Archive for October, 2011

Summit Conclusions

For those of you masochistic enough to go through them, here (summary, full statement) are the conclusions from yesterday’s summit. Expounding a bit on what I said yesterday (which more or less turns out to have been accurate), I’d like to highlight the most important developments that can be taken away from these conclusions before (tomorrow?) I will try to lay out in further detail why I believe it’ll take at least two years before this crisis will have come to any kind of solution.

Starting out with the amusing, the German government of course failed to include its futile reference to the ECB ending its secondary market purchases. More horrifying than amusing is the European Union’s continued insistance on the reduction of budget deficits coupled with measures to “increase growth so as to reduce the unacceptable high level of unemployment” specifically in Spain. Please eat more and watch your weight amigo. This is impossible of course as Krugman, the IMF and others have pointed out.

Greek debt is supposed to decline 120% of GDP by 2020 partly through a ‘voluntary’ 50% hair shave. The EFSF’s capacity will be increased through a leverage mechanism involving an insurance scheme (10-20%) as well as Special Purpose Vehicles that are supposed to attract private and international (China!) investors. Herdentrieb condemns this as little convincing, costly and risky, and is probably right about that. Systemic Banks will be forced to recapitalize to capital ratio of 9% by June 2012. Greece’s second bailout package over 100 billion € will be prepared. Finally, Italy will raise its retirement age and engage in a privatization program in order to stave off contagion.

None of this will put an end to the crisis evidently. The Greek debt reduction is helpful but will still necessitate strict budget policies and concomitant effects on growth for years to come. The leveraged EFSF will most likely diminish pressure on Italian and Spanish interest rates, some at least, temporarily but will not end investors asking for a risk premium – especially following Greece’s de facto default. There will be another summit in a few (or only one?) months with everybody fretting over how the situation can be assuaged, how contagion may be prevented.

The truly relevant part of these conclusions lie with the changes in European economic governance. De fait Greece now will be governed by a combination of EU entities. The Task Force on technical assistance set up by the Commission will remain active in Greece, “mechanisms for the monitoring of implementation of the Greek programme” will be implemented. The Commission will establish “a monitoring capacity on the ground to advise and offer assistance in order to ensure the timely and full implementation of the reforms.” In Italy the Commission will “provide a detailed assessment of the [reform] measures and […] monitor their implementation.” Think about this for a second. Not only will Greek economic and fiscal policy effectively be run by the EU, the Italians will have to accept Commission supervision also – without ever having asked for bailout money in the first place! EU control comes first, sovereignty second in other words.

More structural changes are also going in this direction:

  • Strict conditionality will apply in case of new (precautionary) programmes […]. The Commission will carry out enhanced surveillance of the Member States concerned and report regularly to the Eurogroup.
  • For euro area Member States in excessive deficit procedure, the Commission and the Council will be enabled to examine national draft budgets and adopt an opinion on them before their adoption by the relevant national parliaments. In addition, the Commission will monitor budget execution and, if necessary, suggest amendments in the course of the year.
  • In the case of slippages of an adjustment programme closer monitoring and coordination of programme implementation will take place.
  • The role of the competent Commissioner for closer monitoring and additional enforcement [will be strengthened]. [Note, this could very well also be included in the below governance paragraph of course.]

Apart from this striking move away from national sovereignty to EU oversight even – indirect – control in some cases (conditionality!) movement towards a more integrated European economic governance are clearly visible. Euro Summits will take place place twice a year “to provide strategic orientations on the economic and fiscal policies in the euro area” and will be presided over by a to be named Euro Summit President (for now Van Rompuy will be double-hatting).  “Economic convergence within the euro area [is to be strengthened] […] economic union [to be deepened], including exploring the possibility of limited Treaty changes.” “The Eurogroup will ensure ever closer coordination of the economic policies and promoting financial stability.” Importantly additional permanent administrative structures will be created, thus “the Eurogroup Working Group (EWG) [will] benefit from a more permanent sub-group consisting of alternates/officials representative of the Finance Ministers,” meeting more frequently, working, while being “chaired by a full-time Brussels-based President.” Finally, the “existing [Eurozone supportive] administrative structures […] will be strengthened.”

This means two things. First of all I believe one can make a very good argument that we are looking at the emerging core of a European Economic Union here. The Eurogroup Working Group in combination with the relevant commissioner (Rehn it seems) will serve as the nucleus of European economic governance under oversight of the Euro Summits and its President. Secondly, with Eurozone countries moving ahead on this (and other issues: financial transaction tax, a consolidated corporate tax base) we have finally(?) reached the much-discussed two-speed Europe. The UK will increasingly be ignored (Cameron avait déjà raté une occasion de se taire l’autre jour selon Sarko), the others will have to make a choice in how far they want to take part in this development.

Has the crisis come to an end this morning then (Sarkozy’s press conference came at 4am! Maybe he got home in time for his baby’s breakfast then)? No, far from it, but I believe the structural economic governance and sovereignty reducing measures that were decided upon are laying out a clear path to which direction the Eurozone will get out of this whole affair. I will try to discuss why this will take (most likely two) years not months tomorrow.

