OPINION:The European Council should be recalled right after Christmas to work on strategy for reviving the entire euro zone, writes JOHN BRUTON
THE DECEMBER summit of the European Union agreed to introduce an amendment to the EU treaties to create a permanent bailout fund for euro zone member states that will be activated “if indispensable to the stability of the euro area as a whole”.
This is quite a high bar to cross. Suppose there is a financial crisis affecting the majority of countries in the euro zone, but one large country has insulated itself against this by building up large savings and preventing its banks from lending more than a very conservative amount. Would the position of that country be legally sufficient to prevent the bailout fund being used, because the crisis was not affecting the euro area “as a whole”?
It also appears that a country suffering what economists call an asymmetric shock, such as a collapse in a market on which it is uniquely dependent, would not qualify for help because the shock does not affect the area “as a whole”.
This wording may mean that countries will prefer to seek help from the IMF, because the IMF will look at the situation of individual countries and will not be required to satisfy itself that the euro area as a whole is at risk.
It would appear that this announcement has not calmed the markets. If so, this is because it is a one-sided and incomplete solution. It deals with helping countries to avoid collapse, but it does so by enabling them to add further to their debts by borrowing on the strength of the credit of other member states who have a better credit rating.
What it does not do is provide a vision of how economic growth will be restored, so that a flow of funds will be created to repay the debts.
The EU heads of government have produced tonnes of paper on this topic in the past, notably under the so-called Lisbon strategy. These papers have been full of pieties about “reform” and “flexibility”, but have lacked specifics and above all rigorous follow- up. They have added to the ignored recommendations in OECD reports.
I always had reservations about the Lisbon process because it lent the good name of the EU to systematic evasion of responsibility in matters where the EU actually had no power to act under the treaties, and thus no responsibility for failures.
My own view is that the European Council, which is a body consisting of 27 part-timers that has concentrated ever more power in its hands, is not an organisation whose present working methods make it capable of the sort of rigorous, sustained and self-critical thought that is needed to restore economic growth at this critical moment in history. Its part-time character explains why the European Council is always running after problems, rather than getting ahead of them.
Twenty-seven heads of government, all of whom are already fully employed managing their own countries, can only turn to EU affairs in their spare time, which may consist of sitting on a flight on the way to the meeting in Brussels. The European Council does have a small secretariat and a full-time chairman, but that is not enough to make up for the fact that the people who make the actual decisions are all part-time Europeans. Arguably, the European Commission is available to help, but its role is sidelined by its institutional rivalry with the council.
We are facing more than a financial crisis, we are facing a crisis of the welfare state in ageing societies. We are facing a crisis of globalisation, a crisis of nation states and, potentially, even a crisis of the efficacy of European democracy. These subjects need to be tackled together in a sustained way, with a real sense of urgency. Decisions need to be taken now that comprehensively point the way forward for Europe for the next 10 years.
Leaders need to sit together until they have reached a full mutual understanding on all that needs to be done – the whole job, not just bits of it. Only something on that scale will give markets durable confidence.
For example, they need to sketch out the sort of banking system we need, one in which the collapse of one does not endanger all. They need to create a revenue stream to recapitalise the ECB and a method of helping countries affected by asymmetric shocks.
They need to show they are thinking beyond the present crisis and have a view about where the EU will be politically and economically 10 years from now, which may involve making it more democratic.
In all the fuss about whether creating a permanent EU bailout fund required a treaty amendment, little note has been taken of the fact that the German courts’ objection to giving the EU more powers was not one of principle, but was based on a concern that the EU as it stands is not democratic enough.
Europeans are looking for leadership. They want a sense that someone is in charge. I believe that the members of the European Council should be recalled in the days immediately after Christmas and before the markets fully get going again in the new year, to work together for a week or more with all the relevant members of the European Commission on a 10-year strategy for political and economic reform to facilitate the economic revival of the entire euro zone.
On the narrower issue of bank debts, the conclusions of the December EU summit are also one-sided and incomplete. For example, the Irish banks owe €113 billion to German banks, €107 billion to British banks and a large amount to Belgian banks. If mistakes were made in borrowing this money by the Irish banks, mistakes were made in lending it too. The lending banks were regulated in their home countries, not in Ireland.
While the Irish banks were regulated by Irish authorities which did not do their jobs properly, Irish taxpayers were not parties either to the lending decisions or the borrowing decisions, yet they are taking on the full responsibility of ensuring that the loans are repaid. They are getting new loans to help them do this, but they will have to repay those loans in full. There is a lack of symmetry here, to use a mild term.
Of course something along these lines was needed back in 2008 to prevent the problems of the Irish banks infecting the German, Belgian and British banks too. In protecting those banks, one was protecting German, Belgian and British taxpayers. So surely this is a European responsibility as well as an exclusively Irish one?
This is the sort of burden-sharing that it would take a lot of time to work out fairly and proportionately – time that the busy part-time Europeans on the European Council simply do not allow themselves to take.
John Bruton, a former taoiseach and EU ambassador to Washington, is currently chairman of IFSC Ireland, which promotes Ireland’s financial services sector abroad