eurozone « Business for New Europe Blog

Labour Conference Blog: Europe, from Crisis to Growth

By admin

By Lucy Thomas

Douglas Alexander at the BNE fringe

At a joint fringe held by BNE, CER and Open Europe, sponsored by JP Morgan at the Labour Party Conference in Manchester on the Eurozone crisis, Douglas Alexander criticised the government’s decision to exercise the UK’s opt out from about 130 pre-Lisbon justice and Home Affairs measures. The panel, chaired by Charles Grant, the Director of the Centre for European Reform, consisted of Douglas Alexander MP, Chris Leslie MP, Mats Persson of Open Europe and was joined by Richard Corbett, a former Labour MEP and current advisor to Herman Van Rompuy.

Douglas Alexander MP, Shadow Foreign Secretary, opened the debate by outlining the need to recognise the depth of the crisis in the Eurozone, adding that the problems in the Eurozone cannot be used as an excuse for Britain’s poor economic growth.

The centre left needs to be careful not to fall into the trap of the right embracing the austerity narrative and the left being pro growth, he said. Growth of course matters but there is also a need for fiscal tightening.

He said that the left needs to make the case for growth and reform. Austerity alone is not enough, nor is growth alone. On the concrete steps taken so far, Douglas Alexander made reference to recent European Central Bank action saying that you “can’t deal with insolvency simply with liquidity,” adding that “Labour supports the recapitalisation of the European Investment Bank.” The EU should also think how to better balance the EU budget (or Multi-annual Financial Framework) to ensure growth for years ahead.

Douglas Alexander concluded that the economic challenges faced by the EU and Eurozone are not justification for questioning Britain’s membership of the EU, when Britain in struggling to secure growth it doesn’t make sense to shrink our export market.

Chris Leslie, shadow Financial Secretary to the Treasury, brought up the “three dimensional chess” in the EU going on between “interventionists” who believe that government should shape the economy, versus those with a more laissez faire approach such as Germany, as well as those with more federalist tendencies and those with a more pragmatic approach.

He welcomed the recent announcement by Mario Draghi on so-called “Ordinary Monetary Transactions”, although highlighted the need for conditions on the use of the European Stability Mechanism to be made in a sensible way. Britain should play a role in that, he said, adding “it’s not that we don’t need rules, but something which is careful not to smother the embers of recovery.”

Finally, Chris Leslie raised the need to ensure that democracy is not “forgotten in the future of executive decision making in the EU.” He said that Labour need to bear in mind that the European settlement risks being undermined if people feel that their economic experiences are being affected by decisions made far away in Brussels.

Phillip Souta, Director of Business for New Europe asked what Labour made of the government’s decision to opt-out of over 100 justice and home affairs provisions (including the European Arrest Warrant) Douglas Alexander said that it seemed the government had acted more out of “party management than national interest.” He stressed the potential danger of such an opt-out asking: “how do we safeguard citizens when something as fundamental as European Arrest Warrant is at risk?”

Richard Kaye from JP Morgan asked about the future of banking union and whether the UK could play a meaningful role in drawing up the plans. Chris Leslie said that the European Commission’s proposals on banking union needed to be “thought through carefully” as taxpayers shouldered the burden of bank recapitalisation. He said in relation to supervisory powers it is critical to determine the degree to which the ECB can vote down non-Eurozone members, and that “supervision cannot be wholly ceded to qualified majority voting.”

Mats Persson, Director of Open Europe, said that the forthcoming negotiations on the EU budget represented a “massive opportunity for Labour to make the case for reforming the structural funds,” so that funds can be better focussed on poorer member states and allow Britain a more targeted regional and generation policy itself.

He said that when talking about austerity, the political classes needed to remember what the alternatives are, i.e. a breakup of the Eurozone or more fiscal union with some cross-border transfer of liabilities, which would have an impact on Britain’s place in Europe. He also said that a recent Eurobarometer poll shows that public support for the European Union in 5 Mediterranean countries and Ireland has fallen from 55% to 25% in less than a decade.

