Euro crisis: “I am not sure whether the urgency of this is fully understood in all the capitals”

It would be fair to say that there remains a difference in opinion of the correct response to the euro crisis.   The BBC quotes European Commission President José Manuel Barroso.

European governments need to agree urgently on steps to forge a closer union because of the eurozone’s “systemic problem”, the head of the European Commission says.

Commission President Jose Manuel Barroso called for a “vision of where we need to go”.

“I am not sure whether the urgency of this is fully understood in all the capitals,” he told Euro MPs.

The eurozone debt crisis will again dominate an EU summit in late June.

He has his own vision, of course

Without referring to speculation about a possible Greek exit from the eurozone Mr Barroso insisted that building a banking union and fiscal union must be done “as far as possible with all member states”.

He said further integration of the 17-nation eurozone was “indispensable”, but “under no circumstances must this be seen as an alternative to the integrity of the single market, or indeed the integrity of the union as a whole”.

“Fragmentation is not an option,” he said. The EU must continue allowing for opt-outs, such as the refusal of the UK and Denmark to join the euro, but “they remain the exception, not the rule”, he said.

And the same BBC report notes some of the reaction

There were sharply contrasting views among MEPs who heard Mr Barroso’s speech in the European Parliament in Strasbourg.

Guy Verhofstadt, leader of the liberal group ALDE, said “the problem is not Europe – the problem is not enough Europe!”. “Federal Europe is the solution.”

But the Eurosceptic British MEP Nigel Farage said: “The euro Titanic has now hit the iceberg – and there simply aren’t enough lifeboats to go round.”

For his part, the UK Chancellor of the Exchequer, George Osborne, seems to be suggesting that some people would like Greece to walk the plank…

“I ultimately don’t know whether Greece needs to leave the euro in order for the euro zone to do the things necessary to make their currency survive,” Mr Osborne said in remarks published today in the Times newspaper.

“I just don’t know whether the German government requires a Greek exit to explain to their public why they need to do certain things like a banking union, euro bonds and things in common with that.”

Meanwhile, the Irish Times picks up Bilderbergian Martin Wolf’s FT column.

If the current policies seem unlikely to work and either a federal or a transfer union is ruled out on grounds of political or economic infeasibility, what is left? I suggest the combination of two ideas: “insurance union” and “adjustment union”.

By an insurance union, I mean one that provides temporary and targeted support for countries hit by big shocks. By an adjustment union, I mean one that ensures symmetrical adjustment to changes in circumstances, including changes in financing. Both are necessary and, together, they should be sufficient to ensure a workable union in the long run. These notions would have been unnecessary if original members had been far more similar: the minimal union would then have worked. But that is not what now exists. If the euro zone is to sustain its current membership, it needs a combination of insurance and adjustment.

[And the European Project’s democratic deficit…? – Ed]  Good question.  Martin Wolf ends with this

Is it possible for the euro zone to make the needed reforms in the near-future?

I do not know. The time may now be too short and the irritation too great. But, conceptually, it seems clear what is needed: a swift and effective move towards an insurance and adjustment union. That is neither a federal union nor a transfer union.

It is a way of making it possible for countries that remain largely sovereign to share a single currency. I do not know whether even this is economically and politically feasible. But if not that, what? And if not now, when? [added emphasis]

[Full speed ahead, and damn the torpedoes political trilemma! – Ed]  Indeed.

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  • You skipped the meat!

    Insurance must be provided collectively, on the principle that everybody benefits from the survival of the union. The insurance must support the financial system and (if possible) fiscal solvency in a crisis.

    That’s code for getting the EFSF/ESM to bail out banks directly, instead of laundering it through national budgets as now.

    Unless one imagines that the world economy could now cope with a big shift by the euro zone as a whole towards surplus, the rebalancing must occur largely inside the euro zone. If this adjustment is blocked by weak demand and very low inflation in core countries, the vulnerable countries will be locked into semi-permanent slumps. That way lies close to guaranteed failure.

    That’s code for reflating German demand. But the ECB doesn’t do reflation, unless you rewrite Maastricht.

    I wholeheartedly agree, and have been arguing this for some time. It is also close to the emerging consensus. The problem with the plan is it needs to pass two speed bumps first: Merkel and treaty change.

  • Mister Joe

    Thomas Carlyle was spot on in calling economics the dismal science.

