CAN EMU SURVIVE WITHOUT CLOSER INTEGRATION?

André Sapir: swiftly it became a political matter.
On 23 April 2010 Professor André Sapir (University Libre de Bruxelles) delivered a lecture Can EMU survive without closer integration?'

Sapir teaches international trade and European integration. He is also Senior Fellow of the Brussels European and Global Economic Laboratory (BRUEGEL) and member of Barroso's Economic Advisory Group for the European Commission. He was also chairman of the High-Level Study Group, that published in 2003 an influential report 'Can Europe deliver growth?, better known as the 'Sapir-report', where in fundamental weaknesses in the European economy were reported.
Key issues of the lecture:

- economic governance in EMU;
- a global economic crisis which has hit Europe particularly badly;
- how has EMU managed the crisis?
- inadequate economic governance in EMU: the Greek crisis;
- the way forward: towards a fiscal union?

   

The EU a single market plus what? It is a matter of co-ordination: that is to say, in normal times it is crisis prevention and during crisis it is crisis management. This crisis management was founded on the prevention framework that was judged as sufficient to avoid crisis and of the appearance of the word 'crisis' once in the Treaty ('BOP crisis', balance of payments) and does not foresee a mechanism for intervention (such as the proposed EMF). The only option was co-ordination (burden sharing, fiscal stimulus, European Recovery Plan and with the sovereign debt, the Greek crisis.

About crisis prevention there is the:

  • Delors report 1989 (binding budgetary rules);

  • Maastricht Treaty 1992, articles 103, 104. Little or not used;

  • SGP (Stability and Growth Pact) July 1997. Medium term objective for budgetary positions of close to balance or in surplus (was never understood);

  • Eurogroup December 1997. Informal. Goal: to enhance economic policy co-ordination amoung EU-members, but with two opposite views about its role and the role of its co-ordination (policy mix versus SGP.

Crisis started August 2007 and burst out by the fall of Lehman Brothers. Although the euro-system has worked well, its framework and resilience should also stand solid in storm conditions.

The crisis has hit Europe very hard. GDP decreased strongly.

Europe has to become weatherproof and the European Commission has an explicit responsibility on the matter by insuring integrity of the single market and by coordinating economic policies. In the Greek case, there is failure with the prevention framework and a lack of a crisis management framework. Also absent was an attitude to respect the spirit of the SGP. Another fact is that 3/4 of the Greek debt is to be found outside Greece (mainly Germany). Before the euro EMS (European Monetary System) with its parity was the mechanism. Now, rate policy should be seen as a matter of common interest and is shifting from nominal exchange rates to real exchange rates.

The Treaty has no bail out clause (art. 125) and there should be a lending facility for BOP problems along the lines of article 143. Not multilateral, but bilateral with unanimity of all euro area members. On 12 April there was agreement on size and terms of lending, but the case is far from closed. We may now need also a crisis resolution mechanism to set terms of standstill, or rescheduling, or debt reduction.

Lessons: enhanced capacity to act in times of crisis is needed, we need a robust framework for crisis resolution, respecting the principles of member states with their own budgetary responsibility and the European Council must improve the economic governance of the EU. Examples for governance models are centralisation (political union), one of social and fiscal policies within full decentralisation (systems competition) or coordination of decentralized policies ('Thou shall not', common prevention - ex SGP and 'Thou shall act' with others common action - ex MTFA).

The last given example delivers dealing with potential spillovers, but also confusion of responsibility. Furthermore, big countries create more spillovers and are generally less willing to coordinate, because it implies a loss of

28 April a newspaper reported:

The Greek crisis makes one thing clear: if the Economic and Monetary Union will survive, crisis prevention should be strengthened. 'When fire broke out, we had no fire-brigade. We don't need a fire-brigade, European leaders said, because we don't like fire. But a fire-brigade is urgently necessary, otherwise we are in great trouble." Can the euro survive without an integrated economic and political policy?

While the rescue operation is in progress, one is working on proposals to tighten up supervision on the Economic and Monetary Union.
Euro countries have to send in their budget-sovereignty. As soon as a country let run out of hand their budgets and it is damaging the SGP, intervention should be powerful. For weakened monetary union builds up a threat for the economic growth and with that the social securities.

The crisis have worsened public financing dramatically. Debts are exploded and, although there are differences, that puts pressure on social systems. Countries in the north like the Netherlands and Sweden did get through the crisis better.

 
They carried out reforms, they have a better economic performance qua solvability and efficiency. South European countries are shifting their problems to the next generation.

Before the crisis, they failed already to reform and their debts were already high.
The crisis shows the fragile situation in countries such as Greece. In the mean time, globalisation is in progress and we have to do with strong economic competitors like China, India and Brasil. Through this, Europe is forced to adopt and strengthen its economy still faster.

We cannot afford ourselves weakening of the EMU.

The SGP has failed. The pact should have prevented the Greek financial crisis. But it did not work. The Greek problems were already known for a year, but nothing happened. Supervision on observe of regulation for the euro is too weak. More specific: the Greek crisis broke out because of the fact that in 2005 the SGP was being eased.
In stead of strengthening supervision on observe the euro-criteria concerning debts, deficits and inflation, Germany and France would not follow the euro-obligations, because deficits went beyond norms and of financial penalties.

 
As Presidency of the EU, Italy turned the situation in such a manner, by which Berlin and Paris were not fined. The European Commission did not want a conflict and so, nothing happened. Smaller countries were furious and since then the motto is 'live and let live'. Sour is that Greece has taken advantage of it.

If you are monetary unified, the solution of the crisis desires also some solidarity. Besides the IMF-loans, all euro-countries should support their part. The present rescue package should prevent a failure of Greece, otherwise the problems will reflect as a boomerang on banks, which have lend to the Greek.
The crisis comes on bad time, because European countries are working on their recovery.

Supervision with teeth is necessary. Political leaders should be able to demand policy- adaptions. A view of the European Commission is to get insight in budgets before they are approved. Germany, however has a key position in this.
Germans feel themselves deceived. Exactly that happens of what they were afraid for: to have to suffer for the irresponsible behaviour of other members of the euro-group. Frustrations are hughe, because it is asked ti give aid to a country that took advantage of it, while Germany tightened its belt, due to the high costst of the unification.

  
Europe has advantage of a monetary union. Although the credit crisis was worse, the euro survived 9/11 and the exchange internet crash.
Next months it will become a very difficult debate in Brussels to improve the EMU. But politics cannot escape tightening of the rule of the euro-game.

The euro is a currency without a country, without political policy. That has always been its weakness. If crisis prevention will be tightened and the Council call countries which makes a financial mass to order, a step is made to more political integration. For countries give up a part of their sovereignty. That does not mean that there should come a a kind of economic government. The European Central Bank should stay independent.

If political will is not present, then a gloomy scenario will occur of slow growth, more rising debts and higher taxes. Europe will experience a downward vicious circle in an era wherein world-economy is on a turning point and shifting to Asia (In October 2010 France and Germany agreed that the economic governance needs to be reinforced).

If Europe's economy will not become stronger, we become poor.