much to gain from the EU’s open borders and European citizenships’ rights if you are willing to move, explore and challenge yourself and your national limiting beliefs. They reasonably don’t want to lose these rights.

The Brexit  voters come from a range of different experiences:

  • Some of them  have suffered and still suffer austerity;
  • Some identify Europe with a suffocating bureaucracy and  a political failure, which is how Europe as been sold to British people for decades: as a useful scapegoat.
  • Some expressed a feeling of antipolitics, they would probably have rejected any political establishment and just prove the  crisis of democracy we all see around us.
  • Then there are the champions of national sovereignty, and all sorts of nationalism.
    This feeling has been fueled by the huge migrations from the southern shore of the Mediterranean. It is a real emergency and nationalist attitudes won’t help to find a solution whatsoever. But still we can understand where this feeling comes from: fear. Fear of invasion, fear of sharing already meager work opportunities and national resources.
  • Finally, some think that a free rider state will thrive on the global market, possibly a more and more deregulated global market. This is a completely different attitude, but still anti-EU. And more than the other views it looks anti-historical as the world goes in the opposite direction: solving problems which become more and more global will require more integration, not less. Even little tax heavens are (finally!) under threat of extinction.

    I am totally empathetic with the “remain” voters and still, while I wish the best outcome for them, I wonder if a Brexit is politically avoidable.

    However the dilemma will be solved, some lessons need to be driven:

    ⁃       austerity has not been the solution to the financial crisis. In some countries it even worsened the economic situation. In many states unemployment is still at record level. The price was especially paid by the weaker part of the population, poverty and inequality provided a good soil for populism and nationalism. Moreover, it has been errouneously attributed to Europe, while it was a national solution (as I already explained).
    ⁃       There is a crisis of democracy and a rise of antipolitics almost everywhere. I have my theory about that: the nation states are not anymore the right institutional framework for tackling most of our problems, we need to go more local and more global at the same time. But – be right or wrong my explanation – we need a serious reflection on our contemporary democracies.
    ⁃       Finally, we need to work for a better Europe, we owe this to those who voted against it as to those who voted in favour. I have written about this and for sure I will write more extensively in the future. I’ve already been too long!

    For those who arrived to the end of my reflections: these are challenges not just for polical elites, not just for governments and states, but for all of us. And this is a call of duty for new brave political leaders at all levels.

Why Europe is Losing its Credibility over the Greek Crisis

Posted on by Susanna Cafaro

I will write now something quite subversive: the EU is a reasonably democratic entity.

It is the only international organisation to have a legislative power stemming directly from citizens, with its two-chambers system: the Parliament directly representative of its citizens and the Council, directly representative of governments which are too – at national level – directly representative of their citizens. Its powers are conferred by treaties duly ratified by member states’ parliaments or even through referendum. The legitimacy of EU acts is guaranteed by a judiciary system, composed by national courts and by European judges.

But, not surprisingly, the perceived level of democracy of the European system is now lower than ever.

There is a simple reason for that, which unfortunately is not explained and even less understood by media (and so, of course, by citizens): economic policy is NOT an European competence. And economic policy is what dominates the political debate nowadays.

The compromise agreed on in the Maastricht treaty – never changed since- is that monetary policy is an exclusive competence of the Union, while economic policy is a competence of the member states. Of course a single monetary policy cannot survive with 19 different economic policies. That’s why the Treaty on the Functioning of European Union provides for a coordination of national economic policies – now reinforced through the so called “European semester” and why there are a number of prohibitions aimed at avoiding excessive divergences among national economies (the so-called Stability Pact).

The coordination of national economic policies is a mere intergovernmental procedure, agreed among finance ministers and heads of state and government, without any judiciary control and – even less- democratic guarantees.

Why monetary policy was transferred to the European level, while economic policy remained national? Because budgets remained national.

The EU has a tiny budget (less than 1% of the EU GDP) which cannot allow any deep intervention in the management of crises or the fostering of growth. So, the EU can just recommend such measures to member states.

On top of that, states are not equal.

Not only they differ significantly in size and GDP, but they contribute differently to the EU budget (we have already written about that). And they contribute  differently to the interventions which are outside the EU legal framework, as mostly happened in the management of the Greek crisis.

One of the most dramatic consequences of this crisis – whose extent has yet to be measured – is that many European citizens believe that what happened in the management of the Greek crisis is the normal way of functioning of the EU.

It is not.

I can tell you that Europe is better that that and can do (has done) better than that. It has provided over the years a significant increase of the rights of citizens in many core areas such as consumers’ rights, environmental rights, safety of products, right to move, work, study or be healed in other EU countries and so on.

