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What DoesEurope Want?
THE WHO AND HOW OFRESOLVING THE EURO CRISIS
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INTRODUCTIONThe decisions facing Europe’s leaders and institutions in 2012 are nothing less than colossal. Attempts at the end of last year
to cobble together a “comprehensive solution” culminated in the December 8-9, 2011 European Council summit started a
process that will consume the continent for most of 2012. But questions remain as to the true nature of the crisis, how the EU
can prevent a potential slide in the value of the euro and shore up Greece, and if a lumbering treaty-ratification process can
get ahead of market’s expectations and fears. French and German leaders have stated repeatedly that a new treaty is a major
step towards fiscal union. However, a sober analysis of the proposed measures in the treaty indicates that many of them came
into existence by way of crisis-management policy in 2010 and early 2011.
This piece attempts to dissect the anatomy of the eurozone’s diffuse and often vexing decision-making process to determine:
What does Europe want?
The paper’s first section provides an analytical snapshot of the four main players in crisis decision-making: Germany,
the European Central Bank (ECB), France and the European Commission. These four actors are and will be essential for
the passage and implementation of policy instruments intended to pull Europe out of the crisis. This section is not a
comprehensive analysis of all actors – governmental or private – that can impact political outcomes in the EU. It is rather
an attempt to capture players and policies that stand out in the debate on the eurozone’s short- and long-term future. The
first part begins with an examination of Germany, the country at the heart of the eurozone, and the dynamics that drive the
reluctant hegemon’s actions. It then looks at the ECB, the EU’s only credibly independent institution, which continues to be
the only player with the latent power to bring immediate relief single-handedly. But the bank is plagued by treaty restrictions
and internal ideological conflicts that impair its ability to act. The third part of this section delves into France’s role in bridging
the gap between Europe’s two ideological factions while managing its own internal debate. A fourth and final part considers
the Commission, which entered the crisis as a weakened institution but retains a role as the nucleus of some of the central
questions about the future of fiscal and economic union. As such, the Commission has staked out stronger positions in the
past two years.
The second section examines policy proposals that have emerged or are under consideration by eurozone leaders. These
options range from short-term instruments, such as re-capitalizing banks, to the longer-term re-wiring of the EU’s basic
economic governance. Other policies under review include the depth of European integration and the possible introduction
of mutualized eurozone debt. Debates on all these issues could involve new agreements or treaty revisions.
This publication was assembled by the Bertelsmann Foundation North America based on interviews and research conducted
in Europe and Washington, DC. This text was originally released on the eve of the December 2011 EU summit in Brussels and
has since been updated to reflect the outcome of that gathering. Readers should note that events surrounding the eurozone
crisis are changing rapidly.
This text is primarily meant as a primer for a US audience looking for better understanding and greater transparency of a
highly complex, fast-moving issue that has become the most important challenge on America’s foreign-policy agenda.
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What Does Europe Want?THE WHO AND HOW OF RESOLVING THE EURO CRISIS
Annette Heuser Executive Director
Meghan Kelly Project Manager, Transatlantic Relations
Tyson Barker Director, Transatlantic Relations
Christopher Wiley Program Associate, Transatlantic Relations
INTR
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UC
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January 18, 2012
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TABLE OF CONTENTS
The Main Players Germany 4
The European Central Bank 7
France 9
The European Commission 11
The Policies The European Financial Stability Facility 13
Bank Recapitalization 15
Economic Governance 16
The European Semester 17
The Euro Plus Pact 18
The Six Pack Measures 19
Fiscal Union 21
Eurobonds: Mutualization of Sovereign Debt 23
Conclusion 25
Annex I The United Kingdom 26
Annex IITimeline of Major Decisions Taken to Resolve the Eurozone Crisis 28
Endnotes 30
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
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GERMANY
Germany is seen by many countries, including its European
allies, as a sphinx. Its role thus far in the eurozone crisis is
seen as a testament to the county’s continued ambivalence
to European leadership as no clear vision for restoring
eurozone confidence has emerged from Berlin. Germany’s
focus has instead been on the desire to position itself as
the “guardian of financial stability and budget discipline” in
Europe.1 In the midst of the eurozone crisis, the governing
coalition’s response has been to champion a mélange
of measures, such as austerity cuts, privatization and
pension reforms, on the less competitive member states in
Europe’s periphery, particularly Greece. Berlin has shown
great reluctance to act in any way that could take pressure
off such countries to guarantee that they fundamentally
overhaul their public finance and economic fundamentals.
Since the beginning of 2012, Berlin has slowly begun
complementing this with a new-found emphasis on growth
and jobs creation for the entire eurozone. But this coupled
emphasis – the so-called “second leg” of the EU’s response
– is not to be found in stimulus but in deep, German-style
labor-market reforms that should reduce unit labor costs.
Even while confounding American and European markets
and economists, German Chancellor Angela Merkel’s
response to the crisis seems to place her squarely in
the current of German political Zeitgeist. She shares with
her finance and defense ministers the highest approval
rating (63 percent, a personal high reached previously in
November 2009) of any national German politician. Her
popularity comes despite a faltering coalition partner and
scandals consuming her hand-picked president.
Six primary traits have characterized German decision-
making in the eurozone crisis:
Stability Culture: In the past decade, Germany has
transformed itself from the sick man of Europe, as portrayed
by The Economist in 1999, to the cautious colossus. Reforms
implemented under the Schröder and Merkel governments
created the conditions for the German economic buoyancy
that allowed the country to weather the global financial
and economic crisis successfully. The Schröder government
introduced a series of politically difficult structural reforms,
including labor-market liberalization and adjustments
to unit labor costs, and a solid culture of tax collection.
Merkel’s policies complemented these reforms by raising, in
2007, the retirement age to 67, introducing long-term fiscal
discipline including the introduction of the “debt brake”
into the German constitution in 2009 (a quasi-balanced
budget amendment that will hold the German deficit at
or under .35 percent of GDP beginning in 2015), and being
deeply reluctant to engage in demand-led stimulus in the
aftermath of the 2008-9 crisis.2
Germany’s response to the eurozone crisis has been to lean
heavily on the conservative-minded stability policy that
has defined the governing CDU party’s ideology since the
early days of the Federal Republic. This sensibility dovetails
well with Merkel’s cautious political style. The heart of her
strategy over the last six months has been to put in place
hard fiscal constraints such as exporting by summer 2012
the debt brake to the constitutions of other eurozone
member states and to enshrine in a treaty automatic
sanctions for governments that go astray. Whatever the end
state of European fiscal and economic integration, Merkel
sees this as the issue on which she holds the most leverage.
She wants to exploit that to create an overlapping system
of fiscal measures that will guarantee budget stability and
foster greater competitiveness throughout the eurozone.
The Bild Zeitung Effect: The domestic debate in
Germany around the eurozone is effectively sound proof,
impermeable to external voices. International perspective
is largely muted. The Bild Zeitung, the populist broadsheet
read by more than 2.9 million Germans daily, is a barometer
for one vehemently euroskeptic streak in German public
thinking.3 With headlines such as “Why are We Paying for
the Greeks’ Luxury Retirement?”, “Sell Your Islands, You
Bankrupt Greeks!”, “Swastikas! The Greeks Taunt Europe
even as They Receive Billions More”, the Bild Zeitung reflects
the frustrations of many Germans and often becomes
the narrative around which policy debate coalesces.4
The German government has done little to counter this
populism. It has not effectively communicated the gravity of
the crisis at home, leaving many in the Bundestag and the
general public with the impression that the crisis is not as
existential as the Anglophone and Mediterranean press have
portrayed it to be.5 Berlin has also failed to acknowledge
THE MAIN PLAYERS
“You have become Europe’s indispensable nation.”– Radosław Sikorski, Polish foreign minister, Berlin, November 29, 2011
Germany has long benefitted from an undervalued currency at an
effective fixed exchange rate that has bolstered its competitiveness
vis-à-vis its neighbors.
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
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adequately Germany’s interdependence with eurozone
markets. And it has not examined its own culpability in
the peripheral states’ private- and public-debt explosion
as a result of its current-account surpluses. Germany has
instead resorted to the sort of punitive measures to which
the Bild Zeitung would subscribe.
Let the good times roll: Polls show that Germans do
not yet sense the magnitude of the crisis as their eurozone
counterparts do. Consumer confidence in the country
is high and has climbed through January 2012.6 Business
confidence also continues to grow with the six-month
outlook for German companies higher going into January
2012 than at any point since October 2011.7
In fact, the eurozone crisis has in some many led
to unintended benefits for the German economy.
Unemployment in December 2011 dipped to 6.7 percent, its
lowest recorded level since German reunification in 1990.8
And waves of skilled labor from the employment-starved
eurozone south continue to flow into Germany in search of
work. Intra-EU migration to Germany was up 19 percent in
the first half of 2011 over the same period in 2010.9
Observers have noted that the German government has
been able to achieve a number of political and economic
objectives since the onset of the crisis in October 2009,
sometimes as a direct result of the crisis itself. The German
growth miracle that began in early 2010 was ignited by the
euro’s rapid depreciation, which boosted German exports
on world markets. Germany may again benefit from this
if the currency continues to depreciate gradually in 2012.
Within the eurozone, Germany has long benefitted from
an undervalued currency at an effective fixed exchange
rate that has bolstered its competitiveness vis-à-vis its
neighbors. And the Bund has strengthened its position
as a euro-denominated safe haven due to credible public-
debt targeting, stable macroeconomic conditions, a strong
current account position, and strong competitiveness
relative to other eurozone member states. Most recently,
Germany’s bonds have confounded logic by yielding
negative nominal interest rates for the first time in the
country’s history.10
The German party system is structurally pro-European:A remarkable feature of the German political
landscape is the absence of an organized mainstream
euroskeptic political party. This is unlike other major
EU member states such as France, Italy, the Netherlands
and the UK. From left to right, all of Germany’s major
mainstream parties favor greater European integration.
Only the far left party, Die Linke, a hybrid successor to the
German Communist party along with a group of Social
Democrat defectors, is steadfastly euroskeptic, but the
party is still seen as a marginal force in national politics.
The absence of euroskepticism was reaffirmed at recent
conventions of three of the governing parties in fall 2011:
the Christian Democrats, their Bavarian sister party the
Christian Socialists, and the free-market Liberals.11 The pro-
European attitudes are a product of Germany’s history as a
vanguard of European integration and of the high barriers
to entry for new political parties.
Germanyismorepragmaticthandoctrinaire: Some
attribute an almost Kantian “categorical imperative” to
German political decision-making.12 They cite Germans’
prolonged citations of the Treaties as the basis for action
and contend that Germany acts out of a sense of doctrinal
purity and commitment to a rigid set of values. In fact, the
Germans have shown themselves to be open to compromise
in the past two years. For example, it was the Germans who
adeptly interpreted the Solidarity Clause (Article 222) of
the Maastricht Treaty – a provision originally intended for
emergency assistance in the face of natural or man-made
disasters – as the legal basis for intra-eurozone loans.
Many faces of Germany: Observers of Europe, and
even European politicians themselves, often subscribe
to the fallacy that Germany’s position on the eurozone
crisis is inherent to the German political psyche. Germans
themselves often cultivate this perception. Sometimes
politicians dig deep into the darkest eras of Germany’s past
for tropes that justify current policy. In this way, political
choices cease to be political and become culturally hard-
wired. While this line of argument has served the Merkel
government well and has some shade of truth, Germany’s
position on the crisis is not monolithic. Both the Merkel
government’s aversion to a potential eurobond scheme
and opposition to a dual mandate of the ECB have been
supported by Germany’s leading opposition party, the
Social Democrats. In 2001, then-Chancellor Gerhard
Schröder stated that the ECB should look at growth and
inflation when setting interest rates.13 In August 2011, the
leaders of the SPD held a high-profile press conference to
express support for eurobonds. Along with the Greens, the
entire center-left has already given its backing to mutualized
guarantees for state finance in the eurozone.
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A remarkable feature of the German political landscape is the absence of an
organized euroskeptic political party.
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Thomas Mann’s oft-quoted dictum that he was “not for a
German Europe, but a European Germany” became a central
mantra for the Kohl government in the harrowing period
between German reunification and the Maastricht Treaty.
But both sides of the phrase are embedded in Germany’s
political presence in Europe today.
In the crisis, Germany has mitigated its role between
championing a German Europe and accepting a European
Germany (see chart). But the focus has slowly shifted
toward the latter. The Greek bailout in March 2010, the
establishment of the European Financial Stability Facility
(EFSF) in May 2010, emergency safety valves on sanctions
in the economic governance packages outlined in March
2011, and a surgical treaty revision to make the European
Stability Mechanism (ESM) a permanent successor to the
EFSF in July 2012 are all indicators of a shift towards a
European Germany.
The CDU party platform now allows for bond purchases
by the ECB as a last resort. The platform also allowed
the possibility of mutualized debt following eurozone
integration, direct election of the European Commission
president, and combining the roles of Commission and
Council presidents.14 All of these would set the EU on better
footing to restore confidence in its governing system. The
challenge, many commentators have noted, is timing. In
the course of the crisis, German decision-making has been
glacial yet decisive. Either way, it has shown that where
Germany goes, so goes Europe’s future.