Richard Corbett, an advisor to European Council President Herman Van Rompuy joined the panel, and said that whilst the economic situation was challenging, the Eurozone had managed to prevent competitive devolution and protectionism whilst maintaining a degree of currency stability.

Liberal Democrat Conference Blog: Europe, from crisis to growth

By admin

By Ariane Poulain

David Laws, Minister of State at the Cabinet Office and Department for Education

David Laws, newly re-appointed to the cabinet, said that Britain was, “not separate from the eurozone crisis,” at a panel discussion hosted by BNE, the Centre for European Reform and Open Europe. The discussion, in partnership with JP Morgan, took place at the Liberal Democrat Party Conference in Brighton and was part of a fringe series being held at each of the three party conferences.

The panel consisted of David Laws MP, Minister of State for the Cabinet Office and Minister of State for Schools, Vicky Pryce, Economist and former Joint Head of the United Kingdom’s Government Economic Service and Simon Tilford, Chief Economist, Centre for European Reform. The panel was moderated by Phillip Souta, Director of Business for New Europe.

Simon Tilford started off by saying that September was a “good month for the EU economy with borrowing costs going down, German constitutional court approval of the ESM and banking union.” He then considered whether the “market rally for these positives” would be sustained and said that, if so, the “ECB needs to do more bond buying” but this is not a straightforward solution because any country that wants to benefit would have to sign up to strict conditionality with member states agreeing to the pressures of high fiscal austerity. The struggling eurozone countries, like Portugal and Spain, see this as “self defeating.” Tilford’s view is that the ECB is unlikely to continue to buy debt because it would make it much harder for the ECB to buy debt for subsequent needs and this is why the ECB is “basically powerless to act effectively.”

Tilford stated that a workable solution requires creditors to be able to pool risk – be it in the form of a full banking union or greater integration – and at the moment, the lack of a pan European deposit insurance backstop in the European banking union means that it is “not a fully-fledged banking union.” He strongly emphasised the need for higher inflation for highly indebted countries because otherwise, debt levels are simply unsustainable.

With financial pressures across the EU hampering the UK banking sector and the UK recession considerably deeper than the eurozone, Tilford also considered the EU from the UK perspective. The government has a tendency to offload responsibility for its problems beyond its borders and this “must be taken with a pinch of salt” he said.

He continued by arguing that there are only two plausible scenarios for the EU and both are problematic for the UK. One was that the EU gets serious with a fully-fledged European banking union and further macroeconomic measures. Over time, he said this would lead to a “eurozone that is a more cohesive, political entity”; the UK would then be able to counter this by pushing to engage as constructively as possible but that appeared unlikely. The other scenario was that the eurozone will unravel, leading to huge exchange rate instability and the cornerstone of the EU, the single market, being “unlikely survive the fracture of the eurozone.”

Vicky Pryce began by emphasising that “Europe is very significant for the UK” as she spoke about the current situation of the eurozone. She noted that eurozone forecasts are expecting a decline in GDP this year and next year, all against the backdrop of the fragile Greek economy which has been contracting for five years already.

Pryce recognised that a solution to the eurozone crisis is particularly tricky because firstly, it is a zone already in the midst of recession and secondly, it has very interconnected banking systems. The problems arising from the interconnected banking systems of the eurozone has now led to a banking sector that is not in line with the EU’s single market. The banks are turning inwards, becoming very national and steering away from cross-border lending, and companies are not looking at investing in the eurozone.

EU member states should have invested in price stability measures before the crisis stated Pryce but going forward she largely agreed with Tilford’s analysis of how the EU should act to move from crisis to growth. Pryce argued that debt levels are unsustainable; the ECB needs to spend a lot more, leave concerns about rising inflation to the sidelines and flood the market. This is the response that would give hope and get the European economy working again.

David Laws began by agreeing with Pryce on the significance of the eurozone for the UK. He then went on to discuss the current situation of the crisis, the positive outcomes in recent weeks in Europe and the future relationship of the UK in the EU.

