Sunday 16 May 2010

Eurozone rescue: Exceptional occurrences beyond control?

In ECOFIN’s euro rescue (15 May 2010), we noted that the conclusions of the extraordinary meeting of the Economic and Financial Affairs (ECOFIN) Council on 9 to 10 May 2010 (document 9596/10) reiterated the conditions for financial assistance.

Article 122(2) TFEU mentions natural disasters as a concrete example for EU financial assistance, but adds ‘or exceptional occurrences’. The scope is not restricted to natural disasters. If there are difficulties or there is a threat of severe difficulties, the provision is applicable in my view, despite the outrage expressed by Bruno Waterfield and the Open Europe blog.

Actually, the conclusions added a level of seriousness to the threat. Instead of referring to “a Member State”, the Ministers of Finance representing the 27 EU member states said that he EU [as a whole] faces exceptional circumstances beyond member states’ [all of them] control.

However, the conclusions did not elucidate how these occurrences were ‘beyond control’.

ECOFIN press conference

Did the press conference make things clearer?

A summary of the press conference on the web pages of the Spanish Presidency of the Council says that the loan package of more than 500 billion euros was allocated to cover the needs of members with solvency problems and to defend the euro.

The Spanish Minister of Economy and Finance, Elena Salgado, stressed that the extraordinary Ecofin meeting intended to set in motion financial stability mechanisms, as well as preserving financial stability in Europe, and in particular, in the Eurozone. The commitment to fiscal sustainability was reached to help the economic growth of all member states.

Commissioner Olli Rehn affirmed that “we are talking about the financial stability of the Eurozone as a whole”, and said that the European Commission has presented specific proposals to guarantee financial stability in Europe. Asked what was considered to be “exceptional cases”, Olli Rehn stated that “in the Eurozone there have been systematic attacks, which is considered to be exceptional circumstances that prove to be too much for the affected member state".

My impressions

Bruno Waterfield asserted (and the Open Europe blog applauded) that the crisis was created by human agency, not unforeseen events.

My impression is that the causes are more complex than that.

Even the best public finances were affected by the global financial crisis and the severe economic downturn. Reckless actions by financial institutions were not prevented through existing, underdeveloped financial regulation and inefficient supervision, especially in cross-border cases.

Politicians at national and EU level are partly responsible for their deference to ‘self-regulation’ and ‘light-touch regulation’ lobbied by financial markets.

The public finances (and taxpayers) ended up with the bill. They (we) are still reeling from the effects. In this sense, the sovereign debt problem was largely caused by human frailty.

The pace of debt accumulation in some of the EU member states and the levels of public debt are not sustainable without corrective measures. The states were only beginning to contemplate exit strategies when the markets started punishing the weakest links by driving the bond prices sky-high.

Many of the EU member states proudly announced that the Lisbon Treaty left economic policy in the hands of national governments, so they can be blamed for short-sightedness.

Greece faked the entry into the eurozone as well as the annual exams. In this, human agency can be blamed, including the lack of supervisory powers.

Greece, Spain and Portugal (as well as others) had not been able to make necessary structural reforms to their tax systems, business regulation, labour markets, pension systems etc. during the decade of the Lisbon strategy for growth and jobs. The price tag is beginning to emerge. Unpalatable solutions are now forced upon governments and populations more harshly and suddenly than before.

Reactions or over-reactions, the financial markets suddenly precipitated a severe crisis, which threatens not only the “sinners”, but the euro currency and the European Union as a whole (contagion).

I am willing to buy Olli Rehn’s argument that these are exceptional circumstances and that their effects have proved to be too much for the affected member states.

If a ship starts taking in water during a storm, you have to man the pumps, but you cannot stop work to call a meeting to discuss if a different course could have prevented the disaster. You have to deal with the consequences without delay.

You need to discuss the lessons to be learned – later.

It has been said that debt cannot be paid off by more debt. Is it as simple as that?

By mounting a common defence for the common currency, the EU member states have forged an alliance stronger than its weakest links.

Many questions remain, and the danger is far from over.

Ralf Grahn

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