Balancing Germany’s Unilateral Demands (German Europe) with Germany’s Common Interests with most EU Member States (European Germany)
German Europe European Germany
Budget monitoring and sanctioning through Budget surveillance with reverse qualified majority the Commission voting for the imposition of sanctions
Internal devaluation through wage suppression European Financial Stability Facility (EFSF)/ European Stability Mechanism (ESM)
Inflation targeting as the ECB’s sole mandate Stability or eurobonds (as an end goal)
Labor market reforms and end to wage indexation Eased voting for loans from the EFSF/ESM
Raising the retirement age Financial-transaction tax
German Constitutional Court limits on EFSF lending Higher EU-wide investment in infrastructure projects and research
Debt brakes along the lines of those introduced into Promotion of labor mobility the German constitution in 2009
Targeted use of structure and cohesion funds to promote competitiveness
Private-sector involvement in debt write-downs in Greece
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The European Central Bank (ECB) is the only EU institution
to weather the eurozone crisis with a high degree of
credibility among international economists and markets.
Other institutions – the European Commission, the
European Council, the European Financial Stability Facility
(EFSF) and the cluster of new micro-prudential supervisory
bodies, in particular the European Security and Markets
Authority (ESMA) and the European Banking Authority
(EBA) – are too new, too beholden to entrenched interests
in member states, or too under-resourced to restore
confidence in the eurozone.
Until the onset of the financial crisis in 2007, the ECB
demonstrated a strong degree of loyalty to its Bundesbank
pedigree. The ECB guaranteed price stability, particularly
through medium-term inflation targeting at or below
two percent. The bank also maintained its fierce political
independence from governments.15 The ECB’s strict
adherence to the Maastricht Treaty constrained its ability
to act but at the same time reinforced its credibility. Its
willingness to raise interest rates to firm up the currency and
assuage fears of imported inflation bolstered the fledgling
institution’s reputation as the Europeanized successor to
the Bundesbank.
In the 2007-8 crisis, the ECB began to demonstrate greater
flexibility, particularly in its willingness to intervene in
markets via its discount window (standing facilities) to help
Europe’s troubled banking sector. Then-ECB President Jean-
Claude Trichet recognized early on that global imbalances in
capital and risky lending could imperil the financial system.
The bank quickly and decisively activated the eurozone’s
reserve network to increase liquidity to keep European
banks lending.16 As the global financial downturn became an
acute eurozone crisis, the ECB began to purchase sovereign
bonds from troubled states on the eurozone periphery,
some of which have since resorted to the IMF and the EFSF
for lending relief.
Since assuming the ECB presidency on November 1,
2011, Italian central banker Mario Draghi has addressed
speculation about the ECB’s willingness to continue Trichet-
era policies. Speaking about a possible Greek exit from the
eurozone at his first press conference as ECB president,
Draghi stated simply that “it is not in the treaty.”17 The
response hinted at three tenets that could define Draghi’s
governing philosophy during the crisis: 1) a desire to bolster
the indivisibility of the eurozone; 2) a demonstration of
strict adherence to the Treaty as the governing document;
and 3) an assertion of the bank’s independence.18
Draghi has indicated a willingness to consider greater
intervention now that a fiscal union and tighter budgetary
controls among national governments is on the table.
Speaking before the European Parliament on December 1,
2011, he said that “a new fiscal compact would be the most
important signal from euro area governments embarking on
a path of comprehensive deepening of economic integration.
It would also present a clear trajectory for the future
evolution of the euro area, thus framing expectations.”19 At
the same time, he insists that any ECB intervention stay
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“We have delivered price stability over the first 12 years of the euro – impeccably! Impeccably!”– Jean-Claude Trichet, ECB president, on the bank’s record in the face of German criticism, Frankfurt, September 8, 2011
European Central Bank
Germany/Bundesbank
Netherlands
ECB
Finland
Italy
European Commission
Ireland
France
Spain
Stability/Inflation Targeting
THE EUROPEAN CENTRAL BANK
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
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within the framework of the Maastricht Treaty, meaning the
bank’s intervention is ultimately limited in duration and
scope.20 Since the European summit in December 2011,
euphoria around potential ECB intervention in sovereign-
bond markets has subsided. The ECB has instead stepped
up low-interest credit availability to the banking sector.
These funds could be used to acquire sovereign bonds, but
the impact would not be as potent as direct ECB purchases.
The ECB’s success in 2012 will be contingent upon a delicate
balancing act between its independence and its legitimacy,
particularly in Germany.
TheECB’sindependenceoffersalegalwindowforexpedient action: Prior to the crisis, some countries –
particularly France and Italy – began to question the bank’s
staunch independence and inflationary targeting.
In the early part of the financial crisis, French President
Nicolas Sarkozy did not shy away from using the ECB as
a political foil. He stated that the euro is overvalued by
30 percent to 40 percent, assailed the bank’s “counter-
productive” interest rate hikes in summer 2008, and rued its
independence as a “historical error”.21
Today the French government has come around to respect
the ECB’s independence, primarily because Paris sees it as
the avenue to market easing over German objections. The
bank has demonstrated during the crisis that it is willing
to assert that independence, even if that means snapping
at its most protective benefactor, Germany. Garnering the
public ire of adherents to Bundesbank orthodoxy, the ECB
opposed private-sector involvement in the Greek bailout in
July and intervened in Italian and Spanish bond markets.
At their summit in Strasbourg in November 2011, the
leaders of France, Germany and Italy spoke explicitly about
the sanctity of the ECB’s independence. But this vague
accordance masks real differences among the three. France
and Italy want active intervention in bond markets to hold
down interest-rate spreads and offer respite to countries
with higher interest rates; Germany prefers markets to see
ECB independence as non-interference with the natural
course of market pressures holding forth.
The red lines of Bundesbank orthodoxy: Some
circles in Frankfurt and Berlin feel betrayed by ECB actions
and purported plans to intervene more actively in bond
markets.22 Doctrinaire German economists see the ECB’s
credibility rooted in its adherence to the Maastricht
Treaty.23 For them, calls for primary-market debt purchases
or even interest rate-spread targets violate the Treaty. Even
secondary-market purchases cause discomfort; some see
that as a slippery slope to debt monetization.
German public discourse on the ECB’s role in the crisis
has shown that the bank’s intervention could undermine
German confidence in the euro even as such actions help
save European monetary union. In May 2010, Axel Weber,
Bundesbank president and heir apparent to the ECB
presidency, publicly criticized the ECB, and in February
2011 he decided to leave the institutions of the European
monetary system. Jürgen Stark, the German ECB chief
economist, subsequently and abruptly left that bank’s
governing board, a move that many have interpreted as a
response to its bond purchases following the July European
summit. Stark and Weber had voted in the governing board
against the purchase of troubled sovereign bonds. The
opposition to the ECB’s moves also extended to the highest
political levels in Berlin. In August 2011, German President
Christian Wulff openly criticized the ECB for overstepping
its mandate, saying “I regard the huge buy-up of government
bonds of individual states by the European Central Bank as
legally questionable.”24
Finally, recent personnel decisions under Draghi’s leadership
heightened questions about the ECB’s fealty to its heritage
in Frankfurt. The position of ECB chief economist, one held
by a German at the ECB since its inception, was offered to
Belgian Peter Praet although Stark’s German replacement
on the ECB’s executive board, Jörg Asmussen, was widely
seen as the presumptive successor to the chief economist
position. The decision sparked an unusual amount of
German media attention and questions about the German
monetary establishment’s being sidelined.25
If the ECB’s legitimacy in Germany begins to decline as a
result of future bank action, the EU could face another crisis
of confidence on the monetary side.
If the ECB’s legitimacy in Germany begins to decline as a result
of future bank action, the EU could face another crisis of
confidence on the monetary side.
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FRANCE
The eurozone crisis has placed France in the difficult position,
fighting to maintain the status quo power constellation
in Europe. Paris’ dilemma arises from an ideological pull
between two diametrically opposed economic alternatives:
1) remain consistent with long-held, growth-driven fiscal
practices and ever increasing demand-side policies, and risk
a credit-rating downgrade; or 2) ally itself with the fiscally
spartan, structurally reform-minded Germany to maintain
(at least the perception of) its place in the elite core of
strong economies. France stands Janus-like with one face
toward Germany and one toward Mediterranean countries
such as Italy and Spain. This position has defined France’s
European economic policy since the early 1980s.
In the eurozone crisis, France is the key proponent of a
give-and-take approach, a combination of strict budgetary
monitoring and eased access to capital that German
Chancellor Angela Merkel dismissed so forcefully at the
Tripartite Summit in Strasbourg on November 24, 2011.26
The French political leadership has staked out a position
balancing initiatives aimed at fiscal rectitude with those of
eased assistance to weaker states.
So far, Paris has skillfully achieved its tactical goals in the
emerging EU framework to resolve the crisis. The treaty
arrangements under consideration are – at least for now
– intergovernmental rather than based on community-
based. In addition, the punitive measures for correcting
future budgetary overreach still contain an emergency “out”
in the form of reversed qualified majority voting. Finally,
Sarkozy was able to nudge Berlin towards balancing its
calls for austerity with greater emphasis on growth and jobs
creation.
Still, given the Sarkozy government’s low popularity at
home, its EU negotiating success in late 2011 could prove
a pyrrhic victory. Four salient factors will determine French
negotiating behavior in the coming months:
Maintaining parity with Germany: Since German
reunification, France has been eager to tether German
strength to the European integration process in a way
that allowed Paris to draw down its interest rates and to
maintain the European balance of power with the Franco-
German tandem at its heart. The European monetary union
was the result of that.
The past ten years, however, have brought vastly different
fortunes to France and its neighbor to the east. Both had
similarly high structural unemployment in 2004, 9.2 percent
in France and 9.8 percent in Germany.27 Both enjoyed
current account surpluses in 2002, with France’s at 1.8
percent and Germany’s at two percent.28 Both embarked on
ambitious structural reform processes between 2002 and
2006 to improve the competitiveness of their economies
and reduce unemployment.
Their success in implementing structural reform, however,
diverged. Unlike Germany’s successful rewiring of its labor
market, France failed in its efforts to pass a compromise
reform package in the New Employment Contract (CPE) in
2005.29 French domestic demand outstripped exports and
unit labor costs outpaced productivity. France also has the
second-highest employment-protection level in the OECD.30
Today, French unemployment is stuck at 9.3 percent. It has
a current account deficit of 2.1 percent of GDP, a budget
deficit of 5.7 percent of GDP and carries debt of 85.4 percent
of GDP.31 The veneer of French parity with Germany has
been based largely on its AAA sovereign-debt rating.
FranceperceivesitsAAAratingastheRubicon:For
France, the rating has become the symbol of the country’s
decades-long economic transformation started during the
Mitterrand presidency. It is the economic variant of its
permanent UN Security Council seat, a source of prestige.
The French government is determined to ring-fence its
creditworthiness through a series of reform measures
including: 1) supporting a so-called regle d’or, the balanced
budget amendment; 2) addressing structural reform
issues affecting the labor market and working hours; and
3) advocating protective measures to limit the banking-
sectors exposure (seen in Paris’ reluctance to support in
July 2011 deep haircuts for Greek debt that would expose
French banks to insolvency).
Greater mutualization of public and private debt has
traditionally been France’s position, particularly in the case
of bank recapitalization. French banks are among the most
exposed to the tenuous debt of Europe’s periphery. Many
European banks brought significant amounts of sovereign
debt onto their balance sheets to meet capital requirements
set by the Basel II agreement. Such debt was seen at the
time as risk-free buffer capital. As such, France was the
lead proponent for transforming the EFSF into a bank. This
would give the EFSF access to the ECB’s unlimited lending
capacities to facilitate bank recapitalizations. France
also advocates easing EFSF loan approval by making it
contingent on qualified majority voting of member states
rather than unanimity.
“If we want more solidarity, we need more fiscal discipline.” - Nicolas Sarkozy, French president, on the grand bargain for the future of the eurozone, Toulon, December 1, 2011
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Lowstructuralreformtolerance: The French street is a
powerful political tool in the country’s political life. France’s
abortive attempts to pass structural reforms to its labor
market in 2005 and 2006 demonstrate the informal veto
that high-profile protests and strikes can have. A pension-
reform bill was passed in 2010 with minor revisions, but it,
too, demonstrated the French electorate’s traditionally low
tolerance of reform. The power of street protest in French
political life is acute. In his speech in Toulon on December
1, 2011, President Sarkozy stated that the country must
“mobilize the mind” to push through structural reforms
again.32 In early 2012, he already began to outline these
reforms and declare his support for deeper austerity. In
doing so, he will again test his country’s willingness to
accept reform.
April 2012 elections: Some observers speculate that
President Sarkozy’s re-election hinges on his strategy to
embrace Germany’s position on a balanced-budget law
and other austerity measures. The fault lines around this
position have become the electoral cleavages between the
incumbent and his main rivals on the right and the left.
Socialist presidential candidate François Hollande and far-
right Front National Marine Le Pen have warned against
any transfer of fiscal sovereignty to unelected institutions
such as the European Commission or the European Court
of Justice. President Sarkozy is attempting to outflank his
electoral opponents by finessing his position to include
German austerity, national parliamentary fiscal control and
member state sanctioning authority.
