The good news is that the European Union is not about to fall apart because of the debt crisis, or for any other reason. If that were the case, why would a dozen or so countries still be queuing up to join? The EU is arguably the most successful peace project in world history and has brought stability and democracy as well as some prosperity to its members. This makes it more than attractive enough for others to want to be part of it.
A breakup of the euro is not necessarily unavoidable. Even though some headlines would suggest otherwise, Finland is deeply committed to the euro. A good maxim in any crisis is to hope for the best and prepare for the worst. The euro has grave problems – a federal currency without a federation – but the cost of returning to national currencies is still estimated to be greater than saving the euro.
This said, the EU could and should be doing much better than is the case. To begin with, the Eurozone crisis, despite the cautious optimism now being shown, it is still too early to declare victory. We Europeans will be paying for a long time for mistakes committed first of all in the setting up of the euro and then in dealing with the sovereign debt crisis. We in the EU will surely have to pay for a long time to come the price for having failed to do the right thing at the outset and arrange an orderly debt when the Greek crisis erupted more than two years ago.
It is clear that the euro was, and still is, a good solid idea, but that our wish to make it into the flagship for European unity and integration was premature – it could only succeed with a high degree of economic integration and convergence which was not and still is not there, and as part of a much further reaching financial and political integration.
The euro’s crisis has generated a long list of both temporary and permanent legislation, along with mechanisms aimed at dealing with it now and preventing a repetition in years to come. Some, like the six-pack of legislation to strengthen economic policy co-ordination and set up the European Stability Mechanism permanently, are eminently reasonable and necessary measures. If these had been in place at the outset it is possible that the crisis could have been averted, and would certainly not have reached these proportions. However, further measures are needed to remedy the present one.
So we need to do more. One step is building a credible system for European banking supervision. Irresponsible lending is a major root cause of the euro area crisis and fear of banking collapses is the number one economic concern in the euro area. The financial sector needs stronger controls. Mervyn King has said that if a bank is too big to fail, it is too big. Another quote worth repeating from him is: banks are global in life, but national in death.
We need solid European banking supervision covering all banks. Supervision based on a national focus does not work with the closely integrated financial market we have today. One lesson from the current financial crisis is that problems in one country can easily spread to others. Home loans in Arizona or Ohio can have a global impact.
Concentrating European bank supervision on only the bigger financial institutions would pose a two-fold problem. First – we know from experience that financial contagion easily spreads from small to large institutions. Size doesn’t matter. I believe that many of the banks that are at present a cause for grave concern would have fallen under the threshold of larger systemic institutions. Second, wouldn’t a two-tier supervision – European and national – encourage savings to concentrate to bigger banks, perceived as better regulated. Thus encouraging the opposite of what should happen – the growth of banks into entities that are too big to fail.
I also believe that supervision should cover the whole union and not just the euro area. Many banks operate across the euro and non-euro divide.
Reforming financial markets is crucial. Our financial system has, in a sense, become too dynamic. Better European bank supervision is one step. Taxing financial transactions is another important tool in making a healthier financial system. Financial institutions should also be made to pay for their mistakes – investor responsibility for losses and collecting funds from the financial sector itself to deal with bad bank banks and solid deposit guarantee schemes. They should not be taxpayer liabilities, but financed by the banks themselves. Restructuring banks should be made possible – otherwise we will end with a large number of zombie banks, unviable but kept afloat with public money.
We have all seen what moral hazards have been created by making states the rescuers of first resort. Thus proposals for a Banking Union are right and necessary.
Perhaps one of the underlying tensions within the union has been the fact that the four freedoms underpinning the internal market are in fact at very different stages of integration – people, goods, services and capital are all supposed to move freely, but this is not really the case. In fact only capital has achieved unhindered movement to an unhealthy degree, while the internal market in goods and services is incomplete.
Therefore an important further – long-term – dimension in rebalancing the European economy is addressing an imbalance in the internal market – more should be done to develop the internal market in goods and services and promoting mobility.
The mobility of people and labour has been very modest. People don’t move with jobs, they stay put. The difference with the Unites States – another big internal market – is striking. We can lament this from a theoretical point of view, but we should not underestimate or disparage people’s attachment to their language, culture and established networks – why else would we continue with regional policies in all our members states?
Another essential step in mending the European economy is macroeconomic rebalancing within the euro area – in practice: Germany has to pay higher wages and consume more. The German wage settlements are a good step in this direction. The euro area periphery will not recover without strong demand from the centre. Euro area demand is mainly generated from the euro area.
