Jasper Blom: “Now Is the (SGP) Imposes Strict Limits on Government Deficits in the Opportunity to Take a Left Turn” EU
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is just a small part of the total. If all countries do the same, however, the stability of the currency is in peril. To forestall this practice, the Stability and Growth Pact Jasper Blom: “Now is the (SGP) imposes strict limits on government deficits in the opportunity to take a left turn” EU. A second challenge consists of what are known as asymmetric shocks. If a shock occurs in a specific part of The euro, the pinnacle the euro zone, the exchange rate is no longer available to of European monetary buffer it. Business cycles which do not run synchronously constitute a third challenge. The European Central Bank integration, has been sets the interest rate for the entire euro zone. If the under a lot of strain in countries cannot stay in step economically, the monetary recent years. How did policy will be too loose for some countries and too tight the monetary union for others. Without a solution for that, there will be come about? How did it steeper economic peaks and valleys. The last, and maybe end up in a crisis? And the most important, challenge is the “common destiny”. how can we resolve it? Member states need public support for their measures to counter the above challenges and to solve problems To address these questions, Jasper Blom outlines raised by moving towards a common currency. That is a the history and the future perspectives of the euro. problem in the eurozone today – a crisis of solidarity. History of monetary cooperation In a series of six lectures, Bureau de Helling, the Green European Foundation and the GroenLinks The first plans for a currency union were made back in working group on Europe are delving “Deeper into 1969 under the leadership of Luxembourg’s Prime Europe”. In this second lecture, Jasper Blom, former Minister Pierre Werner. With a timeframe of ten years, policy adviser at the European Central Bank and now the Werner Plan proposed constraining the exchange the director of Bureau de Helling, gave his audience rates of European Economic Community member his insights on the history and the future of the euro. countries within a narrow bandwidth of 4.5 percent, coordinating economic policies and facilitating capital mobility (the making of cross border investments). European currencies would thus no longer be pegged In the previous lecture, Kathelijne Buitenweg spoke of solely to the US Dollar and hence to gold, but also to one her love for the muddle that is Europe. Blom is less another. But the Werner plan was doomed when America charmed: “In the case of the euro, we may indeed abandoned the gold standard, triggering a sharp hike in conclude that Europe is in a muddle. Personally I am less the volatility of the international monetary system. Only a than enamoured of the mess that the euro has currently few of the smaller countries, among them the got itself into.” One thing that can not be made plain Netherlands, were able to peg their currencies to the enough, in Blom’s view, is the true nature of the present Deutsche Mark. crisis. “This is no euro crisis. It is a financial crisis and a solidarity crisis.” In 1978, following the collapse of the Werner Plan, new efforts were made to establish the European Monetary The logic of a currency union System (the EMS). This was a system of fixed exchange rates with regard to the European Currency Unit (the Why have a monetary union? The advantage of having ECU). This was an important step towards a mature your own currency is that the economy adapts more Europe no longer fixated on the Dollar. It will be clear easily to changes in the business climate and it better from this historical account that the Netherlands enjoyed absorbs the shock of shifts in the exchange rate. But de facto monetary sovereignty for only a few years after maintaining your own currency has drawbacks in a World War II. Bretton Woods tied the Dutch Guilder to the trading partnership. They include transaction costs and US Dollar, and soon after that it was pegged to the the uncertainties and volatility of exchange rates. Deutsche Mark. Besides, the symbolic value of sharing a common currency should not be overlooked. The economic The further integration of the European Union gave new literature warns, however, of some challenges a momentum to the idea of a fully shared currency. The monetary union faces. Delors Commission issued a blueprint for the European Monetary Union (EMU) in 1989, and the EU member The first challenge is to prevent a form of free-riding in states adopted it as part of the Maastricht Treaty in 1992. which a member state can issue more debt without Its basic criteria for public finances and for monetary harming the stability of the currency – as long as its debt Jasper Blom: Now is the Opportunity to take