Europe’s Vision Deficit ‘Guy Sorman

PARIS – In the Western part of Europe – the part that former US Secretary of Defense Donald Rumsfeld maliciously labeled “Old Europe” – almost every government is in deep political trouble. The United Kingdom’s new coalition government may be the exception – for now. In the European Union’s big member states, the popularity ratings of leaders – Nicolas Sarkozy in France, Silvio Berlusconi in Italy, Angela Merkel in Germany, and José Luís Rodriguez Zapatero in Spain – hover around 25% or worse.

Whether it is conservatives like Sarkozy, Christian Democrats like Merkel, right-wing populists like Berlusconi, or socialists like Zapatero, political affiliation appears to make no difference. If you hold office in Europe nowadays, you are in trouble. What has gone so wrong? The economic crisis seems to be the most obvious explanation, but perhaps too obvious. Two years ago, when shockwaves from the collapse of the US housing bubble crashed onto European shores, these political leaders reacted with apparent vigor, making themselves rather popular for a while. Paradoxically, the early stages of the financial crisis appeared to favor conservative and pro-market leaders – who seemed to be in a better position to save the economy – more than socialists.

Today, this is no longer the case. Socialism is on the rise again across Europe, at least in opinion polls. And right-wing populism has become an electoral force to be reckoned with in France, Belgium, and the Netherlands. Economic stagnation has come to appear endless. Jobs are scarce, and the future looks bleak everywhere. The Greek crisis has cast a pall over the entire eurozone. The common currency is now looked at with suspicion. On the fringes of public opinion, some people are even muttering suggestions that their countries should revert to their ancient national currencies – which of course would only bring disaster in the form of an even more confusing state of affairs, as EU countries are indebted in euros. To quit the eurozone would only increase their level of indebtedness. What makes this desolate economic landscape even gloomier is the striking inability of European leaders to explain what has happened and is happening to their citizens.

Indeed, I believe that it is here that the seminal reason for their plunging poll ratings lies. Europe’s leaders seem to lead nowhere, because they have no vision on which to draw. Consider the euro: no head of state or government has so far been able to present a coherent defense of the eurozone to counter the pervasive unease that now exists towards the common currency. Or public spending: all European leaders adamantly want to reduce government spending. But these same leaders, including that supposedly stern mistress of the budget Angela Merkel, were arguing less than two years ago that public spending would provide a “Keynesian” way out of the crisis. Why such a turnaround? The European public has discovered that the 2008-2009 fiscal stimulus programs, which were aimed at forestalling an even greater crisis, generated more debts than jobs.

Politicians, however, hate to confess past errors. Thus, they appear unable to explain their new rationale for the spending cuts that they are now announcing. Europe’s leaders make things worse when they prove unable to connect isolated “reforms” – say, a lower public deficit – with any comprehensive vision of the economy. A good example is Sarkozy’s effort to raise France’s retirement age from 60 to 62. Trade unions are up in arms, which, after all, is their duty. The population at large just does not understand what links raising the retirement age with the crisis. The truth that politicians (David Cameron’s UK government excluded, at least for now) are reluctant to admit is that Western Europe’s current morass is distinct from the global US-made downturn.

Old Europe has entered into a severe and intractable crisis of the welfare state as ordinary Europeans have come to know it. The generous retirement pensions, unemployment compensation, health coverage, and all kinds of social programs that make Western Europe a comfortable place to live were established when Europe’s economy and population were growing fast. Now, after one generation of economic and demographic stagnation, the welfare state can be financed only by issuing more public debt. Financial markets, awakened by the global crisis, will no longer support today’s Potemkin-like situation, in which welfare benefits have become a façade propped up by deficits.

Political leadership at such a moment demands a Churchillian accent. It needs to be explained why the euro remains the best protection there is against inflation, the most dangerous social ill of all; why government stimulus will not work and never actually has delivered sustained growth; and why a new equilibrium between welfare and economic dynamism – based on less public debt and more private investment – must be established. Such a discourse, if clearly articulated, would be understood and could be endorsed by many, if not by all. At the very least, it would bring a sense of coherence to the actions of politicians, and those opposed to this search for a new European equilibrium – mostly Marxists and populists – would need to compete with a new vision of their own. Would such an articulate vision make Europe’s leaders more popular? Maybe, and maybe not, but they would almost certainly appear more legitimate, even in the eye of their adversaries.

Copyright: Project Syndicate, 2010.

http://www.project-syndicate.org

Is Europe Doing Everything Wrong?

BARCELONA – The countries on the so-called “periphery” of the eurozone (Greece, Spain, Portugal, Ireland, and perhaps some others) need to carry out complementary adjustments that are often discussed separately but actually need to be tackled jointly. Indeed, to restore these economies to health, three distinct types of adjustment are needed: between the eurozone and the world, between the eurozone’s periphery and core, and between debt and income in the heavily indebted peripheral countries, particularly Greece.
The solutions in each case are as clear as their implementation is complex. First, in order to relieve pressure on the peripheral countries (at least in part), the eurozone must export some of the needed adjustments through a significant depreciation of the euro, which is already taking place. This is the adjustment between the eurozone and the world.

