Feb 21st 2012, 5:47 by The Economist | BRUSSELS
“I HAVE learnt that marathon is indeed a Greek word.” Thus spoke Olli Rehn, the European monetary affairs commissioner, at the end of a 14-hour negotiating session that produced a second bailout package for Greece this morning.
This had been agreed in principle at a European summit in July last year. But political turmoil in Greece, hesitation in the euro zone—and an ever-worsening fiscal hole caused by an ever-deepening recession—made the deal elusive for months.
It was concluded before dawn this morning after finance ministers, the European Central Bank and representatives of private creditors squeezed the numbers to produce a package that was deemed both politically acceptable to creditors and provided Greece with something it reckoned to be sustainable.
As explained in my earlier post, the negotiators were working within self-imposed constraints. According to the final statement, the deal is expected to bring down Greece’s debt ratio to 120.5% of GDP in 2020, while requiring no more than €130 billion ($173 billion) in additional finance in the coming two years. To square the circle, ministers have applied the file to several aspects.
- Private creditors have accepted a haircut of 53.5% of the nominal value of Greek bonds they hold, plus a reduction in the coupon for new bonds, starting at 2% and rising to 4.3% from 2020. This amounts to a loss of net present value of about 75% (up from the 21% originally agreed in July).
- A 50 basis-point reduction in interest rate charged by euro-zone members on their bailout loans to Greece, applied retroactively. This is justified by reference to the profits that will be made by the European Central Bank (ECB) on the discounted bonds it had bought earlier in the crisis. This will be redistributed to national central banks, which will pass them on national governments. This roundabout flow is to avoid any semblance of monetary financing of Greece.
- By contrast, governments promise to pass on directly to Greece any profits made by their central banks on Greek bonds they currently hold.
All this is made conditional on Greece completing a set of “prior actions” by the end of the month—for example, reducing the minimum wage to make labour markets more flexible—and submitting to an “enhanced and permanent” monitoring of European Commission officials in Greece.
In particular, Greece will be expected to deposit a quarter’s worth of debt-service payments into a “segregated account” that will be monitored by the troika (made up of the commission, the ECB and the IMF). Over the next two months Greece has promised to adopt legislation “ensuring that priority is granted to debt-servicing payments”, with a view to enshrining this in the constitution “as soon as possible”. These arrangements may not amount to the budget “commissar” once threatened by some creditors, but the effect may be pretty much the same.
Christine Lagarde, the IMF head who attended the meeting, declined to say how much her organisation would contribute. But it is clear it will be not be the one-third share that the IMF has so far borne in euro-zone bailouts.
Mrs Lagarde also made clear that the IMF’s view would be coloured by whether the euro zone creates a more credible firewall against contagion. This would be done by allowing the current temporary rescue fund, with about €250 billion of lending capacity, to run alongside a permanent new system with about €500 billion. A decision is expected at a European summit on March 1st.
The euro zone claims all this amounts to “a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing”. But a leak of the troika’s debt-sustainability analysis makes clear that the second bailout may well fail. In adverse conditions, ie if Greece does not enact structural reforms, the debt ratio could remain at 160% of GDP in 2020. The politics of imposing a near protectorate on Greece may turn yet more poisonous (see my earlier post on the depiction of German leaders as Nazis.)
Mrs Lagarde makes no secret that there are “downside risks”. But she argued that, by placing greater focus on reforms to boost Greece’s productivity—rather than simply on reducing the budget deficit—Greece will have a better chance of returning to growth. European assistance and close monitoring increases the chance of success.
Still, helping Greece remains a huge gamble, and today the euro zone has just agreed to double its stake.
(Picture credit: AFP)
Feb 20th 2012, 22:47 by The Economist | Brussels
WOLFGANG Schäuble is, in many ways, the strongest – perhaps even the last – Europhile in the German government. But open the pages of Greek newspapers and there he is, the German finance minister depicted in Nazi uniform. It is not just the inflammatory Greek press that dislikes him. The Greek president, Karolos Papoulias, lashed out at him last week: “Who is Mr Schäuble to insult Greece? Who are the Dutch? Who are the Finnish?”
Mr Schäuble is, first and foremost, the German finance minister. As such his job is to protect the interests of the German tax-payer, from both the demands of his fellow ministers and the begging bowl held out by his European colleagues. As creditor-in-chief, one would expect him to be toughest in imposing conditions on Greece before granting a second bail-out.
But the Schäuble problem goes beyond this necessary parsimoniousness. Consistently through the crisis, Mr Schäuble has adopted the hardest positions. First it was a paper circulated by his officials calling for the creation of a budget “commissar” with the power to control the Greek budget. Then it was his open talk a Greek default, and the fact that other European countries were “better prepared” to withstand it. Most recently, he suggested that Greece should postpone its elections so that the technocratic government of Lukas Papademos has more time to implement reforms.
Many think Mr Schäuble has been deliberately pushing the Greeks into a chaotic default (one example is here). Even so, why do it so overtly? Why invite the crude and simplistic accusation the modern Germany is repeating the Nazis’ jackbooted occupation of Greece? It would be so much simpler to let somebody like the Dutch finance minister, Jan Kees de Jager, do the tough talking (see my previous post) while Germany holds back. Every finance minister of a creditor country must demonstrate that he (or she) is driving a hard bargain. Mr Schäuble knows better than most the many doubts that surround even a second vast bailout of Greece (see this report of the IMF's assessment). In the end, Mr de Jager’s menaces count for much less than Mr Schäuble’s; if Greece is to be cut loose the decision will be taken in Berlin, not The Hague.
The FT's Quentin Peel recently recently had an interesting piece on the reasons for Germany's rigidity:
Postwar Germany is both profoundly provincial and committed to Europe. The federal system keeps central government in check, locked into a system of coalition government that is consensual and slow-moving. Both politics and the bureaucracy are dominated by lawyers (Mr Schäuble is one) who believe passionately in the need for rules and respect for the law. It makes for a confusing mixture of compromise and inflexibility. Mixed messages emerge from the different centres of power, not least from the finance ministry and the chancellor’s office, until they can agree a common line.
Some argue that Mr Schäuble’s very pro-Europeanism heightens his sense of betrayal by Greece, and the prospect that it could destroy the European Union’s greatest experiment in integration. There may be truth in this. But I cannot help but feel that that also something of the bad-cop routine in Mr Schäuble’s actions. He must act as if a Greek default is possible, even desirable, in order to turn the pressure on Greek politicians. If that means being portrayed as a Nazi, so be it; the alternative is to let Greek politicians think they are immune because the euro zone will never let them collapse.
Still, Mr Schäuble's claim that the euro zone is ready for a Greek default sounds implausible. Last year European politicians were bending over backwards to avoid any sort of default, lest it destabilise the whole of the euro zone. Yes, the European Central Bank’s massive liquidity programme for banks (not sovereigns) has taken the edge off the panic. The reforms being enacted in Italy and Spain have helped too.
But nobody thinks the euro zone has yet overcome the crisis. If it were otherwise, why insist on the fiction that the restructuring of private debt is “voluntary” simply to avoid triggering credit-default swaps? And surely, if Germany were serious about cutting off the Greeks it would be doing more to strengthen anti-contagion measures. On the contrary: Germany has so far resisted a proposal to strengthen the rescue fund by maintaining the temporary European Financial Stability Facility (EFSF) even after the creation of permanent European Stability Mechanism due later this year.
