A new think tank is in town with a heartfelt mission to save Europe. Its name: Council for the Future of Europe. It was set up recently by über-rich Nicolas Berggruen, a German entrepreneur who, commendably, is left dissatisfied by his billions and wants to spend part of them to create a better world. (See here for a recent Der Spiegel portrait of the man). On 5th September, the new Council set up by Mr Berggruen, published its manifesto for a United Europe. The signatories include a roll call of decent, intelligent politicians and economists; e.g. Jacques Delors, Mario Monti, Gerhardt Schoeder, Guy Verhofstadt are some of the politicians (with the puzzling addition of the deplorable Tony Blair) while Joseph Stiglitz and Nuriel Rubini are two of the economists. This post offers an assessment.
The Council’s initial mission, quite understandably, is to propose solutions to the current Crisis which threatens the very idea of a united Europe. Let’s begin by taking a look at the nine elements of the proposed solution, each of which is followed by my comments:
1. A EUROPEAN FUND. In the short-term further market contagion needs to be avoided. Therefore, rapid implementation of the July 21st decision to allow the stabilization facilities to intervene with precautionary measures, is of critical importance. In addition, the size of the existing facilities needs to be expanded. By 2012, these facilities should be transformed into a full-fledged European Fund.
Comment: The 21st July decision was not worth the paper it was written on. It focused (erroneously) on Greece, Ireland and Portugal, whose debt crisis it sought to defuse, while alluding to (without seriously dealing with) the banking crisis. But it did so in a manner that placed great demands upon the shoulders of the toxic EFSF. The result was contagion to Italy and Spain, an epidemic that will only be made worse if the EFSF is ‘strengthened’ – see here for the reasons. I am, therefore, utterly perplexed by the demand that this toxic agreement, whose very announcement caused contagion, be fully implemented to avert… contagion.
2. APPROPRIATE FINANCIAL SECTOR CAPITALIZATION. The Eurozone must practically ensure that the banks which need it are properly capitalized, including through private sector participation.
Comment: Quite right. We have been saying this for yonks. Our Modest Proposal has been advocating the utilisation of the EFSF toward the purpose of forced recapitalisation Swedish-style or even NAMA-style. In contrast, this new Council is inexcusably vague and desists from offending the bankers. How? By not mentioning that recapitalisation has to be compulsory and must involve serious dilution of the bankers’ existing equity. And by speaking of ‘private sector participation’; a term that brings to mind the recent shenanigans the purpose of which were to get the bankers off the hook at the cost of extending and prolonging the banking crisis.
3. A RESPONSIBLE FISCAL UNION. It has become clear that a monetary union without some form of fiscal federalism and coordinated economic policy will not work. Nation states will need to share certain dimensions of sovereignty to a central European entity that would have the capacity to source revenue at the federal level in order to provide European-wide public goods. Furthermore, a common European debt facility, Eurobonds, should be developed. Eurobonds need effective control mechanisms to avoid systematically large fiscal deficits. The existing stability and growth pact has proven insufficient. To ensure fiscal discipline that protects the public from irresponsible policies on the part of any government, the Eurozone requires an effective and enforceable control system. While standards must be strict the diversity of conditions across the Eurozone requires flexibility in how those standards are met.
Comment: In effect, the Council is adopting what I have recently described as the Menshevik Approach; one that, however well intentioned it may be, will result in gross failure. As I have presented the arguments here, I shall now move straight on to the next Council proposal.
4. ORDERLY DEBT RESOLUTION. Mechanisms for orderly debt resolution must be established for both public and private liabilities if lasting and unmanageable insolvencies arise.
Comment: This is all well and true. But where is the beef? Can we please have some indication of what these ‘orderly debt resolution mechanisms’ may be like?
5. In pursuing the necessary fiscal austerity and structural reforms to restore growth in the medium and long run, we must be careful not to undermine the present fragile recovery in the short-run. Adequate macro-economic policies must be employed to avoid this.
Comment: This is a dog’s breakfast of a statement. The Council wants to keep its cake and it wants to eat it too. It concedes to the barbaric view that we need austerity in the midst of a savage slowdown while, at once, it is calling for policies that do not undermine the recovery.
6. GROWTH AND EMPLOYMENT. Austerity is necessary but not sufficient. To compete in the globalized world, Europe needs to implement an ambitious “Agenda for Growth and Employment” to boost competitiveness (see EU 2020 Strategy). A growth strategy should include efficient use of existing EU funds to stimulate growth and job creation in the periphery as well as programs to enhance research & development, professional skills and higher education. So far Europe has fallen far short of the goals set out in the Lisbon Agenda. Absent such a strategy, the temptation for economic nationalism will arise.
Comment: One might have expected that this group of learned and highly intelligent people would be nuanced and sophisticated in their analysis. That they would have, for instance, explained the importance of combining austerity in the public sectors of Greece, Italy etc. with a large demand stimulus in the surplus regions. No, none of that. Instead, we get the inanity of “austerity is necessary but not sufficient”. To say that we can have investment-led recovery by means of existing EU funds is to misunderstand both the scope and scale of current recession.
7. SOCIAL COMPACT. One of Europe’s key challenges will be an ongoing re-adjustment of the social compact in order to both recognize new realities and preserves this key pillar of the European social model. Social security systems must be prepared to accommodate the impact of an ageing population.
Comment: This statement is as self-evident as it is irrelevant to the Crisis at hand.
8. EUROPE AS A KEY GLOBAL PLAYER. The relevance and geopolitical strength of Europe is directly correlated with the strength of the European Union. Without a strong and integrated Union, European countries face the prospect of ever-decreasing geopolitical influence. It will be necessary to further lay out a vision of a Federation that goes beyond a fiscal and economic mandate to include a common security, energy, climate, immigration and foreign policy as well as develop a common narrative about the future of the union and its place in the world. This is a challenge for all the 27 nations of the Euro
Comment: As per my comment to point 7 above.
9. ENGAGED CITIZENS. These steps toward further integration can only go hand in hand, step by step, with a broad and deep engagement of the public. The process of further integration must be led by a Parliament, a Commission and a Council that has the active support of European citizens. European citizens will become more engaged through democratic processes when the Parliament is further empowered.
Comment: Quite right. The democratic deficit of Europe is probably the most significant and dangerous of the deficits that we are running up. See here.
I have no doubt that both the founder and the members of this new Council have their heart in the right place and intentions that are good and proper. Unfortunately, the policies proposed by this document bring tears in the eyes and fear in the hearts of those who are very much alarmed by the sights and sounds of a derailed Europe. Why? Because if these are the best proposals we can come up with, Europe is doomed. Thankfully, there are alternatives. We still think that our Modest Proposal is streets ahead and offers the hope that Mr Berggruen’s new think tank fails to provide.