The global economy looks set for more unrest, but this time it will not be the USA, or (unless there is a sudden change of direction) the eurozone at the heart of it, but rather the more vulnerable among the world’s emerging countries, which are beginning to suffer the effects both of the end of the Federal Reserve’s quantitative easing policy, and of the more aggressive policies now being adopted by the European countries in the arena of international trade. It is impossible to predict with precision what impact tensions in these areas might have on the European and global stock markets and, in turn, on world stability. However, commentators generally seem to agree that the excess liquidity that has flooded the emerging markets but failed to be translated into structural reforms is bound to leave the most fragile economies at risk and expose their lack of competitiveness and their internal imbalances. Added to this, the fact that raw material prices have stopped rising is set to impact in a similar way on the countries that are the main exporters of these materials.
All that is happening seems to provide confirmation that, in the global economy, it is becoming increasingly important for single countries to have the political capacity to make choices that can guarantee sustainable development. Even the USA has accepted the need to follow this logic, choosing to encourage a revival of its manufacturing sector, bolstering its innovation, research and training/education sectors, and opting to pursue energy self-sufficiency. At the same time, the USA has embarked on the laborious process of correcting, in part, its growing social inequalities and increasing the regulation of its banking system and financial sector, thereby starting to lay at least the basic foundations for more balanced growth. And it has been able to do all this while still being able to exploit the advantaged position that, on account of its status as a main financial and monetary force, as well as a major political and military power, it continues to enjoy vis-à-vis the rest of the world.
In this framework, Europe, recognising its own major handicap – being the sum of disparate national economies, and not a continental power, it has no competitive advantage to exert over the rest of world –, and in spite of repeated criticisms from the English-speaking world and even from the IMF, has actually been moving in the right direction. In other words, it has embarked on the difficult course that will see it overcoming its political fragmentation and the internal tensions generated by the competitive discrepancy between its different economies and national systems. The storm clouds gathering, once again, over the markets should, for Europe, serve as an effective reminder that it is still in a precarious position and reinforce its commitment to the direction it has been following in recent months, namely the completion of monetary union with the creation of the four unions (banking, fiscal, economic and political) indicated in the document submitted to the December 2012 European Council (Towards a Genuine Economic and Monetary Union).
The December 2013 European Council meeting marked an important milestone in this regard: in addition to taking crucial decisions regarding the first of these unions (the banking union), it raised the question of starting the process of creating the fiscal union, and also the idea of instituting an embryonic separate budget for the eurozone, financed by own resources.
In this way, the meeting, in reality, also put another question on the table, namely that of the need to start the process of creating the economic and political unions; after all, the issues (of democratic legitimacy and power of government) raised by these concrete developments make changes in this direction inevitable.
With regard to the banking union, the turning point contained in the agreement reached in December is the affirmation of the principle of risk sharing (sanctioned by the creation of the new bank recovery mechanism). In short, this agreement affirmed the principle of joint control of a banking system that, following the creation of the single currency, can no longer afford to remain national, and also introduced the kind of problem sharing that has to be in place in order for today’s fragmented reality to be transformed into a unified whole. In addition, notwithstanding the criticisms levelled at the Single Resolution Fund (SRF) – the SRF is deemed an inadequate resource, even though it actually compares with the budget of the American Federal Deposit Insurance Company (FDIC) –, the major advantage compared with the national systems currently in force lies in the primarily preventive role that the new system of rules and controls can be expected to start playing (not to mention, in view of its political significance, its role as a deterrent). Having said all this, and underlined that the decisions taken in December therefore constitute an important and decisive step, it is also necessary to highlight both the need to introduce, immediately, several essential improvements – to begin with, the timeframe envisaged for the SRF to become fully operational needs to be drastically reduced –, and the fact that, in any case, the banking union, by itself, is not enough to solve the problems of economic and monetary union (and cannot be expected to endure without further advances in the other unions). Mario Draghi made this very point before the European Parliament last December, stressing that the banking union “is a necessary, but not sufficient condition”. The fundamental difference between the SRF and the FDIC is in fact due to the political framework within which each of these mechanisms operates: whereas in the USA, there exists, difficulties aside, an institutionally established link between the system of control and resolution and the system of federal government (and, therefore, federal funds), the eurozone has no federal-type budget and no European treasury (the SRF, at present, does not even have access to the funds of the ESM).