The conundrum for the fiscal hawks is that issuing a credible threat to Greece requires issuing a credible guarantee that Italy and Spain would be protected from the consequences. But that is something that Germany will not do, for fear of reducing the reformist pressure on Italy and Spain. So through gritted teeth, Greece must be kept afloat in some manner—not at any cost, of course, but for some time yet, as long as the price is not too exorbitant. “We continue to believe that Greece can be saved. Or at least we continue to say so,” says one Eurocrat.
The difficulty in imposing discipline and reform on Greece will be familiar to any parent of recalcitrant adolescents who do not want to do their homework. Dad may shout, cajole and threat; the kid may come to hate the parent. But if the kid refuses to study, he cannot be starved, beaten or thrown on to the streets. The parent may enjoy the illusion of infinite power, but authority ultimately involves much bluff.
Feb 20th 2012, 17:20 by The Economist | Brussels
(Updates at end of this post)
AFTER weeks of angry words, tear gas and smoke, there is an air of agreement over the salvage of Greece. European finance ministers gathered in Brussels tonight sounding hopeful that an accord over a second Greek bail-out, worth €130 billion ($170 billion), was at hand.
“Today we have all the elements we need to reach a deal. It's like a puzzle. All the pieces are on the table; what's needed now is to put them together,” said François Baroin, the French finance minister. Even Germany’s Herr Nein, Wolfgang Schäuble, said he was confident of a deal, saying ministers were “aiming to finalise the decision on a new rescue package for Greece”.
Another symbolic bit of good news came from the European Central Bank (ECB), which announced today that it had made not made any purchases last week under its bond-buying programme. This is the first time the ECB has not resorted to this emergency measure since August, when it acted to stop Italy and Spain from being sucked down the drain.
So is the debt crisis finally on its way to resolution? Not so fast. The Dutch finance minister, Jan Kees de Jager, poured so much cold water on his colleagues' optimistic comments that the euro dropped immediately. On his way into the meeting, he said:
Greece wants the money and so far we haven’t given them anything. We have said no over the past weeks. We can afford to say to no until Greece has met all the demands. It’s up to Greece and the troika to say whether this has been done and for us it is a no until Greece has done so.
Tough talk. But it is hard to imagine the Dutch wrecking a deal on their own if the Germans have decided to grant the second bail-out. Does the Netherlands really want to provoke another round of the crisis now that its economy is in recession? Indeed, Dutch sources whisper that the minister's words have been overplayed. More likely, Mr de Jager is living up to his reputation as the hard man of the Eurogroup, whose job is to stiffen Germany’s resolve.
The real issue for the finance ministers is to try to fit the ever-deteriorating Greek numbers within two self-imposed conditions. One is that the restructuring of Greece’s debt should reduce its burden down to “about 120% of GDP” by 2020. The other is that that the contribution of governments to the second package should be €130 billion (including some funds left over from the first €110 billion bail-out) after the "voluntary" losses being negotiated with Greece's private creditors*. Both are somewhat artificial figures. The debt ratio of 120% was chosen because it is the level of Italy's debt; the contribution of €130 billion was decided in October, so cannot be changed for fear of giving the impression that Greece is a "bottomless pit".
But as matters stand at the start of the meeting, the package would leave Greece with a debt burden of 129% of GDP – too high for many of the creditors. Tonight's homework for the ministers will be to fill the remaining fiscal hole: by convincing the ECB to forego profits on the bonds it bought at a discount (it has more or less agreed to do so) and perhaps by reducing the interest rate that Greece is charged by its creditors.
For lovers of numbers, the details of the options are reported in some detail in the FT (here), the Wall Street Journal (here) and Reuters (here).
But even if a deal is agreed tonight, big questions remain. How long will it be before Greece must come back for still more money? And if it must be kept permanently under threat of default, what is the chance of restoring the confidence needed to help Greece recover? For now, the ministers seem ready to play for time, in the hope that Italy and Spain can be stabilised. They will no doubt express confidence that the Greek problem has been settled once and for all. But sooner or later, they will be back for more crisis talks.
* insert
Update 22:00 - The word is that it's going to be a long night. The finance ministers are busy with another round of negotiations with Greece's private creditors to squeeze a bigger "voluntary" contribution, beyond the 70% loss negotiated so far.
Update 22:20 - The scale of uncertainty about the prospects for Greece are highlighted in the IMF's debt sustainability assessment, which concludes that, if Greece does not carry out structural reforms, its debt ratio could reach 160% of GDP in 2020. From Reuters:
... a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatisation implementation). This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it
Update 02:30 - A more detailed account of the IMF's debt sustainability report is here, from the FT's Peter Spiegel. Diplomats claim the leak is having little impact on the negotiations. But it will have a big impact on the journalists' interpretation of the deal of the credibility off the deal - if and when it is reached.
Feb 2nd 2012, 23:25 by Charlemagne | BRUSSELS
WHEN it is not fretting about the failures of the euro, Brussels’s favourite pastime is to fret about the failures of its diplomatic arm, the European External Action Service (EEAS).
With the Arab world in ferment, the West as a whole in decline and America drawing down its military commitment to Europe, one would assume that Europeans would have a lot to think about and do in international affairs. But a year after the launch of its "foreign ministry", though, the despair is palpable. Fewer and fewer people have anything good to say about its boss, Cathy Ashton.
One unusually fierce shot was fired last month from the pages of The Economist’s sister publication, European Voice (here). The author, Toby Vogel, concluded:
I wrote here a year ago that the EEAS would be judged not by its performance at launch but by the state of the EU's foreign and security policy after a year or two. The new service is still failing. Among all the design flaws that have held back the EEAS, by far the biggest has been to put Ashton in charge of it.
Since then the reports and assessments have been coming in thick and fast. One poor grade comes from the foreign-policy “scorecard” issued by the European Council on Foreign Relations. Another think-tank, FRIDE, analyses more generally the growing trend towards commercial interests in "Challenges for European Foreign Policy in 2012" (PDF here).
Perhaps the most comprehensive demolition came today from Stefan Lehne, a former senior Austrian diplomat who worked for Mrs Ashton’s predecessor, Javier Solana.
His analysis, "More Action, Better Service: How to Strengthen the European External Action Service" (PDF here) is phrased diplomatically, as one might expect, but its exposition of the weakness of the EEAS is more devastating for the sober tone in which it is delivered. In some ways, he concludes, the situation is worse today than it was under the previous system of fragmented roles.
Any new organisation is bound to have its teething problems, particularly one such as the EEAS, which incorporates functions that had been performed by several officers, and which must reconcile the aims and prejudices of 27 different countries. The service, moreover, has been systematically undermined by the European Commission, and by the bigger beasts among the foreign ministers. But much of the trouble boils down to poor leadership, ie, Lady Ashton. There are some first-rate people in the EEAS. But the stories of chaos in her entourage and despair among her subordinates are worryingly commonplace.