Firstly, he said that we should“not underestimate the impact of the Eurozone on our borders as the UK picked particularly unfortunate member states to trade with.” Laws commented on the impact this is having on confidence across business, banking and consumer sectors; furthermore, public perception is highly influenced by the “daily bombardment” of the world economy disaster. All of this, said Laws, is causing the swings in the capitalist economy – which would naturally occur anyway – to be even more pronounced. Usually, corporations feel relatively confident investing in Europe and consider Asia and Africa as more risky but today, this is reversed as companies are unsure what the currency will even be in ten years.

Secondly, he drew attention to positive developments in Europe over recent weeks and in particular, Mario Draghi taking on the ECB. Laws noted how the risk averse ECB has been moving away from its highly cautious position of being totally focused on monitoring inflation and praised Draghi’s efforts to move the ECB in a more pragmatic, sensible direction. With these recent developments, Laws believes that Europe “may have actually passed the most sensitive time in the crisis.”

Thirdly, Laws looked at the UK’s relationship with the EU and said the UK is going to have to accept that the eurozone is currently preoccupied; the ‘UK in EU’ debate is a low priority. He said there is a serious risk that if we engage in the wrong way then the UK will find fewer opportunities to be involved in decision making and represent UK interests.

At the moment, the frustration in the Government is that they see the potential to create alliances with member states that share a similar view on how Europe should develop, such as deregulation, but many natural allies are hesitant to get too close as the UK is not seen as a team player. At present, the UK will not be able to easily forge alliances needed to push forward sensible debate on the EU and the UK’s best interests.

Laws closed by saying that “the eurozone situation is a bit like the Brighton weather, there is not much we can do about it and we just have to wait for it to pass to then define the UK’s relationship with it.”

Merkel blinks as Single Market advocate Mario Monti, not Francois Hollande, emerges as the man who might save the euro

By Phillip Souta

By Phillip Souta

Man of the moment? Mario Monti arriving at the European Council - Photo: European Council

As the dust settles after the 20^th European Council after the crisis began a few years ago, we are seeing the hints of where we may be at the end of the year. Two things in particular are a bit like history in slow motion, that speeded up can indicate where we are really going.

First, Germany is finally starting to talk about the costs of a breakup domestically – this could be the long awaited signal that politicians there are going to start softening public opinion for the measures they’re going to have to take to keep the euro going.

Across the political spectrum, Wolfgang Schäuble, the German finance minister said break-up could cause a “shrinking of wealth”; Jens Weidman, President of the Bundesbank said that break-up would come with incalculable “costs and risks” and the leader of the SDP, Sigmar Gabriel, said a break-up would cause an “enormous economic recession.”

German politicians have been far keener to blame southern European countries for fecklessly driving the euro into the ground without acknowledging Germany’s ten year export boom would have been impossible under the Deutschmark, which would have made Germany’s capital good uncompetitive.

The second development is that southern European countries, led by Mario Monti of Italy rather than the perhaps still somewhat inexperienced Francois Hollande, stood up to Angela Merkel and refused to cooperate unless she moves towards greater mutualisation of debt.

She blinked first at the summit and left without even giving a press conference. Mario Monti, backed by Hollande and Mariano Rajoy of Spain demanded that eurozone bailout funds be used to support eurozone banks directly, and got what they wanted.

If Mario Monti emerges as the leader of the group which confronts Merkel with the hard choices she inevitably has to make, that will be no bad thing for David Cameron. As one of the most passionate defenders of the Single Market, he will be an important ally in making sure it is not undermined by the new structures.

Unexpected pieces of good news indicate more positive scenario for eurozone

By Phillip Souta

By Phillip Souta

One euro coin (photograph: wikipedia)

After a few weeks of unremittingly bad news, a number of events over the last few days paint a picture more complicated than the one seen by most commentators.

