“In nearly 20 years of dealing with EU issues, I’ve never known a state of affairs like we are in now. It really is a very, very difficult fix and it’s far from certain that we’ll be able to find the right way out of it.” (Euro zone diplomat)
12 September is a crucial day for both the EU and the rest of the world as questions are looming on how to save the euro and if it is even possible. It is certain that radical measures is needed to save the euro and a number debates has risen on the strategies that should be followed. Some of the major debates are:
- Should the European Commission have more control over fiscal policy in EU Member States? Is fiscal union an option?
- Should the ESM receive a banking license?
- Is it time to cut Greece out of the EU?
In June earlier this year a vote was suppose to take place on the question of fiscal union in the EU, but as Europe is divided on these questions the vote was postponed. Economists against the fiscal union are of the opinion that the timing isn’t right.
Whereas others are of the opinion that the legislation should enter as soon as possible because the political environment will change all the time and the only way a single currency can work is under fiscal union. Finnish Prime Minister Jyrki Katainen believes fiscal union should take place, thus more control should be given to the European Commission over fiscal policy in EU member States, but to ensure oversight, accountability and legitimacy the Commission needs to be monitored closely. It is important that fiscal monitoring should not allow budget cuts to hamper investments and thus potential growth. Therefore the deficit reduction timetables will be more flexible in exceptional circumstances and member states would be required to identify which investments had growth and employment potential. The proposal for fiscal union also included legal protection to countries on the verge of bankruptcy. This would mean that a country could not default because its creditors will have to make themselves known to the Commission and loan interest rates will be frozen. The EU will be able to rewrite national budgets for highly indebted countries.
It is no secret that some European countries, such as Germany, are much better off than Spain, Italy, Portugal and Greece. The spillover effects of the fiscal union might just hold disadvantages for the healthier economies. Germany was urged to create a central Brussels body that could assume sovereignty over budgets and fiscal policies. The Germans are very reluctant to go ahead with the idea of a fiscal union, as it is reasonable to assume that the richer regions will have to carry the poorer regions and this will have costs to their own economic environment’s well-being. Britain is also not fully on board with the idea, and last year David Cameron refused to sign a treaty to move towards fiscal union. A fiscal union would mean that the balance of power would shift and some believe that if the union takes place Britain should leave the EU; this could drastically change the relationships between Britain and the other EU members. Fiscal union also has disadvantages for the poorer European countries; even tough these countries would get the debt relief they need, there is no assurance that they will receive the transfers or grants to improve their economic environment.
European Stability Mechanism (ESM) banking licence
Another debate that will be settled on the 12 of September is whether or not the ESM should be granted a banking licence. ESM could support Spain and Italy by purchasing government bonds and then using bonds as collateral at the ECB to obtain more money. Spain is one of the biggest economies in the euro zone and they might need a full bailout of 300 billion euros if the high borrowing costs remains the same. One of the biggest concerns is that if Spain falls, Italy won’t be far behind. The ESM doesn’t have the finances to bailout both countries and giving it a banking license would enable the ESM to have unlimited credit and large-scale purchases of Spanish and Italian government bonds could take place to lower the borrowing costs. ECB President Mario Draghi does not agree with this idea, but supporters of the idea include some members of the ECB’s governing council, France, Luxembourg and Italy. They are hoping that if the banking licences are granted it would already calm markets and believe that if the ESM could refinance itself they could intervene in bond markets without putting upwards pressure on inflation.
Opposing views say that such a licence is against the EU treaties and it would lead to rapid increases in inflation which would have a negative impact on wealth. Besides the concern of increasing inflation, it could also endanger the independence of the ECB. Germany is one of these countries and believes that it isn’t in German or European interest to follow this strategy and they cannot agree to joint liability for Europe’s debt or to liability for the unknown. Finland and the Netherlands agree with Germany. However, even tough the Prime minister of Finland is opposed to giving the rescue funds banking licences, he did agree that buying bonds on the primary market could be a solution if guarantees are provided(for example public property). He also believes that Finnish people believe in rule-based union and dutifully kept to the EU budget with self-imposed austerity, thus would be unhappy about bailing out poor managed economies.
The fact that Germany is opposed to the banking licences but is also one of the biggest funders of the ESM, creates a lot of uncertainty around the future of Spain and Italy because the ESM cannot provide full bailout with the current funds available.
Since the financial crises started in 2010 Greece’s budget deficits and debt obligations has become impossible to manage and some European nations believe that the only way the Euro can survive is to cut Greece. The reforms to improve finances and the economy in Greece are far behind, and the country needs more time, money and a debt reduction to survive. This might be a good enough reason to leave the euro zone, but it could have a big influence on the financial markets and the EU economy. Greece is already in a depression and spending cuts will make this worse, because of this reason Athens wants two more years to get the budget deficit below 3% of GDP. This would mean that the second bailout, of 130 billion, would have to increase by 20-50 billion. The euro zone cannot afford to give Greece more money but the alternative is for the ECB and central banks to take significant losses. If Greece stayed in the euro zone, it can have a negative impact the other EU economies in the long run.
12 September is less than a month away, the autumn holiday is coming to an end and Europe is clearly still divided on the major decisions that need to be made; as a result there is a lot of uncertainty regarding the future of Europe. Will fiscal union take place and the EU become the United States of Europe, or will the EU stay in tact and cut their losses (Greece)? Will the ESM have a banking license to be able to save Spain and Italy, or will these countries have to figure out how to survive without an ESM bailout?