Sarkozy tends toward Gaullist suspicion of the supranational,
especially for budgetary and fiscal expenditure issues. In his
Toulon speech, he said: “The rebuilding of Europe cannot be
the march toward more supranational” decision-making.33
This is consistent with debates in spring 2011 in which
France successfully injected a member state veto (see page
19) into the penalty process for the package for economic
governance.
Sarkozy’s comments hint at substantial differences between
French and German positions, with the ECB on Germany’s
side. The French may have scored a victory when the UK
veto led to an intergovernmental (not supranational)
approach to the new fiscal arrangements. Still, the
difference between an intergovernmental approach to fiscal
union and a community approach will continue to be a
point of contention between France and Germany. Berlin
and the Commission still favor the eventual incorporation
of any new agreement into the structure of the EU within
five years.
The establishment of a debt brake in national constitutions
is the one area where the German and French governments
have most stridently agreed. But the measure’s immense
unpopularity in France and the country’s upcoming
elections mean the debt brake may not come to pass in
Paris, even as other member states, such as Spain, are
moving towards approval. Even if Sarkozy wins re-election
in April or May and his center-right UMP party does well in
June’s parliamentary vote, French adoption of a debt brake
will be challenging.
1 0What Does Europe Want? The Who and How of Resolving the Euro Crisis
FRA
NC
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1 1
After a decade of political atrophy, the European
Commission – the EU’s executive – entered the eurozone
crisis in a weakened state and remains the least influential
of the currency area’s key actors. Member states interested
in guaranteeing a dominant state-based approach to EU
governance used the European Council summits from
spring 2010 onward to splice community power, the areas of
pooled sovereignty administered by the Commission.
The Council, the legislative body of the 27 EU member states,
under the leadership of President Herman Van Rompuy, has
been placed at the center of a draft for European Economic
Governance (EEG) and more recently elevated to presiding
over regularized eurozone summits. These expanded roles
will give him significant influence over the relationship
between the eurozone and the wider group of all 27
EU member states. The establishment of the European
Financial Stability Facility (EFSF) as an intergovernmental
body beholden solely to member state consent has further
eroded the Commission’s role in economic and financial
governance. It does, however, have a role on the back end of
EFSF actions as part of a troika (with the IMF and ECB) that
is limited to monitoring the implementation of reforms in
Greece, Ireland and Portugal.
As the “guardian of the treaties”, the Commission pivots
between its function as a technical body, one tasked with
implementing regulatory enforcement, and a political
body, one responsible for introducing new legislation. It
closely guards its prized competency, the ability to initiate
EU legislation under the auspices of Article 17(1) of the
Maastricht Treaty.34 It has a clear stake in a more robust
pooling of competencies in fiscal, financial and economic
questions, and tends to represent this. The Commission
wants to position itself as the responsible party for a
tighter economic and fiscal union. But with the December
2011 decision to move forward with an intergovernmental
fiscal agreement in the wake of the UK veto, it is unclear
whether the Commission can fully buck the trend of its
diminishing political role. Member states will debate in the
coming months the Commission’s role in the future power
constellation while also examining ways to make it more
democratically accountable.
In the 1980s and early 1990s, the endemic pulse of Europe’s
integration process had the Commission at its center. It
could regain that position for the following reasons:
Laboratory of ideas: Despite its circumscribed role,
the Commission remains the source of many legislative
proposals that have defined the EU policy debate in the
crisis. The Commission launched the vehicle for fiscal
monitoring, the Six Pack (see page 19), that will serve
as the precursor to fiscal union. It has laid out a series
of proposals that have become the basis of discussion
for future economic governance. These ideas address
competitiveness targets that adhere to the Europe 2020
strategy for jobs and growth, the need for consistent fiscal
monitoring, support for a financial-transaction tax, and
mutualized bonds.35 The Commission couches its call for
eurobonds in terms of stability, a clear acknowledgement of
a need for German buy-in.
In a desire for greater political autonomy, the executive
body seeks to establish a source of revenue separate from
the member states. These proposals for so-called “own
1 1
The Commission pivots between its function as a technical body, one tasked with implementing regulatory
enforcement, and a political body, one responsible for introducing new legislation.
“For the euro area to be credible – and this is not only the message of the federalists, this is the message of the markets – we need a true Community approach...Within the Community competencies, the Commission is the economic government of the Union. We certainly do not need more institutions for this.” - José Manuel Barroso, State of the Union speech, Strasbourg, September 28, 2011
THE EUROPEAN COMMISSION
THE EU
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
1 2
resources” have included a 2010 suggestion for bonds
to fund infrastructure projects in member states and the
introduction of its support for a financial-transaction tax,
which some have said could be an independent source of
revenue for the EU.
Because the Commission’s influence vis-à-vis the member
states, particularly large countries such as Germany,
France and the UK, has never been fully clarified, personal
relationships between national and Commission leaders
are key to determining the Commission’s role in crisis
decision-making.
GrowingroleintheeurozoneSouth: The Commission
is becoming the steward of Europe’s technocratization
and has taken a much more active role in managing the
eurozone’s troubled economies. Whether through tighter
monitoring of fiscal adjustments, prescriptions of structural
reforms, budgetary reviews or through staffing decisions in
new technocratic governments such as Italy’s and Greece’s,
the Commission is effectively colonizing the beleaguered
euro South. Its role in the troika places it at the center of
austerity measures, privatization, and pension, tax and
employment reforms in Ireland, Greece and Portugal. And
since September, the Commission’s Task Force for Greece
provides assistance for creating a reliable business climate
and reports quarterly on its progress.36
On the precipice of greater power?: The
Commission’s most important political mandate in the
eurozone crisis could come from its more muscular
surveillance role, particularly concerning national budgets.
Its responsibilities in this area under existing provisions,
such as the Six Pack, include overseeing the submission of
national policies to the Commission for scoring before they
are drafted in national parliaments, and implementing a
Super Commissioner for budgetary oversight.
Despite the UK’s high-profile veto of the EU Treaty option,
the Commission could also assume the responsibilities of
the Eurogroup presidency and acquire sanctioning authority
for profligate states that violate a new treaty.37 This would
be an awkward role, however, requiring the Commission
to submit a report at the request of a member state that
could subsequently be used as the basis for a case in the
European Court of Justice. As such, it will be singularly
focused on accelerating the pace of the agreement’s
eventual absorption into the EU Treaty. France and Germany
have indicated that the Commission should take the lead in
generating proposals to promote job creation and greater
labor mobility within the EU.
1 2
THE EU
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
1 3
The European Financial Stability Facility (EFSF), agreed
by the heads of the 27 EU member states in May 2010, is
a bailout fund for eurozone countries locked out of credit
markets and in need of financial stability. It is financed by
eurozone member states through pledged commitments.
The countries in need of assistance do not contribute to the
fund.
Countries can request support from the EFSF only if they
are unable to borrow on markets at acceptable rates. The
EFSF can issue bonds at an interest rate of funding costs
plus operational costs.38 The lending rates were intended
to be about 3.5 percent at the time of the agreement but
have soared as high as nine percent.39 This causes hardship
for countries that borrow; but unfortunately the market
does not offer a better alternative. Approval for a country
to receive EFSF aid requires unanimous consent from euro-
area finance ministers.40 This was a source of controversy
because of the no bail out clause in the Maastricht Treaty,
but leaders were able to work around that.41 It continues to
be a burden on economically strong countries that assume
capital guarantees and the accompanying interest. The EFSF
is slated to expire in June 2012, at which time a permanent
mechanism, the European Stability Mechanism (ESM), will
replace it.42 But since Standard & Poor’s (S&P’s) downgraded
the EFSF’s rating on January 16, 2012, EU officials have
intensified a push to bring the €500 billion ESM into place
by June 2012. The ESM requires the 17 eurozone members
to ratify a framework agreement and the EU-27 to ratify an
amendment to the Lisbon Treaty. Leaders are currently
debating the framework’s terms. Language stating that
countries deemed insolvent “shall be required” to negotiate
bondholder losses will be removed, much to the chagrin of
Chancellor Merkel, who has pushed for tougher language to
avoid further German taxpayer burden.43
The current lending capacity of the EFSF, amounting to
€440 billion, already contains commitments to Ireland,
Portugal and Greece. Ireland and Portugal are currently
receiving loans from the EFSF. Greece has been receiving
aid through loans dispersed by the IMF and bilateral loans
pooled by the European Commission, so the EFSF has thus
far not provided financial assistance to Athens.44 However,
the sources of funding of the second Greek bailout (€109
billion), announced on July 21, 2011, have not yet been
clarified.45 It could be that funds, at least partially, come
from the EFSF and the ESM.
Since its inception, the EFSF has lacked adequate funds
to guarantee financing of debts in countries such as Italy,
Spain or Belgium, should they lose access to credit markets.
The S&P downgrade of the EFSF and two of its significant
contributors, France and Austria, now forces the EFSF to
operate with even less funding. Proposals to leverage the
Facility have been discussed, the most recent being the
ability to lower funding costs through an EFSF issuance of
fixed credit protection (20 percent-30 percent), and through
public and private investment in bonds.46 But the EFSF has
yet to achieve the sufficient firepower of €1 trillion, largely
because investors are not interested in purchasing Europe’s
troubled bonds.
1 3
“Financial markets are skeptical because the EFSF can [make decisions] only unanimously. What we need is instrumentation capable of decision-making that can also be convincing to market participants.”- Wolfgang Schäuble, German finance minister, November 30, 2011
THE POLICIESTH
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CILITY
What Does Europe Want? The Who and How of Resolving the Euro Crisis
THE EUROPEAN FINANCIAL STABILITY FACILITY (EFSF)
Current EFSF Lending Capacity Including Commitments for Country Programs (Billions)
€287
€26€17.7
€109
Effective Lending Capacity
Greece (potential)Portugal
Ireland
Data Source: EFSF
1 4
Eurozone leaders cannot rely on private investors to enlarge
the EFSF’s lending capacity to a credible size. An alternative
option under consideration is IMF leveraging. On November
25, 2011 the Dutch and Finnish finance ministers called on
the IMF to play a bigger part in boosting the EFSF’s lending
capacity. Bilateral loans from countries outside Europe were
touted as a way to “increase the effective size of the IMF”
with aspirations that the “IMF could play a bigger role in
the crisis,” according to Dutch Finance Minister Jan Kees de
Kager.47 But the IMF itself lacks sufficient lending capacity.
In a document released to the IMF Steering Committee in
September, Managing Director Christine Lagarde wrote, “our
lending capacity of almost $400 billion looks comfortable
today, but pales in comparison with the potential financing
needs of vulnerable countries and crisis bystanders.”48 Once
again, all roads return to possible ECB leveraging of the EFSF.49
Eurozone leaders cannot rely on private investors to enlarge the EFSF’s lending capacity to a credible size.
1 4
THE EU
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
1 5
Since the July 15, 2011 stress tests of European banks
conducted by the European Banking Authority (EBA), it has
become apparent that several financial institutions have
serious exposure to risky sovereign assets.
Shockingly, Dexia, the Franco-Belgian bank, announced
a break-up on October 10, 2011 in spite of having passed
the July stress test. The main culprit was the bank’s large
exposure to bonds in the eurozone’s troubled periphery.
Many of Europe’s banks face similar contagion risks.
IMF Managing Director Christine Lagarde has urged a
“mandatory” recapitalization of Europe’s banks to address
the problem.50
In the days leading up to the October 26, 2011 EU summit,
politicians and bankers negotiated ways to reduce exposure
to Greek debt. Reports came from the “troika”(the EU, the
IMF and the ECB), which was charged with investigating
Greece’s balance books, projecting that Greece’s debt would
peak at 186 percent of GDP in 2013, even with a previously
agreed 21-percent debt write-down by private creditors.51
Banks, reluctant to face higher losses, won EU leaders over
with a compromise: A “voluntary” bond exchange that would
require a write-down of as much as 50 percent to 60 percent.
Details of the bond exchange will be negotiated with banks
in early 2012, but there is already fear that payouts will be
triggered on credit default swaps (CDS), whereby the bank
provides an insurance policy to the buyer against default
on governments bonds. Warren Buffet called CDS “financial
weapons of mass destruction.”52 They were a major cause of
the default of big financial institutions in the US, such as
Lehman Brothers and AIG. European leaders would be wise
to avoid this scenario.
In another move to prevent contagion, EU leaders agreed
on October 26, 2011 to force banks to recapitalize to reach a
core tier one capital ratio of nine percent by June 30, 2012.
The implications of this are:
1) The capital requirement will be favorable to German,
British and even French banks and less favorable to
Italian and Spanish banks because they will have to
raise more funds against their inevitable bond losses. It
comes as no surprise that one of Italy’s largest banks,
UniCredit, quickly announced recapitalization plans
amounting to €7.5 billion to reach the nine percent
requirement.53 The fact that guarantees are being made at the
national level feeds the current fragmentation in the
European banking system.