First, the eurozone is not in recession, driven by Q1 0.5 per cent growth in Germany. Despite good employment figures, the UK is. Despite Germany’s powering ahead, this is not an entirely comfortable contrast.

Second, a Bank of America / Merrill Lynch report covered in the FT today (£) says that 60 per cent of fund managers believe the ECB will turn the liquidity taps back on. That would immediately serve to stabilise markets, and to follow onto the next point, serve as a push on inflation.

Third, German policy makers have changed their tone with the election of Francois Hollande. They have hinted they are willing to accept inflation above 2 per cent, which is about as politically sensitive as saying German troops should go on combat operations abroad, and the Chancellor has accepted that a “growth pact” should accompany the fiscal compact. Quite what that will consist of is unclear, but the message to Greeks about to witness a second round of election campaigning is clear – there is more we can do to support you.

Combine this with the unexpected Greek move to fully repay a €450 million bond yesterday, and you have a series of events that may in hindsight look like a turning point if Greeks vote for pro-euro parties in June.

Whilst opinion polls in Greece show Syriza increasing their support from about 16 to 20 per cent, 50 per cent of Greeks still believe the country should keep to the austerity programme – this tension will have to be resolved one way or the other in the coming elections.

If Greeks vote for parties that take them out of the euro, these small green shoots will be quickly forgotten in the dangerous situation that unfolds. There is still a chance that Greece will look into the abyss, not like what it sees, and give the mainstream parties a chance to compete the programme they have started.

Press Release – European Commission is right to back eurobonds

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BNE calls on eurozone creditor states to accept eurobonds as part of the solution to the euro crisis.

The Commission today is throwing its weight behind the idea of eurobonds as part of the solution to the sovereign debt crisis in Europe. Germany opposes such measures on the grounds that they would introduce unacceptable moral hazard and remove the market pressure needed for peripheral states to reform. The choice, however, may be between a combination of eurobonds and ECB quantitative easing or a breakup of the eurozone.

Phillip Souta, Director of BNE, said “It may be that the only way Germany and other creditor eurozone members can protect the euro is through radical measures such as eurobonds.”

According to estimates by the German Institute for Economic Research (DIW), this would cost Germany about €15 billion each year. Phillip Souta said, “This cost would be more than worth it to save the euro, the breakup of which would be a disaster for Europe.” He went on to say that, “German growth over the last ten years would not have been possible with the Deutschmark, which would have had much greater value than the euro, and choked off Germany’s export led recovery.”

Opponents of eurobonds argue that they would introduce an element of moral hazard, but euro bonds can be easily designed to mitigate those risks. One proposal – a variation of which will be included in today’s Green Paper from the European Commission – comes from Jacques Delpla of the Conseil d’Analyse Économique in Paris and Jakob von Weizsäcker, a fellow at Bruegel, a research organisation in Brussels. With this proposal, eurobonds would only apply to the first 60% of a member’s debt in a “blue bond” and with individual members being responsible for anything above it in a “red bond”.

Notes to Editors

Business for New Europe is a coalition of pro European British business leaders who articulate a positive case for reform in Europe. We comment on European issues that have an impact on the UK. For a list of our members, please follow this link http://www.bnegroup.org/about/people/

For media enquiries, please contact Paul O’Hagan on paul.ohagan@bnegroup.org or contact +44 (0)7944 572 351. Phillip Souta can be contacted directly on +44 (0)78 8788 6437.

The Wrong Time and the Wrong Place for an EU Tobin Tax

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By Tom Thatcher

A financial transaction tax may bring economic benefits in some circumstances, but it would be the wrong policy for the European Union at this time.

If Europe’s business community were worried about proposals for a Tobin Tax in August, by the end of September they were positively dismayed. Amid ongoing strife in the markets, Commission President Jose Manuel Barroso formally unveiled plans for a levy on all financial transactions to be imposed across the European Union. The issue became front page news almost overnight, and for the first time economists begun to seriously examine the effect an FTT might have if introduced.