a Left Turn 2 stability were intended to assure convergence of the received 33.5 billion euros in capital injections. European economies and prevent later free riding. The Stability and Growth Pact criteria included a budget The second and third agenda items were the integrated deficit limit of 3% of GDP, and a debt ratio not exceeding budgetary framework and the integrated economic policy 60% of GDP. Capital movements were to be completely framework. Their purpose was principally to alleviate the liberalised, and eventually a common currency was to be free riding problem, but they also supported greater launched under management of the European Central convergence. They ended up as part of the European Bank. The euro was implemented for electronic transfers in 1999, and the new currency became a physical reality Semester for the coordination of budgetary and economic in 2002. policy. Mark Rutte (Dutch Prime-Minister) has to send his ideas to Brussels so that the European Commission can The Eurozone in crisis and the European political offer guidance, before the national parliament has made response its decision. In 2008, the financial crisis began spreading from the US The Stability and Growth Pact has been tightened up with and across Europe. Greece, Ireland, Portugal, Spain and a range of modifications. A positive change was the Cyprus were hit particularly hard. “There wasn’t a Macroeconomic Imbalance Procedure. Not only countries structural problem with public financing,” argued Blom. with large trade deficits have to take action on these, but “Things weren’t going too badly for most EU countries, apart from Greece, before the crisis. In 2007, Ireland had also those with trade surpluses. The procedure is a debt ratio of only 25% and a surplus on its budget. Irish however applied asymmetrically: deficit countries are public finances went awry because of the cost of bailing dealt with sooner than surplus countries. “That is not out the banks.” In other words, the cause of the euro really in the spirit of solidarity,” Blom believes. crisis lies in the financial sector; it is a financial crisis. The final agenda item is democratic accountability and In June 2012, the “four presidents” (Van Rompuy of the legitimacy. “In this case it’s clear that the four presidents European Council, Draghi of the European Central Bank, were primarily concerned with financial and economic Barosso of the European Commission and Juncker of the policy. Reading between the lines, the other three items Eurogroup) presented an agenda to guide European are backed by some very exciting proposals. In policymakers in tackling the euro crisis. The agenda had comparison, this item is a ‘must’ unaccompanied by any four points: (i) integrated financial framework; (ii) really concrete proposals.” integrated budgetary framework; (iii) integrated economic policy framework; and (iv) democratic The future of the euro legitimacy and accountability. The approach currently taken by European policymakers The integrated financial framework was a reaction to the does little to solve the “common destiny” problem. There vicious circle that developed between the banking crises are still too many deficits which are cut, in search of and the debt crises of the eurozone member states: if it budgetary discipline, without regard to social variables. became necessary to rescue large banks, the countries “We shouldn’t tolerate youth unemployment levels in concerned could no longer satisfy the SGP criteria, so some countries being over 50 percent,” Blom argues. generating a crisis on the capital markets. The proposed “Until we are willing to recognise that the Greek, Irish solution, the first pillar of a future Banking Union, is a and Spanish debts are due to our own banks and pension European funding pool (financed by the banks funds, that the deficits on their current accounts are our themselves). It is not however a European fund. The pool own surpluses, and that we give them sporadic loans consists of national funds which when necessary can act which are bound to stringent conditions for draconic as mutual guarantors. The problem of the vicious circle reforms without ourselves being prepared to conduct an of government debt and bank debt is not in itself resolved economic policy that will help the situation, I definitely by this measure, which is disappointing in Blom’s view. see problems for the sustainability of the euro.” The second pillar of the Banking Union is supervision: Why, for example, hasn’t a shock absorption fund been large banks henceforth fall under supervision of the ECB, established to deal with the problem of disparate because national supervisors are sometimes too business cycles? Eurozone countries would deposit chummy with the banks. The third pillar of the Banking money into the fund when things are going well, so that it Union is the joint rescue of collapsing banks.