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The German Bundestag and the EU Summit

The German Constitutional Court’s decision on September 7 concerning the EFSF expansion reintroduced the Bundestag as a significant actor into the Eurozone crisis decision-making process. Specifically, it (the Bundesverfassungsgerichtsentscheidung) disallowed the parliament to pass on its budget responsibility to other actors via indetermined fiat (darf seine Budgetverantwortung nicht durch unbestimmte haushaltspolitische Ermächtigungen auf andere Akteure übertragen). This includes potential mechanisms who may lead to unforseeable financial costs occuring without previous constitutional approval (keinen finanzwirksamen Mechanismen ausliefern, die […] zu nicht überschaubaren haushaltsbedeutsamen Belastungen ohne vorherige konstitutive Zustimmung führen können). Finally, every significantly costly help measure has to be individually approved by the Bundestag (Jede ausgabenwirksame solidarische Hilfsmaßnahme des Bundes größeren Umfangs im internationalen oder unionalen Bereich muss vom Bundestag im Einzelnen bewilligt werden).

Practically this means a number of things, the most important of which today was that the German parliament voted on a broad outline of guidelines that directly determine the position Merkel may take in negotiations during the current EU summit. Such a summit preceding approval is a novelty in German politics. With Germany the only country financially sound enough to serve as a stop gap for the Eurozone crisis today’s Entschließungsantrag attracted a considerable amount of international attention. The combination of today’s parliamentary approval coupled with the constitutional limits outlined above allow for a few observations on the future role of Germany as the key player in the European debt drama that I will try to highlight here, while we are awaiting another – most likely inconclusive – Council conclusion.

a) The Bundestag’s decision today was based on a proposal concomittantly put forward by CDU/CSU and FDP as well as by the SPD and the Greens. In other words, the government passed up an opportunity for a proposal more stringently adherent to its party line(s) in favour of a broad domestic consensus allowing for a large majority and including opposition parties. Going forward it seems likely that this will be the future modus operandi from now on. While the reason for this may partly lie in continued intra-coalition troubles, I believe the reasoning behind this mainly is related to fears of a politically sensitive issue becoming a focal point of inter party contention resulting in a possible populist backlash. This really is an anti-democratic line of thinking but a four party consensus will in all likelihood smother anti-bailout media and political sentiments. Germany when it comes to the Eurozone crisis is now seemingly governed by a Super Grand Coalition with only Die Linke (The Left) out of the picture.

b) The Bundestag asked the government today to strictily adhere to the previously approved EFSF guarantee sums (die strikte Einhaltung des vorgegebenen Garantievolumens der EFSF zu gewährleisten). An additional expansion of the EFSF is thus being ruled out here, while leverage (Mitteleinsatz […] optimieren; vorhandene[…] Mittel möglichst effizient ein[setzen]) is what parliamentarians are demanding.

c) An interesting subplot at this point is that the Bundestag in emphasizing its opposition to ECB-credits and direct ECB purchases according to Article 123 TEU fails to definitely rule out that the EFSF may benefit from such treatment. While these credits may not be given to “Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States,” as “shall be prohibited […] the purchase directly from them,” this “shall not apply to publicly owned credit institutions.” The EFSF of course is limited liability company owned by the Eurozone member states, which could in all likelihood be rather easily turned into an institution fitting the latter descriptor not the former ones. This probably is just a legal oversight with no political ramnification to it but it’s definitely something to consider (UPDATE: I just remembered that Karl Whelan had already noticed this a month ago btw).

d) Concerning the ECB there is a certain irony to the Bundestag stating its opinion that the necessity of further secondary market bond purchases were no more present with the revised (and leveraged) EFSF in power (mit dem Inkrafttreten der EFSF die Notwendigkeit zur Fortführung des Sekundärmarktprogramms (SMP) der Europäischen Zentralbank entfällt) even while emphasizing the independence of the ECB a few lines further down. With the incoming ECB-President Draghi stressing earlier today that the ECB under his helm will continue to “prevent[…], with its use of non-standard measures, the malfunctioning of the money and financial markets from obstructing the monetary transmission mechanism,” this inclusion just looks like a peculiar all-encompassing German populist sentiment that will stand little chance on the ECB governing board.

Summing this all up then, what are we left with? Based on the Bundestag’s guidelines as well as the numerous draft versions of the summit conclusions and their technical details circulating online, this evening will bring nothing but another short-term patch for a huge Eurozone crisis wound. A masive – voluntary? – haircut (40, 50, 60%) for Greece, a fuzzy reform program from Italy supposedly brought about by Berlusconi’s political suicide (hallelujah), a promise of treaty reform proposed by the Commission sometime this fall, a forced bank recapitalization that will arguably decrease liquidity even further.

Yet, what is most important to note is that the current German government due to some extent to the court ruling outlined above but also its political preferences seems unlikely to come up with a proposal putting an end to the crisis until arguably until 2013, when elections in Germany will be held. Every change of the Eurozone’s bailout structure has to pass the Bundestag, more importantly constitutional change is required for the parliament to give up any of its budgetary prerogative. There is little political will within the governmental coalition – arguably not even in the opposition – to significantly increase the bailout once more especially without sufficient conditionality measures in place. These require treaty change then, which the Czechs have already declared would have to be passed via referendum. All of this takes time, which means we can expect a whole number of additional dramatic summits over the next two years.

