It is not a EU crisis, it is just an example of bad policy

Jos Antonio Poncela An old joke says that heaven is a place where the German are the engineers, the British the politicians, the Italians the lovers and the French the cookers while hell is the place where the German are the politicians, the French the lovers, the Italian the engineers and the British the cookers. According to these, the EU is now politically in hell and we need desperately the British to put some common sense. If the situation were not so dramatic almost every single country in the world would be now laughing at how the European Union deals with its economy. We may recall that in 2000 the Lisbon Strategy was going to make Europe the most dynamic and competitive economy in the world in 10 years. That meant, at the time, not growing at a "mere" 3% but almost 4 points faster than the USA when the USA was growing at almost 4% a year. An average real growth rate of 8% during a decade was something so unbelievable that nobody but the Commission took it seriously and that was, instead of 3% stated in the Lisbon agreement, what was needed to pass the US if exchange rates were to be constant in the decade. Member States acted as if they thought it was possible and, in the end, the Lisbon Strategy was nothing but a big propaganda campaign. The problem was not the big lie to the European citizens it was, not even that many people honestly believed it and were deceived. The problem was that it influenced policy, that the EU Commission forced some regions in Europe to put in place policies that were designed and fit for the most advanced regions in Europe like EmiliaRomagna or Baden-Wrttemberg. In the end, the EU Commission just blamed Member

States for the failure because they didn't put in place "growth fostering" policies. Something funny since it was like saying that all countries that were not as developed as South-West Germany was because they didn't put in place "growth fostering policies" that nobody, even the Commission, was willing to tell them what these policies really consisted on1. That is what happens with mantras, they work because of their magical nature and there is no need to explain them. However, when you look beneath the surface, you find nothing but a big lie. Now we're in a very different scenario. It is not a question of becoming the richest people in the world but, quite on the contrary, to avoid massive unemployment and misery for millions of Europeans. However, and to no surprise, unemployment is not in our European authorities' agenda, reducing public deficits and curbing inflation are. Austerity and fiscal consolidation are the new mantra, this time "made in Germany". Almost every single economist who is not in a German public payroll has warned that austerity cannot work when a whole continent puts it in place. This economic policy is known as growth based in "making thy neighbor poorer" and it cannot work if everybody uses it at the same time since, in the end, it will make everybody poorer. Fiscal consolidation is now a necessity, not an economic policy, but it would be so to a lesser degree if the European Central Bank adopted a more decided stand against unemployment and forgot for a while a potential risk of inflation that nobody but the ECB itself sees. ECB monetary policy has been more than ten times weaker than that of the Fed while the biggest problem is now in Europe. Being this the first and main step to get out of this mess Europe has got into, eurobonds would also help. The so called Financial Stability Fund does nothing but buying time, more and more expensive every time, and we all know that postponed economic problems tend to come back bigger and wider. Eurobonds would reduce to a great extent speculation since with only one class of bonds there can be little
It is like teaching kids to play basketball just saying "play as Kobe Bryant or Pau Gasol do" and that's it. Then, if they don't win anything, just get mad at them and accuse them of not following your instructions.
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speculation. No short selling of some bonds in exchange of refuge bonds is possible since there will be just bond. Also, in a far deeper market than today's speculation would be harder. Moreover, the euro would gain terrain as an international reserve currency. A small tax on high frequency financial transactions would complete the schema from the regulation side. In third place, we need increased economic governance at European level, whether led by the Commission or by the Council. For the time being, European economic governance is nothing serious, just a struggle for power between the Commission and the Council, that is, Member States. I would agree that if there is going to be a truly EU economic government it should be the Commission who led the process. Albeit, the Commission needs more legitimacy, needs to be more accountable if it is going to receive more power. It is high time the European Parliament has a say and elects directly the members of the EU Commission with no interferences from Member States. The Council may have a say in the same way Senates have theirs in some Member States when it comes to electing the government, but its role is usually a minor one. We need a central fiscal power, not more sanctions nor reinforced coordination; we need a central authority with real spending power independent from the territorial distribution of public revenues. Whatever the institutional framework, economic governance cannot be a revised edition of the "Growth and Stability Pact" with augmented sanctions2. Ex-post measures, and sanctions can only be ex-post, have failed too many times to deserve another try. A European Treasure that issues eurobonds can be more effective. If eurobonds were the only vehicle of public debt, if loans by banks had to be authorized by the European Treasure and the European Central Bank were to severely punish those banks that lent to governments without the authorization of the European Treasure,

