European attempts to put into practice a root-and-branch reform of the financial world (see yesterday's column) come alongside changes in other areas as a result of the world financial and economic crisis that may impact on the way the European Union operates. Some are essentially technical, like the European Central Bank (ECB) plans and the pros and cons of eurobonds; others have broader significance, like the debate on the importance of budget stability and discussion about how economic growth should be measured.
The idea of eurobonds. The idea of setting up eurobonds, EU government-backed loans, is controversial because of how they would impact on the stability of the euro and the implications in terms of moving in the direction of collective liability for countries' budget deficits. The idea behind them is to overcome the problems facing various countries in the eurozone in selling their government gilts and bonds, and the interest rate problems these generate. Speaking at a European Parliament committee recently, Jean-Claude Juncker said the time will come when Economic and Monetary Union will have eurobonds because people will understand that they are required; but he admitted that at the moment, whenever he mentions the subject, “he gets shot down in flames”. The idea is rejected in Germany because it would create European responsibility for the public debt of the individual member states without being able to manage their debt collectively.
There is a clear connection between eurobonds and the compulsory coordination of budget policies: the eurozone cannot become liable for the public debt of its member countries while each country remains the master of its own budget policy. According to Angela Merkel, a balanced budget should be a constitutional obligation, in harmony with the idea of social market economies where public authorities are the “guardian of the rules”. Merkel believes the new global financial system should set limits on the degree to which countries can become indebted; and any deficit beyond this level would have to be temporary and be accompanied by compulsory programmes for returning to a balanced budget. The EU should make the first step here by introducing in Europe what can later be extended to become a Global Economic Management and Surveillance Charter. In the meantime, she thinks that eurobonds and joint liability for deficits are not possible.
It has been pointed out that income tax revenue in some member states is barely enough to pay the interest on public borrowing. Some circles recommend devaluing the currency, which would increase the cost of energy and raw materials imports; the apparently positive impact would not last long and the repayment of the public debt in hard currency would become even more costly with each devaluation.
The ECB is planning ahead… Should we conclude from the above that no extra EU moves are possible at the moment? Not at all. The financial world predicts that the European Central Bank is preparing to intervene on the capital markets. By law, the ECB is not allowed to buy government gilts, bonds and the like and it is therefore reported to be considering buying fixed rate private bonds of up to €125 billion over six months. This is expected to be announced on 7 May 2009, along with a list of securities (technical fine-tuning of the list is currently underway); national central banks would be given the task of purchasing the bonds. Reacting to leaks to the press, Jean-Claude Trichet said people should not expect anything spectacular because the bulk of the task was in the hands of private banks. The ECB might stimulate bank lending and help bring short and medium-term interest rates back to a reasonable level, he said. At the same time, the ECB is expected to announce at its main interest rate will be cut to 1% but a zero rate has been ruled out.
What the EIB is up to. Meanwhile, the European Commission is finalising its draft legislation on hedge funds and private equity, and Philippe Maystadt, President of the European Investment Bank, has briefed the financial world on the EIB's lending aims and limits. He said the EIB will not provide short-term aid to struggling companies. It only finances investment, prioritising projects that can be up and running as soon as possible but which also take the long view, for example energy efficiency, and R&D on less polluting cars. In line with its guiding principles, the EIB suggests it will increase the volume of its lending by 30% this year and next to more than €60 billion a year.
There is also fierce debate about what exactly should be included in economic growth indicators, how they should be calculated (see the Snippets in newsletter 9883) and increasing pessimism about whether it will be possible to prevent a fall in the value of the US dollar on the currency markets.
(F.R./transl.fl)