European Politics Course Starting Up this year….
Petty much every year is an interesting year to be teaching European Politics….we have elections in Sweden, a referendum on Scottish independence (maybe one for the Catalans as well) and of course there is always Russia..now engaged in what increasingly looks like a full scale war in the Ukraine. The EU is… as ever…on the brink…of collapse and/or expansion.
Because our Blackboard systems sometimes does not give access to students for the first few weeks…I attach here the course syllabus…and our first lecture slide…..click below
The Euro Summit side show…and the ECB main event?
Mr.Flavor Flav in all his glorious badness. Who would you rather watch tomorrow, him or the European Council leaders in conclave? He may also have more ideas about how to fix the Eurozone…….image as usual has been liberated from Wikipedia for emancipatory purposes….
Increasingly, the European Council summit of December 9th risks becoming a muddled side show.
As Prof. Flavor Flav reminded us all a long time ago: don’t believe the hype! http://www.youtube.com/watch?v=1INb5FM_1lE
In fact the real event today has been the decision by the ECB to cut interest rates again, but above all they have begun providing longer term loans to banks-2-3 years loans which give them a chance to restructure and a breather. Various European banks have already borrowed 50bn in US dollars from the ECB, and that figure is likely to go up.
The next step is to buy state bonds with longer maturities as well. More and more this is what is crucial now: what and how the ECB acts rather than what Sarkozy and Merkel or the rest say and do.
Yes of course Article 125 says the ECB should not finance governments…but in fact they have made interventions before…buying state bonds……and they will eventually have to do so again….if needed… they will channel it through an IMF programme ……..the problem is the ECB are gambling that they have time to refuse to make big buys of state paper soon…..they probably think they can let things slide some more……but what if they’re wrong?
More and more the semi-theological discussion about ‘golden rules’ and reform of protocol 12, which is seemingly the substance of this summit, is beginning to look very beside the point.
It is also revealing how markets are responding to rumors that German diplomats have ruled out increasing the size of EU bailout funds by keeping the EFSF and ESM operating together as a crude expedient of doubling the size of funds available to states who could be locked out of the markets and yet need cash…Italy alone will need a shed load of case soon in the new year…….. and the same ‘un-named’ senior German sources’ are also shrill in their demand for a proper full Treaty reform tomorrow which will of course take ages and undoubtedly referenda-which could well be lost. Oh and we probably don’t need-most of the important changes can be swung through expediencies and quick limited treaty tweaks. My guess these are German negotiating positions and spin-actually we all better hope they are just that!
Dave Shellock in the FT points that market disappointment as such German inflexibility was instantly reflected in a rise in Italian and Spanish bond prices, which had previously fallen somewhat.
Meanwhile a fully fledged bank run appears to have taken off in Greece…http://www.spiegel.de/international/europe/0,1518,802051,00.html
“At the start of 2010, savings and time deposits held by private households in Greece totalled €237.7 billion — by the end of 2011, they had fallen by €49 billion. Since then, the decline has been gaining momentum. Savings fell by a further €5.4 billion in September and by an estimated €8.5 billion in October — the biggest monthly outflow of funds since the start of the debt crisis in late 2009.”
With depositors convinced that Greece will sooner be leaving the Eurozone…either by its own will or by events….one can see why….but…….these things can spread ….and this may be how it starts….
And our leaders want a debate tomorrow about Gold Rules/Balanced budgets and a new Lisbon Treaty that could take three to four years to agree?
Twin-track or Triple track Treaty Change?
A Twin Track approach, or we missing another track, and where are we headed to anyway? Thoughts for the impending EU Summit Friday 9th December.
Image is open source and liberated for educational purposes from Wikipedia.
The President of the European Council (that is the summit of the 27 heads of government and state that will meet this Friday ) has suffered a leak…or perhaps deliberately leaked a curious document which sits a little at odds with the Sarkozy/Merkel line that we need major Treaty change……he seems to suggest something I’ve pointed out is maybe both possible and sensible….a very limited Treaty tweak using the Lisbon Treaty’s speedy revision procedure ….
You can find the text of his leaked ‘non paper’ here: http://blogs.ft.com/brusselsblog/files/2011/12/INTERIM-REPORT-FINAL-6-12-.pdf
Keep in mind it may be a willful negotiating deception of a rather classic kind-the exclusive leak, which is of course deliberate. The end result of what emerges on Friday evening could be quite different.
But what does Van Rompay actually say?
Well its the usual stuff about greater fiscal discipline, etc., and a key observation is that he draws the content from a Commission proposal of late November….which is full of Christmas Cheer…..(this proposal can be found here: http://ec.europa.eu/commission_2010-2014/president/news/documents/pdf/regulation_1_en.pdf).
One thing I note is that the text of this legislative proposal (if adopted) could have implications for our domestic budgetary provisions under our Irish constitution, in particular the submission of draft budgetary plans to the Commission potentially before the Oireachtas had seen it! Article 21.1 of the 1937 Constitution states that only the Dáil can initiate a money bill and paragraph 2 says it must be sent to the Senate….by demanding that draft budgets be basically pre-vetted before legislative initiative are these constitutional provisions not being circumvented, by giving the European Commission a de facto veto over Money bills before the Dáil and Senate have debated them?