Second, to regain competitiveness, the adjustment between the eurozone’s periphery and its core requires closing the inflation differential that built up during the pre-2008 capital-flow bonanza. In countries like Greece and Spain, this amounted to roughly 14% of GDP following the launch of the euro.

Last but not least, the adjustment between debt and income may be helped, over time, by higher overall eurozone inflation. But it is becoming increasingly clear that bringing the debt burden in line with the distressed countries’ payment capacities requires, at least in some of them (particularly Greece again), an ordered process of debt restructuring.

So far, European policymakers have chosen to do precisely the opposite on each front. They have tried to talk up the value of the euro, though currency markets have dismissed this as mere political rhetoric, and are rapidly bringing the euro closer to equilibrium.

Likewise, the European Union has tried to dispel doubts about the imminence of Greek and other sovereign-debt restructurings by putting together a reasonably large stability fund (and throwing in €250 billion of still non-existent IMF commitments). This was designed not so much to shield the peripheral countries from a market run as it was to “bail in” private lenders.

Predictably, lenders saw through the announcements and understood the unfeasibility of the underlying fiscal cuts. Bloomberg reports that, in a recent survey of global investors, 73% call a Greek default likely. In these circumstances, postponing the restructuring only perpetuates distrust of European banks with opaque sovereign exposures, and of financial markets in general – in much the same way that uncertainty about exposure to collateralized debt obligations led to a confidence crisis in late 2008.

Why not use the much-heralded stability fund as collateral for a European Brady bond plan that puts an end to the sovereign debt saga? It might sound extreme, but it certainly would be more efficient than a slow hemorrhage of EU funds, which would lead to an official and multilateral debt hangover that could only deter junior private lenders.

Such a plan would also clarify, once and for all, the size of the contagion to EU banks, which could ultimately be ring-fenced. All that is required is the same resources that the European Central Bank is squandering today on at-par debt purchases from distressed peripheral sovereigns – an effort that does not seem to be impressing the markets. In fact, spreads on Spanish and Italian bonds are higher today than before the ECB’s program was put in place.

Finally, European governments seem to be competing to carry out the most drastic fiscal adjustment. This is a self-defeating solution that can appeal only to the most myopic market analysts – and, curiously enough, to a bipolar International Monetary Fund that, less than a year ago, correctly advocated synchronized fiscal stimuli precisely for the same reasons that synchronized fiscal restraint is bad policy for Europe today.

In this context, Germany’s new austerity package is the latest and most striking element in a sequence of ill-advised responses. Fiscal austerity in Germany can only reduce demand for eurozone products, and result in lower German inflation. And lower inflation in Germany means that, to close the inflation differential, peripheral countries will need a bout of outright deflation.

In other words, fiscal cuts in Germany mean deeper fiscal cuts in Greece and Spain. This is a baffling policy choice at a time when Germany should be using its room for fiscal maneuver and its economic clout to create and enhance the demand that peripheral Europe needs in order to grow out of its misery. Such a policy would also generate some welcome inflation to facilitate the relative price adjustment within Europe.

Last year, the London G-20 summit recognized that the global crisis required coordinated spending to pull economies back from the brink. Fifteen months later, Europe and the IMF, by endorsing unqualified fiscal restraint, fail to recognize that the European crisis calls for differentiated policies to achieve multiple and different objectives. Implementing today’s conventional un-wisdom promises only a deeper recession and the postponement of the inevitable day of reckoning.

Copyright: Project Syndicate, 2010.
http://www.project-syndicate.org

Partial stress relief

THE results were always going to be contentious. Ahead of their release there weremutterings in financial markets that European regulators would give their banks a test so stress-free that it would be difficult to fail. Those who expected this easy pass found much evidence to support their view when the Committee of European Bank Supervisors (CEBS) announced the results on the evening of Friday July 23rd. The worst scenario that the stress tests envisaged was a mild recession with relatively moderate losses on bank assets including government bonds—and no sovereign default.

The sceptics’ doubts were also supported by the fact that only seven of the 91 big banks tested were found to be short of capital in the worst scenario. None of the names came as a great surprise: Hypo Real Estate of Germany, ATE Bank of Greece, plus five Spanish institutions: Diada, Espiga, Banca Civica, Unnim and CajaSur.

That so few failed is a reflection of two things. The first is the significant capital-raising that has already occurred. Analysts at Credit Suisse reckon that European banks have raised more than €220 billion ($283m) in capital over the past 18 months, through bail-out money as well as retained earnings. The second is that banks are expected to continue enjoying considerable earning-power. The Bank of Spain reckons that almost half of its banks’ losses as envisaged in the stress tests could be made good from their earnings over the two years to the end of 2011. Many analysts had expected to find more basket-cases; and the fact that a number of banks squeezed over the bar by no more than a hair’s breadth is likely to fuel speculation that the test was tweaked to avoid an undesirable outcome.

Yet to quibble over the exact criteria used in the tests or the number of banks that fail it is to miss a larger point, which is why stress tests are conducted in the first place. They were needed to restore the delicate strands of trust without which the world’s financial system would not operate. And on this measure they are likely to be a qualified success, in that they remove the question-marks that the market had placed over many institutions. The success is, however, only qualified because a number of borderline banks passed so miserably that those are unlikely to regain the confidence of markets.

