The Euro-Group from Monetary Union to some kind of budget solidarity

The European Union has made another of those laborious leaps forward she always proved to be capable of in the most critical moments of her history. The decisions taken on May 9 by the Council of Heads of State and Governments, regarding the financial support to be given in case of necessity to Greece and to other countries being eventually hit by speculation attacks, mark the start of a practice (if not yet the introduction of a principle) of financial solidarity among the countries participating in the economic and monetary Union. It is a complex solidarity, as is complex the inter-dependence among the EMU countries: not only a solidarity from rich countries to poor countries, but also a solidarity among rich, because the main contributor to that intervention will also be its main beneficiary. Germany, in fact, as a creditor of Greece through its own banks, would suffer more than others from a default.

Stored away the institutional innovations introduced by the Lisbon Treaty and installed the new bodies of unitary representation, the Union was able to handle the repercussions on its weaker regions of the very grave crisis triggered by the US financial irresponsibility. As always in the history of the European integration process, they are initially inter-governmental interventions, but they are bearing signs anticipatory of subsequent institutional consolidations. Among these there is to point out: the possibility to issue up to 60 billions worth of euro-bonds; the sharing of the intervention-Fund financing according to the quotas of each country in the ECB; the possibility of an ECB intervention on the secondary market in case of speculative selling of State securities issued by member countries of the euro-zone; the commitment for a more efficient coordination of the economic policies of the EMU countries; the intention to put into effect the powers of accounting and statistical control that the Commission is provided with; the Franco-German entente (on which the agreement of the other euro-zone countries is still to be reached) regarding a levy at the European level to be imposed on banks, earmarked for creating a fund to confront crises without resorting to public debt or to the taxpayers.

The IMF participation itself to the plan, ill-considered by many as an outrage against the ECB, must be seen, in my opinion, differently. The Euro-group is in a position of strength: it has its accounts in order, a balance of payments substantially balanced, a foreign indebtedness negligible, private savings capable of financing public investments and deficits. This strength allows Europe to show everybody without any hesitation or fear that she does not consider herself a “closed-in fortress”, but a part of the world system being formed. Much will depend on Europe's capacity to use the test of financial strength for a great political initiative. The euro-zone in particular, while its intervention in support of a new world monetary system based on cooperation, as China and other emerging countries have already called for, becomes ever more crucial, finds itself still coping with its internal contradiction of a currency lacking an economic government and a unitary representation in international organizations, and of one monetary policy with sixteen budget policies. The Greek crisis is the first serious test that highlights this contradiction, always denounced by federalists, which puts to the test the Euro-group's political management.

For proceeding with proposals and conjectures into the future, of which the Greek crisis has been the midwife, I think it is very useful to make a survey of the heated debate that preceded the Summit. To that end, I'm going to dwell on the following points: 1) the real dimension of the Greek financial problem within the monetary Union; 2) the speculative aggression set up by American financial institutions having Greece as the first target and the euro as the final target; 3) the suggestions of famous economists, above all from the United States, and even from the IMF, aimed at rescuing Greece and knocking down the ECB, the only obstacle to an inflationary policy; 4) the series of solutions put forward in Europe before the Summit, differing in their dosage of mistrust and cooperation; 5) a federalist approach.

1. Greece represents 2,6% of the EU's GDP. Judging the Union's state of health from a liquidity problem in Greece is as absurd as judging China from the public debt in Xizang (Tibet for the Westerners) or the United States from the balance of payment of Wyoming. Greece is one of the poorest regions in Europe, hence a beneficiary of the aids provided by the Union's policies. However, it is not at all true that from the moment it entered the euro there has been a loss of competitiveness in the country. To formulate a judgement of that nature, one has to consider the labor cost for unit of product, which, in the last ten years, showed in Greece a trend quite in line with that of Germany, the most virtuous country of the Union.

Even the concept of virtue, on the other hand, has been questioned by the ex-Friedmanites who are appealing today to a vulgar Keynesianism (no longer Keynesian but still national, whilst imbalances are global) and argue that Germany should consume more and export less. These economists (remarkable the campaign by Martin Wolf in the Financial Times) blame the surplus of current accounts in Germany for being the “cause” of the deficit of the weaker areas of the Union, but neglect to note: a) that only 44% of German “exports” is going to other member countries (among which the Eastern countries are getting an increasing importance), while 56% is absorbed by the rest of the world; b) that German exports are the final moment of a production chain involving other countries of the Union (for example, Italy's North-East is to a large extent a decentralized district of the German industry); c) that German savings, like Italy's and other European countries', match the demographic forecasts of population aging.