2) The relatively short timetable to achieve the capital
requirement will make it difficult for banks to raise private
funds. The European Banking Authority (EBA) has
assumed responsibility for clarifying the precise capital
shortfall, which, it announced on December 9, 2011,
is €114.7 billion.54 Banks must submit their plans for
recapitalization to their national authorities by
January 20, 2012, and these plans require subsequent
EBA approval.
3) Banks unable to raise private funds can turn to
their national governments for state aid. If such aid is
unavailable, national governments can seek loans from
the EFSF. Because most EU countries already pay into
the EFSF, the process is oblique.
Europe’s banking system still lacks consistency and
coordination, but attempts to rectify that are underway.
Financial advisers to the EBA have written EU finance
ministers to “urgently adopt a European approach” by
forming a resolution fund, jointly backed by national
governments that would provide guarantees to debt issued
by EU banks.55 This approach has received support from the
ECB and the European Commission. Germany, however,
has expressed concerns on behalf of the core European
countries. Berlin fears that taxpayers would be liable for the
exorbitant debt in the peripheral eurozone countries.
On December 9, 2011, the ECB announced exceptional
support for eurozone banks by making unlimited loans with
three-year maturities available. The previous maturity limit
was 13 months. The ECB also began accepting a wider pool
of collateral for loans and lowered its reserve requirement
for commercial banks from two percent to one percent. But
some analysts argue that this step does not address the lack
of uniform solutions to mitigating debt.56
1 5
“There is a clear need to restore the confidence in Europe’s banking sector, and the recapitalization plans for European banks are seen as a key part of the approach. But the scope and approach chosen will cause a number of serious problems.” – Charles Dallara, managing director, Institute of International Finance, in a letter to the Group of 20 summit leaders, November 1, 2011
BANK RECAPITALIZATION
Banks unable to raise private funds can turn to their national
governments for state aid.
BA
NK
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
1 6
The idea of a fiscal union is as old as the debate about
the single European currency. In the late 1990s the French
unsuccessfully insisted on aligning the euro with the so-
called gouvernement économique”58 Such a union is now back in
the headlines after receiving renewed support from German
Chancellor Angela Merkel, French President Nicolas Sarkozy
and Italian Prime Minister Mario Monti.
Such a union requires closer coordination on and stricter
centralized enforcement of budgetary rules. EU monetary
policy is currently decided on the European level, while
fiscal policy is determined nationally. The absence of proper
fiscal coordination is often cited as a major cause of the
euro crisis.
In March 2010, the EU began introducing legislation
that builds upon the Stability and Growth Pact (SGP)
and encourages greater fiscal discipline among member
states.59 This push towards greater fiscal union actually
began when the SGP was adopted in 1997, but the current
crisis has forced a fairly drastic acceleration of that original
momentum, and raised the stakes associated with forging a
path to successful macroeconomic harmonization.
The SGP was originally intended to coordinate national
fiscal and economic policy at the European level and to
“ensure that Member states maintain budget discipline in
order to avoid excessive deficits.”60 Its mechanisms for doing
so were simple and comprised two arms: one preventative,
one dissuasive.61 The SGP thus provided both oversight and
the potential for corrective measures in the event that any
member state (or states) fell out of economic harmony with
the others or with the EU as a whole. In practice, however,
the SGP never functioned as well as intended – particularly
when it came to dissuasive measures. Several member
states, notably France and Germany, found themselves in
breach of the SGP requirements as early as 2002.62 Given
their influence and position on the Council, larger member
states such as these were seemingly able to violate the three
percent/60 percent threshold requirements without fear
of reprisal. And despite the mechanisms in place to force
systematic corrections of any subsequent fiscal imbalances,
no offending member state ever faced disciplinary action.
Simply put, the European Council never followed through
on its power to bring sanctions.
Other notable deficiencies of the SGP include broad
non-compliance with medium-term objectives such as
balanced budgets or creating surpluses, even during times
when such goals were easy to achieve (i.e., mid 2000s).63
Perhaps most significantly, the SGP did not adequately
consider the different circumstances that defined each
member state’s economies when the Commission reviewed
budgetary policies. Instead, the pact promoted a one-size-
fits-all approach that disregarded differences between the
economy of a founding member state and that of a new
member state.64 On the whole, the SGP never worked as well
as intended.
A primary criticism of the SGP’s functioning under the
duress of the recent global financial crisis, besides its
general ineffectiveness, was its lack of “bite” to ensure the
compliance of all member states. Indeed, even the SGP
threat of “further proceedings” against member states
violating the three percent/60 percent threshold was
somewhat undefined. Such “proceedings” mostly involved
further review of a member state’s economic imbalances,
the creation of community incentives for a member state
to self-correct the imbalances (incentives which, if not
capitalized upon, merely resulted in further incentives), and
then, ultimately, possible sanctions.65
It is this lack of “bite” that the current package of economic
governance measures seeks to address. In principle, all
three are similar to the SGP. But they come with added
punch, a decidedly more specific corrective framework for
enforcement, and pointed tools for managing a fiscal union.
The following section analyzes the three primary pieces of
legislation – The European Semester, The Euro Plus Pact
and the so-called “Six Pack” – that attempt to give the SGP
teeth and, in some cases, double up on competencies and
creating redundancies in the process.
“The crisis has reaffirmed with great force that strong economic governance is a prerequisite for stability in a monetary union. Sadly, despite having experienced tremendous costs stemming from the sovereign crisis in the euro area, lack of sufficient progress in strengthening economic governance going forward, including clarity on crisis management, has become a grave source of instability in the euro area.”57
- Athanasios Orphanides, ECB council member, November 24, 2011
In practice, however, the Stability and Growth Pact never functioned
as well as intended.ECONOMIC GOVERNANCE
1 6
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
1 7
The European Semester, introduced as a key element of
the Europe 2020 initiative in March 2010, is a framework
for integrated surveillance and multilateral policy
coordination.67 It is an annual assessment of national
budgets by the Commission that is meant to coordinate
member states’ economic policies vis-à-vis national
budgets, to reduce debts, and to incentivize growth
through harmonization. By improving coordination through
multilateral monitoring of member states’ economic
policies, this measure is designed to strengthen budgetary
discipline, macroeconomic stability and growth, and to
improve competitiveness. These goals are in keeping with
the broader Europe 2020 initiative. The process should
also engender a sense of common purpose and fate among
eurozone states.68 The European Semester is a far more
structured vehicle for the goals of the SGP, although it shares
many surveillance elements of the SGP’s “preventative” arm.69
The European Semester is more of a code of conduct than
a set of hard and fast commandments. It distinguishes
itself from the SGP by shifting the timing of the budgetary
process, and of fiscal and structural reform plans.70 The
former is significant because member states were previously
not obligated to make their economic policies contingent
on EU-level influence or approval. Under the Semester’s
rules, national parliaments must wait for the Commission’s
assessment of national policy before they can begin
negotiating their budgetary policy.71 The overall aim is to
strengthen economic policy coordination among countries
by providing what the EU refers to as ex-ante guidance to
states preparing their fiscal houses for the coming year.
A second institutional change introduced by the Semester
is “the alignment of the timing of fiscal and structural
reform plans.” Until now, member states submitted their
plans to align and harmonize with the rest of the EU
(Stability or Convergence Plans) at the same time as their
plans for achieving national budgetary targets (National
Reform Programs).72 The Semester separates the two and
requires more direct involvement, and approval, of the
European Commission and Council. Whether sovereignty is
impinged upon under this scheme is debatable: While the
final stage of national policy formation is free of direct EU-
level control, member states are so encumbered up to that
point that extricating EU influence from the last round of
budget negotiations is impossible.
The results of the European Semester have been mixed.
According to a recent Bruegel-Hertie report, member
states have thus far adapted differently to the European
Semester.73 Ownership of and adherence to the new
economic policy coordination cycle appears strongest in
the new member states. Old member states show strong
(but freely interpreted) adherence. Smaller member states,
those without significant economic relations with other
EMU/EU states, or those in significant economic difficulty
show little or weak adherence. Another problem is that the
European Semester does not differentiate and prioritize
policy actions across countries, and thus the Commission
tends to employ a “one-size-fits-all” approach to policy
recommendations.74
1 7
“The European Semester that begins today is at the heart of the reformed economic strategy. It is the first time [that] we are going to put in place these new instruments of joint governance at the European level… We are effectively introducing a genuine European dimension into national budgetary and economic policymaking for the first time.”66
- José Manuel Barroso, European Commission president, in a press conference to introduce the first European Semester process, January 12, 2011
THE EUROPEAN SEMESTER
The European Semester is more of a code of conduct than a set of
hard and fast commandments.
THE EU
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
European Semester Timeline
Policy Guidance to EU and Euro Area Country-specific surveillance
European Commission
Council of Ministers
European Parliament
European Council
Member States Adoption of National Reform Programmes (NRPs) & Stability and Convergence Programmes (SCPs)
Spring EU Summit
Debate & Orientations
Annual Growth Survey
Debate & Orientations
Policy Guidance IncludingPossible Recommendations
Finalisation & Adoption of Guidance
Endorsement of Guidance
JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY
Autumn: Decisions at national level.
1 8
THE EURO PLUS PACT
The Euro Plus Pact (EPP) was drafted by the Council,
largely at the insistence of German Chancellor Merkel
and French President Sarkozy. It is yet another measure
designed to expand the scope and power of the SGP. It is an
intergovernmental mechanism designed to “strengthen the
economic pillar of the monetary union, achieve a new quality
of economic policy coordination, improve competitiveness,
thereby leading to a higher degree of convergence.”76 By
obliging countries to incorporate the SGP’s fiscal rules
into national legislation to maintain competitiveness
and avoid fiscal imbalances, the EPP is the next logical
step in realizing the SGP’s original goals. The EPP makes
political and economic decisions previously and exclusively
concluded at the national level subject to convergence with
other member states at the EU level.77 Like the European
Semester, however, the development of policies to achieve
convergence remains the prerogative of member states.
There are “broad areas of coordination – e.g., keeping wages
in line with productivity,” but “the policy mix remains the
responsibility of each country.”78
The EPP was endorsed during the European summit in
March 2011 by eurozone leaders (particularly Sarkozy and
Merkel). Non-eurozone states Bulgaria, Denmark, Latvia,
Lithuania, Poland and Romania also voiced support.79 The
EPP focuses primarily on national competencies that are
key to increasing competitiveness and avoiding harmful
imbalances. While the euro-area members agreed on
the pact, other EU member states have been invited to
participate in it – but this is only on a voluntary basis, as
participation in the EPP is not required of non-eurozone
states (non-participants of note include the UK, Hungary
and the Czech Republic).80
The EPP includes structural features that are absent in the
SGP, such as recognition of the differences among member
states’ economies, an awareness of spillover effects from one
member state’s policies on another’s, and an understanding
among member states that upholding the integrity of the
single market must be the guiding principle behind political
and economic convergence strategies.
However, the pact has yet to deliver greater integration
among its adoptees. This is perhaps due to the open
coordination method used to adopt the measures, which
combines the legislation with others to stave off a worse
eurozone crisis, and to provide another mechanism by
which eurozone members can more fully integrate their
economies and collectively monitor fiscal behavior.81
The EPP is not without its critics. Primary criticisms surround
its seeming country bias, and its lack of real “teeth”. The
first complaint relates to the emphasis on competitiveness
indicators and their utility. The EPP has reinforced the
idea that competition – because peripheral countries have
lost competitiveness in the last year – is the only problem
that needs to be resolved. This approach is taken because
“creditor countries control the official agenda and are free
to put emphasis on those issues that do not require much
adjustment on their side.”82 No focus exists on issues that
are not problematic for Germany (national debt brake,
increasing retirement age, etc.). Other issues that would
require German reform, such as service-sector liberalization
and dealing with doubtful assets on the balance sheets of
“government sponsored” banks, have simply been omitted.
Regarding the lack of enforcement mechanisms (the
“teeth”), the EPP is big on meaning but short on delivery.
Belgian MEP Guy Verhofstadt has already noted the absence
of EPP credibility on this issue. “It sets out a series of fine-
sounding intentions and ambitious objectives without
indicating how the member states are to be compelled to
take the measures and implement the reforms which are
needed in order to attain the objectives,” he has said.83
Others, such as Daniel Gros of the Centre for European
Policy Studies (CEPS), have argued that the fundamental
problem of member states’ divergence on basic competition
issues, such as unit labor costs, cannot be made subject
to correction by government pressure. Rather, market
forces and the demands of creditors drive such things, and
they are outside the regulatory purview of convergence/
competitiveness correction mechanisms such as the EPP.
Additionally, this mechanism that single-mindedly focuses
on competition in Europe excludes some of Europe’s most
competitive nations (the UK, Denmark, Sweden, Poland,
Czech Republic).
“It will provide a new quality of economic coordination. And we call it the Euro Plus Pact for two reasons: first, because it is about what eurozone countries want to do more. They share one currency, and wish to undertake efforts on top of the existing EU commitments and arrangements. Secondly, because it is also open to the others… from non-euro countries.”75
- Herman Van Rompuy, European Council president, in a press conference to introduce the Euro Plus Pact, March 25, 2011
The Euro Plus Pact is the next logical step in realizing the Stability and
Growth Pact’s original goals.
