When the Council of Economics and Finance Ministers (ECOFIN) meets informally on Friday, 22 April, one issue on the table will be the reduction of bank exposure to the sovereign debt of their home governments. This issue was laid out in a note from the Dutch Presidency that was leaked on Wednesday. The response of the Italian government in particular was immediate and strongly negative. Italian banks are heavily exposed to Italian sovereign debt and any attempt to reduce that exposure would impose unacceptable costs on an already fragile Italian financial system. To some degree this is the case for other peripheral countries as well. The Dutch Presidency note argues that Europe’s banking union needs to be strengthened with some kind of European Deposit Insurance Scheme (EDIS) and ‘a common backstop for the Single Resolution Fund (SRF)’. Before the Dutch Presidency can flesh out its position on these key support mechanisms, however, it needs to tackle the ‘bank-sovereign nexus’ so that ‘risk sharing and risk reduction go together’. Intellectually, this is a coherent argument.
Category / Weekly note
The United States Needs Europe
‘In an interconnected world, there are no global problems that can be solved without the United States, and few that can be solved by the United States alone.’ United States National Security Strategy, 2015, p. 3.
‘A strong Europe is our indispensable partner, including for tacking global security challenges, promoting prosperity, and upholding international norms.’ United States National Security Strategy, 2015, p. 25.
The United States needs strong allies in Europe. The United States also needs European unity. This is has been a recurrent theme in Barack Obama’s foreign policy since the start of his campaign for the presidency in 2007. It is a theme he borrowed from the second administration of George W. Bush. It is also one of Obama’s greatest disappointments in shaping U.S. relations with the outside world. From the outset, both Obama and his predecessors have been explicit that the United States needs Europe’s strength to promote world order and uphold democratic values. U.S. foreign policy is most effective when it works in concert with Europe. It is least effective when coordination across the Atlantic falters or when Europe is divided or distracted. Future U.S. Presidents will struggle to adapt if European division and distraction becomes the norm. In fact, that may be happening already. Despite the strong language of his 2015 National Security Strategy, President Obama seems to be moving in a direction that relies less on trans-Atlantic cooperation.
The ECB’s New Tactic — Pay to Lend
The European Central Bank (ECB) announced a raft of policy measures on Thursday, March 10, intended to give a further boost to euro area economic performance. Most of these measures were unconventional and yet still precedented. The ECB lowered its main policy rates, accelerated the pace of its asset purchases, and widened the pool of assets eligible to be included in its purchasing program. It also renewed its program for targeted loans to banks that extend credit to the non-financial sector. The only new element was the rate of interest that the banks would pay to access credit that they could lend for investment. The question is whether that new wrinkle will make much of a difference. As is often the case, the answer depends less on the mechanics of monetary policy than on the magic of market ‘confidence’.
Europe’s Strategic Priority
The European Union needs to make economic performance its number one strategic priority. The reason is not to trade off butter for guns and neither is it to abdicate global responsibility. Europe is too important for world order to withdraw into splendid isolationism. To be a global actor, Europe must be strong economically. In that sense, Europe is much like the United States.
National Ownership is Moral Hazard
The grassroots politics that policymakers accept as necessary for success in the domestic context is viewed as a top-down failure in any other country. The question is whether these two views of reform politics are reconcilable. The answer depends upon two things. One is how much you see politics as a process of give and take between policy advisors, politicians and voters. The other is how much you trust politicians in other countries. Unfortunately, the debate in Europe right now is much more about trust than about process.
Has Cameron Delivered for the City of London?
The deal reached between British Prime Minister David Cameron and his colleagues on the European Council last week was supposed to transform the relationship between the United Kingdom and the European Union on four dimensions – economic governance, competitiveness, sovereignty and immigration. Three of these issues are largely symbolic. No declaration or agreement is going to ensure ‘better regulation’ either in Brussels or in Westminster; British sovereignty was never seriously under threat from the vague aspiration to achieve an ‘ever closer union’; and while immigration is a vital issue, few experts on cross-border labour imagine it turns on access to ‘in-work benefits’ or can be deterred by the indexation of child support. By contrast, economic governance is a vital national interest both for the British people and for the City of London. The question is whether Cameron has managed to improve that aspect of Britain’s relationship with the rest of Europe.
Democracy without Solidarity
‘There will never be a good a solid constitution unless the law reigns over the hearts of the citizens; as long as the power of legislation is insufficient to accomplish this, laws will always be evaded.’ Jean-Jacques Rousseau (1772)
You can have the best political institutions in the world but if the people who live within them do not want to use them properly, then those institutions will not work. The challenge is to make people want to use common institutions properly and to agree on what constitutes proper use. This is the challenge that Jean-Jacques Rousseau tackled in his ‘considerations on the government of Poland and on its proposed reformation.’ It is the same challenge advanced industrial democracies face today – at all levels of government. Moreover, better institutions or ‘structural reforms’ were not the answer for Rousseau and they are not the answer now: ‘Although it is easy, if you wish, to make better laws, it is impossible to make them such that the passions of men will not abuse them as they abused the laws that preceded them.’
Partnership and Solidarity: Obama’s Last State of the Union
Leadership through partnership works; democracy without solidarity does not. These are two of the central arguments Barack Obama makes in his eighth and final ‘State of the Union’ address as President of the United States. The first argument builds on the premise that the United States cannot lead by trying to do everything itself; it has to make sure ‘other countries pull their own weight’. The second rests on the idea that ‘democracy does require the basic bonds of trust between its citizens.’ Isolated like this, these claims seem self-evident. In the context of a U.S. presidential election, they are controversial. Indeed, American presidential candidates have been fighting over these issues at least since Barack Obama rose to prominence. This explains in large measure why the United States is so conflicted over the conduct of its foreign policy and so polarized in its domestic political discourse.
Austerity and Anti-Politics
Italian Prime Minister Matteo Renzi gave an interview to the Financial Times shortly before Christmas to criticize the impact that successive waves of austerity are having on political stability in southern Europe. The interview had particular resonance in the aftermath of the Spanish national elections. Spanish Prime Minister Mariano Rajoy was in many ways Europe’s ‘best’ student in terms of economic policymaking. Rajoy not only narrowly escaped the doom loop that tied the fate of the Spanish government to the solvency of its banks, but he also avoided the indignity of falling under official European economic tutelage. He has not always does as told by his European counterparts but his government is often held us as a model of successful macroeconomic adjustment and fiscal consolidation in the face of crisis. His ‘reward’ has been a splintering of the Spanish electorate and a hung parliament. For Renzi, the fate of his ‘friend Mariano’ is an inevitable consequence of Europe’s obsession with austerity.
Lessons from Greece? Individuals Matter
European integration is a process that derives from broad social movements. We look for its origins in the terrifying experience of the twenty years’ crisis, bookended by two cataclysmic world wars. ‘Europe’ is not necessarily a rejection of the nation state, but it is an attempt to rescue the nation state from its inherent limitations and vices. It is a forum within which France and Germany can reconcile their differences; Britain can adapt to its relative decline; Southern Europe can find a bulwark for democracy; and Eastern Europe can emerge from communism.
But Europe is made by people and sometimes individuals can play a decisive role. The events of the past summer are a good example. There are many prominent scholars who have tried to cast the Greek crisis as some kind of clash of economic cultures or institutional path dependence gone wrong. Those arguments have merit. But they do not capture the essence of what happened; they fail to explain how Europe came so close to disaster; and they make it harder to anticipate what could still go wrong.
Erik Jones 