Nor, in some countries—in particular Germany—has there been a release of enough information to allow investors to do their own sums and draw their own conclusions. In this sense, the tests were surely a missed opportunity, for they failed to cut to the central problem facing the market for interbank funding. The reason that trust is so fragile is because of the asymmetry of information that is built into banking. A bank should know just how many ticking bombs lie scattered across its balance-sheet. Those who lend to it, however, have little to go on but its credit ratings and its stamp of approval from regulators, which are subject to conflicts of interest (rating agencies are paid by the banks, and regulators may be reluctant to admit that one of the institutions they are overseeing is bust). Usually these are, nevertheless, sufficient to keep the funding flowing. But when banks stop trusting one another they are effectively saying that they have also lost faith in rating agencies and regulators. Stress tests are intended to restore confidence by introducing a trusted third party, in this case a peer-review mechanism, and an open methodology for assessing which banks are sound.

Trust but verify
A better approach would have been to deal with the lack of information head on, by forcing banks to say what assets they hold. After all, banks’ creditors are increasingly beginning to sound like nuclear-weapons negotiators (and the parents of teenage children) with their insistence on the maxim: trust but verify. In this regard the Bank of Spain has done better than many of its peers. Although Spain accounts for more than its share of failed institutions it has released information on all of their holdings of European government debt. This will go some way towards reassuring creditors of the soundness of the remaining banks.

In Germany, however, the regulator has not released this information and has left it to individual institutions to decide. Some, such as Landesbank Baden-Württemberg, have opened their books to scrutiny. Most, however, have not and doubts about Germany’s banking system are therefore likely to persist.

In the end, CEBS disclosed more information about the tests, and how banks fared in them, than some had feared. National regulators and individual banks may choose to release more information in the coming days. But the overall impression so far is that the publication of the tests will be only a partial stress-reliever. Though the announcement was timed for after European stockmarkets had closed for the weekend, the initial reaction on the foreign exchanges seemed to confirm this: no panic, just a continued nervousness.

Source : http://www.economist.com/blogs/newsbook/2010/07/europes_bank_stress_tests_0

Turkey Knocks: Will EU Let It Enter?

Turkey’s desire to join the European Union has the virtue of being consistent. It was in 1987 that the country first applied to accede to the EU, and it has been knocking on the door ever since.

The fault lines that have become apparent, both within the euro zone and the broader EU grouping, have done nothing to quell Turkey’s enthusiasm for joining the club. The chance to export some more of its jobless may be one of the attractions: Last year, the country’s unemployment rate rose to 14%, up three percentage points on the previous year, against an EU average of 9.5%. Yet it isn’t clear that the work would be there for Turks keen to take advantage of the freedom of movement that EU membership confers.

And there is a price to EU membership. Today the U.K.-based lobby group Open Europe releases figures showing that EU legislation puts a heavy burden on member states. It calculates that, since 1998, EU regulations have cost the U.K. £124 billion ($185 billion). The truth is probably not quite so stark. Many of the regulations would have been implemented by national governments whether or not the EU had imposed them. Compliance, however, is costly. Nevertheless, Prime Minister Recep Tayyip Erdogan is taking the opportunity of Angela Merkel’s visit to his country to try once more to push Turkey’s case for full membership.

He is wasting his time. The German chancellor, having stood her ground so staunchly over bailing out Greece, isn’t about to do a U-turn on this matter. She knows that, if her countryfolk were livid at the prospect of their cash being used to bail out profligate Greece, they would be positively incandescent were she to soften her stance on Turkey. President Nicolas Sarkozy of France would face a similar uprising of anger.

The reason isn’t Turkey’s long-running squabble over Cyprus, although its refusal to open its ports and airspace to EU member Cyprus provides useful tactical cover for those opposed to full EU membership for Turkey. Neither is it the need for Turkey to speed up its political reforms. It is Turkey’s overwhelming embrace of Islam which is the real, but unspoken, issue. With a population of 72.5 million, Turkey would be second only to Germany in scale if it were to join the EU. Although the government of the country is secular, estimates put the proportion of the population which is Muslim at around 99%. Although religion is not the driving force it once was in large parts of Europe, there is a widespread belief that including an overwhelmingly Muslim country in the club would drastically change its character.

There is an opposing school of thought, which argues that there would be positive benefits from having the EU embrace a Muslim country, but opinion polls have shown that to be a minority view. Hence Ms. Merkel on her brief visit to Turkey won’t be budged from her view that Turkey can be a “privileged partner” of the EU, enjoying a long-established customs union for instance, but it cannot be the 28th member of the European Union

Instead of protesting, Mr. Erdogan might anyhow consider whether he really wants to join a club where the rules could soon change fairly drastically. Greece got its bond issue away yesterday but at a punitive interest rate that only exacerbates its problems going forward. Spain looks perilously close to similar difficulties, as does Portugal.