One respected website described the Commission proposal as: “Brussels pushes for radical shift in budget powers away from parliaments”, available at: http://euobserver.com/19/114372
I am not comfortable with the substance of such proposals.
But the main point is a finicky legal one: some of what needs to be done could be achieved by a reform of Protocol 12, which he argues: “Changes to Protocol N°12 can be introduced by a unanimous decision of the Council on a proposal from the Commission after consultation of the European Parliament and the European Central Bank. This decision does not require ratification at national level. This procedure could therefore lead to rapid and significant changes.” (pt.12).
NOTE, this would not involve invoking the procedure for a speedy reform as set out in Article 48, which is qualified by the need for such a revision to be approved by national parliaments, any one of which can stop the revision. There is also a stipulation that Article 48 cannot be used to give the EU new competences.
However, he then goes on: “Another avenue to be pursued either in parallel or subsequently would be to undertake a revision of the TFUE articles related to Economic and Monetary Union, through the revision procedure set out in Article 48 of the Treaty on European Union. Such a revision could consist in a modification or replacement of Article 136 and/or a revision of Protocol N°14 on the Eurogroup.”
The point he makes is that while using the Article 48 route takes longer and is somewhat risker politically, it would allow a more thorough change of the rules that govern the Euro.
Crucially, one needs to understand they are likely to do both-we are now looking at a twin-track treaty change. the first track is a quick and dirty reform of Protocol 12 and the second will be a fast tracked reform of the other bits of Articles 122-126 to toughen up the Euro rules under the procedure of Article 48.
What puzzles me at this stage is how he thinks he can do this without granting a new competence to the EU, for example he suggests in the leaked ‘non paper’:
“an enhanced role for the EU institutions, with a higher intrusiveness in the case of lack of implementation. For euro area Member States in an excessive deficit procedure, there could be a the possibility for the Commission and the Council (Eurogroup) to request changes in a draft budget before it is submitted to the national parliament if the budgetary stance is not in line with the agreed plans. In the case of euro area Member States that are under an assistance programme and persistently fail to meet the conditionality, the Commission could receive exceptional powers, such as ex-ante approval of all major economic reforms”
That all seems to be giving the Commission rather obviously new powers..(and) does that not mean new competences under the terms of Article 48?…….and if so to what extent can Article 48 then be actually relied upon? Much may turn of a very limited and technical definition of what a ‘new competence’ is. Doubtless the Commission legal staffers are polishing a paper on that now.
Other ideas in the non-paper include the use of the oldish ‘enhanced co-operation’ possibility to allow the 17 Eurozone members, which is not really news because Merkel and Sarko signaled they may need to go ahead with a new set of rules for just the Eurozone 17 and the British would be happy with that as long as some safeguards are met.
Intriguingly, he raises the possibility of Eurobonds in coded language: “Opening up the possibility, in a longer term perspective, of moving towards common debt issuance in a staged and criteria-based process, for example starting with the pooling of some funding instruments.” This matches the point I made yesterday that as a fake major concession the Germans will probably get ready on Saturday night to ‘concede some type of common European debt instrument’…… presenting it as a major shift…when in fact one can see it just sensible.
There is also a rather banal statement that the soon to emerge European Stability Mechanism (ESM) rules will come under heavy pressure to be re-written so that unanimity is edited out...”bringing the ESM decision making procedures more in line with mechanisms in place in the IMF (unanimity being restricted to a limited number of decisions)”.……..this is despite the fact that the ESM Treaty (2011) was only agreed a few months ago….and they are already changing it…..Moreover, as I posted yesterday some of the rules taken by unanimity within the ESM are really important.
What is missing here is all that stuff about Golden Rules…but remember what Merkel is looking for there is a national government political promise to change national constitutions to write in a balanced budget rule……so the question of framing that in EU law may not arise at all….
But if there is a desire to push for further demanding changes…or if the limits of Article 48 are breeched…then the only way to change the Treaties is through some kind of laborious series of inter-governmental conferences…which could last years. It may well be that they also feel the need to sign off on that as well…and let it slow burn…..so we could be looking at a triple track Treaty reform eventually……
And what does all this mean for Ireland?
Quite a lot.
If Treaty reform can be kept to a twin-track use of Article 48 together with a reform of the obscure protocol 12, then we may well avoid the need for a referendum…although that would be controversial and may be litigated. However, when the ESM Treaty was negotiated and agreed it was enabled by a simple reform of Article 136 which was pushed through using Article 48(6)…..and the legal advice was that this was consistent with the Crotty judgement and therefore we did not require another referendum….
What remains unclear is the extent to which all of what they want to do can be really done under Article 48…or whether in fact they will have to countenance a more substantial and slower change of the Lisbon Treaty….if so, then we are for sure in a referendum zone…….in any event I think sooner rather than later Ireland will find it hard to avoid another divisive EU mandated referendum………..