1 8
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
1 9
These measures contain six legislative proposals to
strengthen the EU’s and, in particular, the eurozone’s
economic governance. Four of them focus on reforming
the SGP, two on addressing macroeconomic imbalances.85
The Six Pack features mechanisms for early detection
of imbalances and subsequent enforcement of punitive
actions against non-compliant member states (e.g., a
codification of the European Semester procedures into
law). Together, these measures are designed to enhance
budgetary discipline as intended under the SGP, to ensure
a satisfactory reduction in member states’ public debt, and
to decrease high deficits by achieving ambitious, country-
specific, medium-term budgetary objectives.
The Six Pack constitutes the most comprehensive set of
economic regulations pursued since the creation of the
eurozone. The Commission first presented these legislative
measures in September 2010. The European Parliament
approved them on September 28, 2011, and the Council
adopted them on November 8, 2011. Collectively, and in
coordination with other elements of the new economic-
governance rules, the six are intended to provide a method
for much stricter implementation of the SGP by increasing
transparency and accountability, enhancing surveillance
of fiscal and macroeconomic policy across the EU, and
giving the Commission more power to sanction and punish
offending member states. The Six Pack is the teeth missing
from the SGP.86
This set of new rules did not, of course, come about easily.
France and Germany, despite sharing largely congruent
aims, differed on execution. But Germany long pushed
for the adoption of common fiscal standards and norms
(unsurprisingly those that resemble its own fiscally
responsible practices).87 Not all eurozone members are
pleased with this approach. In the context of the euro crisis,
Berlin argues that its own growth and employment figures
demonstrate that it has the correct approach, and therefore
is right to push other EU countries down its path.
One primary issue of contention hinged on the nature
of sanctions for states that flout the new rules. Should
sanctions be imposed automatically (as favored by
Germany) or implemented via some form of qualified vote
in the Council (as favored by France). Paris also wanted
Council-approved warnings to precede sanctions. The
legislation’s final version includes a compromise that
allows for “reverse qualified majority” voting on warnings.
It stipulates that “in case of a persistent and/or particularly
serious failure to respect the rules, the Commission will draft
a recommendation to the member state to take corrective
action. The recommendation will be adopted by the Council
unless a qualified majority of member states vote against
it.”88 If no such majority blocks the recommendation, then
it is automatically issued. The French won a minor victory,
even if it came at the expense of a more rigorous and
effective corrective mechanism.
It’s difficult to speculate on how the Six Pack will play
out, which makes the dual-pronged hopes of these
measures more likely to have dual-pronged results. On
the one hand, the integrationist trajectory written into the
rules brings hope that Europe’s fiscal houses will better
coordinate and create a better firewall to defend against
future economic crises. If implemented stringently and
rigorously, the governance package could work well at
binding the individual and collective economic health of
all member states. This would prevent future catastrophic
imbalances and steer a course towards a more perfect fiscal
union. However, the severity of the envisioned methods
of correction (i.e., fines and sanctions in cases of member
state fiscal impropriety) could also turn potential crises into
much more serious economic difficulties for both offending
states and their neighbors.
More recently, a few weeks before the December 9, 2011
summit, the European Commission proposed two new
pieces of legislation designed to complement the Six
Pack measures by increasing the Commission’s power to
provide budgetary surveillance of eurozone countries.89
The proposals allow for enhanced monitoring procedures
and mechanisms, and are targeted primarily at eurozone
member states in the greatest financial danger (i.e., those
facing severe stability problems, those accepting financial
assistance, or those just moving off such assistance). An
expanded set of monitoring tools includes “a common
budgetary timeline [and] common budgetary rules”. The
tools can vary in their “intrusiveness” depending on the
1 9
“This ‘Six Pack’ reforms the Stability and Growth Pact and widens surveillance to macroeconomic imbalances. We are now back very close to what the Commission originally put on the table… This legislation will give us much stronger enforcement mechanisms. We can now discuss Member States’ budgetary plans before national decisions are taken. This mix of discipline and integration holds the key to the future of the euro area.”84
- José Manuel Barroso, European Commission president, State of the Union speech, September 28, 2011
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severity of a member state’s financial situation.90 The
primary value-added feature of the proposals is that
governments would be required to “publish and present
their draft budgetary plans in advance of their adoption by
national parliaments”.91 This still does not, however, grant
the Commission the right to veto member state national
budgets.
The ECB sees measures such as those comprising the Six
Pack (and the two new complementary measures) as the
only way to limit the eurozone’s broader troubles while
building sustainable economic stability. The Commission,
which helped introduce and further many of the new
governance proposals, has a strong interest in using them to
advance economic integration and to protect Europe from
future economic crises. Being vested with significant new
powers under the new economic governance scheme, the
Commission is in a new position of strength. And despite
criticism from some member states that the totality of the
new measures is tantamount to a sovereignty-sapping
“United States of Europe”, controlling or preventing future
crises would prove impossible for European institutions
without the new corrective tools and powers.
The Six Pack constitutes the most comprehensive set of economic regulations pursued since the creation of the eurozone.
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FISCAL UNION
The proposal for fiscal union is the most ambitious of the
proposals to solve the eurozone crisis because its credibility
requires buy-in from many EU member states. Although
it remains unclear how fiscal union differs from the
aforementioned EU legislation on economic governance,
some EU leaders believe a new agreement with a legally
binding mechanism would make, at a minimum, the rules
appear more enforceable to doubtful investors.
German Chancellor Angela Merkel has been a strong
advocate of achieving fiscal union through treaty change,
which requires ratification by all 27 EU member states. She
was disappointed by UK Prime Minister David Cameron’s
announcement at the December 8-9, 2010 EU summit that
London would not participate in a new agreement. Cameron
attempted to obtain special treaty concessions for financial
services in exchange for his approvals, but EU leaders did
not budge. The conventional thinking is that weak regulation
of financial services helped create the eurozone crisis.
French President Nicolas Sarkozy has favored an
intergovernmental agreement starting with the eurozone 17
and offering other EU member states an option to sign on
later. He has only reluctantly supported Merkel’s proposal
for treaty change92, a position mirrored in the French public.
A recent poll by Harris Interactive shows that 64 percent of
French respondents value national sovereignty and think
that states should act independently without permission
from European partners.93
The compromise proposal that Merkel and Sarkozy
negotiated includes automatic sanctions for countries that
breach the EU’s deficit limit of three percent stipulated in
the Stability and Growth Pact (SGP). The “automaticity” of
the sanctions demonstrates the need to apply the rules
more forcefully, as they have been repeatedly broken in
the past. Should a country wish to reject a sanction, it
would need a qualified majority agreement among all
the eurozone states.94 Additionally, the proposal calls for
balanced-budget amendments to be enshrined in national
constitutions.
All member states but the UK agreed to a new fiscal compact
at the December EU summit. At the next EU summit on
January 30, 2012 leaders should consider an initial draft of
the compact before adopting it at a March 1, 2012 European
Council meeting. A working group comprised of member
state advisors is working on the draft.
Plans are also progressing for an intergovernmental
treaty, which will exist outside the EU Treaty, among
26 EU member states. Such pacts normally provide
EU institutions with limited enforcement power, but a
Economic Governance: Fiscal Union
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UK
Spain
Italy
ECB
Germany
France
European Commission
Finland
Netherlands
Community Centered
Member State Centered
“The lessons are very simple: rules must be adhered to, adherence must be monitored, non-adherence must have consequences.” – Chancellor Angela Merkel, Bundestag address, December 2, 2011
FISCA
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Confidence in the finality of the eurozone
crisis is still low.
What Does Europe Want? The Who and How of Resolving the Euro Crisis
2 2
recent draft was controversial for a provision allowing the
Commission to bring a profligate member state to the
European Court of Justice (ECJ). This was criticized by the
UK, which insisted that an agreement outside the EU Treaty
should not give new powers to EU institutions. When that
provision was subsequently removed, a prominent group of
MEPs complained that the draft language did not respect
the integrity of the EU institutions.95 On January 18, 2012,
the European Parliament adopted a resolution expressing
doubts about the necessity for an intergovernmental
agreement (P7_TA-PROV(2012)0002).
Meanwhile, the ECB has criticized the draft as substantially
watered-down. Jörg Asmussen, an ECB executive board
member, wrote in a letter to the Financial Times that “[t]hese
revisions… clearly run against the spirit of the initial general
agreement on an ambitious fiscal compact.”96 ECB backing
has been important for eurozone leaders to obtain because
they initially believed an ambitious fiscal compact could
encourage the bank to step up its intervention in flailing
bond markets, thereby assuaging investor fears. But by the
start of the December 2011 EU summit, the ECB signaled
it would not act that way. The latest criticism of the draft
further dampens its impact.
It is also unclear if the agreement would require a national
referendum in Ireland, where passage would be anything
but assured.97 Given this potential hurdle, Chancellor
Merkel appears to want to make ratification a requirement
for further bailouts.
Eventually, the intergovernmental agreement could be
inscribed into the existing EU Treaty. This could realistically
happen within five years.98 Such an approach would help
satisfy the European Commission, which has repeatedly
denounced any method that establishes a fiscal union
that divides the EU into a “two-speed Europe”.99 Given the
agreement’s diminished impact in the short term, however,
confidence in the finality of the eurozone crisis remains low.
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The European Commission and certain political leaders
support creating mutualized, or shared, debt among
eurozone nations. They join many leading economists
and policymakers who see this as a solution to Europe’s
fragmented fiscal system.
Under a so-called eurobond scheme, eurozone countries
would issue joint bonds and collectively guarantee them.
By pooling eurozone lending, the nominal interest rate
on sovereign debt regardless of the issuing country would
coalesce around the weighted average rate of current
national bond issuances. This would imply, if using the
first seven months of 2011 as a basis, interest rates of
3.17 percent for two-year bonds and 4.41 percent for 10-
year bonds.100 This scenario would raise interest rates on
German bonds by between 1.34 percent and 1.73 percent,
representing an annual cost of between €33 billion and
€47 billion for Germany.101 But such a structure would
relieve the pressure on countries such as Italy and Spain,
which are struggling to maintain affordable access to bond
markets. They would use a eurozone-wide debt guarantee to
exploit the creditworthiness of their more financially robust
northern neighbors, especially Germany. A mutualized bond
would also be a highly liquid asset to rival Treasury bonds
as a reserve asset. This, in turn, would add to the bond’s
long-term attractiveness.
European Commission President José Manuel Barroso
proposed such “stability bonds” in his State of the Union
speech on September 28, 2011.102 These instruments,
Barroso said, would be “bonds that are designed in a way
that rewards those who play by the rules, and deters those
who don’t.”103 They would be designed for the daily financing
of eurozone governments through common issuance.
The Commission has devised three possible approaches for
mutualization:104
1)Fullmutualization:This plan would convert all national
government bonds to eurobonds backed by the 17 eurozone
countries. It would require treaty changes and would face
major political hurdles. Full mutualization would also be
unlikely to incentivize indebted member states to continue
with difficult reforms since it would shield them from the
market pressures that have spurred austerity measures and
structural reform over the past year and a half.
2) The Blue Bond Package: Eurozone countries
would issue common eurobonds to a certain limit (e.g.,
60 percent of their annual GDP). National governments
would be responsible for backing any additional debt that
they issue. This plan would also require treaty changes and
face political hurdles. It has nevertheless been championed
by many, particularly those in the think-tank community
who see it as an effective incentive to member states to
keep their debt below 60 percent of GDP. Any excess debt
issuance, dubbed “red bonds”, would be less creditworthy
and require a higher yield to balance investor risk.105 In the
long term, this could exert corrective pressure on member
states that would otherwise be tempted to allow debt to
exceed 60 percent.
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EUROBONDS: MUTUALIZATION OF SOVEREIGN DEBT “Eurobonds are not a short-term fix, but they could fill the gap left by the loss of confidence in government bonds generally.”- John Bruton, former Irish prime minister and former EU ambassador to the US, October 18, 2011
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What Does Europe Want? The Who and How of Resolving the Euro Crisis
European Commission
France
Austria
Germany
Spain
Netherlands
Finland
Does Not Support Eurobonds
Pro-Eurobonds
Italy
ECB
Mutualization
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3)Limitedguarantees: This third option would provide
some guarantees on newly issued bonds. Its structure
would be similar to that of the European Financial Stability
Facility (EFSF), although bond guarantees would be
readily available to states in non-emergency situations
as well. Limited guarantees would still likely lead to a
decline in creditworthiness since they would reflect the
creditworthiness of the nations that offer them.
The political hurdles to mutualizing debt lie first and
foremost in Germany. Chancellor Angela Merkel has
adamantly opposed the creation of eurobonds, not
least because Germany would risk its AAA rating if its
creditworthiness were pooled with the rest of the eurozone.