The support arrangements agreed to by the euro-zone countries, incorporating Ms. Merkel’s insistence that the International Monetary Fund should be involved, might not hold for long. A retreat to a smaller euro zone is becoming a real possibility. The rejects would then join the slower speed Europe currently outside the single currency. Turkey might find itself slightly more welcome in that grouping.
The duties of ownership

The EU’s relatively new commissioner for the Internal Market, Michel Barnier, has plans to address the regulatory burden on businesses. However, in his determination to find ways of making owners of businesses think long-term, he deserves support.

In an interview with Financial News, Mr. Barnier said of the financial crisis: “Many shareholders acted with a short-term perspective rather than acting with the long-term viability of the institution they own in mind.” This isn’t an observation unique to him, but he is well placed to do something to correct the lack of engagement by investors with the businesses they own. He promised to bring forward “initiatives” in this area within the coming months.

One of his aims would be to ensure institutional investors made full use of their voting rights. He is likely to find plenty of support within the G-20 for such a move. Perhaps he should also revisit the issue of short-selling. So-called long-term investors will regularly lend their stock to those who are solely interested in driving down the price. In return for the marginal income they make from stock-lending, they risk jeopardizing the value of their holdings. That doesn’t seem to amount to joined up thinking!
At last, a Tory tax cut

National Insurance is a British attempt to disguise what is not insurance but is tax. It is an extra levy charged to workers and their employers geared to salaries. It is not earmarked to fund the National Health Service or provide for state pensions. The latter, frighteningly, are unfunded.

The employer’s National Insurance charge is, quite simply, a tax on jobs. The Labour government had legislated to increase NI next year. Now the Conservatives have said they will reverse that increase. With just six weeks to go before the election, at last some clear blue water may be opening up between the two main parties.

Source: http://online.wsj.com/article/SB10001424052702304370304575151612719531350.html#articleTabs%3Darticle

Communists urge Russia to stop “bowing down to the West”

Russian Communist chief Gennady Zyuganov has fiercely criticized the country’s leadership for its foreign policy and demanded that Moscow stop “bowing down to the West.”

“The Russian leadership strives to strengthen cooperation with the US and strongly believes in its friendly intensions. However, the behavior of our new ‘comrades’ – well illustrated by the recent ‘spy scandal’ – hardly resembles a friendly one,” the statement by the leader of the Communist Party reads as published on the faction’s official website.

The politician noted that the incident involving an alleged Russian spy ring in the US occurred shortly after President Dmitry Medvedev’s official visit to the US, indicating that the “stone to be thrown at Russia’s window” had been prepared in advance.

Zyuganov has also criticized Russia’s decision to support new sanctions against Iran over its nuclear plans and “the gas war” with Belarus – both of which, he believes, are not in line with the country’s geopolitical interests.

“Trying to please the US, the Russian leadership keeps making new concessions and pushes away those very few allies that we have left. In return, Moscow gets gifts like the spy scandal,” he stated.

Among the concessions the Communist leader is not happy about is the recent announcement that Russia will buy 50 Boeing 737 commercial jetliners for the Aeroflot state holding. That move, Zyuganov believes, is harmful to the country’s aviation industry.

He is confident that “a refusal to buy Boeing planes would be a good stimulus for a revival of the Russian aviation industry.”

Also, lifting a ban on importing American poultry – agreed by the two sides – hits Russian agriculture, Zyuganov said. Earlier Russia prohibited American chickens for safety reasons as it was feared that the US used too many antibiotics in chicken-rearing. The chicken issue has been a hot button in Moscow-Washington relations since the early 90s when, after the Iron Curtain was lifted, American poultry – known in Russia as “Bush legs” – flocked into impoverished country.

Zyuganov suggests that Russia should refuse buying “Bush legs” since their import not only “destroys the Russian poultry industry which has only started to revive” but also poses a health risk.

Russia, for its part, gets no benefits in return, he states, citing as an example America’s “sham refusal to deploy its missile defense shield in Poland.”

“Moscow, in return, announced it was abandoning all counter measures it was planning. But today the US is deploying Patriot missile systems… and are planning to deploy the most up-to-date SM3 missile interceptors,” he said.

Speaking about US Secretary of State Hillary Clinton’s Eastern European and Caucasian trip, Zyuganov said it was “undoubtedly a continuation of a campaign aimed at creating an anti-Russian block.”

In conclusion, the leader of the successor faction of the party that ruled the Soviet Union for over 70 years defined American actions as “unfriendly” and “insulting” and urged retaliatory measures.

Source : http://rt.com/Politics/2010-07-13/zyuganov-criticises-foreign-policy.html

Biden calls on EU help to face 21st Century threats

On a visit to Brussels yesterday (6 May), US Vice-President Joe Biden stressed the importance of the EU-US relationship in responding to 21st Century threats such as climate change and the fight against terrorism.

Speaking to the European Parliament, Biden said “much has changed” since late US President Ronald Reagan addressed the EU assembly in 1985.

Referring to America’s help in rebuilding Europe after the Second World War, Biden said Europe continues to be the United States “most important ally” and trading partner.

“It’s no accident that Europe is my first overseas destination as vice-president. We need each other more now than we ever have.”

