And if the Crisis Awakened Europe? Ideas for a New Eurozone

Stefan Collignon

The financial crisis is threatening to destroy half a century of European integration. By nature, it is blind, brutal, literally inhumane.  But in reality, it is primarily a test of the political will of the people in Europe and of those that they chose to govern them.

In their great irresponsibility, the speculators have hit where it hurts most.  At the very moment when some European citizens are put off by the weakness of the European Union’s dealings with the effects of globalization and are tempted to leave behind all prospects of integration, a stronger Europe is needed in order to reach an enduring way out of the crisis.

The crisis is first and foremost political, and so are its solutions. Therefore, in most countries, such as France and Germany, the public debate has been rekindled, new voices are being heard, taboos are broken, for the best (a collective awakening) and the worst (a collective recess). Do we need more or less of Europe? It is now becoming increasingly clear to everybody that we cannot afford to remain stuck in the middle of the stream of financial integration, and be threatened by the waves of speculation. A historical opportunity presents itself in these times of danger. Time has come for Europe to save the Euro, of course, but more fundamentally also, to map out its own path against the excesses of globalized finance. In order to achieve this goal, we will need a variety of tools, among which the most crucial will be satisfying the demands for democracy.

Christian Paul

Since the common currency was created in 1999, every citizen could measure the advantages and annoyances of this major innovation. In every country people are doing this in keeping with their national history, the relationship to their currency and their economic agenda. It would certainly have been preferable to have made clear from the beginning that the Euro entailed the exercise of rights and duties. Among them, budgetary responsibility and financial responsibility go hand in hand.  Besides that, the Euro as a new common good for all Europeans also requires a new historical effort for a better democratic organization. Instead of that, European politics – its excesses in support of the free market, its treacherous handling of state economies as shown by the Greek conservatives – keeps going on as if nothing had changed, and as a result it has left ticking time-bombs in various member states.

Faced with the crisis, the coordinating process between governments has failed. When we lack truly shared resources and a clear vision of the common good, there are many decisions that cannot be made in real time, whether it is 17 or 27 of us. The Euro is one of our European common goods. But each government pursues partial interests and follows short-term trends; every agreement is nothing more than a minimal compromise, and the consequences of this are disastrous.

The cacophony of governments has given markets the dual signal to speculate and to panic. Decisions are coming too late and bring too little to the table. However, there is worse. The present system allows European conservatives to impose their vision of a crisis exit strategy based exclusively on austerity. It is a natural temptation for Germans to impose constraints, as they are reluctant to take the next step towards integration. Nicolas Sarkozy, whose credibility has been severely hampered by a costly and cronyist fiscal agenda and by the explosion of debt levels (because in France, the debt is the responsibility of the conservatives!). This obsession with austerity is a serious mistake, both on style and substance.

Democracy is yielding to markets. How can we take the offensive?

In the very short run, by mustering the courage to provide Greece with sufficient liquidity that would allow this country to resume growth, without which the crisis will spread, domino-style. That is something markets will definitely not do! The French socialists back this solution, reject austerity, and fight for a united and responsible answer in support of the more fragile states.

Over the medium term, the Treaties do not prevent any progress being made towards an economic government for the Euro Area. First of all, it is time to nominate a Minister of Finances for the Euro Area who will serve as a political counterpart to the ECB and work within the Commission. He would build his leadership by being accountable to the European Parliament and benefiting from being vested with real authority by national member states, who themselves must realize that they – together or separately -  do not hold the key to the crisis. Jean-Claude Trichet himself has explained the reasons for this solution.  The Central Bank knows all too well that a hemiplegic Europe is bound to end in catastrophe.

To move forward, the political will to save the Euro must create three new instruments dealing with the common currency, the economy and jobs. For this purpose, one has to create, first of all, the conditions under which the European Union could issue Eurobonds – securities which would be collectively guaranteed by the Union. The European Financial Stability Fund could be the appropriate instrument to do so, and should in a next step buy the sovereign debt back to counter the speculation of the markets and their usurious rates. But this European power will only be credible if appropriate financial means are put together to safeguard European solvability. At least part of the future European tax on financial transactions could be used towards a united response to speculation, well beyond the direct effects that it has in slowing down the circulation of speculative capital.

Secondly, Europe must draw the lessons of the failure in the conception and application of the Stability and Growth Pact. It did not prevent budgetary excesses in euphoric moments, but it has hampered growth in times of crisis. These two aspects must be separated. We suggest, for the future, to examine a new surveillance mechanism for budgetary issues, more flexible and efficient. A European law, under the impulsion of the Commission and with the agreement of the Council and the Parliament, will establish a maximal amount for the issuance of new debt in the Euro Area (vertical flexibility). It will organize the emission of debt permits, akin to the system of “pollution permits”. The amount of these permits will take into account current business trends, employment and prices in the Euro Area. These permits will in turn be allotted to member states according to the size of their GDP, their budgetary past and their debt levels, as well as their structural needs in accordance with their demography and their potential for development. They could be transferred from one state to another, possibly following the model of tradable emission permits. This would allow a horizontal flexibility of budgetary policy. Another law would forbid banks from lending to public entities if the latter can’t come up with the necessary permits. This mechanism would therefore combine discipline and flexibility.

Finally, a true European industrial policy must create the conditions for new growth. An Institute for European Economic Reconstruction could be put in place to manage the transformation of the European economy. It would be the European version of the Public Investment Bank that is called for by the Socialist Party in France. This institute, which would be linked to the European Financial Stability Fund, would be subject to the authority of the Economic Government of the Union, and would operate as an industrial holding. It could purchase public and private assets and transform them in accordance with a coherent European strategy. Therefore, European control of the economy in the interest of citizens would overcome arbitrary short-term policies and prevent privatizations at sell-out prices – or the arrival of sovereign funds from outside the continent.

It is crucial, however, to base this plan for European revival on stronger democratic legitimacy than what is known in the Union today. We would otherwise be bracing ourselves for a fatal failure. A European Economic Government needs to have at its disposal not only tools for action, but also strong political foundations. It has to reflect the preferences of its citizens through elections, and not only those of national governments and their representatives. The tools must reflect budgetary discipline (which is not the same as austerity), but also serve the purposes of fiscal harmonisation and active social policies within the Euro Area.

This must be the object of a Treaty for the Euro Area, which will organize not only these tools but first and foremost their democratic control. The fears that a new Treaty sparks off must be overcome. The goal of this Treaty would make the Euro Area a forefront within Europe and would insure the preeminence of European democracy over markets, a goal that citizens will embrace when they can chose and influence European policies. The way out of the crisis is inseparable from making a new step toward European democracy, and this is also one of the main issues at stake in the French elections in 2012.

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