Jan 31st 2012, 0:18 by The Economist | Brussels
BY THE standards of past summits, European leaders finished early—shortly before 10pm on January 30th. And by the acrimonious standards of past gatherings, notably last month’s bust-up with Britain, this event was uneventful, even amicable. Agreement was reached on the fiscal compact, the new treaty to toughen budget rules, in record time: less than two months.
A final row between France and Poland over who gets to attend which summits was resolved with a complicated compromise. This involves variable configurations of meetings involving 17 countries (the euro zone), 23 (the largely-forgotten Euro-Plus Pact, 25 (the signatories of the fiscal compact), 27 (all EU member states, still in charge of the single market) and 28 (involving soon-to-join Croatia).
It shows that, at the very least, European leaders can negotiate rapidly when they have the political will to do so—and when the British and the Czechs decide to step aside. Whether electorates will be quite so quick to shackle themselves to Germanic fiscal rules is another matter.
But did the leaders achieve anything useful to stem the crisis in the latest of their interminable summits? Their compact—now called the “treaty on stability, co-ordination and governance in the Economic and Monetary Union”, has as its main aim the imposition of balanced-budget rules on members. This may be a useful discipline in good times. But many worry that, at a time of widespread crisis, such pro-cyclical rules risk imposing too much austerity too widely, thus darkening the spectre of recession and making it even harder to balance budgets. This may explain why leaders suddenly want to be seen talking about their plan (declaration is here in PDF) for growth and jobs, particularly in tackling the problem of youth unemployment.
Nevertheless, Angela Merkel, the German chancellor who had pushed hard for the treaty, hailed it as a great success. Many others, however, dismiss the compact with so much faint praise. “It is an important distraction”, says one diplomat. “It has gone from damaging to merely useless,” says a member of the European Parliament. Even Mario Monti, these days everybody’s favourite Italian, judged the compact little more than “a decorative songbird”.
By contrast the two issues that could affect the course of the euro-zone debt crisis in the coming weeks—the fate of Greece and the possibility of creating a bigger firewall—were for the most part ignored or relegated to side-meetings. With Greece and its private creditors still negotiating the scale of haircuts to be imposed on bondholders, this may have been too delicate a time for leaders to discuss Greece. A statement from the euro zone says little that is new.
Moreover, Mrs Merkel was keen to dampen emotions after her officials floated the idea of placing the country under a commissar with the power to reject Greek budgets. When asked about such a prospect, Mrs Merkel expressed “frustration” with Greece’s lack of compliance with its austerity-and-reform programme, but backed away from imposing such a draconian loss of sovereignty on Greece. President Nicolas Sarkozy of France, for his part, said "there is no question of placing Greece under tutelage.”
Jan 27th 2012, 0:31 by The Economist | BRUSSELS
THIS grotesque map of the world, depicting Europe as a bloated balloon, caught my eye this week, and powerfully illustrates one of the factors in Europe's debt crisis. It depicts the countries of the world sized according to the amount of government spending*. that they spend on social protection, from pensions to health, education and unemployment benefits.
In the words of the World Bank, which published it in a report issued this week ("Golden Growth: Restoring the lustre of the European Economic model", here), Europe is the world's “lifestyle superpower”. As opposed to America, which spends almost as much as the rest of the world put together on defence, Europe spends more than the rest of the globe combined on social policies.
In many ways this is an admirable aspect of Europe's economic model, which combines high living standards with high standards of social welfare. The trouble is, such spending is helping to bankrupt governments—not least because those very same caring policies ensure that Europeans live longer, requiring more expenditure on health care and the payment of pensions for more years.
Anybody who wants to understand the strengths and weaknesses of European economies in this time of crisis would do well to read the report (the overview is here).
Dec 18th 2011, 19:43 by Charlemagne | BRUSSELS
THIS will be my last blog post this year. But although Charlemagne is taking a break, the EU machinery, perhaps unusually, is working overtime over the festive season. It is trying to gift-wrap the new treaty that leaders agreed to draw up over the head of Britain's prime minister, David Cameron.
My piece this week on the British row argues that the bust-up could yet go either way: towards a progressive deterioration in relations that might ultimately see Britain leave the union, or towards a reconciliation that sets aside the rancour of the night of December 8th-9th. The past few days have seen evidence of both possibilities.
First there was the war of words started by French leaders as they openly incited markets and credit-rating agencies against Britain, arguing that perfidious Albion was more deserving of a downgrade than France. For two countries with similar debt levels, Britain has a higher budget deficit and is running higher inflation. The difference is that the Bank of England, unlike the European Central Bank, acts as the lender of last resort to the sovereign, so investors are less worried about losing the face value of their bond.
The French charge was led by the central-bank governor, Christian Noyer, and quickly followed up by François Fillon, the prime minister, and François Baroin, the finance minister. Even the daily Le Monde seemed surprised by the vehemence of the attack, asking "what has bitten the French government?" The answer, it seems, is the need to prepare the country for the imminent loss of its AAA rating.
Dec 9th 2011, 8:03 by Charlemagne | BRUSSELS
WE JOURNALISTS are probably too bleary-eyed after a sleepless night to understand the full significance of what has just happened in Brussels. What is clear is that after a long, hard and rancorous negotiation, at about 5am this morning the European Union split in a fundamental way.
In an effort to stabilise the euro zone, France, Germany and 21 other countries have decided to draft their own treaty to impose more central control over national budgets. Britain and three others have decided to stay out. In the coming weeks, Britain may find itself even more isolated. Sweden, the Czech Republic and Hungary want time to consult their parliaments and political parties before deciding on whether to join the new union-within-the-union.
So two decades to the day after the Maastricht Treaty was concluded, launching the process towards the single European currency, the EU's tectonic plates have slipped momentously along same the fault line that has always divided it—the English Channel.
Confronted by the financial crisis, the euro zone is having to integrate more deeply, with a consequent loss of national sovereignty to the EU (or some other central co-ordinating body); Britain, which had secured a formal opt-out from the euro, has decided to let them go their way.
Whether the agreement does anything to stabilise the euro is moot. The agreement is heavily tilted towards budget discipline and austerity. It does little to generate money in the short term to arrest the run on sovereigns, nor does it provide a longer-term perspective of jointly-issued bonds. Much will depend on how the European Central Bank responds in the coming days and weeks.
Dec 9th 2011, 2:05 by Charlemagne | BRUSSELS
AT LEAST there is hope. Grim-faced European leaders gathered in Brussels on December 8th for their summit to save the euro with the news that Pope Benedict XVI was praying to the Virgin Mary for the sake of Italy and Europe. He should also spare a prayer for Mario Draghi, the president of the European Central Bank.
As the dinnertime negotiations stretched into the wee hours of Friday morning, leaked drafts of a communiqué indicate that the summiteers intend to agree to a “fiscal compact” to ensure the stability of the euro zone. These words matter: they are the same ones that Mr Draghi had used a few days earlier in a Delphic judgment that many interpreted to mean that he would intervene more heavily in the bond markets, once the politicians had delivered a more credible system to impose budget discipline.
The leaders seemed to be appealing directly to Mr Draghi to deploy the “big bazooka”, which only he controls, to protect big and vulnerable sovereigns like Italy and Spain. So is salvation at hand? Not quite.