Among new challenges, Biden cited climate change, Afghanistan and the threat of Iran starting “a nuclear arms race in the Middle East” just as the US and Russia were reducing their nuclear arsenal, something he said would be “an irony”.

That is why a missile defence shield is needed “to deter and defend against missile attacks on this continent,” he said amid applause (EurActiv 05/02/10).

“The past 65 years have shown that when Americans and Europeans devote their energies to common purpose, there is almost nothing that we are unable to accomplish.”

Call for responsibility

He also called on the European Parliament, which has won new powers since the entry into force of the Lisbon Treaty last year, to face up its newly-found responsibilities.

“Under the Lisbon Treaty, you’ve taken on more powers and a broader responsibility that comes with that increased influence. And we welcome that, because the United States needs strong allies and alliances to help us tackle the problems of the 21st century.”

“The world has changed. It has changed utterly,” Biden said, referring to the threat posed to citizens “by non-state actors and violent extremists.” This “scourge”, he said, could only be contained “if we make common cause”.

Biden called on the Parliament to back a draft EU-US banking data exchange deal as part of anti-terrorist activities, saying “the terrorist finance tracking programme is essential to our security”.

The so-called SWIFT agreement was rejected by Parliament the day before amid concerns that it would violate European citizens’ right to privacy (EurActiv 05/05/10).

But Biden said the two objectives could be reconciled. “I am absolutely confident that we must and can both protect our citizens and preserve our liberties,” he said.

“The longer we are without an agreement on the Terrorist Finance Tracking Programme, the greater the risk of a terrorist attack that could have been prevented,” he stressed.
Positions

Reacting to Joe Biden’s speech, Dutch liberal MEP Jeanine Hennis-Plasschaert (VVD; ALDE), the European Parliament’s rapporteur on the Terrorist Finance Tracking Programme, said Biden had “struck the right tone and message of an administration that is willing to listen and not just lecture”.

Both the EU and US “agree on the imperative of reaching a mutually acceptable agreement as soon as possible to plug the current vacuum,” she said.

But she stressed that the European Parliament “cannot be complicit in any agreement that goes against our own laws”.

Parliament to back new EU-US data-sharing deal

The European Parliament is tomorrow (8 July) expected to rubber-stamp a revised EU-US agreement on bank data-sharing, called ‘SWIFT’, that is set to give significant new powers of oversight to US anti-terror investigators. Some MEPs feel, however, that the ongoing saga represents “misuse” of parliamentary power.

The vote, expected to be carried by a large majority, will draw to a close one of the most heated debates of 2010.

The new deal, struck earlier this week (5 July), was backed by a clear majority of MEPs on the Parliament’s justice and home affairs committee, who said earlier concerns over the protection of citizens’ privacy had been met.

An earlier version of the agreement had been rejected by MEPs in February, forcing EU countries and the European Commission to renegotiate a deal with the US authorities (see ‘Background’).

The only major parliamentary group still opposing the new deal are the European Greens, who made a last-ditch attempt to sway their fellow MEPs yesterday (6 July).

German Green Jan Philipp Albrecht called on MEPs to hold out for a better deal, arguing that the new agreement – despite its concessions – was “premature” and would make it “difficult to anchor a high level of fundamental rights at the international level”.

“The EU now seems to be satisfied with the low level of protection in US law, in which legal protection by independent judges is replaced by the will of the administration, and ubiquitous surveillance is preferred to individual judicial decisions,” he claimed.

Under the new agreement, so-called “scrutineers” appointed by the European Union will become part of the US Treasury’s operations that examine the financial transactions of terror suspects. In the medium term, this new commitment will “guarantee the end of non-individualised transfers of data to the US authorities,” said German centre-right MEP Alexander Alvaro, the Parliament’s rapporteur on this complex brief.

Parliament sources speaking on condition of anonymity told EurActiv that Alvaro was right to be pleased, given that the Parliament had won “huge concessions” from the US.

What happens next?

The European Socialists, having been among those pushing hardest for a revised agreement, hailed the new deal as a success. Greek Socialist MEP Stavros Lambrinidis said that “instead of the ‘swift’ SWIFT agreement they were aiming for, the involvement of Parliament forced the Commission and the US Administration to negotiate a ‘good’ SWIFT agreement”.

The new agreement, while not perfect, “brought a new – and much needed – spirit of openness and cooperation in the American Administration’s relations with the EU,” he argued.

However, the Greek MEP cautioned that while the new agreement strikes a better balance for the EU, what happens next is also crucial.

Under the deal, European police agency Europol will be responsible for interacting with US authorities requesting EU banking data. Lambrinidis believes that Europol is ill-equipped to do this task alone and will require additional legal experts to protect the EU interest.

“Europol is hardly the ideal EU body to conduct the initial review of US data requests,” he argued, adding: “I therefore hope that Commission can devise a way to station in Europol a representative of the European Data Protection Supervisor to oversee those initial bulk data grants, just as we have succeeded in stationing an EU overseer in the Treasury.”

Misuse of new parliament powers?

In the broader context of EU power politics, opinions are divided as to whether the Parliament acted shrewdly or foolishly in so muscularly brandishing its new Lisbon Treaty powers of approval over international agreements.