Wikipedia: 30 St Mary Axe, home to many City firms

Certainly, there are no shortage of arguments in its favour and the raft of distinguished policy makers who have lined up behind it – not least in the European Commission – mean that the idea may at least be worth considering. Indeed, if one moves away from the inherently negative ‘banker bashing’ which has pervaded the debate thus far, it quickly becomes evident that there are some more rational aspects to calls for its introduction. Broadly, these more considered approaches have two distinct strands.

Firstly, there has been an increasingly influential lobby arguing that a transaction tax would help bring about more stability in European markets. According to this narrative, an inevitable side effect of the plan to charge a levy of between 0.01% and 0.1% on financial transactions would be a reduction in the appetite of traders for ultra short term computer generated trades, as an increased volume of trades would lead to both an increase costs and potential reduction in profit margin.

Given that these short-term trades are often responsible for greater market volatility, regularly spooking lenders and inducing panic for no apparent reason, this could be viewed as a positive step.

The second major argument in favour of a financial transaction tax focuses on the semantics of the phrase, as well as historical examples of the FTT in practice. Most observers thus far have assumed that a European Tobin tax would involve a straight forward surcharge on transactions, similar to that trialled disastrously by the Swedish government during the 1980s, during which time much of the country’s financial services sector decamped to London. However, other have contended that deductions could have more in common with Britain’s stamp duty – a toll paid for listing shares rather than buying or selling them.

It is worth noting that Britain has not only maintained its financial sector since introducing the tax in 1986, but has in fact expanded it – a sign that Tobin taxes need not necessarily be detrimental to economic development, depending on one’s definition of them.

These two arguments have been touted in some quarters as economic justification for a policy which is clearly both expedient and convenient politically for the Commission – imagine how much easier things would be for them if the EU had its own source of funding.

Yet neither argument really attempts to get to grips with contextual problems unique to the EU’s current predicament, a fact which significantly both diminishes their value and damages the logical foundations underpinning any future European Tobin tax.

As opponents of the FTT have always stressed, the major problem is not the concept of the tax itself but rather plans to introduce it exclusively within the European Union. Without the acquiescence and compliance of other G20 nations, there is a very real possibility that financial services companies will simply move out of the area altogether to avoid it. Aside from damaging the EU’s economy at a time when most member states can ill afford it, member states would still be susceptible to the same shocks caused by volatile markets as they are now, with the caveat that the largest markets would now lie outside their jurisdiction.

Moreover, although a ‘pay-per-listing system’ may have worked as a method of taxing financial services companies in London, the EU Commission has shown little appetite for introducing this kind of levy. Its official proposal explicitly states that the programme under consideration would involve a straight percentage deduction on all transactions, with the rate varying depending on the type of transaction being carried out. Debating the merits of stamp duty may therefore be an instructive exercise but it is also a redundant one in this case, given that a listings tax is not on the agenda.

There is, of course, a political aspect here too. At a time when support for the European Union seems generally to be on the wane, it seems imprudent to so obviously isolate Council members with large financial sectors. Although reports coming from Britain that the City of London would be forced to contribute up to 80% of the revenue generated by a Tobin tax seem to be exaggerated, the worries within various member states over the impact of a financial transaction tax are significant enough to be taken seriously. The Commission would do well to consider the potential consequences of its actions before proceeding further.

All this pales into insignificance, however, when compared with the final reason why the EU is not yet ready for a Tobin tax. The economic area is currently experiencing negligible economic growth rates almost without exception, a trend which seems set to continue at least in the short term. In such an environment, a financial transaction tax makes little economic sense, particularly when the Commission’s own impact assessment predicts that it could reduce the continent’s economic output by up to 1.8%. Fiscal consolidation only truly works if economies are able to grow at the same time – a fact which has been demonstrated by the ongoing trials of some EU member states, in spite of their austerity measures.

The financial transaction tax could risk upsetting this balance, no matter how much the Commission and some members of the Council want it to work.

It is simply the wrong policy for the EU at this time.