Dec 5th 2011, 18:57 by Charlemagne | BRUSSELS
ANGELA MERKEL and Nicolas Sarkozy have come a long way since their walk along the seafront at Deauville in October last year. That meeting produced a compromise that, some hoped, held the promise of resolving the euro zone’s debt crisis.
That deal envisaged tougher monitoring of countries’ budgets and economic policies, and a rapid amendment to the European Union's treaties. Many thought treaty change was unnecessary but went along for Mrs Merkel's sake.
Sounds familiar, no? That is because, a year on, “Merkozy”, as the Germano-French duo are now known, are once again pushing for a toughening-up of controls on national budgets and yet another revision to the treaties.
At a summit in Paris today the two leaders announced they would “force-march” the euro zone towards stricter rules to ensure that a debt crisis could never happen again. They will submit proposals for a new treaty on Wednesday and, if they cannot secure agreement from all 27 EU members, they declared they were ready to push ahead with a separate agreement among the 17 members of the euro zone. That risks isolating Britain, as well as the nine other non-euro states.
Treaty change is no more popular than it was in Deauville, not even among euro-zone members. But at a summit of European leaders in Brussels starting on Thursday the chances are that some form of treaty revision will grudgingly be agreed, because Mrs Merkel wants it so badly.
But in many ways, the new proposals undo the bargain at Deauville, which, many think, helped worsen the crisis. Since then Ireland and Portugal have been bailed out; Greece has sought a second rescue programme; contagion has spread to Italy and Spain; and the prime ministers of Italy and Greece have been replaced by technocrats.
Dec 2nd 2011, 22:10
THE two speeches in two days by Nicolas Sarkozy and Angela Merkel reveal the many differences between them ahead of next week's European summit. I give a brief analysis in my earlier post. What follows is a more detailed exegesis (a link to Sarkozy's speech in French is here and a PDF Merkel's address in German is here):
Sarkonomics and the origin of the crisis
The French president offers a strange bit of Sarkonomics to explain that the crisis was caused by external forces – the unregulated globalisation of trade and finance – of which France is essentially a victim.
Financial globalisation established itself to compensate artificially the ravages that [trade] liberalisation without rules caused in the economies of developed countries. It was necessary so that the surplus of some could finance the deficits of others. It was necessary so that debt could compensate for the unacceptable fall in living standards of households in developed countries. It was necessary to finance a social model that was crumbling beneath deficits. It was ineluctable so that financial capital could seek elsewhere the profits that it could no longer hope to gain in developed countries. Thus was established a gigantic machine to create debt.
Mr Sarkozy says France cannot be blamed for the troubles it faces because other rich countries are in trouble too; yet he does not explain why some developed countries (Germany and several Nordic states, for example) have survived the crisis better than France despite the infernal debt machine. Later on, Mr Sarkozy says France has to cut back on state expenditure to preserve its destiny (this was tricky for him, as he had vowed three years earlier in Toulon not to conduct a policy of auterity)
Mrs Merkel, for her part, does not speak much of great uncontrollable forces unleashed by laissez-faire capitalism. Instead she emphasises the responsibility of individual states. The problem, in her view, is that countries have broken fiscal rules, and there has been nobody to enforce the limits on deficits and debt.
Dec 2nd 2011, 19:06 by Charlemagne | BRUSSELS
IT SEEMS odd, at first sight, to see the markets taking so much hope from two speeches in two days - one by France's President Nicolas Sarkozy and the other by Germany's Chancellor Angela Merkel - that revealed more differences than agreement on how to resolve the euro zone's debt crisis.
Perhaps it is the fact that both say the European Union's treaties should be changed, and any agreement on any subject is good news. Or perhaps it is the hope that, whatever they say in their opening bids, they will come up with enough of a deal at the next European summit on December 8th-9th to allow the European Central Bank to deploy its “big bazooka”.
Then again, markets have often rallied ahead of summits in the expectation of an agreement, only to be disappointed within days, or even hours, of the latest half-step being announced.
Neither Mr Sarkozy nor Mrs Merkel offered any real detail of what should be included in a revision of the treaties. But even their vague outlines reveal contrasting philosophies. I give a fuller analysis of the speeches in the next post (here). In summary:
- Mr Sarkozy places the emphasis on “solidarity” among European states (ie, joint Eurobonds, and no defaults or debt-restructuring after Greece), while Mrs Merkel gives priority to budgetary discipline and rules.
- Mr Sarkozy urges the European Central Bank to act; Mrs Merkel is jealous of guarding its independence
- Mr Sarkozy wants to create a hard core of euro-zone countries within the European Union; Mr Merkel wants to include as many non-euro states as possible
- Mr Sarkozy wants to Europe to integrate through the action of leaders (reproducing France's presidential system, with lots of discretion for the executive); Mrs Merkel favours more independent institutions like the European Commission and the European Court of Justice (more akin to Germany's federal structure, which retricts politicians' leeway)
Nov 10th 2011, 2:23 by Charlemagne | BRUSSELS
NICOLAS Sarkozy is causing a big stir after calling on November 8th for a two-speed Europe: a “federal” core of the 17 members of the euro zone, with a looser “confederal” outer band of the ten non-euro members. He made the comments during a debate with students at the University of Strasbourg. The key passage is below (video here, starting near the 63-minute mark)
You cannot make a single currency without economic convergence and economic integration. It's impossible. But on the contrary, one cannot plead for federalism and at the same time for the enlargement of Europe. It's impossible. There's a contradiction. We are 27. We will obviously have to open up to the Balkans. We will be 32, 33 or 34. I imagine that nobody thinks that federalism—total integration—is possible at 33, 34, 35 countries.
So what one we do? To begin with, frankly, the single currency is a wonderful idea, but it was strange to create it without asking oneself the question of its governance, and without asking oneself about economic convergence. Honestly, it's nice to have a vision, but there are details that are missing: we made a currency, but we kept fiscal systems and economic systems that not only were not converging, but were diverging. And not only did we make a single currency without convergence, but we tried to undo the rules of the pact. It cannot work.
There will not be a single currency without greater economic integration and convergence. That is certain. And that is where we are going. Must one have the same rules for the 27? No. Absolutely not [...] In the end, clearly, there will be two European gears: one gear towards more integration in the euro zone and a gear that is more confederal in the European Union.
Nov 4th 2011, 20:19
"THE IMF will never be big enough to save the euro zone.” That is how one IMF official dismissed the idea that the fund would help put up a firewall to protect the euro zone. It could help, obviously, but in the end salvation was for the euro zone to figure out for itself.
With Greece potentially facing a default and exit from the euro in the coming weeks, euro-zone countries have been working to build up their rescue fund, known as the European Financial Stability Facility, though financial engineering that might expand it to about €1 trillion. But without the full power of the European Central Bank, which is not allowed to lend to states, this is not enough to save a country like Italy, should it collapse in the bond markets (see my previous post)
Nov 4th 2011, 19:33 by Charlemagne
FIRST Greece. Next Italy? Troubled euro-zone countries get bail-out money with conditions and strict monitoring by the International Monetary Fund (IMF). But at the G20 summit that concluded in Cannes today, the troubled euro zone got no more money (more on this in my next post), and Italy was placed under IMF monitoring.