Lambrinidis neatly explained the socialist line on this debate when he argued that the debacle “demonstrated that Parliament is a serious interlocutor that can exercise its new powers responsibly and effectively”.

However, the European Conservative Group (ECR), which is dominated by the strongly pro-Atlantic UK Conservative party and supported the original SWIFT deal, believes the Parliament exercised power for power’s sake.

An ECR source told EurActiv that the Parliament “misused its new Lisbon powers,” adding that it was “unfortunate that the US got caught up in this new experiment”.

The US has from the start approached the debate with a great degree of goodwill, and the Parliament has not responded in kind, they argued.

However, the ECR spokesman on civil liberties, UK MEP Timothy Kirkhope, nonetheless backed the revised deal, arguing that while it is “not perfect, we do not live in a perfect world”.
Positions

Centre-right MEPs Manfred Weber (Germany) and Ernst Strasser (Austria) argued that their group, the European People’s Party (EPP) “firmly supports this new Agreement following the changes introduced in order to guarantee higher standards of data protection, including a thorough European oversight of data extraction on US soil”.

“Negotiations were reopened to take Parliament’s final demands into account, such as the request for a binding twin-track approach to establish a European Terrorist Finance Tracking Programme (TFTP) at the earliest,” they said.

Speaking in Strasbourg ahead of Thursday’s vote, European Conservative Group (ECR) spokesman on civil liberties, UK MEP Timothy Kirkhope, told MEPs who still opposed the agreement that while “the agreement is not perfect […] we do not live in a perfect world; that is exactly why it is needed. It is why we do not just have a duty to protect the data and rights of our citizens, which we have achieved, but also to protect their security and their safety”.

He argued that the new deal “has achieved a great deal compared with last time, including judicial review, EU oversight, review procedures and blocking mechanisms, and presents us with the future possibility of our own EU TFTP system. This agreement is undoubtedly more equal, more open, and more democratic”.

Parliament mellows on EU diplomatic service

The European External Action Service (EEAS) is to become official after the summer recess and start recruiting in autumn, it became clear after a key European Parliament committee gave its green light yesterday (6 July) to the EU’s diplomatic service.

Two weeks after the Madrid deal on the EEAS was struck (see ‘Background’), recommendations on its organisation and working methods, set out in a text by Elmar Brok (European People’s Party, Germany) were approved by the Parliament’s foreign affairs committee.

Under the most optimistic scenario, the European Parliament could have given its final blessing to the EEAS at its current plenary session, which ends on Thursday. However, as leading MEPs explained, more time proved to be needed for the political groups to digest the Madrid compromise.

Parliament’s negotiators Elmar Brok, Guy Verhofstadt (ALDE, Belgium) and Roberto Gualtieri (S&D, Italy) said that on the whole, Parliament’s requests had been fulfilled.

The Parliament’s services published a brief summing up the major decisions on the EEAS, where the MEPs had impacted upon the consultation process.

Substitution

MEPs who were reluctant to see civil servants (such as the executive secretary-general) deputise for Lady Ashton when briefing Parliament have won an undertaking that, where necessary, she will be replaced either by the EU commissioners for enlargement, development or humanitarian aid or by the foreign affairs minister of the country holding the EU presidency for Common Foreign and Security Policy (CFSP) issues.

External co-operation

Control over EU external co-operation programmes (development and neighbourhood policies) will remain the responsibility of the European Commission, contrary to Ashton’s original proposal, which would have given more power to the EEAS.

Proposals for changes in development policy (European Development Fund and Development Co-operation Instrument) will be prepared jointly by the EEAS and the Commission, under the commissioner’s responsibility, and then jointly submitted for a decision by the EU executive.

EEAS: At least 60% EU staff

MEPs have also obtained an undertaking that at least 60% of EEAS staff will be made up of permanent EU officials. This will guarantee the diplomatic service’s Community identity. Officials from national diplomatic services – to constitute one third of the staff when the service has reached its full capacity – will be temporary agents for a duration of up to eight years with a possible extension of two years.

Recruitment will be “based on merit whilst ensuring adequate geographical and gender balance,” Brok’s report says. Measures to correct possible “imbalances” could be taken during the 2013 review of the service.

On 1 January 2011, a total of 1,525 civil servants from the Commission and the Council’s General Secretariat will be transferred to the EEAS. 100 new posts have been created. Recourse to seconded national experts will be limited to these experts, who will not be counted as staff from member states (one third of the total).

Headquarters

The EEAS will have its headquarters in Brussels and will be made up of a central administration and the 136 former Commission delegations.

The central administration will be organised in directorates-general comprising geographic desks covering all countries and regions of the world, as well as multilateral desks.

Political and budgetary accountability

Before taking up their posts, EU Special Representatives and Heads of Delegations to countries and organisations which Parliament considers “strategically important” will appear before the foreign affairs committee.

The HR will also seek Parliament’s views on key CFSP policy options and MEPs holding institutional roles will have access to confidential documents.

The service’s political and budgetary accountability to Parliament is guaranteed, with full budget discharge rights over the service.

