12/02/2009

European Union: Time for a new bold initiative!

The confirmation of the deepening of the global recession is creating its own vicious downward spiral which in turn is fuelling the destructive flames of nationalism and protectionism.

 

If, as a general matter, Governments have reacted vigorously avoiding, so far, the worst outcomes, that is to say a financial systemic crisis, it is becoming increasingly obvious that the sharp deterioration of the global economy is impairing further efforts to repair a badly damaged financial system.

 

The hearings on Capitol Hill or in Westminster, aside from a salutary humbling of senior bankers, demonstrate that despite devoting unprecedented amounts of taxpayer’s money to shore up the system, credit it still not reaching a growing number of those who may need it. There are some simple reasons for this:

 

-         The deterioration of the creditworthiness of borrowers resulting from the recession itself;

-         The withdrawal from the credit markets of many “non bank” credit institutions (amounting in some countries to close to 40% of the market) and/ or of “foreign bank” lenders.

-         Lending constraints imposed by regulatory solvency/liquidity ratios. The recapitalisation of number of banks through Government intervention has mainly “replaced” capital deficiency rather than increased the lending base.

 

Most of the banks interviewed, whose solvency ratios are sound, were able to testify that they were fully supportive of - and compliant with – Government policy. Unfortunately the negative impact of the three above mentioned factors exceeds by far the capacity of these institutions to compensate for the deficiencies of the system as a whole. It is this deficiency which is perceived by citizens who direct their anger – unfairly in many instances – to the “bail out of Wall Street” by “Main Street”, or its European equivalent, to use the now familiar cliché.

 

It will be extremely difficult to restore normally functioning credit markets at least until the economy as a whole is stabilised. Governments seem to have taken the measure of this problem by initiating stimulus packages on an unprecedented scale but, it remains to some extent, a chicken and egg problem.

 

One of the major difficulties with this approach is that it encourages Governments to accompany stimulus with overt or covert protectionism. There is quasi unanimous agreement that such measures aggravate rather than alleviate the problem. The solution can only be found by consensus, the world economy having become largely integrated through an irreversible globalisation process.

 

It is in this sphere that the European Union – spurred by the Commission - should spearhead a bold new initiative aimed simultaneously inwards at the internal market and outwards to the rest of the world.

 

With regard to the internal market, the European Council should reiterate the mandate of the Commission – as guardian of the Treaties - to ensure the full application of existing rules applying to the “single market”. In other words, all 27 Member States should reaffirm their determination to avoid implementing any protectionist measures that discriminate against one another. In so doing they would not only conform to the existing Treaty, but also demonstrate that they are prepared to pay more than lip service in opposing protectionism.

 

As a quid pro quo, however, the EU should take a much more forceful stance towards the outside world. Speaking with a single voice and representing the globe’s wealthiest market of 450 million citizens, the  EU – while defending an open market position -  should be in a strong position to oppose protectionist measures envisaged by its most important trading partners. If unsuccessful, it would be able to impose meaningful retaliatory sanctions that are clearly out of reach for individual Member States. The credibility of such a policy is underpinned by the fact that the internal market accounts some 85% of the EU’s commerce giving it comparable autonomy to that enjoyed by the United States.

 

The trade-off for each Member State is simple: greater internal EU solidarity against stronger representation of the Union’s external interests. Such solidarity sets also the stage for implementing the closer coordination of internal economic and financial policies that has remained, so far, largely limited to declarations of intent.

 

There is a second area in which the Commission should re-establish its credibility which has been challenged as the crisis developed. While the hyperactive and successful French Presidency may have given the illusion of a more forceful Europe, individual Member States (including France) have taken advantage of the circumstances to reassert the pre-eminence of  the EU’s “intergovernmental” over its “supra governmental” character. This is evidenced by the purely “national” design of the stimulus programs and other interventionist measures, as well as an undisguised disregard for the spirit, if not the letter, of the EU’s legal and regulatory framework, such as the Stability and Growth Pact, restrictions on worker mobility, etc.

 

The exceptionally challenging circumstances faced by the Member States will lead most of them to incur substantial budget deficits and significantly increased borrowing requirements to finance them. The “national” approach followed by Member States is already reflected in the market by a significant widening of spreads between borrowing costs applicable to Member States, including some Members of the Eurozone. Furthermore, sovereign ratings (Ireland – Spain – Belgium) are also coming into question. Such developments are highly unwelcome and could, over time, impinge on the credibility of the Euro itself.

 

It might therefore be an appropriate time to reactivate and revamp the dormant “balance of payments” assistance program of the EU, re-baptising it to reflect its accessibility to all Member States (Eurozone Members do no longer have individual “balance of payments” problems). Such a facility should be of a significant size (EUR 200 billion?) providing appropriate visibility to the added value provided by the EU to its members. Enjoying the highest AAA rating, EU issuance would reduce the cost of borrowing of weaker Member States, thus contributing to limiting their deficits. Structured as a “pass through” vehicle while benefiting from the EU guarantee, it would not impair the Community budget, unless a borrower defaulted; such an event remains highly unlikely for a Member State, even in such a difficult period of crisis.

 

These initiatives would project a stronger image of the Commission, particularly useful in the months preceding European parliamentary elections and its own renewal. By doing so, it will also contribute to transforming the challenges of the crisis into an opportunity for strengthening European integration and creating a sound basis the economic recovery and future prosperity.

 

19:06 Écrit par Paul N. Goldschmidt 13 Ave. Victoria 1000 Bruxelles dans Général | Lien permanent | Commentaires (0) |  Facebook |

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