The European Council also discussed the possibility of starting a system of mutually agreed contractual arrangements and associated solidarity mechanisms within the eurozone, and the Conclusions of the meeting indicate the need for further study of this question, instructing the Council and Commission presidents to draw up proposals to be presented to the October 2014 European Council “with a view to reaching an overall agreement on both of these elements”. The relative negotiations are bound to prove difficult, as they will bring to the fore all the controversial issues and difficulties that currently paralyse the states: the most fragile countries’ fear of losing their sovereignty; the anxiety, in northern Europe, over the possible creation of moral hazard situations (already experienced a number of times); the fear of undertaking a Treaty revision that, in some countries, would have to be put to a referendum whose possible outcome risks to be (in France particularly) unpredictable; and finally the difficulties linked to the need to render the broader EU framework compatible with the narrower one of the eurozone, should the latter be transformed into an economic and political union. In the end, however, an agreement will have to be reached, because the survival of the euro depends on it. On the one hand, it is necessary, as requested by Germany, to create economic policy constraints capable of harmonising the levels of competitiveness across the eurozone countries, even the weakest ones. At the same time, Italy and France in particular, equally justifiably, want to see the eurozone creating its own independent financial capacity with which to drive and support the economies of its member states (i.e. by creating solidarity mechanisms associated with mutually agreed contractual arrangements), because building a capacity for redistribution at European level, linked to a power of political intervention, is the only way of breaking the vicious circle of austerity without growth.
The creation of an autonomous fiscal capacity for the eurozone is, therefore, the essential objective, as it would, in turn, allow the financing of an additional budget that would not merely be the result of transfers of funds by the states (and would not, therefore, amount to a “horizontal” system of solidarity between sovereign states, which is what we have today); instead, the introduction of a European power of taxation would involve the citizens directly. As a further necessary step, the eurozone MEPs (acting in ways that the European Parliament, providing it is willing, may itself establish, e.g. through an ad hoc committee of eurozone MEPs, through decisions taken in restricted composition, or through some other, similar system) must have their say on these tax revenues and the content of the “agreements”.
Since the creation of a separate budget for the eurozone requires Treaty amendment, which is not yet on the agenda, the next steps in relation to contractual arrangements and associated solidarity mechanisms within the eurozone will almost certainly have to be compatible with the existing Treaties, and it is likely that governments will once again fall back on the solution of international treaties in order to facilitate their entry into force, postponing overall institutional changes. But the fact nevertheless remains that all the problems are now on the table, and should therefore guide the actions of those who are, in fact, seeking to work towards these changes (and, as shown by President Hollande’s statements during a press conference at the Élysée Palace on 14 January, Chancellor Merkel’s address before the Bundestag on January 29, and Schaeuble’s declarations in Brussels on January 27, are aware of what is at stake). Therefore, the crucial aspect, reflecting the scope and effects of the solidarity mechanisms, will be the manner of their funding. The Conclusions of the December European Council make no mention of this aspect, but it is clear that should it eventually be agreed to fund them purely through national contributions, this will inevitably throw up, once again, the very contradictions and problems, currently impeding governance of the eurozone, which so desperately need to be overcome (including the tensions between the countries of northern and southern Europe). The real challenge inherent in the creation of solidarity mechanisms is, therefore, to decide to fund them through recourse to a European power of taxation, and start the process of involving the European Parliament.
The gradual advances and slow progress of the eurozone countries in this direction must not be mistaken for absence of the will to reach the objective. The obstacles ahead are enormous and managing to secure, at the same time, consensus for a concrete political union project from the key countries (France and Germany, with the support of Italy) has always been the problem holding back the process of European integration. Real convergence in this sense is more possible today than it was in the past, when the Franco-German axis seemed to work perfectly well and when, in the absence of urgent problems to address and inescapable choices to make, there was a tendency to make high-sounding statements which, however, were never followed up with action.
Today, unless action is taken, Europe will perish; and France and Germany (or their present leaders at least) seem to have realised this. It now falls to everyone, and primarily to Italy which, on assuming the EU presidency, will have greater powers to intervene in the organisation of the October European Council, to make sure that this action is taken.
Publius