The operational budget will be the Commission’s responsibility. Parliament will receive from the Commission a document clearly accounting for the external action parts of the Commission budget, including the establishment plans of the Union’s delegations, as well as the external action expenditure per country and per mission. The EEAS administrative budget will be in a new section X “European External Action Service”.

The foreign affairs committee and the budgets committee bureaus will have stronger scrutiny rights over CFSP missions financed out of the EU budget.

Basic organisation

The statement on basic organisation stipulates that there will a human rights structure at headquarters level and locally in the delegations as well as a department assisting the HR in her relations with Parliament. On crisis management and peace-building, the statement says that CSDP structures will be part of the EEAS.

Next Steps

After the summer recess, changes to the Financial Regulation, the Staff Regulation and the 2010 budget, on which Parliament has joint decision-making powers with Council, will be voted upon.

What Euro Crisis? Hans-Werner Sinn

MUNICH – Despite huge rescue packages, interest-rate spreads in Europe refuse to budge. Markets have not yet found their equilibrium, and the governments on Europe’s southwestern rim are nervously watching how events unfold. What is going on?

The rescue packages were put together on the weekend of May 8-9 in Brussels. In addition to the €80 billion program already agreed for Greece, the European Union countries agreed on a €500 billion credit line for other distressed countries. The International Monetary Fund added a further €280 billion.

The driving force behind all this was French President Nicolas Sarkozy, who colluded with the heads of Europe’s southern countries. French banks, which were overly exposed to southern European government bonds, were key beneficiaries of the rescue packages.

Since rescue measures beyond the pre-arranged Greek package had not been on the agenda for the Brussels meeting, German Chancellor Angela Merkel thought she could safely go to Moscow to commemorate the end of World War II – unlike Sarkozy, who declined Russian Prime Minister Vladimir Putin’s invitation. Worse, the leader of the German delegation to the EU meeting fell ill and was taken to hospital upon arrival in Brussels. This left the German delegation headless.

Proclaiming a systemic crisis of the euro, Sarkozy seized the opportunity and took Germany by surprise. He asked for huge sums of money and, as Spanish Prime Minister José Luis Zapatero reported, threatened to pull France out of the euro and break up the Franco-German axis unless Germany opened its purse. After just two days of negotiations, the Maastricht Treaty’s no-bailout clause, which Germany once had made a condition for giving up the Deutsche Mark, was defunct. The “Club Med,” as Germans call the southern countries, had taken over Europe.

Even the European Central Bank chipped in, buying government bonds of over-indebted countries, using a loophole in the Maastricht Treaty and overruling the Bank’s German representatives. The European house creaked mightily. Germany’s president stepped down soon after the decisions – some say because of them. Germany’s political elite are in an uproar, and serious voices advocate splitting the eurozone into northern and southern tiers, with France relegated to the latter.

I do not share this view. The euro has successfully protected Europe against exchange-rate risks, and it is a useful step towards further European integration. Moreover, the stability provided by the Franco-German axis is indispensable for Europe.

Nevertheless, the tensions created by Sarkozy’s recklessness threaten Europe’s political stability, heightening market uncertainty relative to what a more prudent, coordinated rescue program would have implied. The programs that have been agreed will not suffice to reassure creditors, and Germany will most likely be unwilling to bow once again to Sarkozy in the coming negotiations to prolong the rescue measures – at least as they are constructed now – beyond the initially stipulated three years.

The arguments used to justify the coup are dubious. In order to overcome the no-bailout clause, Sarkozy and other European leaders dramatized the decline of southern European governments’ bonds and the corresponding increase in interest-rate spreads. By formally proclaiming a systemic euro crisis – when in fact there was only nervous market reaction concerning a few European countries’ government bonds – they could invoke Article 122 of the Union Treaty, which was intended to help member countries in the event of natural disasters beyond their control.

If anything, the proclamation of a systemic crisis poured fuel on the fire. Investors took Europe’s leaders at their word, because politicians usually downplay rather than overstate a crisis.

The average interest-rate spread relative to Germany of the countries protected by the new rescue package was 1.08 percentage points on May 7, when the world was claimed to be going under. Then it seemed that the rescue packages were pushing the spreads to much lower values, but optimism faded as European leaders’ interpretation of the crisis sunk in with more and more market participants. In the week ending June 18, the average spread had climbed to 1.1 points.

Obviously, the market is now as nervous as it was before that May weekend. But that is a far cry from spelling doom for the euro. In 1995, shortly before the euro was announced, the corresponding interest-rate spread was 2.6 percentage points, more than twice today’s level. The euro was simply in no danger when European leaders decided to rescue it, and it is not in danger now. Markets are just moving towards a new equilibrium with higher interest-rate spreads, which reflect the higher default risk of some European countries – a bit like in pre-euro times, though much less extreme.

There is nothing wrong with this. The market adjustment will end when appropriate spreads are found. Any political attempt to stop this process any sooner is bound to fail. There is no reason for panic, and every reason to stay calm and wait for the new equilibrium to emerge.

