Franco-German eurozone plan is “insufficient”
As leaders prepare for a crucial European Union summit, Swiss specialists tell swissinfo.ch why the latest bid to save the euro currency from collapse is inadequate.
Over the next two days the leaders of France and Germany will be hoping to build support in Brussels for their plan for eurozone nations to submit their economies to much greater scrutiny.
René Schwok is a political scientist at Geneva University and Manfred Gaertner works as economics profesor at St Gallen University.
swissinfo.ch: Europe is seeking greater fiscal discipline and France and Germany are calling for a new harmonised “golden rule” requiring eurozone states to balance their budgets. Is this realistic?
René Schwok: The latest proposals by German Chancellor Angela Merkel and French President Nicolas Sarkozy are not original. They repeat those already adopted by the European Council on October 23. And they are well below the expectations of most observers.
Indeed, there is no proposal on an enhanced role for the European Central Bank (ECB). There is no mention either of the creation of eurobonds or equivalent instruments, and the European Commission would not get new powers to control budgets before adoption.
The “golden rule” is not original as it is a simple copy of the EU Stability and Growth Pact criteria [agreement adopted in 1997 to facilitate and maintain the stability of the Economic and Monetary Union]. The only novelty is that the imposition of sanctions will be automatic, unless a qualified majority of the European Council opposes it.
Even if they are going in the right direction, these proposals are insufficient to prevent further attacks against the eurozone area.
swissinfo.ch: A two-speed Europe is becoming increasingly apparent. There is now talk of new treaties which don’t include all member states. What is your view?
R.S.: Merkel and Sarkozy clearly state that these new agreements should be incorporated into EU treaties. Maybe this will appear in the form of a protocol to which only the 17 eurozone states subscribe. Under EU law this is called enhanced cooperation, allowing some states to move forward in some areas without forcing the others to follow. The only requirement is that recalcitrant states let the others go ahead.
I don’t see Britain preventing the 17 eurozone states making decisions for themselves. It is rather countries that aspire to join the eurozone like Poland, which do not like the idea that others decide the rules that will be applied to them in a few years without being able to participate in their elaboration.
swissinfo.ch: How is it possible for states like Greece and Spain to reconcile a commitment to draconian fiscal austerity and a national objective of ensuring growth and wealth?
R.S.: The measures being discussed are not short-term. For some countries they certainly increase the probability of a recession. But the hope is that they lead to a coherent and sustainable economic recovery in the mid-term. This is the Franco-German bet.
swissinfo.ch: What’s your view on the threat by the rating agency Standard & Poor’s to downgrade 15 out of 17 eurozone countries?
Manfred Gärtner: S&P has explicitly said it wants to put pressure on eurozone politicians. This is an outrage in itself, and it is very revealing for anyone who still doubts the rating agencies have a political agenda.
And it is a slap in the face for all those who defended Moody’s as being innocent weathermen. I hope that S&P’s decision serves as a wake-up call for Europe’s politicians and that they finally take action against rating agencies.
swissinfo.ch: What are the possible repercussions for Europe if S&P carries out its threat?
M.G: Statistics suggest that every time a country is downgraded by one notch the interest rate it pays for its bonds rises by some 50 basis points. This could cost Germany, with its government debt of €2 trillion, up to €10 billion a year. Add this to its current deficit of more than €80 billion, and rating agencies may just feel compelled to downgrade Germany by another notch.
The wheel keeps on spinning, and will spin faster and faster until the bearings come apart.
It would force governments to cut back spending which, with a global recession on the horizon, is the really scary part.
swissinfo.ch: How crucial is this EU summit for the 17-nation eurozone’s fate?
R.S.: There will be many more “crucial meetings” ahead: if there are more crises concerning the euro; in March when the European Council officially signs the treaty amendments, during the ratification process by national parliaments and perhaps in public referendums. The first part of 2012 will definitely be rich in “crucial meetings”.
French President Nicolas Sarkozy and German Chancellor Angela Merkel announced joint proposals on Monday to strengthen budget discipline in the eurozone to restore confidence lost in the currency area’s sovereign debt crisis.
Their plan seeks to enshrine tougher budget oversight in the existing EU treaty or alternatively, creating a new treaty for the 17 eurozone nations that others could opt in to.
It proposes a harmonised “golden rule” requiring governments to balance their budgets within a specified period should be anchored in the constitutions of all 17 eurozone states. The European Court of Justice will be the ultimate arbiter of whether the national “golden rule” conforms with the amended treaty, but it will not be empowered to overrule individual national budgets.
It also proposes automatic sanctions for breaking rules.
The two leaders suggest holding monthly summits of eurozone leaders until the end of the crisis to discuss measures to promote growth.
Both leaders explicitly ruled out issuing joint eurozone bonds, a widely canvassed possible longer-term solution to the debt crisis.
A professor at the European Institute of Geneva University.
Schwok has published 20 books and authored many articles focusing mainly on the EU, international relations, external relations of Switzerland and the foreign policy of Nazi Germany.
A professor of economics at St Gallen University.
He has published over 160 papers on economic issues like sovereign debt, the impact of rating agencies and the macro-economics of financial crises.
(Translated from Spanish by Simon Bradley)
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