Speaking ahead of her December 2, 2011 Bundestag
address, she said that “I and the rest of the government
find eurobonds the wrong method in this stage of European
development, even damaging.”106 Germany sees the
introduction of a mutualized bond scheme as an undue
course to relieve pressure from governments currently
implementing politically difficult reform packages as a
result of rising borrowing costs. In addition, the German
Constitutional Court ruled in September 2011 against
eurobond issuance.107
Eventual mutualization has nevertheless not been ruled
out. EU Internal Market Commissioner Michel Barnier’s
prediction that “Germany will move [on eurobonds] as soon
as it has confidence in our capacity to manage together”
may yet come true.108
France has taken a public position similar to that of
Germany. French Budget Minister Valerie Pecresse has said
that eurobonds “would be the final stage of a process of
convergence. Right now there’s a consensus that the step
to take is repairing public finances.”109 Given the French
economy’s vulnerability, however, this position could
change if negative economic developments continue.
The IMF has consistently stated that now is not the right
time to consider eurobond issuance. Chief Economist
Olivier Blanchard has said, “Our position is that it would
be premature to implement [eurobonds] before a good
system of surveillance is in place.”110 Blanchard favors other
corrective measures not yet fully exhausted. ECB Executive
Board Member José Manuel Gonzalez-Paramo bluntly told
an audience at Oxford University, “I think eurobonds will
exist at some point.”111 The potential implementation of
eurobonds as a means of is seen my key participants as the
capstone of the fiscal union process.
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CONCLUSIONWith its implications for fiscal sustainability, competitiveness and financial markets in Europe and around the world, the
eurozone crisis is a global economic crisis. But more fundamentally, it is a political crisis. The ostensible power centers in
the EU have not upheld hallowed concepts, such as the community method or open coordination, that are enshrined in the
Treaties and high-minded communiqués. In reality, power is tucked away in national capitals that pursue their own interests.
That is a challenge for a system that is subject to vetoes from numerous states and institutions, many of which can derail
decision-making, and that is difficult for many Europeans to access and influence. Indeed, these are some of the EU political
system’s most endemic flaws.
The EU’s long-term legitimacy will require policymakers, central bankers, Commission officials and economists to bring
decision-making out of the shadows and subject it to the edifying check of democratic accountability. The question of what
Europe wants must ultimately be decided by the people of Europe themselves.
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THE UNITED KINGDOM
A somewhat dramatic coda to the December 2011 European
summit came with UK Prime Minister David Cameron’s
veto of an EU-based treaty change on fiscal coordination.
After an entire night of intense deliberation in which other
member states refused to accept British insistence on
single market opt-outs for the UK financial-services sector,
Cameron emerged in the morning to say that he had vetoed
the proposed changes to protect British national interests.
At home in London, the veto was lionized by the euroskeptic
boulevard press and the Tory party rank and file as a
demonstration of decisive leadership. But it was gleefully
derided in France and lamented in Germany whose
government sees the UK as a natural ally for the continuation
of market liberalization and fiscal rectitude. Either way, the
move has “plunged Britain’s position in Europe into the
greatest uncertainty in a generation.”112
The UK government has demonstrated since the veto that its
staunch opposition to a new treaty was not an apparition. It
has sustained its campaign against the new treaty, vowing to
block the eventual signatories of the agreement from using
EU institutions in its enforcement. This decision is having
a clear impact on the development of fiscal governance,
particularly regarding the role of the European Commission
and the European Court of Justice (ECJ) in enforcement.
The erosion of informal ties with pan-Europeanconservatives:Always an outsider in the European club,
the UK has accelerated the process of disentangling itself
from EU governance. Adroit policymaking in the highly
stylized negotiations of Brussels and Strasbourg requires
access to as many formal and informal halls of power as
possible. Having long recognized this, the UK, Poland and
other non-eurozone members – often derided as “outs”
by the political leadership of France and other eurozone
members – have sought to preserve their influence through
their role as informal observers to negotiating processes.
This takes place inside the Council, the formal negotiating
area, and outside in political caucuses, where party
groupings hammer out joint positions on issues before
European summits. The UK will be party to the negotiations
on the intergovernmental fiscal treaty.
In recent years and much to the dismay of some of its
most ardent advocates in Brussels – including its own
nationals – the Tory party under Cameron’s leadership
has broken many of the informal ties that linked his party
to the continental center-right. The most glaring example
of this was the Conservative party’s 2009 decision to pull
the Tories from the pan-continental European People’s
Party (EPP), a federation of center-right parties, and
to join instead an ideologically haphazard grouping of
euroskeptics, the European Conservatives and Reformists
(ECR). This decision has marginalized Tory members in the
European Parliament as evidenced by roles in leadership
and key committees. It also effectively barred Cameron from
attending EPP summits. The Marseilles EPP gathering on
the eve of the EU summit was seen as the moment in which
leaders such as German Chancellor Angela Merkel, French
President Nicolas Sarkozy, European Council President
Herman Van Rompuy and European Commission President
José Manuel Barosso – all of the center-right EPP – could
coordinate positions on treaty change. Some keen observers
have speculated that had Cameron not abandoned the EPP
in 2009, he would have had a clearer sense of the Franco-
German sentiment and been able to plan accordingly.
Splendidisolation:France, now pursuing a strategy that
maintains the dynamic that leaves the UK marginalized, is
pushing hard for passage of an EU-wide financial-transition
tax (FTT). Other leaders, including Merkel, have supported
such an initiative but only if implemented throughout the
eurozone or, optimally, the EU. The UK is strongly opposed
to an EU-wide FTT on multiple grounds and could again be
placed in a position to veto, perhaps alone.
A diminished actor in the world: One of the most
consequential examples of collateral damage from the
eurozone crisis has been its impact on the EU’s ability –
formally and informally – to project power in the world.113
Despite its Franco-British leadership and powers derogated
to it by the Lisbon Treaty, the much maligned European
External Action Service (EEAS) has suffered a still birth
since 2009.
The timing of the financial crisis could not be more
inauspicious for the EEAS, placing enormous pressure
on it to focus on financial and institutional wrangling in
Brussels and leaving it noticeably absent from such major
ANNEX I
“The European Community belongs to all its members. It must reflect the traditions and aspirations of all its members.”– Margaret Thatcher, The Bruges Speech on Britain and Europe, September 20, 1988
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geopolitical events as the Arab Spring and the Fukushima
Daiichi power plant disaster in Japan. The UK has the
largest defense budget in the EU and the region’s greatest
expeditionary capabilities. London is also one of the most
consistent advocates of the European presence in the
world. But the Cameron government has been clear in its
intent to rein in the EEAS’s power, going so far as to block a
meager €27 million increase in its budget.
The crisis has shown that role of the EU as a global actor
will remain relegated to its power as a “force multiplier”
in unconventional levers of power – humanitarian and
development aid, sanctions, regulation, and trade relations.
The pretense to a greater Europe-puissance has begun to
give way as this goal looking less realistic.114
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MAY 2, 2010 The European Central Bank, European
Commission, and the International Monetary Fund agree to
a €110 billion bailout package for Greece. Greece promises
austerity to cut its budget deficit to three percent of GDP
by 2014.
MAY 9, 2010 The 27 heads of EU member states agree
to create the European Financial Stability Facility (EFSF), a
legal instrument that provides funding assistance by solvent
eurozone countries for insolvent eurozone countries.
NOVEMBER 28, 2010 EU finance ministers approve
a €85 billion bailout package for Ireland that includes
funding from the EFSF (and its permanent mechanism,
the European Stability Mechanism (ESM)), the IMF, and
bilateral loans from the UK, Denmark, and Sweden. Ireland
promised austerity in return.
JANUARY 12, 2011 The European Commission adopts
the first Annual Growth Survey (AGS) and begins the
new annual cycle of economic harmonization and policy
coordination known as the European Semester.
MARCH24-25,2011 The European Council agrees on the
Euro Plus Pact, a strategy for competition and employment
growth that is obligatory for eurozone countries and
optional for the remaining EU members.
MAY16,2011 EU finance ministers approve a €78 billion
bailout package for Portugal that includes funding from the
EFSF, the ESM and the IMF.
JULY21,2011 At an EU summit, heads of state announce
the second bailout for Greece of €109 billion from the EFSF,
ESM and private investor losses. They also announce the
enlargement of EFSF from €440 billion to €780 billion,
which will require ratification by national parliaments.
OCTOBER 13, 2011 The enlargement of the EFSF is
finally ratified with approval by the Slovak parliament.
OCTOBER 26, 2011 At an EU summit, heads of state
announce plans to reduce Greece’s debt whereby private
investors take a greater loss (about 50 per cent) through
a voluntary agreement in exchange for safer debt. Leaders
also announce plans to recapitalize Europe’s banks at the
cost of €106 billion and create a €1 trillion firewall to
prevent the spread of contagion to larger, more solvent
eurozone countries.
NOVEMBER 8, 2011 The European Council adopts
the Six Pack measures, six proposals comprising the EU’s
economic governance package. The Six Pack amends and
strengthens the Stability and Growth Pact (SGP), introduces
a new Excessive Imbalances Procedure, and includes new
requirements for national budgetary frameworks.
NOVEMBER 9, 2011 Greek Prime Minister George
Papandreou resigns after a tumultuous week in the markets
spurred by his threat to put the country’s bailout conditions
to a referendum due to violent protests in the streets of
Athens over harsh austerity measures.
NOVEMBER 16, 2011 Italian Prime Minister Silvio
Berlusconi resigns after the Italian Parliament passed
austerity measures in light of soaring interest rates on
Italian debt. Technocrat Mario Monti succeeds him to lead
Italy towards more fiscal responsibility.
NOVEMBER 23, 2011 The European Commission
publishes a “Green Paper” on the feasibility of stability
bonds, a proposal for mutualizing debt among the eurozone
countries.
NOVEMBER 24, 2011 Italian Prime Minister Mario
Monti, French President Nicolas Sarkozy and German
Chancellor Angela Merkel meet in Strasbourg to discuss
Monti’s plan to balance Italy’s budget by 2013. They agree
to create plans for a fiscal union and to stay quiet on the
role of the ECB.
NOVEMBER 30, 2011 Eurozone finance ministers
agree on ways to boost the EFSF’s firepower through bond
guarantees and private investment. They also discuss IMF
involvement in boosting the fund.
ANNEX IITIMELINE FOR MAJOR DECISIONS TAKEN TO RESOLVE THE EUROZONE CRISIS
2 8
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DECEMBER 5, 2011 French President Nicolas Sarkozy
and German Chancellor Angela Merkel meet in Paris to
discuss plans for treaty change and automatic sanctions for
fiscal irresponsibility. They also request other EU leaders to
announce their positions on treaty change by the December
8-9 summit, so that measures can be in place by March
2012.
DECEMBER8-9,2011 The EU summit focuses on plans
for a fiscal compact, to which 26 EU member states agree.
UK Prime Minister David Cameron refuses to support it,
thereby blocking potential treaty change. ECB President
Mario Draghi resists notions that the bank would intervene
in sovereign-debt markets. Eurozone and EU leaders agree
to contribute €150 billion in bilateral loans to the IMF to
support global financial stability.
JANUARY 9, 2012 French President Nicolas Sarkozy
and German Chancellor Angela Merkel meet in Berlin to
prepare for the January 30, 2012 EU summit. They praise the
progress of the fiscal compact-drafting process and launch
a strategy to revive economic growth and job creation in a
further effort to combat the eurozone’s debt problem. They
also urge the expedition of Greek debt restructuring.
JANUARY 30, 2012 Another EU summit in Brussels
is scheduled to discuss solutions to the crisis. Under
consideration is a draft of the guidelines for a fiscal compact.
MARCH1,2012The 26 EU member states are expected
to sign on to a new fiscal compact. Eurozone leaders re-
assess the adequacy of the ESM/EFSF €500 billion ceiling.
JULY 2012 The European Stability Mechanism (ESM)
enters into force and the EFSF ceases to negotiate new
programs.