Actually, the budget of the Greek State is in line with that of other countries all over the world, after the mass destruction of world savings carried out by the United States. In Europe, a public debt at 100% of GDP is in the perspectives of even the countries most respectful of financial orthodoxy. Greece's public debt is higher than that of other member countries, as is natural to expect from a country that has still to catch up with the rest of the Union. Only in the case of the United States, due to a no-longer-tolerable double standard, it is considered “normal” that the country with the highest per capita income is also the most indebted with the rest of the world. In the EU, instead, it is considered normal that to be indebted are the poorer countries. Certainly the center-right Greek government, presided over by Karamanlis and supported by Bush, has made itself responsible of a policy of deficit-spending, reflecting, on the one hand, the structural weaknesses of the country, and, on the other, corruption-ridden situations common to other less developed countries. It would be wrong, however, to consider this as a fully-comprehensive reason of the Greek debt, so as to justify an oppressive attitude (Washington Consensus-like) towards the debtor, just now that the center-left government of Papandreou has shed light on the accounts and has resolutely started a painful recovery.

A significant part of Greece's public expenditure is earmarked for defence, due to an ancient hostile reflex with regard to Turkey, a country which cannot be kept out of the Union without jeopardizing the Union's strategic security and its multicultural roots. These absurd winds of war between a member country and a candidate country (remember also the events in Cyprus) are boosting, however, big businesses in the military industry, be it French airplanes, German submarines or Italian frigates, sold to Greece or to Turkey. It becomes clear, then, that there is a twofold responsibility of the Union: in the delay of the negotiations with Turkey, and in the supply of arms to two countries destined to pacification in the European framework. As to the military industry, it could find a very different kind of development in the planning of a European Agency for Armaments capable of adapting the Union's intervention capability to the new needs of “global” security.

2. A monetary war has been waged by Wall Street to divert world investors' attention from the only present-day possibilities of default of important sovereign States: the United States itself and Great Britain. Unfounded concerns over the euro, considered today the only possibility for diversifying public and private portfolios, have been deliberately created. Now we know that in 2001 Goldman Sachs helped the Greek Government led by Karamanlis to fix their accounts through their by-now well-known “financial innovations”, undermining the solid foundations established for the euro by the EU convergence criteria. A mine that today the same ones who planted it are going to detonate, simultaneously charging the euro-group of having let countries in the euro-zone that were not ready for such a step (so does, for instance, Paul Krugman, see NYT, February 15, 2010).

All these manoeuvres produce the effect of a temporary devaluation of the euro against the dollar, with corresponding speculative gains for the same old guys, but in the end they will benefit European exports, while they show the distrust of American managers in their own production system. The United States does not hope any longer to redress its fundamental imbalances through an increase in competitiveness, therefore it does its utmost to find finances for its civilian and military hyper-consumption, attracting other capitals from the rest of the world, and preparing thus the next imminent catastrophe. I presented in the last issue of this review Fred Bergsten's (Director of the Peterson Institute for International Studies) projections about the US accounts: should it persist on this ruinous route, it will soon be a failed State.

3. The end of the euro starts from Athens, hope the economists corroborators of Wall Street who, without declaring so, pursue the same scope with suggestions sometimes malicious, sometimes explicit.

The first citation is for Martin Feldstein (Harvard University), who suggests to Greece to leave the euro “temporarily”, just the time to go back to the drachma, devalue the same and then come again in the euro. The proposal contains too many mistakes for one to think that they are not malicious. In fact, it is not true: a) that the problem originates from a competitiveness gap (the trend of the labor cost for unit of product in Greece and in Germany from 1999 to 2008 proves the opposite); b) that, even in the case of competitiveness diverging trends, the resort to competitive devaluations constitutes a wise strategy (Europe chose the euro just to avoid the repeating of the policies followed between the two world wars); c) that devaluation is a convenient strategy in the specific case of Greece, which has an economy based on shipping, tourism and banking; d) that replacing one's currency twice, first when leaving and then when re-entering, is a zero-cost operation (whilst the ECB showed that it actually is a too costly operation for a country attempting to do so); e) finally, that the “temporary” exit of Greece from the euro-zone is certainly an operation with no consequences on its belonging to the Union.

In the second place, I would cite the more radical positions by Otmar Issing (President of the Centre for Financial Studies and a former member of the European Central Bank’s executive board) and by Luigi Zingales (Chicago University). “Europe cannot afford to rescue Greece”, Issing says (FT, February 16, 2010), arguing that the Maastricht Treaty would not allow Greece to be aided and that an intervention would create a moral hazard of enormous proportions. To the first point one may object that financial solidarity is contemplated by the Treaty (Art. 122). On the second point, there is to consider, on the one hand, the strength of the instruments the EU has to enforce the observation of conditional clauses applied to loans, and, on the other, the risk of increasing the probability of financial crises if the lack of confidence should spread. Zingales, on his part, draws the extreme consequences of Issing's position, and proposes to leave Greece to its fate “to unite Europe”. Greece should be expelled not only from the euro, but also from the Union. In his opinion, the “radical pro-Europeans” (translated: we federalists) do not take into account the fact that there would not be a consensus for an aid to Greece through an acceleration of integration. So, Zingales is considering already lost a political battle that is still under way, that could not be lost, and will end with a further advance of the European process.