Though yields on its bonds have soared alarmingly, Italy has not had to seek a bail-out (not yet anyway). And in an attempt to ensure it does not succumb, bringing down the euro with it, it has been placed under a special preventive regime—placed on probation to ensure it implements the many promises it made to carry out reforms designed to promote growth and balance the budget by 2013.
Nov 4th 2011, 11:31 by The Economist | Cannes
SOME European delegates walking around the G20 summit in Cannes can be seen sporting an unusual badge: Groupe de Francfort.
The Frankfurt Group, or GdF for short, is the latest addition to the proliferation of international political groups, the G7, G8 and the G20, among many. Consisting of the leaders of Germany, France, the Eurogroup of finance ministers, the European Central Bank, the European Commission and the International Monetary Fund, the F-team has quickly established itself as the cluster managing the euro’s crisis. It has no legal structure or secretariat, but it is now the core within Europe’s core.
Nov 4th 2011, 1:18 by The Economist | Cannes
THE BEACHFRONT of Cannes is deserted. The streets are still. The city is quiet, apart from the rumbling of journalists pulling their rolling bags and motorcades whisking G20 leaders to and from their hotels.
One can almost hear the scraping of shovels as European leaders rushed to fill the sandbags in the hope of surviving the impending explosion in Greece, perhaps followed by Italy (see earlier post).
Nov 4th 2011, 0:51 by The Economist | Cannes
FOR MOST of the first day of the G20 summit in Cannes, the world’s most important leaders have been mere spectators to the political drama in Athens that could determine the fate of the euro zone, and of the world economy.
Forget the financial-transaction tax. Forget the regulation of commodity prices. Forget the call to ensure that the world’s poorest do not suffer twice, once because of their wretchedness and twice because rich-world aid budgets are cut. These things and more will be mentioned in the final communiqué. The most burning issue is the fate of the euro.
Oct 24th 2011, 0:33 by The Economist | BRUSSELS
“I HAVE never failed to make the grade,” says Silvio Berlusconi after being summoned before headmasters of the euro zone for a beating. “I was convincing.”
But Angela Merkel of Germany and Nicolas Sarkozy of France thought differently. When asked whether Italy's prime minister had reassured them about doing his homework to draw up a plan to bring down Italy's vast debt and implement structural reforms, Mrs Merkel and Mr Sarkozy first hesitated, then looked at each other and, finally, smirked knowingly. (video clip here, in French)
“How to put it?” started Mr Sarkozy, “We have confidence in the sense of responsibility of all of Italy's political, financial and economic authorities.” Mrs Merkel chipped in: “It was a meeting among friends.”
It was anything but friendly. Rarely has a member of the euro zone—and a founding member of the European integration project, no less—been chastised so publicly. But in many ways, the euro-zone debt crisis is now all about Italy.
In discussions all weekend, including at two European summits, leaders worked on drawing up a package deal to save the euro that should be concluded in another round of summits on Wednesday.
All three of the main issues—the fate of Greece, the “firewall" to prevent contagion and the recapitalisation of Europe' banks—revolved in some ways around Italy: if Greece's debt is restructured, will the markets then turn on Italy, the next most-indebted state in the euro zone? If so, is the new firewall big enough to protect Italy? And does the plan to strengthen banks with fresh capital, so that they can withstand the loss of value of their bond holdings, not place an unfair burden on Italy, whose banks hold vast amounts of depreciated Italian debt?
Earlier this summer, when Italian bonds started to collapse, the European Central Bank (ECB) had quietly told Mr Berlusconi to push through reforms in exchange for the ECB' intervention to buy Italian bonds, so holding down Italy's borrowing costs. But once the most acute market pressure was relieved, Mr Berlusconi began to backtrack on his austerity measures, to the fury of Germany.
At the summit, Mr Berlusconi was told bluntly to go away and come back in three days' time with a credible plan to reform his country. “There is no question of appealing for solidarity from partners if those whom we assist do not themselves make the efforts necessary” declared Mr Sarkozy.
Herman Van Rompuy, president of the European Council (who presided over the summits), later repeated the point, saying “certain countries” had to make “commitments” about future reform. Or else, what? asked journalists. “They WILL make commitments,” replied Mr Van Rompuy, curtly.
The Italian prime minister, through, is unrepentant. Like every practiced school miscreant, he has an excuse for everything.
No structural reforms? His partners in the Northern League prevented a reform of pensions. Now he would urge the league's boss, Umberto Bossi, to abide by proposals to have a uniform retirement age of 67 across the euro zone.
Was Mr Sarkozy not furious with Italy? Well, the French president's attitude to Italy was coloured by his understandable annoyance about the allocation of seats at the ECB. Having supported an Italian, Mario Draghi, to succeed Jean-Claude Trichet as the bank's president, France had demanded that the Italian member of the ECB's six-man executive board, Lorenzo Bini-Smaghi, should step down early to make way for a Frenchman. But Mr Bini-Smaghi had declined to listen to pleas to avoid a casus belli between Italy and France, despite the offer of prestigious jobs back home (though not the job he wanted, ie, to become governor of the Bank of Italy).
“Sarkozy was annoyed,” admitted Mr Berlusconi. “There has been a clash on this question of Bini-Smaghi, for which I bear no responsibility. At a certain point I told him [Sarkozy]: 'What can I do? Shall I kill him? I don't think so.'”
Mr Berlusconi is always great with the one-liners. But his buffoonery is wearing thin on the rest of the euro zone.
Oct 23rd 2011, 19:08 by The Economist | Brussels
IN A decade’s time, perhaps, the twin European summits on October 23rd may come to be seen as the moment when the 17 countries of the euro zone started to break away from the 10 non-euro states.
It is always hard to define the precise moment when an big and complex process has started. But today would be a good candidate. This is not just because the summit of the 27 members of the European Union is being followed by a separate meeting of the 17. This has happened before, after all.
But the long and bad-tempered lunch that separated the two summits in Brussels - with France's Nicolas Sarkozy and Britaoin's David Cameron as the main protagonists of the acrimony, even though they have just won a war in Libya - indicates that both the euro's “ins” and its “outs” are aware that their relationship is changing in a fundamental way.
I explore several of the issues of a two-speed, two belief Europe in my column this week (Wake up, euro zone). Several factors combine to bring all this to a head.
1. The markets are testing to destruction the ambiguity of a monetary union with disparate national fiscal and economic policies. In aggregate terms the EU’s deficit and debt rations are in better shape than, say, those of the United States. But the EU is not a federal state, and the markets sense that the euro zone is reluctant to stand fully behind its weakest members.
2. Nicolas Sarkozy has secured Germany’s support to hold regular meetings of euro-zone leaders. They will be presided over by Herman Van Rompuy, president of the European Council (who chairs summits at 27), but the euro-zone leaders reserved the right to choose someone else where Mr Van Rompuy’s term expires. Even if integration goes no further, the habit of the 17 working together will be felt across the EU.