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1 Beschluss des 24. Parteitages der CDU Deutschlands: Starkes Europa – Gute Zukunft für Deutschland. Pg. 8.2 Die Schuldenbremse – für die Zukunft unserer Kinder. Federal Republic of Germany. 2010, retrieved online : http://www.bundesregierung.de/Content/DE/__Anlagen/2010/schuldenbremse-infografik-textversion,property=publicationFile.pdf3 Informationsgemeinschaft zur Feststellung der Verbeitung von Webeträgern e. V., retrieved online : http://www.ivw.de/4 Bild-Zeitung, Oct. 27, 2010; Bild-Zeitung, June 6, 2011.5 “Is this really the end?” in: The Economist, London. November 26th, 2011, retrieved online : http://www.economist.com/node/215402556 The GfK Group, retrieved online : http://www.gfk.com/7 Ifo Business Survey December 2011. Retrieved online at: http://www.cesifo-group.de/portal/page/portal/ifoHome/a-winfo/d1index/10indexgsk8 “Germany’s unemployment rate at record low in December.” In BBC Online. Retrieved online at: http://www.bbc.co.uk/news/business-163904299 Schultz, Stefan. „Europas Krise, Deutschlands Segen“ in Spiegel Online. January 9, 2012. Retreived online at: http://www.spiegel.de/wirtschaft/soziales/0,1518,808010,00.html10 Auction Result: treasury discount paper of the Federal Republic of Germany. January 9, 2012. Retrieved online at: http://www.bundesbank.de/download/presse/pressenotizen/2012/20120109.tenderergebnis.en.pdf11 In May 2010, the CDU attempted to use a hard line on Greece to push up its poll numbers in North-Rhine Westphalia. In August 2011, the FDP attempted to profile itself as a Euro-skeptic force. Both strategies backfired with the CDU losing 10.3% of its support and control of the government and the FDP garnering a paltry 1.8%. 12 Wohlgemuth, Michael. “Kant was No Stickler for Principles” in: What does Germany Think About Europe? Ulrike Guerot and Jacqueline Henard (eds). June 2011. Pg.13. 13 Schmid, John. “German Slump Prompts Push for Lower Rates: Schroeder Urges the ECB to Focus on Growth, Too.” The New York Times, June 30, 2001, retrieved online : http://www.nytimes.com/2001/06/30/business/worldbusiness/30iht-ecb_ed3__1.html 14 Beschluss des 24. Parteitages der CDU Deutschlands: Starkes Europa – Gute Zukunft für Deutschland15 The US Federal Reserve has a dual mandate of inflation targets and employment. Lowering interest rates can create inflationary pressure, which helps to create jobs because businesses are more likely to spend and grow. Additionally, it could depreciate the currency which would boost exports.16 Marsh, David. The Euro: The Battle for a New Global Currency. New Haven. 2009. pg. 217. 17 Speech by Mario Draghi, November 3, 2011. Retrieved online : http://www.ecb.int/press/key/date/2011/html/sp111201.en.html 18 Angela Merkel was the one who publically broached the possibility of departure of Greece from the eurozone. 19 Speech by Mario Draghi, Hearing before the European Parliament on the Occasion of the ECB’s 2010 Annual Report, December 1, 2011. Retrieved online at: http://www.ecb.int/press/key/date/2011/html/sp111201.en.html20 Atkins, Ralph and Hugh Carnegy. “Draghi hints at eurozone aid plan,” Financial Times, December 1, 2011. 21 Marsh, 227. 22 Draghi, December 1, 201123 Article 123, Treaty of the European Union, retrieved online : http://eur-lex.europa.eu/en/treaties/dat/11992M/htm/11992M.html24 Speech by Christian Wulff. Lindau Nobel Laureate Meeting. August 24, 2011. Retrieved online : http://www.lindau-nobel.org/upload/2011_08_24_Opening_Speech_Wulff_English_6252.pdf 25 Mahler, Armin. „Maßgeschneidertes Trostpfaster,“ Spiegel Online. January 3, 2012. Retrieved online at: http://www.spiegel.de/wirtschaft/unternehmen/0,1518,807005,00.html26 Taylor, Paul. “Euro Zone Leaders May Have to Accept Tighter Union.” New York Times, November 28, 2011. Retrieved online : http://www.nytimes.com/2011/11/29/business/global/euro-zone-leaders-may-have-to-accept-tighter-union.html27 Eurostat. Retrieved online : http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Unemployment_statistics28 Trading Economics. Retrieved online : http://www.tradingeconomics.com/germany/gdp-growth29 Barker, Tyson. “Flexicurity in Europe’s Labor Market” in: Policy Matters, Volume 4, No. 2, 2007. Berkeley. Retrieved online : http://policymatters.net/issue/PolicyMatters_Spring_2007.pdf30 France’s Loi Aubry limits weekly working hours to 35. 31 IMF Stability Report on France, November 2011. Retrieved online : http://www.imf.org/external/np/country/2011/mapfrance.pdf 32 Speech by Nicolas Sarkozy. Toulon, France. December 1, 2011. Retrieved online : http://www.elysee.fr/president/les-actualites/discours/2011/discours-du-president-de-la-republique-a-toulon.12553.html33 Ibid. 34 Treaty of the European Union, retrieved online : http://eur-lex.europa.eu/en/treaties/dat/11992M/htm/11992M.html35 The Europe 2020 strategy’s predecessor, the Lisbon Agenda, set forth a series of targets to create a European knowledge-based economy that was meant to be the world’s most competitive. Green Paper on the feasibility of introducing Stability Bonds, European Commission. November 23, 2011. Retrieved online : http://ec.europa.eu/commission_2010-2014/president/news/documents/pdf/green_en.pdf36 The Commission has a two-pronged mission in Greece: It wants to establish investment projects aimed at maintaining demand and employment, and it aims to expedite the injection of €15 billion of structural funds. Its informal influence has also increased by staffing the ministries across the region have been seconded from the Commission to help distressed countries meet targets set by the troika. Questions and Answers on the Task Force for Greece. European Commission website. September 13, 2011. Retrieved online : http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/599&format=HTML&aged=0&language=EN&guiLanguage=en 37 As President Barroso stated: “It was an illusion to think that we could have a common currency and a single market with national approaches to economic and budgetary policy. Let’s avoid another illusion that we can have a common currency and a single market with an intergovernmental approach.”38 These bonds are not referred to as “eurobonds” because they are guaranteed by individual member states rather than the collective euro zone. Some argue, however, that this is a façade and they are essentially Eurobonds. See: De le Dehesa, Guillermo. “Eurobonds: Concepts and Implications,” European Parliament, March 2011, retrieved online: http://www.europarl.europa.eu/document/activities/cont/201103/20110317ATT15734/20110317ATT15734EN.pdf).39 EFSF Framework Agreement, retrieved online: http://www.efsf.europa.eu/attachments/20111019_efsf_framework_agreement_en.pdf. In November, the interest rate on EFSF loans reached 9 per cent in Ireland. Reddan, Fiona. “Ireland’s funding costs start rising again,” Irish Times November 26, 2011, retrieved online: http://www.irishtimes.com/newspaper/finance/2011/1126/1224308179040.html).40 See EFSF Framework Agreement.41 The Solidarity Clause of the Maastricht Treaty provided the legal basis for the financial stability amendment. The provision was originally intended to allow for intra-governmental assistance in the midst of natural or man-made disasters. See De Witte, Bruno. “The European Treaty Amendment for the Creation of a Financial Stability Mechanism,” Swedish Institute for European Policy Studies Bepa: June 2011, retrieved online: http://www.eui.eu/Projects/EUDO-Institutions/Documents/SIEPS20116epa.pdf. 42 The ESM will be established as an intergovernmental organization under public international law. See the European Council’s website at: http://www.european-council.europa.eu/eurozone-governance/features/feature151211-moving-towards-fiscal-union.43 Peel, Quentin and Peter Spiegel. “Devil’s in detail of Sarkozy-Merkel deal.” Financial Times December 6, 2011, retrieved online: http://www.ft.com/intl/cms/s/0/30aba180-2040-11e1-9878-00144feabdc0.html#axzz1frbFkoZd. 44 The European Council’s fact sheet on the adjustment program for Greece, retrieved online: http://www.european-council.europa.eu/media/443140/27.10.11-greece-factsheet.pdf.45 Valée, Shahin. “There is no such thing as EFSF leverage without the ECB,” Bruegel October 19, 2011, retrieved online: http://www.bruegel.org/publications/publication-detail/publication/621-there-is-no-such-thing-as-efsf-leverage-without-the-ecb/. 46 The EFSF website, found at: http://www.efsf.europa.eu/mediacentre/news/2011/2011-015-maximising-efsfs-capacity-approved.htm. 47 “Netherlands, Finland favor strengthening IMF role as they improve euro defenses,” Washington Post November 25, 2011, retrieved online: http://www.washingtonpost.com/business/markets/poll-germans-strongly-against-eurobonds-approval-of-merkels-crisis-management-rising/2011/11/25/ gIQANZaNvN_story.html48 Armitstead, Louise and Jonathan Russell. “Christine Lagarde: IMF may need billions in extra funding,” The Telegraph September 25, 2011, retrieved online: http://www.telegraph.co.uk/finance/financialcrisis/8788223/Christine-Lagarde-IMF-may-need-billions-in-extra-funding.html
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49 In August 2011, Daniel Gros, director of the Centre for European Policy Studies (CEPS), the Brussels-based think tank, and Thomas Mayer, Deutsch Bank chief economist released a paper that proposes to register the EFSF as a bank (called the European Monetary Fund (EMF)), which would give it access to potentially unlimited amounts of ECB re-financing in case of an emergency. The EMF would have access to the ECB like other banks have; the ECB acts as a lender of last resort for eurozone central banks. The authors tout this idea for three reasons: It works around the EU Treaty’s prohibition of ECB monetary financing, it could effectively increase much- needed EFSF liquidity, and it does not require additional taxpayer money. See: Gros, Daniel and Thomas Mayer. “Refinancing the EFSF via the ECB,” CEPS. August 18, 2011. 50 Speech by Christine Lagarde. “Global Risks are Rising, but there is a Path to Recovery”: Remarks at Jackson Hole. August 27, 2011, retrieved online: http://www.imf.org/external/np/speeches/2011/082711.htm. 51 “No big bazooka,” The Economist October 29-November 4, 2011. 52 “A nuclear winter? The fallout from the Bankruptcy of the Lehman Brothers,” The Economist September 18, 2010, retrieved online: http://www.economist.com/node/12274112. 53 Unicredit Strategic Plan, retrieved online: http://www.unicreditgroup.eu/en/pressreleases/PressRelease1753.htm. 54 Press Release, European Banking Authority, December 8, 2011, retrieved online at: http://stress-test.eba.europa.eu/capitalexercise/Press%20release%20FINALv2.pdf. 55 See letter text on the blog of the co-author, Sony Kapoor: http://www.re-define.org/blog/2011/11/28/need-pan-eu-funding-support-banks. 56 Please see: Véron, Nicolas. “Europe Must Change Course on Banks,” Peterson Institute for International Economics December 19, 2011, retrieved online at: http://www.piie.com/realtime/?p=2581. 57 Orphanides, Athanasios. “New Paradigms in Central Banking?” Working Paper 2011-6, Central Bank of Cyprus Working Paper Series. Nicosia: Central Bank of Cyprus, November 2011. Retrieved online. www.centralbank.gov.cy/media/pdf/NPWPE_No6_112011.pdf 58 “EU governance by self-coordination? Towards a gouvernement économique.” European Commission Report, August 2004. Retrieved online. http://cordis.europa.eu/documents/documentlibrary/100124131EN6.pdf. 59 Communication from the European Commission. “Europe 2020: A strategy for smart, sustainable and inclusive growth.” Brussels, 3.3.2010. Retrieved online. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:2020:FIN:EN:PDF 60 “Stability and Growth Pact and Economic Policy Coordination.” Summary of EU Legislation, Economic and Monetary Affairs, Retrieved online at: http://europa.eu/legislation_summaries/economic_and_monetary_affairs/stability_and_growth_pact/index_en.htm61 The first arm of the SGP, the preventative arm, required member states to submit annual plans to the Commission that laid out how they would maintain their “sound fiscal positions” vis-à-vis their national economic policies. These plans were in turn assessed by the Commission, and then ultimately judged by the Council. If the judgment of the Council was that any member state appeared to be in jeopardy of losing its sound fiscal position, the Council could issue a warning (in conjunction with the Commission providing pointed policy advice) to the offending member state, in the hopes that doing so would prevent that state from getting into excessive deficits. The second arm of the SGP, the dissuasive arm, established a mechanism whereby any member state whose deficits ran over 3% of GDP/Debt:GDP ran over 60% (and thus was in Treaty violation) would be called out for excessive deficits, given a set of policy recommendations by the Council on how to course-correct its fiscal trajectory, and provided with a specific time frame in which to bring itself back to the firmer footing of deficits below the 3% threshold. Any state failing to act on the Council’s recommendations would be subject to “further proceedings”, which for eurozone states also included the possibility of sanctions.62 Blanchard, Olivier and Francesco Giavazzi. “Improving the Stability and Growth Pact Through Proper Accounting of Public Investment,” in Fiscal Policy, Stabilization and Growth Pact: Prudence or Abstinence?, edited by Guillermo Perry, Luis Servén, and Rodrigo Suescún. Washington DC: The World Bank, 2008. 259.63 Savage, J.D. and Verdun, A. “Reforming Europe’s Stability and Growth pact: Lessons from the American Experience in Macrobudgeting”, Review of International Political Economy 14(5). 2007. 842– 867. 64 Alves, Rui Henrique and Óscar Afonso, “The “New” Stability and Growth Pact: More Flexible, Less Stupid?” FEP Working Paper Series, June 2006. 6.65 Dutzler, Barbara and Angelika Hable, “The European Court of Justice and the Stability and Growth Pact – Just the Beginning?” European Integration online Papers (EIoP) Vol. 9 (2005):5. Retrieved online. http://eiop.or.at/eiop/pdf/2005-005.pdf 66 José Manuel Barroso, press conference unveiling the first Annual Growth Survey (AGS). Brussels, January 12 2011. Speech retrieved online. http://www.youtube.com/watch?v=UvRBC8jxkh4 67 “Monitoring progress through the European Semester.”Europe 2020 website. Retrieved online. http://ec.europa.eu/europe2020/reaching-the-goals/monitoring-progress/index_en.htm 68 “In order to ensure the proper functioning of EMU, euro area Member states are under a particular obligation to regard their economic policies as a matter of common concern due to the potential for spillover effects among countries sharing a common currency. Therefore, a more comprehensive and permanent overhaul of economic policy coordination at the EU and euro area level has proved necessary in light of the crisis and the current challenges.” Council Recommendation of 12 July 2011 on the implementation of the broad guidelines for the economic policies of the Member States whose currency is the euro. Official Journal C 217, 23/07/2011 P. 0015 – 0017.69 Using the AGS as the foundation for the semester more broadly, and taking its policy advice into account as the basis for developing policy goals moving forward more specifically, member states then draft their National Reform Programs (NRP) along with their Stability or Convergence Programs, to reflect the advice offered in the AGS. The two documents each member state produce based on the AGS will be presented to the Commission for assessment. Thereafter, the Council (based on the Commission’s assessment) will return to each member state a tailored set of specific guidelines, which in turn are to be used in the shaping of national budgets in the second half of the year. Actually implementing the specific guidelines as they appear in the Council’s recommendation and incorporating them into their national policies is, however, optional. States still maintain their rights to policy and budget formulation without EU influence. There is also no direct punitive consequence built into the European Semester itself that results from a member state deciding not to base its national policy around the Council’s suggestions – although punitive measures are built into other legislative arms of the overall economic governance package that now seeks to redefine the SGP. European Commission. Retrieved online. http://ec.europa.eu/economy_finance/een/019/article_88106_en.htm; The European Semester comprises an annual, six-month cycle in economic policy coordination among all 27 member states that starts in January and finishes in June/July. It begins with the Annual Growth Survey (AGS), a report in which the Commission analyzes the Union based on the progress made towards Europe 2020 targets, a macro-economic report, and the joint employment report. The AGS applies to the EU as a whole, but is also individualized; it is meant to change the way national governments shape their economic and fiscal policies. Member states are encouraged to draft their budgetary and structural reform plans according to AGS recommendations and conclusions, taking an interest in their neighbors’ economic well-being as well as their own. The Commission is to monitor progress towards commonly agreed goals throughout an initial period. The first six months of each year are thus meant to act as a back-and-forth between member states and European institutions (Commission and Council), during which time policy interdependencies are to be identified, and general and country-specific recommendations are made. This is done before national parliaments meet to make policy decisions in the second half of the year.70 Hallerberg, Marzinotto and Wolff, 8-9.71 Europe 2020 website. Retrieved online. http://ec.europa.eu/europe2020/reaching-the-goals/monitoring-progress/index_en.htm 72 A National Reform Program is a set of objectives and measures identified by EU member states that need to be taken in order to achieve budgetary targets and the correction of excessive budget deficits. National Reform Programs enable member states to identify the setting of national targets under the “Europe 2020 Strategy”, as well as undertake growth strategy measures for development, employment and social stability. They are not, in and of themselves, budgets, as much as they are a plan for establishing a framework upon which budgetary goals should be based, and which informs the creation of a national budget. As may be implicit in the titles, Stability Programs are submitted by eurozone states, whereas Convergence Programs are submitted by non- eurozone states. Both are comprised of measures respective member states pledge to undertake in order to stabilize their public finances.73 Hallerberg, Mark, Benedicta Marzinotto, Guntram B. Wolff. “How Effective and Legitimate is the European Semester? Increasing the Role of the European Parliament.” Briefing Paper for the European Parliament. Brussels: European Parliament, August 2011.74 Ibid.75 Herman van Rampuy, press conference unveiling the Euro Plus Pact. Brussels, March 25, 2011. Speech retrieved online. http://www.youtube.com/watch?v=Vfy8B0rckp0&feature=relmfu 76 Press release of the European Union, “Conclusions of the European Council (24/25 March 2011). Retrieved online. http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf77 Policy areas subject to convergence include: reducing the cost of labor and increasing productivity by reducing centralized bargaining and decreasing public wages; increasing long term, and especially youth, employment; reforming public finances by limiting government liabilities; controlling levels of private debt; coordinate corporate tax policy; all of these must now be coordinated and aligned between member states across the EU.