Pity that nobody explains that, nobody writes about it, nobody takes a stance for minimum democratic standards in the management of coordinated economic policies.

The price Europe is going to pay for the intergovernmental (poor) management of the Greek crisis is a loss of credibility in all the other fields of intervention. Trust will take long years to be (hopefully) restored.

I hope that our politicians and journalists are aware of that.

“With great power comes great responsibility”: the Case of ECB’s Accountability

Posted on by Susanna Cafaro

“With great power comes great responsibility”.You know where this quote comes from 🙂

I think it perfectly applies to the ECB.

When I started to study it (OMG, about 20 years ago!), I found out that its almost exclusive competence in managing the Eurozone monetary policy and its well-guaranteed independence were mirrored by a panoply of accountability tools.

The democratic legitimacy of the ECB is grounded on the respect of the rule of law and specifically on the fact that (i) it has been established by a treaty ratified by all member states; (ii) its Executive Board is appointed by the European Council, acting by a qualified majority on a recommendation from the Council after it has consulted the European Parliament; (iii) its decisional bodies act in accordance with decision-making procedures codified in the Treaties and in the Statute annexed thereto.

This legitimacy ground is complemented by the accountability of the ECB towards the European Parliament. The ECB President regularly reports on the bank’s monetary policy and other duties during his quarterly hearings before the European Parliament’s Committee on Economic and Monetary Affairs. The content of the “monetary dialogue” has evolved over time and now covers all aspects of economic and monetary policy. In addition, the President of the ECB and the other members of the Executive Board may be heard by the competent Committees of the European Parliament on  own initiative or at the request of these; MEPs may address written questions to the bank and ECB’s compulsory replies are published in the Official Journal of the EU and on the bank’s website.

The aim of these exchanges between the Parliament and the ECB is monitoring its compliance with the objective of price stability: in all documents and interviews the ECB is required to justify its work and does it by making known its monetary policy strategy in detail. The definition of price stability rests on ECB’s competence and can be found in two important decisions, adopted in 1998 and 2000.

As part of the ECB’s reporting obligations, the ECB publishes quarterly reports, weekly financial statements, and a Monthly Bulletin plus a wide range of other task-related publications. It also addresses an Annual Report to the Council and Parliament. This document is presented by the President of the ECB to the Parliament’s plenary which –few months after – adopts a resolution after a general debate. This exercise is far from being a mere formality: in 2005 the Bank’s annual report was rejected (even if this vote didn’t have any binding effect). The Members of the Governing Council deliver numerous speeches to address relevant topics of concern for the public and the ECB President and Vice-President provide an in-depth explanation of the ECB’s assessment of the economic situation and the rationale for its monetary policy decisions during regular press conferences – monthly- after each meeting of the ECB’s Governing Council.

All this was already in place before the financial crisis.

Only on December 18th 2014, the European Central Bank communicated its intention to start publishing summary minutes of its policy deliberations beginning four weeks after its next meeting, as a key part of its communications strategies. For sure it is a step forward in terms of the institution’s transparency and accountability.

A few days ago somebody made me notice that if “with great power comes great responsibility”, the contrary is also true: with great responsibility comes great power.

Once again, the ECB is a perfect example. During the financial crisis and especially after the Greek crisis exploded, the ECB took on more and more responsibility, stretching its mandate to guarantee the price stability and – ultimately – committing itself to save the very existence of the euro.

Draghi’s London speech (July 26, 2012), was a turning point:

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Starting from then, new unconventional monetary instruments were created – the Outright Monetary Transactions, the Quantitative Easing – and the communication strategy became one of them. Now, in front of this (undeniable) increased power, one legitimately asks if the accountability tools foreseen by the Treaties are still adequate. Maybe it is time to introduce a new one: a monetary dialogue with a Parliament (or a Parliament configuration) specific to the Euro area.

The proposal of signing a specific Euro Treaty for the Eurozone economic governance -establishing an executive body responsible in front of an Euro-Parliament – has been advanced by three political manifestos appeared in 2013 and 2014. The first was presented by the German Glienicker Gruppe, the other two were French: the proposal by the Groupe Eiffel and the Manifeste pour une Union Politique de l’Euro. Such a Parliament would add a new dimension in holding the ECB accountable and could contribute significantly to the democratization of the Euro-governance. In the meantime, it would be possible to establish in the European Parliament a  subcommittee to the ECON Committee composed of MEPs from the Eurozone, to prepare the ECON Committee’s work on legislative proposals and overseeing activities specific to the Eurozone, including the monetary dialogue with the ECB.