New EU Treaty Plot thickens…….to Fog…to Smog
Zeichen 270 – Verkehrsverbot bei Smog or Sign No. 270 – no traffic allowed due to smog, a nice German Road Traffic sign liberated for educational purposes here from wikipedia.
Well that makes it seem more dramatic but I’m piecing together events…Monday’s Franco-German pre-summit summit offered us the following…..
Mini-Treaty Reform instead of ‘Big Bang’? ☺
Sarko wants the new Treaty done by March 2012. …(when he will still be President)..so that must mean some kind of use of Article 48(6)…and NOT the ordinary revision procedure which requires a much longer time frame?
If so, that in turn suggests a much more modest Treaty reform, focused on the existing provisions of Article 122-126 which govern the Euro most probably, and Protocol 12 of the Lisbon Treaty which sets out the various Maastricht criteria…that members of the Eurozone are supposed to meet (but many of whom didn’t follow these and did not care much about it either).
All for one, one for all? ☹
The Treaty changes will be for all EU27 or alternatively, just the Eurozone 17 will go ahead. This sounds quite innocuous, almost generous and pragmatic, BUT in fact its a serious negotiating ‘weapon’. What in effect the French and German are saying is that a core group will pioneer ahead with tough common fiscal rules…anyone like the UK or Denmark who do want to agree these because they are outside the Eurozone anyway are fine…or with more menace….. the Irish and Greeks who might fail to ratify such a set of tough conditions…will effectively choose to exit the Eurozone….that is one possible interpretation.
Making Eurozone sanctions easier-reasonably clear and doable ☺
What of the substance of the changes to Article 126 and Protocol 12?
Well it seems the voting arrangements that allow sanctions to be triggered or alternatively waived will be altered…this can be done fairly handily under Article 48(7) of the Lisbon Treaty, but requires unanimity. This might make some sense.
According to the FT’s Quentin Peel: “Mr Sarkozy said the new deal on sanctions would mean that any eurozone country deemed by the European Commission to have broken the budget rules would be subject to sanctions unless a qualified majority of members of the common currency voted to block them. The old agreement was that a qualified majority must support them.”( at http://www.ft.com/intl/cms/s/0/d935797a-1f69-11e1-9916-00144feabdc0.html#axzz1fkmFdwxE)
The big idea here is to move to automatic sanctions if a country breeches the 3% deficit level (but what about the level of accumulated debt?…see below). This provision seems okayish given that if we had it in place back in the early noughties it might have introduced some measure of discipline and sense into various states’ fiscal practices…however, the roots of the present crisis do not for the most part have their origin in unsound fiscal policies…but in a more fundamental expansion of credit which the creation of the Eurozone partly sustained and multiplied, especially in the peripheral PIIGS.
A Golden Rule or Legislation Against Sin? ☹
Then there is talk of a Golden Rule which would ban persistent deficit spending and enforceable by the ECJ.
According to the FT, the plan here is that each national government will undertake to re-write their domestic constitution to put in place a Gold Rule, that prohibits deficit spending.
Alternatively, this could only be done by a major change of Article 126, and this would seem to rule out the speedy revision procedure of Article 48 , which cannot be used wherever such a revision would grant the EU a new competence. This is murky, at least legally never mind politically and economically. The point here is that the Gold Rule plan requires national constitutional reform-and for Ireland this provision alone guarantees a referendum. Once again the signs are Ireland will sooner or later be faced with another EU referendum.
The chances of all 17 Eurozone countries changing their domestic constitutions in this way and in a timely manner (or even at all) is far from clear. What happens to any state whose electorate refuses? This could well be Ireland.
I will for now leave aside the wisdom of writing a balanced budget provision into any country’s constitution. The obvious point is that it removes flexibility from national governments in times of stress (although some wordings allow for this), and moreover, it will if followed today, force an even deeper contraction and further austerity by legal fiat. Yeah…they’ll vote for that!
A Gold Rule or a Golden slap on the wrist? ☹
More puzzling still is that its not clear what the Court would do if a country was continually using deficit spending. The BBC website notes: “Addressing concerns about countries’ sovereignty over their own budgets, Mrs Merkel said the court would only assess whether a budget showed “a real undertaking to return to a balanced budget” but would not be able to invalidate it.” From: http://www.bbc.co.uk/news/world-europe-16037425
Well that is perfectly clear then. The ECJ will only get involved to proclaim that there is a real sign that a country (Italy, Ireland, Greece, etc.) is returning to a balanced budget not that they actually have balanced their budget. I will just leave aside the obvious comment that the ECJ is not the appropriate institution to make such an economic judgement (judges not be trained economists) and they may well evade their responsibility by recourse to simple procedural checks. And if the ECJ does decide in future that say Italy are not judged to be ‘returning’ to the right road what exactly will the Court do? Well according the Merkel they certainly won’t freeze the national budget or invalidate it. Fine them? That will improve things no end, given that the problem is their borrowing money presumably because they don’t have enough in the first place. This seem unenforceable and must be window dressing.