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78 Rennie, David, “The Divisiveness Pact. Charlemagne Column, The Economist, March 10, 2011. Retrieved online. http://www.economist.com/node/18330371 79 http://www.novinite.com/view_news.php?id=12662680 Press release of the European Union, “Conclusions of the European Council (24/25 March 2011). Retrieved online. http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf; “’Euro-plus pact’ divides non-eurozone members.” Euractiv, March 25, 2011. Retrieved online. http://www.euractiv.com/euro-finance/euro-plus-pact-divides-non-eurozone-members-news-503526 81 The OpenMethodofCoordinationis a relatively new method of coordination within the EU designed to help Member States progress jointly in the reforms they needed to undertake in order to reach the Lisbon goals. It consists of fixing guidelines/timetables, indicators & benchmarkes, translating guidelines into national and regional policies, and periodically monitoring progress in order to help engender mutual learning processes among/between member states.82 Gros, Daniel. “Sense and Nonsense of the Euro Pact Plus,” in The Contribution of 16 European Think Tanks to the Polish, Danish and Cypriot Trio Presidency of the European Union. Brussels: Notre Europe, June 2011. 83 Verhofstadt, Guy. “Can the euro survive Merkel, Sarkozy and Barroso?” MEPs Corner. Retrieved online. http://www.alde.eu/alde-group/meps-corner-news/meps-corner-details/article/can-the-euro-survive-merkel-sarkozy-and-barroso-37453/ 84 José Manuel Barroso, State of the Union Address, Strasbourg, September 28, 2011. Retrieved online. http://ec.europa.eu/commission_2010-2014/president/pdf/speech_original.pdf 85 1) Regulation amending regulation 1466/97 (from July 1997, regarding the strengthening of surveillance of budgetary positions and the surveillance and coordination of economic policies): from now on, budget plans will be sent to the Commission as part of the European semester; countries are not allowed to increase spending by more than their average GDP growth; failure to reach mediumtermbudgetobjectives(MTOs) result in initial warning, penalties of 0.2% of GDP after 7 months (requires only simple majority vote). This is the “preventative arm” of the economic governance package; 2) Regulation amending regulation 1467/97 (from July 1997, regarding speeding up and clarifying the implementation of the excessive deficit procedure): countries in violation of 60% of GDP debt limit will have to reduce debt by at least 0.5% on average over 3 years or face penalties of 0.2% of GDP (only overturned by qualified majority vote). This is the “corrective arm” of the economic governance package; 3) Regulation on fines for deficit countries: regulation setting out a range of fines for eurozone countries under the excessive debt procedure. Countries flouting MTO requirements/EU debt limits are subject to fines ranging from 0.2-0.5% of GDP; difference over SGP is that now fines will actually be enforced. Similar penalties for countries that falsify debt information; 4) Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area: when a country fails to abide by Commission recommendations or make reforms to eliminate excessive imbalances, it will be fined up to 0.1% of GDP annually. Overturned only by qualified majority vote; 5) Regulation on the prevention and correction of macroeconomic imbalances: sets up a monitoring system for imbalances – public and private indebtedness, house prices, unemployment, current account balance, real effective exchange rates, etc. Those crossing the threshold are subject to a review by the Commission. If imbalances are found, the country must submit a corrective plan. If after six months and two warnings no progress is made, the country can be fined up to 0.1% of GDP. Overturned by reverse qualified majority vote; 6) Directive on the requirements for the member states’ budgetary frameworks: this establishes statistical and budgetary standards – such as that state accounts should be published monthly, debt and deficit limits should be written into law, budget planning should be done over three years, independent auditors should check all government accounts. 86 Very similar in its approach and structure to the SGP, these measures have two primary arms: preventative (action through warnings) and corrective (action through sanctions and fines levied as a % of GDP). Member states must enact policies that are as fiscally prudent as possible, regardless of how rosy their economic situation is compared to their European neighbors. Failure to meet the agreed upon standards will result in sanctions. In addition to this, and as outlined in the European Semester and the EPP, budget developments are followed more closely than in the past, subject to oversight by the Commission and ultimate judgment by the Council.87 Kundnani, Hans. “Germany as a geoeconomic power.” European Council on Foreign Relations website. Retrieved online. http://ecfr.eu/content/entry/commentary_germany_as_a_geoeconomic_power 88 EU Press Release, “EU Economic Governance: A Big Major Forward”. Retrieved online. http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/364&format=HTML&aged=1&language=EN&guiLanguage=en 89 COM(2011) 821 final 2011/0386 (COD) – “Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area.”; COM(2011) 819 final - 2011/0385 (COD) – “Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area.”90 European Commission, Press Release (MEMO/11/822), 11/23/2011. “Economic governance: Commission proposes two new Regulations to further strengthen budgetary surveillance in the euro area.”91 Ibid. 92 In a December 1, 2011 speech in Toulon, Sarkozy stated, “It is not by going down the path of more supranationality that Europe will be relaunched.” Carnegy, Hugh. “Sarkozy reluctant to cede key powers,” Financial Times, December 1, 2011, retrieved online: http://www.ft.com/cms/s/0/b23b95ec-1c2c-11e1-9631-00144feabdc0.html#axzz1fCcoTR1L). 93 Harris Interactive website: http://www.harrisinteractive.fr/ 94 Carnegy, Hugh. “France and Germany agree new rules,” Financial Times, December 5, 2011, retrieved online: http://www.ft.com/intl/cms/s/0/d0d39098-1f53-11e1-90aa-00144feabdc0.html?ftcamp=rss#axzz1ffkvqh5F 95 “Draft treaty changes soothe Parliament,” Euractiv, January 13, 2012, retrieved online at: http://www.euractiv.com/future-eu/draft-treaty-changes-soothe-parliament-news-510120 96 Spiegel, Peter, Gerrit Weismann and Robin Wigglesworth, “S&P Downgrades France and Austria,” Financial Times, January 14, 2012, retrieved online at: http://www.ft.com/intl/cms/s/0/78bf6fb4-3df6-11e1-91f3-00144feabdc0.html#axzz1jjalSmhN. 97 The Irish Constitution requires a referendum in case of EU treaty change. For background, see: Kelly, Meghan. “The Latent Power of the Irish Referendum,” B|Brief Bertelsmann Foundation: December 15, 2011, retrieved online at: http://www.bfna.org/publication/the-latent-power-of-the-irish-referendum. 98 Pop, Valentina. “More power for EU commission in new draft of fiscal treaty,” EU Observer, January 6, 2012. retrieved online at: http://euobserver.com/19/114777. 99 “EU Rehn: Treaty Changes Should be Based on Current Framework“ Wall Street Journal, November 30, 2011, retrieved online: http://online.wsj.com/article/BT-CO-20111130-709777.html100 What will Eurobonds cost? Position of the Institut für Wirtschaftsforschung (Ifo). August 17m 2011. Pg. 4. 101 What will Eurobonds cost? Position of the Institut für Wirtschaftsforschung (Ifo). August 17m 2011. Pg. 4. 102 Transcript retrieved online at: http://ec.europa.eu/commission_2010-2014/president/pdf/speech_original.pdf 103 ibid. 104 European Commission website: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/820&format=HTML&aged=0&language=EN&guiLanguage=en 105 Delpla, Jacques and Jakob von Weizsäcker. “Eurobonds: The Blue Bond Concept and its implications,“ Bruegel Policy Contribution. March 2011. 106 Scally, Derek. “Merkel says she will not barter on eurobonds,” Irish Times, December 2, 2011, retrieved online at: http://www.irishtimes.com/newspaper/world/2011/1202/1224308475202.html. 107 Under Art. 110 of the German constitution, the Bundestag enjoys full fiscal sovereignty, and this right was reaffirmed by the Constitutional Court as an essential parliamentary control of the executive. While the court accepts a partial transfer of decisions to the level of the EU, the parliament must retain a minimum set of rights to ensure democratic decision making. Eurobonds constitute a fundamental breach of this principle.108 “Germany will move on eurobonds, says Barnier,” EUobserver, November 23, 2011, retrieved online at: http://euobserver.com/1016/114332. 109 “Sentiments Higher on New Options of Eurobonds,” International Business Times, September 15, 2011, retrieved online at: http://www.ibtimes.com/articles/214148/20110915/sentiment-higher-on-new-options-of-eurobonds.htm 110 Rastello, Sandrine. “IMF’s Blanchard Says It’s ‘Premature’ to Issue Euro Bonds,” Bloomberg, September 20, 2011, retrieved online at: http://www.bloomberg.com/news/2011-09-20/imf-s-blanchard-says-it-s-premature-to-issue-euro-bonds.html. 111 “ECB’s Gonzalez-Palermo: Eurobonds to exist at some point,” Reuters, November 24, 2011, retrieved online at: http://www.reuters.com/article/2011/11/24/us-ecb-eurobonds-idUSTRE7AN1YU20111124 112 Traynor, Ian, et al. “David Cameron blocks EU treaty with veto, casting Britain adrift in Europe,” The Guardian, December 9, 2011. Retrieved online at: http://www.guardian.co.uk/world/2011/dec/09/david-cameron-blocks-eu-treaty113 “EU Foreign Policy must not become a casualty of the Euro Crisis” Open letter. December 16, 2011. Retrieved online at: http://euobserver.com/7/114664114 Corn, Tony. “Toward a Gentler, Kinder German Reich? The Realpolitik behind the European Financial Crisis. In: Small Wars Journal, November 29, 2011.
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