A politics of fairness could help bridge gap between public opinion and market demands, writes PAUL GILLESPIE
TWO QUOTATIONS sum up a momentous week for the euro zone. After Thursday’s meeting of the European Central Bank its president Jean-Claude Trichet told a news conference: “If credibility comes back then everything will be very easy.” In Paris German finance minister Wolfgang Schäuble said: “While the financial markets want a European responsibility for financial and budgetary policies, public opinion does not.”
Ireland is entangled in this drama. The resentful response to the EU/IMF pact is largely to do with an understandable feeling that, unfairly, we were made a pawn in the wider European game to restore financial and banking credibility. But public opinion in Germany believes it unfair to fund the voluntary debts of deficit states. For historical reasons, Germans take an uber-conservative accountancy rather than an economic approach to indebtedness. This makes it all the more difficult for its politicians to reconcile monetary, economic and political integration, even when they are convinced, like Schäuble, it is entirely in German interests the euro should survive.
Trichet’s reference to an “overwhelming majority” of the ECB approving its decisions to extend liquidity for banks and selectively buy up Irish, Portuguese and other bonds shows German reservations are not widely shared. This is a tactical not a strategic U-turn, however. It buys some time with markets; more important, it opens up an essential space in which to debate the euro’s long-term future. Because of the current extraordinary mismatch between market and political expectations this needs immediate attention.
Given the huge political costs for all involved were the euro zone to break up, are there intermediate options between full fiscal federalism involving member states’ budgetary policies and the existing incomplete design? These can bridge the gap with public opinion, which expects an effective functioning system, making it easier for German politicians to argue the case.
Their relative isolation needs to be brought home to German citizens, whose new sense of normalcy contradicts their country’s continuing role as Europe’s strongest economy and most powerful state. Credit and credibility are, after all, derived from the Latin verb credere, to believe. If Germans think they can easily fashion a new Europe only in their own image they are in for a rude shock. To be credible, the EU must pool interests and values as well as sovereignty. Political identities are already lightly, if unevenly, Europeanised. A supplementary European Demos is created through such dialogue, argument and contestation, not on pre-existing cultures.
From Ireland’s point of view renegotiating last weekend’s deal, including rescheduling or cancelling debts, depends on formulating demands which can gain support elsewhere in the EU. Unilateral withdrawal and default appeals to be an unrealistic model of national sovereignty for such a small, open capitalist economy, even – arguably – as a last resort when EU-wide options have been tried and failed.
An emerging politics of fairness throughout the EU can make the formulation of such demands easier. Why, it asks, should German and French banks be fully protected from their reckless lending? Did these states not benefit too from the boom years in the “periphery”? Interestingly that view is shared in Germany, explaining the clumsy timing for Ireland and Portugal of the Merkel/Sarkozy initiative on bondholder haircuts after 2013. Why, Germans ask, should Ireland divert €53 billion of their corporate taxation per year by its low tax policy, and expose itself to such a colossal share of the EU’s indebtedness through its financial services centre?
The following transformative demands are suggested knowing that crises dramatically close the gap between possible and actual outcomes. The great contrast between speedy economic and financial events and formulation of EU-level political alternatives is pitiful, especially on the centre left. If these require treaty change, so be it: when you win the argument you’ll win the referendum.
1. Radically extend the ECB’s current liquidity easing into a quantitative easing. The bank’s existing exposure at €128 billion amounts to only 1.4 per cent of the EU’s GDP, tiny compared to the US Fed. This would reduce the euro’s high value.
2. Reach an EU agreement with Greece, Ireland, Portugal and Spain for a negotiated rescheduling of existing debt (including haircuts, debt-for-equity swaps, extension of term periods).
3. Give the proposed new, permanent, emergency financial facility powers to issue EU bonds and deploy high, collective EU credit rating on the markets. This could replace part or all of the national borrowing requirements, for example by taking the existing Stability and Growth Pact limit of 60 per cent state indebtedness on to the ECB’s books. Explore an innovative “deficit-easing” policy whereby the ECB creates money and gives it to governments in proportion to their populations (see smarttaxes.org/ wp-content/uploads/2010/11/Douthwaite-Deficit-easing.pdf).
4. Demand an EU macroeconomic strategy switching from austerity and deflation politics to investment-led recovery prioritising sustainable energy, development and human infrastructure (see euromemo.eu).