Interest-rate spreads between safe and risky assets are natural to functioning credit markets. They signal potential risks and enforce debt discipline on borrowers. This is exactly what Europe needs. The Stability and Growth Pact, aimed at punishing countries that breach the 3%-of-GDP deficit limit, was a joke: not a single wayward country was ever punished. Fortunately, capital markets finally stepped in to impose the necessary hard budget constraints on governments.

This discipline will stem the gigantic capital imports by the countries at Europe’s periphery and end the overheating ushered in by the interest-rate convergence that the euro brought about. These countries will go through a slump that will reduce their inflation (perhaps bringing them close to deflation) improve their competitiveness, and reduce their current-account deficits.

Conversely, Germany, which has suffered from relative deflation and a long slump under the euro, will experience an inflationary boom that will reduce its competitiveness and current-account surplus. French Finance Minister Christine Lagarde, who often complained about trade imbalances in Europe, should applaud these market reactions, which were unintentionally strengthened by her president.

Copyright: Project Syndicate, 2010.
http://www.project-syndicate.org

Too Much Saving, Too Little Investment’ Raghuram Rajan

Talk abounds of a global savings glut. In fact, the world economy suffers not from too much saving, but from too little investment.

To remedy this, we need two kinds of transitions. How well the world makes them will determine whether the strong global growth of the last few years will be sustainable. This is the central message of the IMF’s World Economic Outlook, which will be released this week [editors: on Wednesday, September 21st 2005] on the eve of the Fund’s 2005 Annual Meeting.

First, consumption has to give way smoothly to investment, as past excess capacity is worked off and as expansionary policies in industrial countries normalize. Second, to reduce the current account imbalances that have built up, demand has to shift from countries running deficits to countries running surpluses. Within this second transition, higher oil prices mean consumption by oil producers has to increase while that of oil consumers has to fall.

The current situation has its roots in a series of crises over the last decade that were caused by excessive investment, particularly the bursting of the Japanese asset bubble, crises in emerging Asia and Latin America, and the collapse of the IT bubble in industrial countries. Investment has fallen off sharply since, and has since staged only a very cautious recovery.

The policy response to the slowdown in investment differs across countries. In the industrial countries, expansionary budgets, coupled with low interest rates and elevated asset prices, has led to consumption- or credit-fueled growth, particularly in Anglo-Saxon countries. Government savings have fallen, especially in the United States and Japan, and household savings have virtually disappeared in some countries with housing booms.

By contrast, the crises were a wake-up call in many emerging-market countries. Historically lax policies have become far less accommodative. Some countries have primary fiscal surpluses for the first time, and most emerging markets have brought down inflation through tight monetary policy. With corporations cautious about investing and governments prudent about expenditure – especially given the grandiose investments of the past – exports have led growth. Many emerging markets have run current-account surpluses for the first time.

We should celebrate the implicit global policy coordination that enabled the world to weather the crises of recent years. However, the fact that rich countries are consuming more, and are being supplied and financed by emerging markets, is not a new world order; it is a temporary and effective response to crises. Now it needs to be reversed.

Indeed, it is misleading to term this situation a “savings glut,” for that would imply that countries running current-account surpluses should reduce domestic incentives to save. But if the problem is weak investment, then a reduction in such incentives will lead to excessively high real interest rates when the factors holding back investment dissipate. Policy, instead, should be targeted at withdrawing excessive stimulus to consumption and loosening the constraints that are holding back investment.

There are reasons to worry whether the needed transitions will, in fact, occur smoothly. First, with asset prices like housing fueled by global liquidity, goods prices kept quiescent by excess capacity and global trade, and interest rates held down by muted investment, domestic and external imbalances have been easily financed. The traditional signals provided by inflation expectations, long-term interest rates, and exchange rates have not started flashing.

Instead, bottlenecks are developing elsewhere, as in oil. It may well be that easy financing has given economies a longer leash. The worry, then, is that when the signals change – as they must – they will change abruptly, with attendant harsh consequences for growth. Alternatively, prices such as that of oil will have to move more in order to effect the most pressing transitions, creating new imbalances. Policymakers should not see higher oil prices as an aberration to be suppressed, but should focus on underlying causes.

Second, more investment is needed, particularly in low-income countries, emerging markets, and oil producers (though less in China, the exception that proves the rule). But the answer is not a low-quality investment binge led by government or fuelled by easy credit; we know the consequences of that. Instead, product, labor, and financial markets must be reformed so that high-quality private-sector investment emerges.

It is here that the good may have been the enemy of the perfect. Strong exports and decent government policies have enabled some countries to generate growth without the reforms that can create the right incentives for investment. These countries are overly dependent on demand elsewhere, which in turn is unsustainable.

With the right reforms, adopted in concert, the world can make the needed transitions. But one of the risks associated with the large current-account imbalances we now face is that politicians may decide to blame one or another country and espouse protectionist policies. That could precipitate the very global economic downturn that we all want to avoid.

If, instead, countries see the transitions as a shared responsibility, each country’s policymakers may be able to guide the domestic debate away from the protectionism that might otherwise come naturally. Each country should focus on what it needs to do to achieve sustained long-term growth. In that possibility lies the well-being of us all.

Copyright: Project Syndicate, 2005.
http://www.project-syndicate.org