It is absolutely no wonder that the Ratings Agencies have reacted the way they have-if this is the making of the Summit deal on Friday it has the makings of a dog’s breakfast. It is simply not credible to say your demanding a balanced budget rule in all Eurozone members and then in fact your doing nothing of the kind because you have no credible way of forcing the implementation of such a rule which in the first instance would fall upon national constitutional courts one presumes. Every bit the same type of hogwash as the Maastricht criteria, which have the appearance of tough legal rules but as we know in reality were never anything like that nor can they be, without fundamentally changing the nature of the EU.
Bringing forward the ESM slush fund to 2012? ☹
This was supposed to be working in 2013. In any event it will be a reheated EFSF mechanism. What is really important here is that the ESM they are proposing should be reformed to take decisions by QMV and not unanimity. The full text of that treaty can be found here: http://consilium.europa.eu/media/1216793/esm%20treaty%20en.pdf Article 4 of the existing Treaty which established the ESM allows for three sorts of decisions which can be taken by ESM boards of governors or directors-those requiring QMV, those requiring a simple majority, and those requiring ‘mutual consent’ which requires the unanimity of those participating in the vote. Article 5(6) list the type of decisions that require unanimity, and I bold the really important ones:
(a) to issue new shares on terms other than at par, in accordance with Article 8(2);T/ESM/en 11
(b) to make the capital calls, in accordance with Article 9(1);
(c) to change the authorised capital stock and adapt the maximum lending volume of the ESM, in accordance with Article 10(1);
(d) to take into account a possible update of the key for the subscription of the ECB capital, in accordance with Article 11(3), and the changes to be made to Annex I in accordance with Article 11(6);
(e) to grant financial assistance by the ESM, including the economic policy conditionality as stated in the memorandum of understanding referred to in Article 13(3), and to establish the financial terms and conditions, and the choice of instruments, in accordance with Articles 12 to 15;
(f) to give a mandate to the European Commission to negotiate, in liaison with the ECB, the economic policy conditionality attached to each financial assistance, in accordance with Article 13(3);
(g) to change the pricing structure and pricing policy for financial assistance, in accordance with Article 14(4);
(h) to change the list of financial assistance instruments that may be used by the ESM, in accordance with Article 16;
T/ESM/en 12
(i) to establish the modalities of the transfer of EFSF support to the ESM, in accordance with Article 35;
(j) to approve the application for membership of the ESM by new members, referred to in Article 39;
(k) to make adaptations to this Treaty as a direct consequence of the accession of new members, including changes to be made to the distribution of capital among ESM Members and the calculation of such a distribution as a direct consequence of the accession of a new member to the ESM, in accordance with Article 39; and
(l) to delegate to the Board of Directors the tasks listed in this Article.
You can quickly see that some of the most important decisions in the ESM are to be taken by unanimity.….so then it is not clear to me what is being proposed here…will the list of decisions in Article 5(6) be all now taken by QMV or just some? Is that what is on the table now? From and Irish perspective it would be very useful to have unanimity in the actual decision to grant aid or not and the price of it……….why should we give that up? We may well need to draw funds from the ESM after 2013? The reality is that there has been marked reluctance to engage with us on renegotiating the price of the bailout for Ireland, which continues to grow to levels which I think seem unsustainable.
Eurobonds off the table? ☹
Well the would say that wouldn’t they. It may be that Sarkozy has acceded to the German line, but I think much more likely is that this is an opening negotiating position-start from giving away nothing. I think sooner or rather later some form of Eurobond instruments will have to be contemplated, perhaps couched in a legal way that that does not actually involve the use of joint legal liability-which Article 125 precludes. The Commission have already sketched this EurobondLite option out.
No More Haircuts Please We’re German? ☹
One of the stranger things was a statement by Merkel and Sarkozy that there would be no more imposed losses or debt write offs as part of their bilateral summit conclusions. These were forced on Banks in October 2011, up to a level of 50% in some cases as regards Greek debt paper. One can see here that politically connected French and German banks have probably been lobbying hard. The only reason why haircuts will not be imposed, is because they will bring down politically connected Banks, and not just in France and Germany. Notice this does not preclude some type of European NAMA type vehicle emerging which would then collect up the larger bad loans and the title to notional assets tied to these, and basically sit on the bad debt and ‘bleach it’ over a period time. There are basically four ways to get rid of a huge debt mountain:
- Inflate it away-some of this will happen anyway by natural inflation, but the ECB is legally and worse, culturally predisposed, not to let inflation get really high-like above 5-6% which is when it can really inflate away what we owe, as well as unfortunately undermine our purchasing power and damage investment.
- Write off a portion as lost-a haircut of 20-50% is common in business but in the Eurozone context this would trigger bank collapses sooner rather than later. This is why they’ve ruled it out (apparently…but Merkel said that before didn’t she?)
- Sit on the debt, the loan, and the asset, and wait till you can off load, restructure it, or the value or ability to repay conditions change. This may or may not involve dubious accounting and legal practices such as taking the bad debts/loans and parking them in a separate legal vehicle (NAMA in Ireland). In reality this means that the public purse must pay in the short term, or the ECB simply prints money and buys bad debts, giving banks in effect free cash. My guess is that this in some way or other (heavily disguised) is what will have to happen.