3. Angela Merkel, the German chancellor, is pushing hard for re-opening the EU’s treaties. The EU has already done this once to create a permanent bail-out system (it has not yet been ratified). Now it wants to do so again to impose greater fiscal and economic discipline on states that use the euro. The euro zone has adopted several new tools to monitor and co-ordinate economic policies. But having bailed out three peripheral states, and with the prospect of big economies like Italy collapsing, Germany and the other creditor states want even stronger treaty-based powers – for example the ability of taking a profligate state to the European Court of Justice.
4. David Cameron faces an increasingly emotive domestic debate on Europe. He is resisting demands from eurosceptics for a referendum on Britain’s membership of the European Union. But the prospect of opening the treaties makes it harder to ignore pressure to seize the moment to redraw Britain’s relationship with the EU or, indeed, to withdraw from the union altogether. Having encouraged the euro zone to integrate to save itself, Britain is now looking for “safeguards” to ensure it does not stray too far.
All these issues mean that European leaders spent the best part of two hours over lunch debating the interplay between the 17 and the 27. Should the ins meet first, followed by the outs? Or should it be the other way around?
On Wednesday 26th, when the euro zone holds the second session of its two-part summit, the EU’s 27 leaders will make a point of gathering beforehand. The meeting will last just an hour, and will sign off on the plan to recapitalise Europe’s banks. But because the financial sector is part of the single market, which is an issue for all EU states, and Mr Cameron wanted to make sure that the 27 were seen to take the decision, not the 17.
For now, Mr Cameron does not appear to have a very strong hand. Most of the other euro-outs are committed, legally and politically, eventually to joining the single currency. Mr Sarkozy’s harsh words to Mr Cameron were strikingly spiteful: “We are sick of you criticising us and telling us what to do. You say that you hate the euro and now you want to interfere in our meetings.”
British officials shrug off Mr Sarkozy’s legendary rudeness as a personality flaw. “He never pursues it. He is not interested in texts,” says one diplomat.
This is not quite true. In the final conclusions, Britain was unable to secure strong language to safeguard the interests of non-euro states. Britain had proposed a reference to the need to develop “concrete and effective mechanisms to ensure that the integrity of the internal market at 27 is fully preserved and that the interests, including essential economic interests, of the non participating member states is fully protected”. Instead, the task of safeguarding the interests of the outs was left to the European Commission, the EU's civil service
Despite the resistance of most European leaders, Mrs Merkel secured a specific commitment to “exploring the possibility of limited treaty changes”, to be discussed in December following a report by Mr Van Rompuy.
Later on, Mr Van Rompuy explained:
It is normal that those who share a common currency must take some common decisions relating to that currency. In fact, one of the origins of the current crisis is that almost everybody has underestimated the extent to which the economies of the eurozone are linked; and we are now remediating that. However, it is vitally important to safeguard the integrity of the single market among the 27. It gives the union cohesion and is the very basis of our prosperity. So we must keep the links between the two types of decision-making as close as possible, in a spirit of trust. And that's why we decided today that the 27 leaders will also meet before Wednesday's follow-up euro summit.
Mr Cameron said the last treaty revision, to create the permanent European Stability Mechanism, had allowed Britain to extricate itself from contributing to the bail-out of Greece and others.
Those countries in the eurozone that see the need for greater integration recognise that it may be necessary to have treaty change as well as other measures to integrate their economies. Treaty change in the future may well present a good opportunity for Britain. The last treaty change which was to create the European Stability Mechanism gave us in Britain the opportunity to get out of the bailout funds for the eurozone. So we exacted a good price for that treaty change [...] We shouldn’t get ahead of ourselves, the idea of the possibility of treaty change has to go back to the European Council, then you have to have a convention, then you’ve got to consult the European parliament, then, then, then… This process can take years.
Turning to his backbenchers, he said a referendum would be a distraction – not just from the need to deal with the crisis, but from the opportunity to exploit a chance to renegotiate Britain’s status.
I don’t think this is the right time to legislate for an in/out referendum. This is the right time to sort out the eurozone’s problems, defend your national interest and look to the opportunities there may be in the future to repatriate powers back to Britain. Obviously the idea of some limited treaty change in the future might give us that opportunity….We must not get overexcited about this but any treaty change in the future does give you the opportunity to advance your interests which of course I would want to do.
Oct 20th 2011, 23:00
THE big blanks left in the draft of the euro summit communiqué that was doing the rounds on October 20th said it all. (PDF is here)
Amid the self-congratulatory verbiage about how the euro zone had taken “unprecedented steps to combat the effects of the worldwide financial crisis”, the document was silent on all the most important elements of the much-promised “comprehensive solution” to the euro's debt crisis: how to strengthen monitoring of Greece's derailing adjustment programme; how much of a haircut to impose on private holders of Greek debt; how to boost the power of the bail-out fund to protect Spain and Italy; and how to recapitalise Europe's most fragile banks.
These voids were due to be filled in a weekend marathon of meetings in Brussels. Finance ministers would gather on October 21st and 22nd. Then the leaders would hold twin summits on October 23rd, first of all the European Union's 27 members, followed by a gathering of the 17 leaders of the euro zone. At the end of it all there would be, as Nicolas Sarkozy and Angela Merkel promised in Berlin a fortnight earlier, a “global package” that would prove to the world that the euro zone could deal with its problems.
“You should know that France and Germany have perfectly common positions on all the issues,” Mr Sarkozy had declared at the time, comically refusing to give any detail of what that the accord consisted of. (Transcript here, in French)
The disagreement between the French president and the German chancellor became ever more apparent as the days went by. Mrs Merkel started to play down the prospect of a comprehensive resolution of the crisis, saying there would be no magic wand. A rushed visit by Mr Sarkozy to Frankfurt to meet Mrs Merkel and other key figures, apparently leaving his wife, Carla Bruni, to give birth to their baby daughter on her own, does not seem to have unblocked the positions.
On October 20th, the climate of discord seemed to grip even the troika of technical experts assessing the Greek programme. Reports emerged of disagreement between the IMF and the European Commission over their estimates of Greece's ability to bring down its debt; the IMF thinks the commission is being too optimistic. A draft of the troika's report (PDF is here) spoke of the country's debt dynamics being “extremely worrying”. But the key section in the report setting out the figures was left blank.
Reports started circulating of the Franco-German disagreement being so bad that the summit might have to be delayed. This was quickly denied. But asked whether there might have to be an additional summit next week, a senior EU official said vaguely: “Is there life after death?”
Yes there is, at least when it comes to euro-zone summits. As the summit of October 23rd gives up the ghost, another one is already being born. A statement (Word file is here), from the Elysée Palace said the French and German leaders were determined to draw up “a global and ambitious solution” to the crisis. After a “deep examination” of the issues on the 23rd, the statement said, there would be a new summit to be held by October 26th, at the latest.
The charitable view of the mess is that Mrs Merkel needs time to consult the Bundestag on changes to the bail-out fund. Moreover, given the poor state of Greece's reform programme, more time is needed to negotiate with Greece's private sector a greater reduction of its debt than agreed in July. The cynical view is that there is a perfect disagreement between Paris and Berlin. Details of the latest state of play are summed up here. In short, the summit to resolve the crisis is, itself, in crisis.
Correction: This blog post briefly, and mistakenly, referred to "London" rather than "Berlin" in the last paragraph.