This last proposal could be easily implemented without any treaty change, not amending the European Parliament’s Rules of Procedure (where couldn’t be allowed any differential status among MEPs), but with informal agreements among political groups.

A Case-Study: The Greek Crisis.

Posted on by Susanna Cafaro

Much has been written about the Greek crisis.

Below, some thoughts on this story seen through the glasses of democratic standards and  -specifically-  through the two lenses of the legitimacy and accountability (3D democracy vision)

The financial crisis, in Greece more than elsewhere, has highlighted the erosion of state sovereignty in key areas of typical citizen-state relationships such as the welfare system and the labor market, in which the need for choices perceived as legitimate – but also accountable – is crucial. Some fundamental rights have been touched, some less fundamental ones have been significantly reduced.

Decisions had been taken by top political bodies (Eurogroup, European Council)  and technocratic institutions (European Commissions, ECB, IMF). Let’s put aside for a moment the good intentions as  restoring sound public finances: the simple truth is that parliaments have been ignored. The Greek Parliament – of course- but also the European Parliament.

The issue regards also the method and not just the matter. The solution to the issue itself -austerity or not austerity- is strongly influenced by the method used as some institutions are more easily driven to deliver rigor than growth. Moreover, they lack the necessary legitimacy and accountability to deal with individuals’ rights.

Conditions were attached to the Greek loan facility – a package of bilateral loans by Euro area member States complemented by an IMF loan. Two intergovernmental agreements were signed and entrusted the Commission to manage the package under strict conditionality. A loan facility agreement was then signed by the Commission on behalf of the Euro area member States and by Greece. Next, the economic conditions were agreed on in a series of Memoranda.

Their respect of the rule of law as well as their compliance to the EU Treaty and the EU Charter of Fundamental Rights couldn’t be assessed by the European Court of justice because of the widespread use of atypical legal acts as well as of their intergovernmental nature.

Why? Why the Eurogroup and the German Government had such a strong voice and the Court of Justice had not? Why the Parliaments were not in the debate? Why, even now, with a clear Greek vote legitimizing a different majority in the Parliament and a different vision we still see the old movie going on again and again?

Just follow the money…

Money is not from the EU, money comes from some European governments and from the International Monetary Fund . With some help from the ECB.

The EU budget is too tiny to cope with the crises: less than 1% of EU GDP. Moreover, the 28 EU countries were not all willing to contribute, so the Eurozone States had to manage the crisis on their own. They did it through intergovernmental agreements (as creating the ESM) and according bilateral loans. The IMF – traditionally leaded by an European-  was very sensitive to the problem (even too much, according to the BRICS).

And here comes the Troika…..

The Troika is nothing more than a committee of creditors, entrusted with the management of the loans. Of course it hasn’t any accountability. Its doubtful legitimacy and lack in transparency have been clearly pointed out by the European Parliament.

If we want to assess its accountability, we have to split it into its three components:

The European Commission is an accountable institution, it has to report to the EP, answer to MEPs’ written questions and could even be dismissed by the Parliament with a majority vote. The ECB too is subject to a monetary dialogue with the EP, even if less incisive than the dialogue the Commission has with the EP. Unfortunately, having them acting together confuses responsibilities and makes harder to assess the role of each institution for the decisions taken.

And then we have the IMF.

There is a story I want to tell you about the IMF in the Greek crisis:

In a IMF Country Report about Greece (June 2013) we can read that due to the process of fiscal consolidation  the country paid a too high a price in terms of social and economic losses: “Market confidence was not restored, the banking system lost 30 percent of its deposits, and the economy encountered a much deeper- than-expected recession with exceptionally high unemployment. Public debt remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession”.  The reports makes clear there were successes as well as “[N]otable failures” in the program.

This is somehow a progress in the culture of the institution: analyzing critically the consequences of their choices. For sure the establishment of an Independent Evaluation Office in 2001 contributed to such improvement. Nonetheless, who is politically responsible if a choice is reported wrong? are there any consequences? The answers are: 1) Nobody, 2) No.
A gap in accountability is more than evident.

There is much to say about the tangle of many potential conflicts of interests inside the Executive Board of the Fund and in the IMF itself that we cannot unravel all of them here (but we’ve done it elsewhere!).

What makes the Greek crisis an interesting case study -unfortunately for the Greek people- is that it makes clear that democracy matters. Beyond matters of principle.

What is also really sad (at least for me) is that Europe is losing its credibility over the Greek crisis.