- Growth of the economy, or hit oil or win the lotto. None of these are particularly plausible.
And there is more….?
Gavyn Davies over in the FT has an interesting blog post where he speculates on the content of a fiscal union Treaty such as Merkel and Sarkozy seem to be touting. Much of what he says is detail that we have not heard from Merkel or Sarkozy and it is this detail I would worry about. He suggests the final deal could feature some type of revised Treaty (or Treaty protocol) which had the following:
“First, countries will be subject to new limits, not only on their budget deficits, but also on the ratio of public spending/GDP, designed to ensure that spending is forced downwards if debt and deficit ratios are above targets.
Second, there will be a new procedure which will force countries progressively to reduce their debt/GDP ratios so that all of them will reach no more than 60per cent of GDP over the next 20 years. (German finance minister Wolfgang Schäuble proposed one example of exactly this procedure this weekend.)
Third, there would be financial sanctions, such as compulsory interest free deposits, or outright fines, amounting to 0.2-0.5 per cent of GDP for countries which are in breach of the procedure.
Fourth, member states would be expected to adopt a common set of practices into their national budgetary frameworks, so that the targets which had been agreed at a eurozone-level would be enshrined in their own domestic fiscal rules. These rules might include “balanced budget amendments in national constitutions or legislation.” From: http://blogs.ft.com/gavyndavies/2011/12/04/germany-is-winning-the-debate-on-fiscal-union/#axzz1fa1uxaUF, “Germany is winning the debate on fiscal union”, December 4, 2011 6:36 pm by Gavyn Davies
Putting all this together one sees…..a fog of agendas and ideas…one wonders to what extent much of this is negotiating guff….and some is baggage to please domestic voters and the German constitutional court perhaps……..and notice by the way how the substance does not really address two core questions:
Where, when and how much money will European Banks get to face their huge bad debts and new capital ratios? They will need a lot-the Spanish savings banks may be sitting on 100bn worth of bad debt. And look at just how much it cost to bail out Irish banks.
Where, when and how much money will Member States like Italy, Spain and Ireland raise money for the roll over of bonds, and for deficit spending……the rates being charged by the market are excessive, so we may have to look at some novel forms of collective bond issues (Eurobonds) or else more money will be needed from the IMF/ESM-EFSF……….
Thinking more about it, I can only see the other rating agencies join S&P on their downgrade advice.
It will be interesting to see what more clarity the week and weekend summit will bring.
WHAT A NEW EU TREATY ON THE EUROZONE RULES MEANS FOR IRELAND-MORE BAD NEWS?
Those are French students protesting against Sarkozy. We may be seeing something very soon here in Ireland if Sarko’s big idea of a big new EU Treaty takes off.
For Ireland, the idea of another major Treaty is arguably very very bad news. I note the talk is now shifting to ‘urgent Treaty change’…but its not clear if the German’s and French have given up on the idea of a big sweeping new Treaty as well…..this is more or less what Sarkozy said:
“After this long road, we are coming back to essentials. That’s why France and Germany want a new European treaty, in order to rethink the organization of Europe,” See: http://www.npr.org/2011/12/01/143017948/sarkozy-speaks-on-reshaping-eurozone
I’ve no problem with using Article 48(6) of Lisbon to take emergency actions and rewrite the ECB rule book in a minimal way. I do have a major worry about another major Treaty. Why?
First, it seems unlikely we could avoid holding a divisive and bitter referendum, as the changes suggested in a major Treaty reform would likely be significant enough to fall within the scope of the Crotty verdict which argued a referendum would be required whenever an EU Treaty had an impact which was likely to “alter the essential character of the Communities”…or “create a threat to
fundamental constitutional rights.” It would fall under the first heading be massively rewriting the Maastricht rules and the latter because the Oireachtas has under our constitution primary responsibility for any Budgetary process.
Secondly, its seems far from certain the Irish electorate would vote yes to a complex treaty reform-that could easily be presented as unwise in economic terms, and in nationalistic terms, a further imposition on our economic sovereignty. As one commentator noted: “An Ipsos-MRBI poll recently for The Irish Times showed that any referendum on the EU here would start with 47 per cent of voters in the No camp versus just over a quarter in the Yes camp, a near insurmountable lead.” Daragh McDowell, The Irish Times, November 14th. http://www.irishtimes.com/newspaper/opinion/2011/1114/1224307524795.html
Thirdly, this makes me fear any referendum would become a ‘gun to the head’ type question. Either you agree to this Treaty change which gives the EU new fiscal powers of supervision over national budgets OR you don’t get access to Eurobonds and/or you can’t be in the Eurozone. In effect it could become a second referendum on whether or not we should stay in the Eurozone (with added discipline).
The problem there is that emotionally a great many Irish people may well feel they would like to kiss the Euro goodbye, and copy the Danes, Swedes and British. However, it would be tricky to leave the Eurozone and their are sober arguments for and against.