Except of course if I am wrong and EU leaders will have sliced open the Gordian Knot this evening.

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Elections in Tunisia – preliminary results

After an impressively calm Sunday dominated by long queues in front of the electoral bureaus here in Tunis, preliminary results are slowly trickling in. Amongst the least surprising of these is the resounding victory by النهضة (Ennahdha – Renaissance), which is set to become the premier party of post-revolutionary Tunisia. Ennahdha had been at the head of most pre-electoral polls and either finished first or a close second in all electoral districts for which results circulate so far. An Islamist party – even a moderate one, self-styled on the AKP’s model – winning a democratic election outright in an Arabic country is a historic event in and of itself of course. The FIS had won the first round of elections in Algeria in 1991 only for the secular FLN-government to annul the second tour leading the country straight into a bloody civil war the aftershocks are filled up to today. In Palestine, حماس (Hamas) won the legislative elections in 2006 only for Western governments to turn around and impose sanctions on the newly, democratically elected government. A democratically elected Islamist-led government – or in this case technically a constitutive assembly, which will appoint an interim government as well as propose a constitution – emerging peacefully from the Tunisian revolution and accepted as an interlocutor by Western powers would be historically unprecedented and an important symbol for political development in the volatile region. While this looks like a distinct possibility at the moment it remains Zukunftsmusik (music of the future) for the time being and in any case is widely being discussed in the Western media already.

Back to Tunisia then. Aside from the expected success by Ennahdha a number of surprising subplots stick out. The biggest of these might be the trouncing of the PDP, the biggest – legal – opposition party under the Ben Ali regime, which had been portrayed in the Western media – and by itself domestically as well as abroad – as the secular counterpart to Ennahdha in a duel of – near – equals. The PDP will in all likelihood finish fifth at best. Its devastating results symbolize well the foreign media’s superficial understanding of the political scene in Tunisia as well as the dramatic disconnect between Tunis’ secular elites and the majority of the highly critical and economically disowned Tunisian population. Thus rumors circulating as to money from sources related to the ancien régime financing the PDP’s electoral campaign sowed distrust against it, more importantly though the party was seen – unfairly maybe and to a large extent based on its participation in the intensely unpopular interim Mohamed Ghannouchi government – as not offering enough of a break from the previous regime.

An interesting political science question to consider following these elections is that the only two parties to have significantly invested in advertisement before the start of the official campaign period (during which advertisements were forbidden) had little success at the urns. This includes the PDP but also the UPL a generic party founded by a Tunisian business man, Slim Riahi – an émigré who had become rich in the UK – that was omnipresent in Tunis for a few weeks with advertisements at every bus stop and in every newspaper. His party has not won even a single seat so far. Political advertisement seems to have played into Tunisians’ fear of parties ‘just wanting to win’ or wondering about whose money (and interest) were behind them.

The two parties that performed well alongside Ennahdha were interestingly enough the ones that had broken out of the secular parties’ confrontational course versus Ennahdha, the CPR and Ettakatol. The CPR, led by Moncef Marzouki a long-time opponent to Ben Ali and former President of the Tunisian League for Human Rights, had mainly because of its leader become the talk of the town in the days before the elections. A completely unrepresentative survey of my Tunisians friends in the week preceding the elections showed nodded approval to Marzouki everytime someone brought him up – which happened frequently. Meanwhile Ettakatol, which some Tunisians argue has the attributes of a weather cock, largely confirmed its good standing in pre-electoral poll numbers.

Following these two – on the European spatial axis, not the American one – (centre-)left parties comes the biggest surprise winner of these elections, العريضة الشعبية (Aridha Chaabia). Arguably even many Tunisians had not heard much of this party before this weekend. Its leader Hechmi Hamdi lives in London from where he runs a private TV station, Mostakella, which serves as his platform for a decidedly populist presidential campaign. He personally did not even stand for elections this time around, yet his promises of free health care and grants to be paid out to all unemployed, spawned enough votes to catapult his party onto the national scene. Especially in Sidi Bouzid, Hamdi’s home region, Aridha Chaabia had an astonishing amount of success with its list, led by Hamdi’s brother, looking likely to finish with the highest vote total of all parties. Even if unlikely for political reasons, the Tunisian electoral commission (ISIE) has thrown some rain on Aridha Chaabia’s parade by declaring that complaints against the party have been raised because of Mostakella’s continued advertising following the official closure of the campaign. ISIE could invalidate part or all of Aridha Chaabia’s lists.

Looking towards the future then, the Tunisian Constitutive Assembly looks to be dominated by Ennahdha, which most likely will be short of anywhere up to 20 votes of an absolute majority. They will thus in all likelihood enter into some kind of an – issue-based? – coalition with the CPR and Ettakatol. Ariadha Chaabia presents an unpredictable factor in an already historically unprecedented situation in Tunisia as does the PDP’s handling of its – to be expected – isolated opposition role.

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