  • Mick Fealty

    It’s only going to get more dismal, more abstract, more important, and more dangerous…

  • Neville Bagnall

    I agree with Andrew on the meat of the Wolf column.

    I also agree with Wolf regarding the real-politic chances and desirability of Federal and Transfer unions.

    His Insurance union reads to me (as Andrew also seems to pick up) like a variation of a Banking Union, but with perhaps a bit more of a role with regard to sovereign debt and emergency deficit financing. What he doesn’t address though, as far as I can see, is how to solve the indirect loss of market discipline that so worries the Bundesbank.

    Its going to be quite a balancing act to determine what level of fiscal limitation is required for a given level of debt/deficit insurance. I’d like to see some discussion about how retail/commercial splits might impact the implementation of a banking union and how disproportionate private debt/GNP ratios or banking/GNP ratios could be part of the rules and structure.

    I agree that euozone-internal adjustment is needed, but I think Andrew is wrong to concentrate on the ECB’s role in that. Yes it would be better if the ECB wasn’t so fixated on inflation, but German reflation has more to do with German fiscal policy (and behaviour) than the ECB I think. After all the ECB has been tending to loose policy lately, but despite that and an export boom in Germany, inflation is still far too well under control there for the good of the periphery.

    I can see some sort of deal coming together on a banking/insurance union. The adjustment union seems a lot more woolly and hard to achieve. Which I think leaves us stuck with capital investment via the EIB, cohesion funds, etc. Which of course has its own moral hazard, already alluded to.

  • Neville,

    I’m curious what you think German fiscal policy can do that printing money can’t. Borrow to fund consumer spending?

  • Neville Bagnall

    By its nature, ECB policy is a blunt instrument, executed through globalised financial markets where the intended effect is often blunted or wholly misdirected by independent actors with their own agenda.

    The ECB is keeping rates low, operating in the secondary markets, and pumping huge amounts of liquidity into the banking system. Yet if anything the supply of money in the peripheral real economies is shrinking.

    I cannot say that fiscal policy is necessarily more effective – there are many examples of badly targeted governmental initiatives.

    Nevertheless, the core issue here that needs to be resolved long term is the competitiveness of the periphery versus the core.

    The core has some fundamental competitive advantages, demographically, geographically, infrastructural, etc. But also socially. Attitude to debt, investment, corporate governance and structure, wage negotiation. For the long term stability of the eurozone, the periphery needs a set of its own competitive advantages.

    I’m not arguing for a one size fits all solution. But the debt mountain in the periphery can only be inflated away or paid down via fiscal transfer (debt forgiveness, interest/investment cost replacement or relatively higher peripheral growth).

    Inflation is only an option for the periphery if it is higher in the core. Since the fiscal policy of the core aims to keep inflation down for export competitiveness, some adjustment of policy in the core would be helpful. Given the weakness of the Euro at the moment, it should not have an overly negative effect on overall eurozone competitiveness.

    Alternatively, or perhaps more correctly additionally, fiscal policy around investment (private and public) could be aligned towards aiding the periphery. But this needs to seep through all levels of society and economy. Core based companies need to be encouraged to seek investment and trade opportunities in the periphery where the fiscal balance favours the periphery in the short to medium term. Likewise there needs to be encouragement for the spending of private income in the periphery.

    You can see how much of an uphill battle all that is. And how, if anything, current news headlines are counterproductive. Witness the fall off in Greek tourism.

    For the stability and health of the european and world economy, fiscal adjustment within the eurozone is essential, both to deal with the cost of the debt mountain, and to address the long term core-peripheral competitiveness balancing act.

    A huge burden of that adjustment will fall on the periphery – to do anything else would be simply to damage the eurozone as a whole in world trade terms. But a viable long term solution requires both pan-european action and core adjustments as well.

    Governmental institutions can only do so much. That much they need to do and quick-fast. However the real battle is for the mental adjustments that have to come in corporate boardrooms and from individual consumers and citizens.

    That is the political challenge. That is the challenge for Merkel, Rajoy, Kenny, et al. Can they speak beyond their own borders? Can they speak to Europe rather than to each other?

  • Likewise there needs to be encouragement for the spending of private income in the periphery.

    As opposed to… China? That’s a fine line to tread. There are easy ways and hard ways to do it. Unfortunately the easy ways tend to lead to trade wars. The hard ways (liberalisation of services) didn’t even get done in the good times, so they’re going to be even less likely now…