Oct 19th 2011, 23:07 by The Economist | BRUSSELS
NICOLAS Sarkozy attended two births today. The first, in Paris, concluded happily when his wife, Carla Bruni, brought into the world a baby girl. She is the French president's fourth child, and the second for his spouse. The infant's name has not been confirmed.
Mr Sarkozy then flew to Frankfurt to attend another parturition. The mother is called Europa, nicknamed euro. And we already know the name of her bundle: Comprehensive Solution. It is the third such offspring this year, and the latest labour promises to be the hardest. There is every sign that the babe, if it is not still-born, will be a disappointing runt.
While baby Sarkozy's arrival happened discreetly, there were lots of relatives on hand to wait for Comprehensive Solution. Europa's labour coincided with the retirement ceremony of a favourite uncle, Jean-Claude Trichet, who does something in banking and offered a few cautionary words about necessity being the mother of procreation. Given the risky birth, everybody left the party in silence. But the relatives will gather again in Brussels tomorrow, and the day after tomorrow and the day after that for a great family Council.
The godmother, Angela Merkel, has already told the world to expect a sickly, cursed child: “All of the sins of omission and commission of the past cannot be undone by waving a magic wand.... This is going to be a long and arduous road.”
The birth of Comprehensive Solution involves a delicate operation to remove a putrid boil in Europa's nether regions. The condition is called “Greek debt” and the euphemism for the medical procedure to excise it is “applying a haircut”. It is more like amputation. And not even the financial doctors know if it will stop the infection, or cause it to spread throughout Europa's body.
It was only a few days ago that Nicolas and Angela had promised the world the birth of a Saviour, who would protect Europa from the wild bond-raiders come from the forests.
But the more the experts have studied foetus, the more it seemed to be not quite right. It was supposed to develop two strong legs, with €2 trillion worth of muscle, to hold up Europa. But now it looks like it will have no more than €1 trillion, ie, one leg.
And Comprehensive Solution was supposed to have two strong hands (to hold the purses of Europa's bankers). These were reckoned to weigh in at €200 billion. But further inspection puts them at less than €100 billion, ie, barely one hand. Having indulged in fiscal promiscuousness well into adulthood, old Europa lacks the strength to bring forth a healthy child.
Nicolas still hopes for a miracle. He is back in Paris with Carla and the baby girl. But he knows his family's fate depends on the survival of Comprehensive Solution.
Come the family Council in Brussels on Sunday, everybody will sing the praises of Comprehensive Solution. But word of its horrible condition is spreading through the souks, where traders see it as a bad omen. And through the gloom of the forest, one can already catch the glint of the bond-raiders sharpening their swords.
Oct 18th 2011, 20:20 by The Economist | BRUSSELS
WITH the euro zone sinking deeper into crisis – now France is threatened with a downgrade of its AAA credit rating – you might think that everybody in Brussels would be dedicating every waking hour to averting the looming catastrophe.
But just days before the EU’s summit on October 23rd , the permanent representatives of the EU’s 27 member-states in Brussels are devoting an almost obscene amount of time to their old pastime: theological disputes over the balance of power within the EU.
The latest version of this game is the question of how and by whom the European Union is represented in international bodies: what are the roles and prerogatives of EU bodies and national governments in all manner of international discussions.
Welcome to the parallel universe of planet Brussels.
So far 85 joint statements have been blocked at the United Nations, the Organisation for Security and Co-operation in Europe and the Council of Europe. The myriad subjects range from nuclear disarmament to the rights of the child, the rights of indigenous people, financial reform of the UN, the status of the Roma, economic development in Africa, resistance of germs to antimicrobial drugs and much more besides.
At issue is a disagreement over who should speak on a particular subject – the member-states, the European External Action Service (EEAS, the EU’s newish “foreign ministry”) or the European Commission (the EU’s civil service)? And on whose behalf should they claim to speak – the member states collectively, the EU as a whole, or just as a particular body, eg, the Commission?
These matters were supposed to have been settled in the 2009 Lisbon treaty, which created the EEAS. But there are many grey areas of shared competence. These are being contested by the Commission on the one hand, and by the British on the other. The problem dates back to the Lisbon treaty, but has become acute since May, when Britain’s Foreign Office publicly gave warning that it would resist any attempt by EU bodies to encroach on British rights in foreign policy. More often than not in the long discussions at COREPER, the committee of permanent representatives, the British have been outnumbered 26:1.
Pierre Vimont, one of the most senior EEAS officials, has expressed his frustration at such pedantry. As he told the annual dinner earlier this month for the Friends of Europe, a Brussels-based think-tank, the burning issue has been whether “we should pronounce statements on behalf of’ ‘the EU’, or ‘the EU and its member-states’."
Old hands in the EU will note that, in a system where power only ever seems to flow towards Brussels, the frontier between national and shared competence will inevitably be guarded vigilantly. Britain's Tories, in particular, never liked the idea of giving the EU an enhanced role in foreign policy; most others would dearly like the EU to speak with greater authority, so want to see it taking more of the stage. As one (non-British) national envoy notes despairingly: “Other countries laugh at us. They can’t believe the Europeans have gone back to institutional bickering.”
All this should act as a warning for the current discussions on reforming euro-zone governance. France would like to create new inter-governmental institutions to run the euro zone. Germany wants to re-open the treaties to give Brussels more authority over national budgets. But as the foreign policy dispute shows, any change to the balance of power is bound to be challenged, could cause paralysis - and may worsen the problem you are trying to solve.
Oct 6th 2011, 0:24 by The Economist | BRUSSELS
THIS is a long post, and a diversion from my usual EU- and euro-related concerns. But until recently I was writing about cybersecurity, and it does matter to the security of Europe, as the cyberattacks on Estonia in 2007 demonstrate. So here goes...
Later today (Thursday) Britain's foreign secretary, William Hague, will take questions from the public via Twitter on the London conference on cyberspace that he is organising for next month. As a journalist, I cannot help but feel that this a bit of a stunt: communicating in 140 remotely typed characters, the questioner has little chance of putting a politician on the spot. Still, I suppose one should not criticise ministers for trying to communicate with the public.
The subject is serious, however. More and more people and devices are being hooked up to the internet. One debate concerns the future governance of the internet: should it be directed by governments, or should it be left to the private sector to develop inventively (and somewhat anarchically)? The Economist recently ran an account of the debate (here) and expressed its view in a leader (here). To judge from Mr Hague's tweets, he agrees with us.
Inevitably, given the pervasiveness of information technology, cyberspace is also becoming a question of security. After land, sea, air and space, cyberspace is now the fifth dimension of warfare. Could a country launch a crippling attack from cyberspace, say to knock out the electricity grid of a rival state, or snarl up the logistical chain of its armed forces? The answer is: maybe.
For those that want to get up to speed, a good place to start is my Economist cover story on cyberwar last year (here), and the accompanying leader (here).
In America, especially, cyberspace is rising up the scale of national-security threats. Britain, too, is tooling up for defence (and offence) in and through cyberspace. In the rest of Europe the debate perhaps centres more on questions of data privacy. On all sides of the Atlantic, however, cybercrime is endemic.