The argument for a national currency is basically the flexibility that some type of national currency would give you-for example one could run a national currency at a lower level of value, a depreciation strategy, which can help boost competitiveness and exports. However, in the long term such strategies can easily cause their own problems, and in the short term they make imports more expensive-and Ireland imports quite a bit as much as she exports. One also has to ask whether Ireland has a good record of using any national autonomy and freedom of action wisely, like Switzerland or Norway? It is true that in early 1990s a significant devaluation of the Irish currency did help our economy, but the risk might be that domestic national management of any new national currency could be become a real political football that could easily be badly managed. After all look at how we domestically managed our Banking and Property sector?
All those debts denominated in Euros would still likely have to paid with some new currency whose value would be unknown? A currency value fluctuation risk in repayment would come into play. Many Hungarians are now trying to pay back mortgages that were sold to them in Euros or Swiss Francs-with a Florint that has massively devalued.
“Two-thirds of Hungarian mortgages are in Swiss francs – taken out to take advantage of low interest rates, mostly when the Swiss currency was weaker. The franc’s sharp gains against Hungary’s forint have left many borrowers struggling to make repayments.”
From: EU urged to probe Hungary mortgage move, By Neil Buckley, East Europe Editor, Financial Times, http://www.ft.com/intl/cms/s/0/22904922-e835-11e0-9fc7-00144feab49a.html#axzz1fC7Nr7oi
The Hungarian Parliament was forced to introduce a law which allows mortgage payers repay at a rate 25% below the exchange rate-a move that is controversial and is sure to be litigated. In effect the Hungarians are imposing some type of unilateral re-denomination of foreign loans, which is legally tricky and may have long term effects on domestic credit supply.
Savers with Euros in the bank would rush to get their money into other currencies or out of the country, fearing that a Punt Nua would lose value relative to the Euro, and therefore we would have further capital flight and might even have to bring back currency controls.
We would have to get back into the business of running a national currency again almost overnight-it took years of planning for the switch to the Euro! Such a sudden currency switch is far from straight forward for a very small trading nation like Ireland. Would it in fact mean a return to the Sterling zone, which means in some ways having your economic freedom cramped by the City of London and the Bank of England as much as say the ECB and the Franco-German leadership of the Eurozone? Should we discuss being linked with the Dollar? That didn’t work well for Argentina. And the Dollar is losing value as well.
Finally how would our exporters view Ireland outside the Eurozone? It must be quite advantageous that we are in the Eurozone if they are using Ireland to export to the continent (although less so if they are focused on the UK market). There would be a return to a risk of exchange rate fluctuation which would be some type of tax on investment. I honestly don’t know how big it would be, but in the short term it would likely make the work of the IDA a lot harder trying to convince a big American or other firms to open up an operation in Ireland if they expected to trade heavily in the Eurozone. The fact that we wouldn’t be might put them off.
One quickly see this is shaping up to be a strategic nightmare for Ireland. We either vote to join a strict fiscal union which will impose further austerity upon us most likely, and ‘shotgun wed’ us into perhaps a much deeper type of federal integration, for example harmonizing corporate taxes, OR we refuse all that and are forced also by doing so, to leave the hard-Euro zone, and have to fall on back on some expediency of re-using the Punt, re-joining the Sterling zone, or something very uncertain?
Not much of a choice there it seems, but there is a lot to play for yet. Most of all Sarkozy may well simply lose the French Presidential election during April and May. If so..I for one say…. good riddance….to him and may be as well to the idea of another ‘grand Treaty’ which I think is the last thing we need now.
Face the current and massive crisis with the imperfect rules we have and work around them and within them and simply get on with it!
Oh, and its Friday.
DO WE REALLY NEED ANOTHER EU TREATY?
The most interesting thing is that a major change of the Treaties may not be needed.
One can probably work expediencies within the existing Treaty of Lisbon where needed and in some cases, the simplified revision procedure can be used (Article 48.6), which has already been done in March 2011, when the European Council agreed a regulation that amends Article 136 with two new sentences which simply state that Eurozone members may well set up a European Stability Mechanism.
This is currently going through a process of ratification in each member state (Ireland ratified it by a simple act of the Oireachtas on the 20th September 2011, it might be added without much debate which focused on the legalities of the instrument, although this was raised in Ireland: see: http://www.people.ie/eu/esmref.pdf and somewhat refuted by Dr. Gavin Barrett: see:http://www.ucd.ie/law/news/name,103484,en.html )
For an accessible primer of the EU legal rules relevant here see: http://www.creditwritedowns.com/2011/11/the-relevant-articles-of-the-lisbon-treaty-for-the-sovereign-debt-crisis.html
The points I would make here are simple ones.
- The EU’s leaders have to move very fast-we are taking days and weeks not months and years needed for a proper and detailed reform of the Treaty of Lisbon.
- The EU’s leaders probably have to do things that the Treaty of Lisbon does not make easy or even strictly speaking does not even permit-therefore a combination of working around the rules and revising them will become necessary.
