European Parliament wants possibility “to be studied”. The idea of a European loan among the plethora of anti-crisis measures was discussed briefly at last week's European Parliament plenary session and discussed at greater length in other sessions. This column said that such an initiative would be premature (EUROPE 9860) because it presupposed a strengthening of the Economic and Monetary Union's economic limb, which cannot be envisaged in the immediate future. The debate has broadened out, which is positive, because this is an essential subject in the context of the economic recovery and improving eurozone management instruments.
By voting for the Ferreira report on the economic recovery, Parliament adopted an amendment that calls for “studying the possibility of a major European loan jointly guaranteed by member states”. The wording is cautiously composed (studying the possibility) and there were many misgivings: 350 votes for, 317 against. The initiative came from Bernard Lehideux from the Liberal and European Democracy Group and is aimed at sending out a common signal in response to the crisis. It would provide guarantees against the risks of eurozone implosion by helping countries like Greece and Ireland benefit from low interest rates rather than the high rates on which they are obliged to take out loans. During the debate, Pervenche Berès, the Socialist president of the EP's economic and financial committee, asked for the discussion on Eurobonds to be unblocked.
What Jacques Delors really said and outlined. Those who spoke in favour of the loan pointed out that Jacques Delors had launched the idea in 1993 but they forgot to mention that in 1997 he asked for a Monetary Coordination Pact to be created at the same time as the Stability Pact. This pact would not give birth to European economic governance but would make budgetary policy coordination obligatory. Mr Delors underlined these facts at the beginning of the year during the tenth anniversary of the Euro where he also explained that “getting a finance minister to agree that other ministers discuss his internal policy on the basis of a Commission report is not achieved overnight…” (See this column in EUROPE 9816). Mr Delors proposed that while waiting for the supplementary pact, the EU should have an annual lending facility of up to €8bn to fund common infrastructure projects and affirmed the customary rule that when a collective project benefits future generations, it is normal to share the repayment costs between these generations and the generation carrying out the project. On the other hand, Mr Delors indicated that it was unimaginable that the EU got into debt to cover the budgetary deficits of a member state until budgetary policies were effectively jointly managed in a more genuine and robust fashion than is currently the case today. For the time being, EMU is continuing to mainly walk along on one leg.
José Manuel Barroso's line was based on the same consideration when he ruled out the possibility of Eurobonds. Perhaps one day when the Lisbon Treaty creates the possibilities…The president of the Eurogroup Jean-Claude Juncker did not exclude the future creation of a European agency capable of issuing Eurobonds and which would also be able to manage part of existing national debts. It would obtain more advantageous rates on the markets than national rates for heavily in-debt countries, which would encourage the latter to sell off bonds in national debt. The European Investment Ban (EIB) considers that it would be able to manage Community loans without having to set up a new body. We can see that possibilities are being studied but it's not for now, it's for the future.
Positive reactions of principle but…There were many reactions to the vote by the European Parliament. In Jean Quatremer's blog, he provided a report that created a real debate (not just Franco-French but with participants from other nationalities) between those for and against. For clarity's sake I will divide the different arguments up.
Finally, a positive initiative from Europe! This is the main reaction from those arguing “for” and I will quote the following: “Finally, a strong European-level idea that breaks with the never ending refrain of market sirens! This could be the first step towards a European economic policy that is obviously limited to the eurozone and is a really promising beginning”.
“A very good signal from the European Parliament. It again provides hope and not before time”.
“A very good initiative. Let's hope it's carried out”.
“A European loan would usefully complete state by state borrowing capacities, in a similar way to that in the US”.
There was, however, one critical comment: “We should, nonetheless, ask why member states are unable to directly finance themselves from the Central Bank. The Maastricht Treaty prevents it but this is not a valid reason”.
Reasons behind misgivings. Reservations were explained quite broadly and ranged from the most general (on questions of principle) to those more explicit and detailed. It appeared, in reading, that those who spoke were both competent and informed but neither economists nor professional commentators. A selection of the contributions published is as follows:
“It is very doubtful that more state indebtedness to the banks is the obvious solution to a crisis of solvency”. This would result in “a few more million on the dole”.
“Still borrowing - always borrowing. In the middle of a crisis I can't see the local authorities or state tightening their belts. Taxes will go up to pay them back and it won't be any good moaning about it”.
After two general considerations, arguments and conditions become clearer:
“Yes to solidarity, but yes to fairness too. Although everyone wants more solidarity between EU member states, we all need to agree and, above all, respect certain rules ensuring that this solidarity is not borne unfairly”.
“In what capacity and on what basis should the results of national policies be jointly managed? I admit that I find the idea of assuming part of the responsibility for Italian or Greek debt, which results from a notorious structural incapacity to introduce much needed reforms, a bit much. This at least applies to Greece, despite 25 years of benefiting from very big financial transfers.”
“It should be quite clear that a budgetary and financial solidarity mechanism between EU member states should be counterbalanced by supervision of states that exceed the limits…This is likely to be the real problem”.
“If it involved funding projects out of the Community budget, I would understand. But we are talking about the amounts and balances of national budgets decided by each state. It's a moral issue. Those at the bottom of the class will be able to borrow more and manage less well by benefiting from European interest rates, which will bring down the zone's 'rating' and increase European interest rates…The main public finance guidelines should be imperatives decided at an EU level within a Community process. But I am not sure that many Europeans would accept the level of public spending and budgetary balance (with all the implications for public policies) to be decided at Community level”.
Spending must be discussed in common. We can see that the two last reactions quoted very explicitly express a fundamental demand: common responsibility for budgetary deficits is incompatible with management that is totally autonomous from spending. Jacques Delors was less demanding and requested that member states' budgetary polices be subject to close coordination in a pact that would connect up member states. This need does not only respond to the concern of “paying for the others” but above all represents a necessary condition to safeguarding the euro's value and stability. If certain standards are not respected, the euro will lose value and interest rates for public borrowing will rise for everyone, including the member states that have successfully managed their spending.
Will the eurozone's implosion therefore become unavoidable? What will the least solid member states do without protection of the euro? This is why this column stated last week that Eurobonds are for the time being, unthinkable. The European Parliament should finish making its decisions on the clarification of the link between the possibility of the EU taking on debt as it stands and enhancing the “economic limb” of the eurozone. The two operations cannot be separated.
European solidarity exists and can still be further strengthened. I would like to conclude by pointing out that last week this column had already underlined the fact that Community solidarity already plays an essential role through common policies, regional funding, other support instruments, EIB financing etc. This solidarity can be further developed and strengthened through projects and reforms that can be studied and with the entry into force of the Lisbon Treaty. The least well off member states have neither been abandoned nor told to get by as best they can. But those who prefer to have less close links, weaker institutions and purely intergovernmental procedures are obviously free to decide for themselves.
(F.R./transl.rh)