In purely economic terms, and on the surface, the Euro crisis appears to be over. The recovery has gained in both strength and depth. Unemployment is now below its pre-crisis average. A number of former crisis-hit countries are staging an impressive recovery. Public debt ratios are coming down and the ECB is preparing to wind up its QE program by the end of the year. Nonetheless the recent meeting between Chancellor Merkel and President Macron in Meseberg, Brandenburg in the run-up to the forthcoming European Council meeting on 27-29 June can still rightly be seen as crucial. Economic misery continues, especially in Greece and Italy, but the deep wounds of the crisis have yet to heal in many countries. More fundamentally, the recovery hides the fact that major structural issues remain unresolved. The recent crisis of government formation in Italy illustrated this well, leading to a major spike in interest rates not only in the third-largest EMU-economy, with its low growth and debt ratio north of 130% of GDP, but also in other countries like Spain, with much lower debt and fast growth. The risk of contagion and of break-up has clearly not gone away. The recovery has merely papered over the cracks; but every recovery in history has given way to a downturn. The Euro Area, as currently institutionalised and with debt ratios still high, monetary policy highly expansionary, and political trust in short supply, cannot withstand a renewed downturn. [Read more…]
Today the EU Commission launched a long-awaited set of concrete proposals to deepen European Monetary Union (EMU). The proposals are voluminous and in some areas detailed. Here’s a summary of the most important points and a first evaluation.
First, the European Stability Mechanism, currently intergovernmental, is to be transformed into a European Monetary Fund as a fully-fledged EU institution. Beyond the legal change – which is surely welcome, the intergovernmental solution having been chosen under the pressure of imminent crisis – the Commission envisages few functional changes. The main task of crisis-lending to Member States in need and the related ability to issue bonds to raise finance remain. New is that the EMF is to back-stop the Single Resolution Fund as part of the Banking Union. By providing guarantees or a credit line, and in parallel by reducing the policy areas subject to unanimity, the EMF will be able to offer swift assistance in the case of banking crises, plugging a notable hole in the policy framework. By underpinning confidence in financial stability, this should reduce the likelihood of its having to be used.
Reference is made to the possibility for the EMF develop new financial instruments “over time”. This is a door left open to a future extension of borrowing – and thus stabilization – capacity in the future.
Equally important, unlike in the vision of now-departed German finance minister Wolfgang Schäuble, the EMF is not foreseen to play a key role in disciplining member states and ensuring the implementation of structural reforms. Oversight responsibility is to remain unchanged (i.e. divided between the Commission and the Council). [Read more…]
Those who wish to leave – so a German saying – you should not seek to dissuade from so doing. To few people is the phrase more applicable than to Wolfgang Schäuble who is resigning the post of German finance minister and, with it, that of de facto head of the Euro Group. He held these roles since 2009, that is virtually since the onset of the Euro Area crisis. While the crisis and the associated double-dip recession was a failure that had many fathers, Dr. Schäuble was arguably the most wanton of those who, to paraphrase Keynes, blundered in the control of a delicate machine, the working of which he does not understand.
On the other hand, the fact that someone who has caused much harm is leaving an influential post does not mean that his or her influence falls to zero. His arty certainly remains the dominant force in German politics. Nor, alas, does it necessarily mean that the successor will be an improvement: it seems likely that he or she will come from the liberal FDP which campaigned on a manifesto of rejecting any form of transfers or bail-outs, and threatening countries that fail to meet tough fiscal targets with being forced out of the single currency.
At his last Eurogroup meeting the departing German finance minister left a chilling message of his own in the form of a short non-paper on European economic policy. I will go through point by point, but the spoiler is simple: it represents a doubling down of believers in Maastricht and a complete rejection of all the risk-sharing and stability-promoting ideas tabled by the European authorities and, most vividly, by French President Macron. [Read more…]