Lib Dem Party Conference LIVE Event Blog – Will the euro crisis split the EU?

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Business for New Europe and the Centre for European Reform in partnership with Citi and Linklaters brought together an eminent panel of experts to discuss the developing situation in the eurozone yesterday at the Liberal Democrat Party Conference in Birmingham. Michael Moore, Secretary of State for Scotland, Sharon Bowles MEP and chair of the European Parliament’s Economic and Monetary Affairs Committee, Baroness Shirley Williams and Jeremy Browne, Foreign and Commonwealth Office minister joined the discussion. The event was chaired by Simon Tilford, chief economist of the CER.

Jeremy Browne, Shirley Williams and Simon Tilford

Months ago, when BNE and the CER initially decided to organise this panel discussion, we could not have predicted how timely this debate would actually be. The discourse within the EU, has progressed from bailouts of peripheral member states to the splitting of the eurozone or even worse, the full disintegration of the common currency. At the panel discussion, all speakers were eager to stress the implications of the crisis for the United Kingdom to a full room of around ninety delegates.

Sharon Bowles, who recently attended a meeting of finance ministers in Poland, said that if there were a disastrous event within the eurozone, the UK would be just as much dragged in as if we were not. Many have said that the UK’s exposure to Greece is manageable should Greece default, however, Bowles stressed that the crisis was no longer contained to Greece and that contagion was a real problem to the UK, citing the figure that the UK has a £2 trillion exposure to France. Bowles welcomed George Osborne’s intervention last week calling for greater integration within the eurozone as she believes that a banking crisis within the eurozone will undoubtedly lead to a banking crisis within the UK.

On the meeting in Poland, which was attended by Tim Geithner, US Secretary of the Treasury, Bowles said that European finance ministers had not lost an opportunity to make things worse with constant internal squabbling proving the point that politics rules over the markets. Bowles said that there needs to be greater integration within the eurozone, while dealing with moral hazard, and that there is no chance of the rescue fund being made larger as it would potentially put the German credit rating at risk.

Turning to the UK, Bowles said that closer integration within the eurozone could present big dangers for Britain. Bowles recognises that the actions of the 17 members of the eurozone in dealing with the crisis will have spill-over effects on the 10 countries outside. She predicts that there will be temptation to decide single market issues within the 17 therefore disenfranchising other member states, including the UK. In any new framework, France and Germany envision themselves as the core, based on a ‘markozy’ line. Bowles stressed that the EU ‘brand’ is based on the 27 together and many of the non-eurozone countries are very important globally.

Simon Tilford, Sharon Bowles and Michael Moore

Bowles points out that many of the non-eurozone members of the EU, including the UK, have been the biggest advocates of the single market’s advantages on a global level. Many of the eurozone countries, however, are more concerned with the internal market, looking inwards. In that context, it is useful to the UK that the euro plus pact referenced the single market.

Bowles also went on to say that the discussions amongst eurosceptic Conservatives about repatriation of powers from the EU in this time of crisis is the worst thing possible for the health of the City of London. With approximately forty legislative bills in front of Sharon Bowles in the European Parliament, all with incredible importance to the UK and the City of London, it was not helpful to have this talk in the backdrop. Bowles claims that this talk could lead to awful ramifications.

Jeremy Browne then continued by saying that in all three of the party conferences over the next few weeks, there will of course be discussions on important national issues but the shadow of the eurozone crisis may one day render these internal discussions redundant. He therefore told attendees that they had come to the ‘right’ fringe meeting.

Initially, Browne was sceptical of the UK joining the euro. Whilst seeing the benefits of a single currency to the Single Market, he was not fully convinced. Browne said that the loss of monetary policy was problematic for him and that many countries that did join the common currency were not ready and should not have been allowed to do so. Browne said that he can understand German worries of profligate Greeks and that governments of creditor countries, including Germany, must command the consent of their populations to take the necessary decisions.

