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.