For a deeper analysis of this issue see "Why stricter rules threaten the Eurozone" by Simon Tilford and Philip Whyte and published by the Centre for European Reform (CER).

there would be little need of sanctions since deficits that cannot be financed have little chances to even exist for more than a few months. This road map is not new. Many economists from both sides of the Atlantic have proposed them many times. They are not a magic recipe that can make economic problems disappear as if we casted a spell on them but they can alleviate our current problems. In the end, as it should be obvious, the question is not if a single currency for Europe is good or bad. It is a matter of good or bad economic policy backing that currency and, to a less degree, good or bad institutional architecture. Till now policy, and not only economic policy, does not meet a minimum quality standard and has just made things worse. A short review list of beginner's mistakes by the Merkozy duet: 1. They didn't let the IMF fix the Greek problem when the IMF had the experience and the resources to do it. At the time, the Greek problem contagion was avoidable. Instead, their national pride forced them to say that Europe could take care of it but they did nothing letting the problem rot. 2. The EFSF and EFSM got money at 1,9% that lent Greece at 5,8%. Since markets estimated that Ireland and Portugal would not be able to pay those interests, contagion started. It is worth noticing that the Greek rescue was not a present for the Greeks, it was more a very lucrative investment of European tax payers' money and a rescue to the banks holding Greek public debt. 3. At Deuville the duet created the ESM, the permanent mechanism that replaced the EFSF, but in exchange all debt had to incorporate clauses of collective action (CACs) forcing holders to accept eventual

restructurings and partial defaults. This increased Spain and Italy's risk premia starting contagion mainly to Spain. 4. Juncker proposed the issue of eurobonds, something publicly rejected, creating more frustration and pushing debt prices down. For the first time

this type of negotiations are public and financial markets are hard hit by the lack of agreement. In the mean time, the ESM was actually issuing quasi eurobonds. 5. They forbid the ESM to buy public bonds in the secondary market and they set the rules of functioning of the ESM. This rules are so rigid that it makes almost impossible normal functioning of the ESM. Among them, they state that private lenders to a country will only get repaid after the ESM and the IMF, private lending to rescued countries almost disappeared and contagion got worse. 6. The ECB is worried about inflation and increases interest rates, restricts money growth, accepts deposits from private banks at attractive rates and sterilizes most open market interventions. It creates a big credit crunch. 7. They focus on the financial side of public accounts and ignore the relation between finance and the real economy. Their obsession with austerity measures causes the second dip into recession.
While these actions would just have granted the Merkozy duet a place of honor in the list of incompetent politicians, they have done a couple of things that are of a more profound nature. They have started to spread in Northern Europe the view that Spanish, Italians and Southerners in general just make siestas while living on loans from laboring Germans. At the same time Germans are, in the South's view, the origin of all evil. The EU is seen as a modern version of a German Reich with little scrupulous to bring down democratic governments and replace them by technocratic governors. The Commission and European Parliament, while being almost neglected, have assisted silently to this process instead of claiming more democratic legitimacy to face new problems with new powers. Finally, Mrs Merkel has tried to shape a few things that should be general enough to belong to everybody irrespective of their ideology. She has successfully imposed her very particular ideology on national constitutions and European treaties. In a few months, a new generation of European leaders, including those from the German SPD, will find that they are not very comfortable with these changes and will try to reverse them. The conflict is therefore served.

Jos Antonio Poncela