A Google News search for “cyber attack” throws up recent news of a threat by hackers to knock out the New York Stock Exchange on October 10th, a report on a new centre to defend America's critical infrastructure, speculation about the cause of the failure of Bank of America's online banking service, and demands by Congress for America to respond firmly to “predatory” cyberespionage by China.
Ahead of the London conference, the Ditchley Foundation in Britain gathered senior officials, industry experts and NGOs at its Oxfordshire retreat to discuss how best to balance the benefits of an open internet with the need for action to protect the electronic commons. I was asked to sum up the debate. These were my thoughts, tidied up and edited where necessary for clarity and discretion:
THE words of one senior participant still resonate: "It's so big it does my head in." At every turn this weekend, we have run into the problem of definitions: what is it that we are dealing with? It is not because cyberspace it is distant or foreign, but because it is all around us and we are part of it.
As with the Supreme Being, we can only talk about it in metaphors. Some have invoked the language of nuclear deterrence, others of biological weapons, others have spoken of crime, others of public health. Some talk of the Law of the Sea. One breakout group reports: "We are in a swamp where we need to make polders."
Some of the questions that came up:
- Is this millennial change, or perhaps just decennial?
- We don't know how big the problem is
- We don't know what to protect
- The discussion on critical infrastructure is a bit like a Monty Python scene: "So, apart from e-mail, Skype, Facebook, iPads, iPhones, drains, water, electricity and air-traffic control, what has cyberspace ever done for us?" We don't know what is critical, and what is critically critical. What depends on cyber (eg, the financial sector). And how does cyber depend on non-cyber (eg, the grid)?
- We cannot count the cost of cybersecurity. We cannot insure against losses. And we cannot sue for negligence
Everybody here seemed to quote their children. So are we the right people to be discussing this? What is cyberspace? “It's stuff,” says one participant, quoting his kids
Why is it so hard to understand?....
Sep 17th 2011, 15:42 by The Economist | Wroclaw
THROUGH the crisis, European taxpayers have bailed out first the banks, and then busted states. So it is little wonder that many governments are reluctant to consider either of the main options to end the euro-zone crisis: opening up the wallet (by enlarging the euro-zone rescue fund), or letting others borrow one’s credit-card (issuing joint Eurbonds).
Germany and France want somebody else to start paying. And who better to punish than the reckless bankers and speculators who, in their view, caused the trouble in the first place?
The idea of imposing a financial transaction tax (FTT) has been around since the start of the crisis, indeed for several decades since it was mooted by the late Nobel laureate, James Tobin. But has faced a seemingly insurmountable problem: in a globalised connected financial world, a financial tax has to be global if markets are not simply to shift their operations to where they will not be taxed.
As Timothy Geithner, America’s Treasury Secretary, repeated to European finance ministers in a less-than-cordial encounter (see previous posting) in the Polish city of Wroclaw this week, the United States opposes the FTT on the grounds that it would raise the cost of capital and weaken the already-fragile economic recovery.
Undeterred, Germany and France last week called for the tax to be imposed by the European Union alone (see joint letter from the German and French finance ministers here). The European Commission is also supporting the idea, and will unveil proposals in the coming weeks. Michel Barnier, commissioner for the single market, said his proposals would be “technically simple, economically bearable by the financial sector, financially productive and politically just”. He gave no figures for how much money could be raised.
Supporters of a more localised FTT would argue that this is an opportunity for Europe to show the way in taking action that is both moral and remunerative. As with emissions-trading to curb climate change, others will follow. Indeed, European officials are already arguing over who should take the proceeds of an FTT: national exchequers, the European Union or a special-purpose European fund to deal with future banking collapses?
Even so, the idea is running into the firm objections of, among others, Britain. Jacek Rostowski, the Polish finance minister who holds the rotating presidency, said the EU was “very, very divided” on the issue when it was discussed in Wroclaw. In any case, he said, “nobody expects this element to be crucial in our attempt to stabilise the situation, both fiscally and financially.” In other words, the FTT is not worth the trouble it would cause.
Thus the idea that gathered strength yesterday: a financial transaction tax within the 17 countries of euro zone. “I’m sure that if it’s impossible at the worldwide level, we’ll need to organise that in the European Union, or at least in the euro zone.” To reduce the risk of avoidance, he said, an FTT in the euro zone would have to be imposed at a lower rate than a global tax. In an interview, his German counterpart, Wolfgang Schäuble, supported the idea.
One might question whether an FTT in an ever-smaller geographical area makes sense, particularly given that it excludes London, Europe’s main financial centre. The pony-tailed Swedish finance minister, Anders Borg had some words of caution:
We have substantial experience in Sweden. Basically most of our derivative and bond trading went to London during the years we had a financial transaction tax. So if you don’t get a solution that is universal it is very likely to be detrimental for European financial markets. And from the Swedish perspective, we cannot foresee that we would introduce such a tax in our system again.
The idea of an FTT at 17 raises another intriguing question: might it become the first fracture in the EU from the move to integrate the euro zone to confront its debt crisis? An FTT is no longer a question of monitoring budgets and maintaining fiscal discipline, but a move to integrate taxation, which in turn influences the EU’s single market.
Britain may consider a FTT at anything other than the global level to be self-defeating. But what of a common base for corporate tax in the euro zone? Even if British tax rates are lower, a simplified and uniform system for calculating and paying corporate tax in the much of the European market may prove attractive to some companies.
Such issues worry British officials. But for now the greater alarm is over a collapse of the euro, so the British have become among the loudest cheerleaders for euro-zone integration. “Time is running out,” said George Osbone, Britain’s Chancellor of the Exchequer. “They have got to get a grip and deliver a solution to the uncertainty in the markets.”
If the ordinary citizen has to pay tax on a daily financial transaction, like buying a toothbrush, there can be little moral argument against taxing financial transactions. But at a time of crisis, the question is an FTT might actually worsen the crisis. Might a euro-area FTT not weaken the euro area’s banks? After all, the IMF is urging governments urgently to recapitalise their banks - not to draw money out off them - to halt the spread of contagion from their exposure to the sovereign debt of vulnerable European countries. Two French banks were downgraded this week due to their exposure to Greek debt
It would not be the first time that Germany and others, in taking aim at the bankers, shoot themselves in the foot. The demand that the financial sector pay for a share of the second bail-out of Greece (which has not yet been approved) caused delay, destabilised the markets and had to be buttressed by offers of government cash to protect the European Central Bank and Greek institutions. It raised comparatively little money. If the euro zone believed the creditors should take the hit, it should have allowed a proper restructuring of Greece’s unsustainable debt. Instead it came up with a fudge that did more harm than good.
The resentment of bankers, and the desire to protect the taxpayer is understandable. But the grudging and erratic response of the euro zone’s governments has been as much part of the problem as of the solution. The citizen will be placed at ever greater risk unless the crisis is tamed quickly. To do that, two destabilising feedback loops have to be broken. The first is between collapsing banks and collapsing treasuries; the other is between panicking markets and hesitating governments. An EU or euro-area FTT helps with neither. For now, it is a distraction - and could make things worse.
In this blog, our Charlemagne columnist considers the ideas and events that shape Europe, while dealing with the quirks of life in the Euro-bubble. An archive of print columns can be found here. Follow Charlemagne on Twitter »
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