Browne stressed that he does not want the euro to break up and that its success was in our national interest. He wants Britain to take an active part in the EU, despite being a non-eurozone country. The UK has always tried to avoid the prospect of a two speed Europe and should continue to do so despite it becoming extremely difficult with further economic governance emerging within the eurozone. As one of the ‘Big 3’ within the EU, the UK has an interest in demonstrating leadership. Examples of this can be seen in free trade discussions, most recently with the FTA with South Korea being an effective lever for a further FTA with Japan. If the UK were not in the EU, we would not have the same bargaining power on the global stage. He went on to say that the EU is a force for moral good, as an aid donor for example. He also said that the present Government has been keen to use the EU as a political device in foreign policy. This has been seen in Syria, for example, where the UK has pushed for a common EU position.

Browne concluded that the Europe which will emerge from this crisis will be a new Europe, and it is important that the UK takes a leading role in it.

Michael Moore started by saying that whether or not people agree with the Coalition on tackling the deficit, one just needs to look at Greece, Portugal and Ireland to see that they are necessary. The globe realises the importance of this crisis and Tim Geithner’s attendance in Poland was an example. Moore paid tribute to Sharon Bowles’ work in the European Parliament and was happy to see a Liberal Democrat at the heart of this.

Moore said that the euro crisis effects the UK terribly and we must be engaged and cannot enjoy the geographical luxury of being at the side of Europe. In addition to our banks and pensions being effected, our growth would also be compromised. While seeing the inevitability of fiscal integration in the eurozone and always being a proponent of the euro, the danger for the UK is that we may see internal cliques to emerge, where we will be excluded. Moore continued by stating that it would be bad for Europe and bad for the UK if we were marginalised. Our priorities are that we should engage, we should use the extensive financial expertise within the UK to assist eurozone countries, and we also lift our heads slightly looking at how we look at European growth. The EU needs to look at how we can get the single market working more effectively and the idea of repatriation of powers is very damaging.

Baroness Williams concluded the discussion by saying that the UK has hurt itself with the passage of the European Union Bill, calling the bill ‘micro-management to the utmost’. She continued by saying that Ministers within the government have been making some thoughtful remarks, but these do not have the same weight as acts of Parliament.

As to emerging from the crisis, Baroness Williams said that some sort of fiscal integration, where tax harmonisation takes effect and that there is a dangerous situation within the EU of a lack of real leadership. Baroness Williams was also critical of the Liberal Democrats’ sister party in Germany, the FDP, who have made it very tough for Chancellor Merket to find solutions.

Baroness Williams continued by saying that the UK could be just as damaging with its talk of repatriation of powers should a treaty change be required. For one of the ‘Big 3’ stepping in, stopping the other two from doing what is necessary to save the euro is unconscionable.

Williams concludes that Europhobe conservatives see this crisis as the greatest opportunity to repatriate powers from the EU, or even leave the EU altogether. She fears that the UK will be even more detached than we already are. For Liberal Democrats, this is extremely dangerous, when important issues such as climate change and human rights can only be effectively championed on the EU level.

Following the opening remarks by all four of the panellists, Simon Tilford from the CER moderated a question and answer session. Discussion topics included the need for an EU finance minister should there be a fiscal union; the need for detailed communication from governments was paramount when dealing with the markets; the unlikely prospect of a return to growth in Europe; the effects of the referendum lock in Parliament; the diminished role of the European Commission in an increasingly intergovernmental approach to the crisis; lack of leadership throughout Europe; the importance of the EU safeguarding peace in Europe following the Second World War; and that the crisis is not just a crisis of the eurozone, but a crisis of capitalism.

Karlsruhe’s judgment on bailouts comes with a sting in the tail

By admin

By Paul O’Hagan, Deputy Director of BNE

As expected, the German constitutional court today approved the country’s contribution to the euro zone bailouts. This decision was of course crucial to Chancellor Merkel as she faces increasing political pressure at home on what Germany’s role should be in saving the common currency but the approval came with strings attached.