- There is a very quick mechanism to revise the Treaty of Lisbon under Article 48(6), however it cannot be used to give the EU a new competence or power, and agreement must be by unanimity of the heads of state/government (all 27), and the measure must be ratified by each member states’ appropriate means-usually a simple vote of Parliament. If even one parliament rejects it, then the speedy amendment falls (that could be the UK’s House of Commons). We in Ireland may or may not require a referendum subject to the interpretation of the Crotty judgement. It depends on the substance of the amendment, but the fact that the use of Article 48(6) precludes any case where a new competence is given to the EU, this might seem to imply it would fall outside the test set down in the Crotty judgement. So we might not need a referendum as long as Article 48.6 is used. However, it still depends on the exact details of any Treaty changes.
- Article 123 of The Treaty of Lisbon prohibits the ECB from printing money to give to governments, and even any EU agencies, or any public authorities. However, it is entirely possible for the ECB to print money and pass this directly to banks across Europe to meet their liquidity but also solvency requirements. A special commercial vehicle could be created to manage the banking crises which is at the heart of the Eurozone crisis in a much more aggressive and systematic way than heretofore. To date, ECB intervention has been limited to interbank market liquidity requirements, but a more long lasting credit facility to banks could be created (although the ECB would hate the idea….it would be preferable to a mass banking collapse across the Eurozone and beyond?)
- Article 125 would appear to exclude Eurobonds, but then it has already been side stepped by the creation of a European Financial Stability Facility and the new European Stability mechanism after 2013. This was done invoking the ‘emergency measures’ clause of Article 122. The Commission’s recent report on three options for Eurobonds noted that there was nothing legally to prevent a co-ordination of national bond auctions which would be structured by common rules, as to what countries could participate, how much they could raise and and how they would repay, and what additional security/collateral could be offered, without formally involving a joint legal liability for the bond between all parties [see http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/820 ] Notice also that Article 125 does explicitly allow some form of joint funding which would involve mutual guarantees for ‘joint projects’. This could be a ‘back door’ by which some member states could agree to issue bonds via the European Investment Bank to fund some capital expenditure projects, which by the way are very important for creating demand in the context of the current recession, impeding depression.
- Article 126.14 allows for a protocol on the excessive deficit procedure-the old Maastricht Treaty Rules of the Growth and Stability pact which were supposed to prevent moral hazard and countries like Greece borrowing too much or issuing too much debt paper. Obviously these failed. Indeed they were ignored by France and Germany when they were challenged in the early noughties on their borrowing! It would be possible to re-write these via Article 124.14 and do also a rewrite of Protocol 12 (see below) all using Article 48. The only trick is you cannot grant the EU a new competence in doing this…but could the rules be made more binding in a way that did not yet involve a new competence? In fact all that really has to happen is for there to be political will to apply what is already written down in Article 126……..the need for some entirely new complex Treaty that makes the process in Article 126 seems too unlikely to ever be achieved…
And the point is? There is enough room within the existing EU Lisbon Treaty to take some pretty radical and unorthodox measures which might provide some help in the current crisis. The idea that a major reform of the Lisbon Treaty is technically needed or desirable both seems crazy given the political risk such will be undeliverable, and most all, will be too little too late even if it was.
Another Bloody EU Treaty?
Once more with added austerity? How they looked happy in 2007 when the signed off on the Lisbon Treaty. Little did they think they could be back at it again in 2012 or 2013, and we could be voting on again…for the third…or maybe even a fourth time?
Another big EU Treaty?
That seems to be the position of the French and Germans based on press statement over the last weeks (see: http://www.bloomberg.com/news/2011-11-28/merkel-spurns-bazooka-in-favor-of-fast-track-eu-treaty-change.html ). There are 3-4 rationales associated with this idea, none of them particularly sound in my view.
Firstly there is a general argument that tough stability rules are needed to make the Eurozone work and an admission that previous convergence criteria rules in the Maastricht Treaty were not tough enough. Future rules on budget deficits and debt levels may take the form of automatic sanctions, imposed by the Commission presumably, on any offending nation in the Eurozone.
Problem: This legalistic argument may or may not be valid (the downside of tough strict rules is that they lead to inflexibility and during a severe recession or national emergency it may make sense for any national government to have the freedom to run a large budget deficit). In any event its like arguing that sprinkler systems should be mandatory while a large building is on fire. It does nothing too fix the inter-related banking crisis and the sovereign debt crises.
Secondly, it is clear that the Germans are linking a demand for conditions over national budget spending via a legal stick to control spending with any assumption of common debt financing-Eurobonds. They are saying if you want Germany to help raise money for other countries via common debt instruments then we must have a say on how you spend that money.
Problem: That might seem fine put that way, but in practice the devil is in the detail. How much say? Just the broad brush of deficit levels and debt to GDP ratios, or would there be a right for the Commission to go through a budget line by line and strike out particular budgetary provisions that they deem ‘excessive’? One would assume not the latter, but then how effective will such measures be if they do not really have the teeth to get into national spending in countries like Greece or Ireland?
