Angela all alone
By Charlemagne ¦ Brussels
MAYBE it is the strongest sign that Europe’s leaders think the worst of the euro-zone crisis is over. For nearly four years Angela Merkel, the German chancellor, has been all-dominant in Europe. But at this week’s EU summit in Brussels she ran into an almost unified wall of opposition – from both creditor and debtor countries alike – against her idea of introducing “contracts” to promote economic reforms. Rub your eyes; this does not happen often in European politics. Usually it is Germany – not the rest of Europe – that says nein.
“Millimetre by millimetre we will make progress. But I agree, it’s only a millimetre,” said an exasperated Mrs Merkel at the end of difficult summit dinner on December 19th.
Germany pushed the idea that countries should sign binding contracts with European institutions on a programme of reforms, in exchange for additional economic help. Northern hawks* like the Netherlands and Finland were adamantly opposed to additional transfers, fearing they might becom
MAYBE it is the strongest sign that Europe’s leaders think the worst of the euro-zone crisis is over. For nearly four years Angela Merkel, the German chancellor, has been all-dominant in Europe. But at this week’s EU summit in Brussels she ran into an almost unified wall of opposition – from both creditor and debtor countries alike – against her idea of introducing “contracts” to promote economic reforms. Rub your eyes; this does not happen often in European politics. Usually it is Germany – not the rest of Europe – that says nein.
“Millimetre by millimetre we will make progress. But I agree, it’s only a millimetre,” said an exasperated Mrs Merkel at the end of difficult summit dinner on December 19th.
Germany pushed the idea that countries should sign binding contracts with European institutions on a programme of reforms, in exchange for additional economic help. Northern hawks* like the Netherlands and Finland were adamantly opposed to additional transfers, fearing they might become permanent. Southern doves rejected the idea of yet more surveillance and reforms imposed from Brussels, especially if the “solidarity mechanism” offered only paltry sums.
The result was a “negative coalition” of the rival camps who opposed the German idea for diametrically opposed reasons, said another senior EU source.
A major factor was that many leaders feared the unpopularity of the move would feed the rise of anti-establishment, anti-EU and anti-immigrant parties in May’s European election. So the idea of contracts, repeatedly pushed off since autumn of 2012, has been postponed yet again, to October 2014. “The cadaver is still moving but we will have to wait for a better time to revive it,” says one well-placed European official.
Without the fear of an acute crisis that might endanger the euro, nobody was in a rush to abide by Germany’s wishes. In the past, countries desperate for Germany’s financial backing quickly agreed to two separate rounds of treaty change, which they almost unanimously felt were unnecessary, to satisfy Mrs Merkel’s wish to placate the judges of the German constitutional court.
For Germany, the problems of the euro zone ultimately stem from the loss of export competitiveness, particularly in the countries of the periphery that allowed wages to outrun productivity. Its prescription is structural reforms to liberalise labour and product markets, and to promote growth.
But it has proven difficult in the extreme to get countries to change their ways, not least because the structure of economies is a matter to member-states, not European institutions.
Voluntary initiatives, starting with the Lisbon Agenda that sought to make of Europe “the most competitive and dynamic knowledge-based economy in the world” by 2010, and the follow-on Europe 2020 strategy, were long on words and short on real achievements.
The Euro Plus Pact of early 2010, whereby countries would make voluntary pledges that would be reviewed yearly by peers, came as a response to the crisis but quickly disappeared. The commission’s “country-specific recommendations” are now an annual fixture but are little heeded. France, for instance, said the commission should not “dictate” the shape of reforms.
For all the denunciation of austerity, governments have find it easier to cut deficits (too often by raising taxes rather reducing spending) than to address the rigidities of the labour and product markets that hold back growth and, in the case of the euro zone, reduce the flexibility needed to survive within the constraints of a common currency.
In a
Ultimately, this boils down to a simple rule of thumb: if you meet stronger opposition to structural reforms domestically, and receive less of a push from Europe on this than on budgetary consolidation, the likelihood is that you will make less progress on structural reforms.
In the autumn of 2012 two factors came together. First, there was Germany’s perennial pressure structural reforms, even if it meant re-opening the treaty to make economic co-ordination more binding. Second, France wanted the creation of a “fiscal capacity” – euro-zone budget – to act as a tool of macro-economic stabilisation, for instance by topping up benefits for the short-term unemployed)
By the end of 2012 the only thing that survived was a thin compromise: countries could, more or less voluntarily, reach “contractual arrangements” with Brussels institutions on a programme of reforms that would be financed by transfers, in the hope of increasing “ownership”. Both sides saw it as a child’s footstep towards their ultimate goal.
As the months have passed, though, both of these elements have been further weakened. The summit communique seeks to bridge the gap between those who wanted “binding” contracts and those who wanted them to be “voluntary”. It now speaks of “mutually agreed contractual arrangements”.
And the associated “solidarity mechanisms”, say officials, are now more likely to be loans than grants; indeed they may just be some form of loan guarantee designed to hold down borrowing costs. Tellingly, François Hollande, the French president, now speaks of “financial capacity”, not a fiscal capacity, which would not be a separate budget. The mass of official verbiage, packed with caveats, is an indication of how difficult the discussion has proven to be (wonks will find it in pages 17-20 of the official conclusions.
For better or worse, the countries that have enacted the greatest reforms are those that have been forced to seek bailouts. Mariano Rajoy, the Spanish prime minister, opposed the contracts but was clear that nobody could accuse Spain of failing to reform.
So the contracts are really aimed at vulnerable countries that have not come under official programmes: principally France and Italy. Fate has ensured that the task of resolving the thorny issue in October must fall to Italy, which will take over the rotating presidency of EU ministerial meetings in the second half of 2014. All that Enrico Letta, the Italian prime minister, would say was that “the time was not right”.
The rejection is particularly galling given that Germany had just taken an important, but insufficient, step to set up a banking union). Will Mrs Merkel now block banking union (it is supposed to be completed by May)? Probably not, say senior EU officials; it is too important to become a hostage of tactical games. Mrs Merkel might need only to play a waiting game: sooner or later somebody will want Germany to commit more money to stabililse the euro zone, and then Mrs Merkel will hold up a nice contract for everybody to sign.
Dec 20th 2013,
Source: economist.com