A special citation, finally, is due to Olivier Blanchard. The economist with Dominique Strauss-Kahn at the IMF goes straight to the core of the problem and asks himself: should the inflation target of the ECB be moved from 2% to 4%, would there be anything wrong? Opening a breach in the walls of the ECB to let a big inflation pass through seems to be indeed the final objective of this group of thinkers. Now that the Washington Consensus would revolt against the USA, the IMF's policy has changed!

4. The passage from the single currency to European financial solidarity starts from Athens, think instead those who wish to tackle the problem with the twofold objective of consolidating the Greek debt and resolutely defending the euro. Most of the proposals put forward with this commendable intention, however, are marked by “methodological nationalism”, because they aim not so much at the Union's overall interests as at balancing the interests between the creditors and the debtors States. Within the EMU, the concept of crisis of the balance of payments of one country has no sense: one must look at the balance of payments of the euro-zone. Of course, the markets may express a greater or lesser confidence with regard to specific issuers: Volkswagen or Fiat, the German Republic or Greece, Rhone-Alpes or Andalusia, Hamburg or Lisbon. Even a public issuer may “default”, as happened with the City of New York.

Among the best articulated proposals for an EMF, a prominent place has been taken by that formulated by Daniel Gros (Centre of European Policy Studies), in particular after the intervention in the debate preceding the Summit by Wolfgang Schäuble, Finance Minister of Germany, who was likely inspired by it. The special, and also questionable, aspect of Gros' proposal consists in suggesting that the cost of an intervention in favour of weak countries shall fall on those countries themselves, through the payment of a penalty (or insurance premium) proportional to their overrunning beyond the ceilings fixed by the Maastricht Treaty for the deficit and debt of the States participating in the EMU. Instead, it is interesting his suggestion of a bankruptcy procedure applicable to States and other public institutions (on the model of the US Chapter 11).

Schäuble's proposal (FT, March 12, 2010), of course, is political and does not go into technical details. He notes that the EMU finds itself for the first time “engaged in full surveillance over the fiscal and economic policy of one of the member countries”, urges everybody to follow a Bundesbank-brand orthodoxy and proposes to use the following instruments: a) an instrument forged on the experience of the “EU’s facility for medium term financial aid to non-eurozone member States”, which allowed to successfully confront the crises in the countries of Central and Eastern Europe; b) “emergence liquidity aid from an EMF to reduce the risk of defaults”, strictly conditional and costly, so as to discourage its use; c) “the EU statistical office Eurostat, having the right to inspect all public accounts where suspicion of manipulation is substantiated”. The most significant aspect of the proposal concerns, however, the institutional competences: “Political decisions about aid should be taken in the Eurogroup in agreement with the ECB”. When it goes to the core of the matter, Germany is not opposed to European solidarity, but requires, rightfully, that it shall be dealt with within European institutions.

5. A European and cosmopolitan vision, to use Ulrick Beck's expression, allows us to draw up projects as if a government of the European economy were really in operation, both in domestic policy and in coordinating itself with the other world regions, in the interest of the Union, which was born economic as well as monetary. It allows us, for example, to think of Europe's unitary participation in the UN, the IMF, etc.; of a European initiative in support to China's proposal of monetary reform; of the creation of a world-level Rating Agency with the participation of the creditor countries (or, at least, of a European Rating Agency) and of a regulated market of SDRs; of a European-wide budget policy that is the indispensable complement of its monetary policy; of an industrial policy (including the field of services) that is entitled to use the whole range of instruments, instead of limiting itself to the trade policy (where the exclusive competence of the federal level already produces very good results); of Europe's ability to deal with the inevitable backwardness situations of some regions with well-financed regional policies and with efficient federal controls over the use of funds; of a relaxation of the rigid connection between income and worked hour, ever less meaningful in the knowledge-based economy, through social policies aimed to all residents, in order to prize their freedom of choice, creativity, unworried and fruitful alternation of active and inactive periods.

In such a framework, to the present generations it should be asked to pay (through taxes) their present consumption of public goods (including the so-called “external dis-economies”, both environmental and social), while to future generations only the burden of the investments producing benefits in the long term (public debt) should be left. The service of debts should always be warranted by the return on investments which, in the case of public debt, consists in the greater tax revenue made possible by the increase in GDP generated by the investments themselves. The European federalists' proposal for a budget policy of the Union would allow to finance projects with the above described features, through the issuing of Union bonds (taking advantage of the Union's high rating), and to cover the service of debt with Union’s resources of its own (for example, a carbon tax, a European tax on banks, a European value added tax); the creation of Agencies (Energy, Environment, Security) would allow in addition to earmark expenditures and control their allocation with public criteria, i.e. such as to counterbalance the distortions coming from a mere capitalistic allocation and to attract also private investments. That would be the truly European solution to problems like the Greek crisis.