The European Central Bank also needs to take an active role in maintaining healthy demand by regulating the supply of money – as sound currency is a core mission, then combating deflation is as important as combating inflation.
The story of the eurocrisis is not only one of too little too late, it is also one of deliberate bad choices. I am thinking particularly of some more questionable measures like the Treaty on Economic Union, which is at best irrelevant for dealing with the present crisis and at worst has the potential to impose unworkable austerity policies while delegitimizing perfectly sensible Keynesian policies in the future at a huge cost to growth and employment. Furthermore it is yet one more measure that it adds to the confusion that increasingly surrounds the EU’s institutional framework.
The euro-crisis has to be dealt with the means available in the present treaties, which are flexible enough to allow us to take the necessary steps now needed – if we only knew what they were, one could also add. So talking about treaty changes is not going to help us deal with the crisis. They can only be agreed and implemented after a lengthy and complex procedure, and the answer to this is not to try to circumvent them at the cost of further eroding the democratic legitimacy of the European project.
The damage done to democracy in Europe is no less than the harm being caused by poor economic governance. Even by the EU’s modest standards for respecting its own rules and the democratic elements they contain, the EU’s answer to the crisis has been dismal. The reality is that all the normal procedures for preparing and taking decisions at EU level have been bypassed.
The European Commission has been shunted to the sidelines and the permanent president of the European Council has become no more than a front man for decisions prepared in a very opaque manner and public debate by the ’duopoly’ of Berlin and Paris that seeks to impose its own solutions on everyone else. In short, other EU governments are today expected to come to European Council and euro group meetings with little if any advance knowledge of what it is they are expected to sign up to. It can be argued, of course, that Berlin and Paris have merely filled the leadership vacuum left by others. This is true to a degree, but cannot excuse the high-handed way it has been done.
The larger framework for the way the sovereign debt crisis has been managed within the EU has also contributed to the Union’s crisis of democracy. The Finnish Parliament has through its Grand Committee been among the best informed of national parliaments in the EU, meeting when necessary at 7.30 AM on Monday mornings to go through the proposals for the second Greek rescue package. But even if our own national system of parliamentary scrutiny of EU affairs has functioned between government and parliament more or less as our constitution requires, it has on occasion meant that the government has had to openly share with parliament its own ignorance and information of what would be proposed to our prime minister or finance minister at a forthcoming Council meeting.
The role of Europe’s national parliaments in the EU decision making process cannot be stressed too much. With all due respect to the European Parliament, it does not enjoy the same democratic legitimacy as does a national parliament, and clearly can have no say at all in how national budgetary resources should be used to deal with the debt crisis. Not, I should add, that the EP has itself been adequately informed or consulted on those issues where under the treaties it has real powers and responsibilities.
It is important however, to move ahead from what has happened and what has gone wrong to focus instead on what needs to be done at a global level to rectify past mistakes and avoid future crises. Meeting during the depths of the 2008 financial crisis when the world’s financial markets and architecture seemed threatened with meltdown, international leaders adopted a far-reaching statement on reforming of the international financial system. Looking back at what has been achieved since then, one must sadly conclude that most of that fine sounding programme has either been watered down or is still awaiting implementation.
To be fair, the EU has done more than most to introduce more orderly regulation and transparency to chaotic financial markets. The European Commission has adopted a more proactive role in trying to close tax havens, some of which are to be found within the EU. The Commission has even proposed the introduction of a Financial Transaction Tax, whose title is more impressive than its contents but which can and should be improved. At least the Eurozone governments should stand ready to adopt it, since the UK government’s opposition makes it so far impossible to do so at EU level.
In conclusion I want to stress, that we should not be too pessimistic – history has been on the side of European integration. It had a crucial role in cementing peace after the Second World War. It assumed a central role in reuniting a divided Europe after the Cold War by enlarging east. European integration is also an important tool in dealing with globalisation – the central problems of the world cannot be addressed in the confines of the nation state. We need a supranational approach.
Many visions about building a genuine economic and monetary union are quite detailed on integrated financial, budgetary and economic policy frameworks but vague on strengthening democratic legitimacy and accountability. This is a serious, maybe even fatal mistake – we should start with strengthening our democratic framework and opening a genuine debate on the development of economic and monetary union rather than jumping straight to the conclusions.
Our aim in Finland is to start this process by joint deliberations between government and parliament and I would encourage others to follow suit. Then we need an open process, where outcomes reflect member state views, rather than technocratic preference.