Also as expected, the court decreed that any future bail out arrangements would be subject to greater say from the Bundestag in order to safeguard sovereignty and preserve the parliament’s authority on Germany’s budgetary expenditure. This decision is of course understandable given the fact that Germany is the biggest contributor to any bail out fund.

Andreas Vosskuhle, president of the court, stated that the decision however was not a “blank check for additional rescue packages.” This decision may present yet another challenge to a swift and effective remedy to the crisis. Many are calling for greater integration within the euro zone through the joint euro bonds, tax harmonisation, budget coordination and the possible establishment of a central finance ministry.

These steps towards federal governance are indeed profound and should be taken sooner rather than later. The court’s decision today, whilst commendable for safeguarding parliamentary sovereignty, may in fact only hamper and prolong the recovery of the euro”.

Bailouts, austerity and democratic legitimacy – it’s not pretty, but politics is working in Europe

By Phillip Souta

By Phillip Souta

Portuguese prime minister, Jose Socrates. Who would want this man's job? Photograph: Wikipedia Commons

Jose Socrates, the prime minister of embattled Portugal, tendered his resignation on 23 March after failing in a last ditch attempt to get a raft of austerity measures through parliament. New elections are to be held on 5 June. In the mean time, Portugal has applied to the EU for a bailout as spreads on Portuguese debt shot through the roof following the opposition’s rejection of the austerity package.

A lot has been made of the fact that he apparently lacks the democratic legitimacy to do this. Bruno Waterfield, the Telegraph’s Brussels Correspondent makes this argument in a recent blog, last post for Portuguese democracy. He argues that the bailout “will be stitched up, copper bottomed and binding before the Portuguese people have the chance to vote on June 5.” But does Socrates really lack legitimacy? And will the opposition really be stitched up? Read full article »

The emerging consensus on fixing the euro zone

By Phillip Souta

By Ariane Poulain

George Osborne, "follow the logic of the single currency" (Photo: HM Treasury)

The EU is heading for another round of the old game of official agenda versus events as they happen. EU leaders meeting at the end of the week are set to discuss energy policy. Their officials will have been toiling away, for months, on energy policy (it is, after all, a strategic issue for Europe). But revolution in Egypt and a possible deal on the euro zone are likely to dominate EU leaders’ discussions as they meet on Friday.

Beyond issuing what will probably be quite robust statement supporting democracy in Egypt, the European Council is likely to focus on a deal to address the problems of euro zone debt over the next couple of years. It feels like longer, but the €85bn Irish bailout happened a mere two months ago. Since then, debate about what needs to be done has been frenetic. Two particularly interesting pieces of work have been released. Graham Bishop, a leading analyst in this area, has written a book, “The EU Fiscal Crisis: Forcing Eurozone Political Union in 2011” and Willem Buiter, chief economist at Citi, co-authored a paper on the “debt of nations”. They point the way to a euro zone very different to the one we see today.

A consensus has emerged, and it appears is being accepted by Germany, that debt restructuring of troubled sovereigns like Greece, Ireland and Portugal is inevitable. This should take place in an orderly way sooner rather than later, whilst we have control over how it might happen. The maturity of Greek debt is likely to be extended to 30 years, amongst other measures.

Berlin is also likely to agree to lend more to the European Financial Stability Fund (EFSF), but on very strict conditions, including requirements for peripheral countries to raise retirement ages, align their tax policies more closely with other euro zone members and enact balanced budget amendments. This is what ‘euro zone economic governance’ will look like.

Graham Bishop argues that we are likely to witness the emergence of a “political entity” which will be “characterised by a centralised funding of public debts that result from a collective oversight of many detailed aspects of economic life”. It looks like something along these lines is already happening.

David Cameron, the prime minister, has said that the euro zone needs to do what ever is necessary to ensure stability, and George Osborne has recently called on the euro zone to “follow the logic of the single currency” in the Financial Times. The euro zone is likely to look very different in five years, and British policy makers need to start thinking now about how the UK will exert influence on a bloc that is becoming far more integrated.

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