Saturday 15 May 2010

Euro Group leaders rescuing the euro

The latest in our series of blog posts inspired by the rescue actions in the eurozone was More on the EU’s no-bailout rule (European financial stabilisation mechanism), 14 May 2010.

The problem

In addition to the mind-boggling sums involved and the sudden calls for solidarity national leaders have done little consistent work to prepare their citizens for, the population has been bewildered by seemingly contradictory rules:

If EU bailouts are prohibited, is financial assistance allowed?

EU citizens have been taught that their country is not liable for the commitments of other member states: the so called no-bailout rule (Article 125 TFEU). On the other hand, EU financial assistance is expressly allowed in case of a serious threat of severe difficulties caused by natural disasters or exceptional occurrences beyond the control of a member state, according to Article 122(2) TFEU.

If citizens can make neither head nor tail of this, it is the responsibility of the national political leaders and the institutions of the European Union to elucidate.

This means that we have to sift through the paper trail left by the European Council, the Commission and the Council.

If the EU institutions work properly and transparently, the answers should become clear. If not, a vacuum is left to be filled by all sorts of protests, conjectures and conspiracy theories.

There is a lot to look at, so we have to advance patiently, one step at a time, without being stunned by the magnitude of the decisions. On the contrary, these monumental actions require detailed scrutiny and open discussion.

Euro Group

If we oversimplify matters crudely, we can say that the economic policy coordination specific to the second largest reserve currency in the world, the euro, depends on an informal intergovernmental arrangement.

Article 137 of the Treaty on the Functioning of the European Union (TFEU) refers to the Protocol on the Euro Group.

Protocol No 14 aims at ever closer coordination of economic policies within the euro area, and the Euro Group has a president, elected for two and a half years (Jean-Claude Juncker). Article 1 contains the substance of the arrangement (OJEU 30.3.2010 C 83/283):

Article 1

The Ministers of the Member States whose currency is the euro shall meet informally. Such meetings shall take place, when necessary, to discuss questions related to the specific responsibilities they share with regard to the single currency. The Commission shall take part in the meetings. The European Central Bank shall be invited to take part in such meetings, which shall be prepared by the representatives of the Ministers with responsibility for finance of the Member States whose currency is the euro and of the Commission.

The Ministers of Finance (although not specifically mentioned as such) meet informally to discuss. The Euro Group does not make formally binding decisions.

Eurozone leaders

However, it was an even more informal meeting of the heads of state or government of the euro area countries which set things in motion on 7 May 2010:

Statement of the heads of state or government of the euro area (press release)

Based on the principles of responsibility and solidarity, the participants expressed their political will to provide 80 billion euros (110 billion with the IMF) to Greece, in exchange for the Greek reform package, which was described as ambitious and realistic.

The leaders reaffirmed their commitment to ensure the stability, unity and integrity of the euro area, and they stated that the institutions of the euro area (Council, Commission, ECB) as well as the eurozone member states agreed to use the full range of means available to ensure stability.

The national leaders said that their countries were prepared to accelerate the consolidation of public finances. They promised strict enforcement of recommendations under the Stability and Growth Pact.

The meeting expressed support for the European Central Bank (ECB) in its action to ensure the stability of the euro area.

Taking into account the exceptional circumstances, the Commission would propose a European stabilisation mechanism to preserve financial stability in Europe, to be decided at an extraordinary ECOFIN meeting 9 May 2010.

The President of the European Council decided to accelerate the work of the Task Force, given the preparedness of the national leaders to:

- broaden and strengthen economic surveillance and policy coordination in the euro area, including by paying close attention to debt levels and competitiveness developments;

- reinforce the rules and procedures for surveillance of euro area Member States, including through a strengthening of the Stability and Growth Pact and more effective sanctions;

- create a robust framework for crisis management, respecting the principle of Member States' own budgetary responsibility.

The press release noted that the Commission would present its proposals on May 12.

Finally, the leaders agreed on the need to make rapid progress on financial markets regulation and supervision.

My impressions

The meeting was a first response to a grave crisis threatening one of the core aims of the European Union: an economic and monetary union (EMU) whose currency is the euro.

The leaders of the eurozone member states said the right things, although only words followed by deeds have the ability to convince hard-nosed or jittery markets.

The Ministers of Finance (ECOFIN) and the European Commission were left to nail down the details of a persuasive package over the weekend.

Ralf Grahn

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