international analysis and commentary

For the eurozone, a better summer than expected


There is some good news for the euro as we enter the fall season: the summer of 2012 did not see a sharp deterioration of the common currency. However, fundamental problems remain, especially as regards the internal imbalances and the so-called democratic deficit. In August 2011, an opinion piece on Europe in the Financial Times warned about “The Guns of August”, referring to Barbara Tuchman’s eponymous book on the outbreak of the First World War as a series of (tragic) events which had caught European leaders by surprise. Indeed, August 2011 did see an aggravation of the eurozone’s sovereign crisis. This year things went differently, as international markets reacted very positively to the commitment made by the European Central Bank (ECB) chief, Mario Draghi, who promised that everything will be done in order to save the common currency. More than that, September was characterized by two positive developments that took place in Germany, clearly the key country in the EU. First, on September 6th, in Frankfurt, the Governing Council of the ECB decided that the Bank would buy bonds on open markets and without any limits, of countries that need help. In return, these countries, with Spain being the most obvious candidate, have to comply with a number of strict conditions. Six days later, a bit southwards, in the Baden-Württemberg city of Karlsruhe, the German Federal Court gave its (conditional) green light to the European Stability Mechanism (ESM), the 700 billion euro rescue fund for eurozone countries. As a result, the Treaty on the ESM, that had already been approved by the German parliament, can now also be ratified by its President and will be up and running by October. In addition, on the same date the Commission issued its plan for a joint European banking supervision, which may lead to a real banking union.  

In short, the end of summer brought important steps towards the ECB’s role evolving beyond price stability, some signs of debt mutualization and the possible beginning of a banking union. The immediate result is that much pressure has been taken off Southern Mediterranean debtor countries and that the eurozone may not be on the brink of collapse. Of course, this does not mean that the eurozone crisis and its negative impact on the whole process of European integration have been overcome. On the one hand, it is true that Germany (more precisely its Chancellor, but not the President of the Bundesbank Jens Weidmann) has backed the ECB decision, adopting a more flexible position towards the role of the bank. However, it must be recalled that while debtor countries will be protected against excessive bond yields, they will be required to abide by rigorous conditions. The Fiscal Compact itself, due to enter into force next year, has codified already existing secondary level legislation on fiscal austerity, to the liking of Germany and other Northern European countries. A renewed version of the well-known “external constraints”, able to induce member states (such as Italy) to introduce reforms that they would not otherwise carry out, is a good thing. However, the apparent governance shortcomings of Southern European countries are not alone in being responsible for the current state of affairs. It is now widely understood and accepted that if the aim is to redress the imbalances of the eurozone, divided along a North-South geographical and economic fault line, not only Southern European countries have to reform, stop indebting themselves and become more competitive; Germany – having rightly been labeled the “China of Europe” – and other Northern European countries must simultaneously change their policy based on a mix of low domestic consumption and strong exports. Indeed, putting all the burden on indebted countries can prove counterproductive.

Any strategy to save the euro and make it more functional must also tackle the ever more salient issue of democratic legitimacy of the new eurozone governance and, more  generally, of the EU as a whole. The latest ruling of the German Constitutional Court on the ESM – stating that any German contribution surpassing the 190 billion euro ceiling must be approved by Parliament – points exactly to the issue of democratic legitimacy in the EU. The changes in EMU governance between 2010 and 2012 have resulted in a progressive transfer of competences from national capitals to Brussels. At the same time the inter-institutional balance in Brussels and the European capitals have been shifting: competences attributed to the European Council and  national executives have increased, to the detriment of the national parliaments. Controversial issues are also raised by the submission of Stability or Convergence Programs, containing multi-annual budgetary projections and details of national fiscal consolidation strategies, by national governments to the Commission before they are discussed by national parliaments: this has led some experts to wonder whether the principle “no taxation without representation” is at risk. In sum, the thorny questions that were brought to the attention of the German Constitutional Court are likely to become more and more salient across the whole EU. Various solutions may be put forward, but a strengthening the oversight role of the European parliament (and possibly an increased dialogue with national parliaments) seems to be an indispensable step, given  its EU-wide character. This is the only institution that represents collectively the European citizens and can counterbalance the trends toward national fragmentation.

The final report on the Economic and Monetary Union that the European Council President will present next December will hopefully include useful and innovative proposals on this issue.