Yet, relatively small and detailed fiscal changes can over time lead to larger implications for public borrowing and debt. For example increasing pensionable ages to 68 across the entire Eurozone might dramatically reduce long term fiscal liabilities but that would be getting into to very different national pension regimes. Also, there is a logical and ethical problem here; why should other Eurozone members have rights over a national budget exclusively in a negative sense, but not also have a positive duties to help out another member states in distress-to give them transfusions of cash? If Germany for example suffered from a localized recession, but the German government refused to take positive fiscal measures to reflate the Germany economy, would not the Eurozone as a whole not have a right to demand that measures were taken to boost German demand…in part because it would have knock on effects on the rest of us?
The logic of any fiscal union, however minimal, must cut both ways: all members police each other to make sure nobody is spending too much or too little, but all members are obliged to look after and pay for each other as well-at least to some extent? Sooner or later that logic will creep into any fiscal union.
Finally of course there are very different economic theories about appropriate budgetary cycles-and most economists inspired by Keynes would adhere to the view that in a savage depression the last thing one should do is prohibit heavy borrowing or running a deficit. Equally during the good times, there may be a need to be ‘counter cyclical’. If you remove this flexibility from the nation states, how can they respond to any future recessions? Either there is a rule that each nation state keeps sizable contingency funds, or some type of centralized Eurozone wide contingency fund to help meet sudden current spending deficits would sooner or later become logically needed. The problem with fiscal union, is once your in for a penny, your in for a pound.
Thirdly, its not clear how much of this ‘stability zone’ plan is really an attempt to split the Eurozone into a more manageable ‘hard currency’ area and a sin bin of countries like the PIIGS, who can then be organically allowed to emerge….each peripheral states like Ireland or Spain would have to decide how badly they wanted to be in the Eurozone…they would then have to accept financial and budgetary discipline set by some collective Eurozone body…perhaps within the Commission…perhaps in the ECB……or some other agency. States that either could not meet the tough conditions or were not prepared to do so, would exit the Eurozone.
Problem: The theory seems to be that amputation is the best way to stop the spread of a contagious disease. It may do this but may well also kill the patient! In fact, a new core Eurozone runs a risk of becoming competitively disadvantaged by being overvalued-something which German exporters complained about the old DM in the 1980s. As it became more valued and respected its rate of exchange with other currencies appreciated and that meant in relative terms German exports began to look a lot more expensive outside Germany. So the conclusion here is ‘be careful what you wish for’.
Once again this solution does nothing to address the massive (bad)loans which French and German banks gave out to the various PIIGs countries and governments-except there would now not only be a risk of default, or haircuts to be factored in, but even if the PIIGs keep paying their loans back they may well be doing so in a different currency. A crucial question is whether loans that Irish banks borrowed from German banks in Euros would be re-dominated into Irish punts…or whether they would remain on the Irish banks’ books as loans to be repaid in hard currency Euros but funded from Irish borrowers who would be using a weak national currency perhaps?
A new cost of currency risk would therefore enter into calculations about the rate and extent of bad debts which threaten to sink European banks.
There is also the political cost, that would attend here. States such as Greece, Portugal and perhaps Ireland, who all might not qualify for Core Eurozone membership would bitterly resent their de facto expulsion. It would be naive to think the political fall-out of a two-tier Europe would be predictable or benign. Some of the peripheral countries may well transform from being essentially pliant and consensual member states, to being very awkward nations, which might make the British look reasonable.
Fourthly, perhaps the whole thing about major Treaty reform is just a gambit? After all the chances of ALL 27 nation states agreeing to a major revision of the Lisbon Treaty cannot be that good. So maybe by adding the requirement for a major Treaty change Merkel just buys time, courts domestic opinion, which likes the idea of forcing state like Greece to be fiscally responsible. Much of the strict rhetoric by Merkel and Sarkozy may be merely a ruse to pave the way for a two speed Euro zone (and even two speed EU)…..after all banging on about Irish Taxes is surely the right way to get the Irish to vote down the seemingly inevitable referendum…which may be what the French and Germans really want us to do?
Problem: we do not have time for a time delaying exercise or a major treaty reform.
Equally, the obvious could well happen after a long period of time-say 12 months from now. Some EU state will simply fail to ratify any such new Treaty. It could easily be Ireland, or even non-Eurozone Denmark. What have we learned from the Lisbon and Nice Treaties debacles? Well major Treaty reform is NOT what ordinary voters want or fully understand. They may well take their frustrations out on the hapless politicians who seek to push such changes, especially in countries like Ireland, where a referendum would seem inevitable. Any changes along the lines of automatic Treaty sanctions would be a major change of the Treaties and would likely fall within the scope of the Crotty judgement. which argued a referendum would be required whenever an EU Treaty had an impact which was likely to “alter the essential character of the Communities”…or “create a threat to fundamental constitutional rights.” It would fall under the first by rewriting the Maastricht rules and the latter because the Oireachtas has under our constitution primary responsibility for any Budgetary process.
BLUEPolitik 