Structural Reform and Economic Sustenance in European Austerity

Speaking at the World Economic Forum in Davos, Switzerland on January 25, 2013, Mario Draghi, president of the European Central Bank(ECB), said the bank’s program to buy the bonds of heavily indebted E.U. states had been “very helpful” in reducing the perception that the euro was on the verge of collapse. He also pointed to the structural reforms that heavily indebted states had enacted as “now bearing fruit.”[1] He urged those governments to continue to implement structural reforms so those states could take advantage of the ECB’s low interest rates and easy credit to banks. In short, the strategy of the ECB was to use monetary policy as leverage for long-term-oriented structural reforms at the state level. Political risk analysts listening to the central bank official likely came away with a more optimistic stance on the long term prospects for the E.U. economy.

The full essay is at "Structural Reform and Economic Sustenance."

 1. “Davos: ECB’s Draghi Says ‘Real’ Economy Still Stagnant,” Deutsche Welle, January 25, 2013.

                                                                                                       

Democracy Deficit in the E.U.’s State-Rights Federalism: The Debt Crisis

Holding back additional transfers of governmental sovereignty from the state legislatures to the E.U.’s legislative chambers not only inevitably pushes power to non-democratic E.U.-level  institutions, notably the ECB; the democratic basis even at the state level can be compromised.

The complete essay is at Essays on Two Federal Empires.

Merkel Siding with China against the E.U.: Federalism Imploding?

In May 2013, German Chancellor Angela Merkel interjected herself into the brewing trade conflict between the E.U. and China. At issue was the European Commission’s proposal to impose import tariffs on some Chinese solar and telecommunications products in response to suspected dumping by China. Merkel’s involvement involves a conflict of interest for her and exploits a vulnerability in the E.U.’s federal system.

Although the flags of the E.U. and China both have stars, the E.U. has a federal system while China is centrally governed.  Both forms of government have drawbacks, but at the "empire level," federalism usually works better than a central government, given the expanse.   Source: ipolitics.ca

The full essay is at Essays on the E.U. Political Economy, available at Amazon.

Should Germany Prop Up the E.U.'s Southern States?

In April 2013, Deutsche Welle reported that the German central bank had “analyzed possible effect a domestic growth package could have on southern European economies. ‘By and large, it would have no impact,’ claimed Clemens Fuest, president of the Mannheim-based Center for European Economic Research. ‘We won't be able to fight recession in southern Europe with domestic growth incentives.’ He added that southern European states do not just have a demand problem. ‘Prices there have got out of hand,’ he said. ‘Wages and labor costs have spiraled out of control, and must be brought down again. If you were to implement a growth scheme, you'd only slow down the necessary adjustments.’”

The full essay is at Essays on the E.U. Political Economy: Federalism and the Debt Crisis, available at Amazon.

Bailouts, Bond-Buying: E.U. Plows Ahead!

On September 12, 2012, a psychological threshold was reached in the E.U. on the way toward “ever closer union.” That is to say, at the end of that day Europeans could feel an overdue sense that come what may, the euro would be protected. Moreover, the E.U. (at least for the states willing to sign up for greater E.U. enforcement of state deficit and debt limits) would proceed along with further incremental shifts of governmental sovereignty from the states to the union thereof. The sense of relief was palpable in Europe as state and federal officials as well as commentators and citizens breathed a collective sigh of relief.

Most pressingly, the constitutional court of the state of Germany announced that that state could in fact contribute to the fund to bailout indebted states. The court held that the state legislature would have to pass any increases because the further integration of the E.U. must not be allowed to proceed without commensurate democratic legitimacy and the rule of law. The President of the E.U. Parliament observed that this holds at the E.U. level as well.

The complete essay is at Essays on Two Federal Empires.

Greek Austerity Win at E.U.’s Loss?

According to one director of a public-debt consulting firm in the E.U., “In the realm of investor perceptions, Spain has crossed the Rubicon from solvency to insolvency.” A day after Europeans in the state of Greece had given a narrow victory to parties in favor of maintaining the austerity program there, investors’ concern regarding the viability of the euro pushed the yield on Spanish 10-year bonds as high as 7.2 percent—a level that Spain’s economy minister, Luis de Guindos, claimed is unsustainable in the long term.

The full essay is in Essays on the E.U. Political Economy, available at Amazon.

Tsipras against Austerity: Merkel Bends on Stimulus

Under pressure to join a unity government in Greece with the New Democracy and Socialist parties, Tsipras of a “radical left” Syriza party was holding firm as of May 13, 2012. Even as the resulting prospect of new elections and a possible reneging on the agreement by Greece, there is something to admire in Tsipras’ position.

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

A Rigid Refusal to Renegotiate: Blaming the Greeks

As Greek party leaders struggled to put together a government in May 2012 after a splintering election, a major (and contentious) issue was whether to demand a renegotiation of the bailout agreement. Alexis Tsipras, leader of the Coalition of the Radical Left known as Syriza (which made large gains in the election), was declaring the agreement null and void given the mandate implied by the gains made on the far right and left (both being opposed to the austerity program). Tsipras believed he “had changed the debate to the point that the formerly dominant parties that had signed the loan agreement were . . .  indicating they might agree to demand it be renegotiated.”[1] His statements were enough to prompt a firm Nein! from Angela Merkel in Berlin and a related “tightening of the screws” from the committee of the European Financial Stability Facility.

The full essay is at Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

1. Rachel Donadio and Niki Kitsantonis, “ContinuingLeadership Deadlock in Greece as Its Lenders Watch and Wait,” The New York Times, May 9, 2012.

Anti-Austerity in Greek Government

The Socialists and then the New Democracy Party told Greeks that sacrifices were necessary to avert default on the state’s debt. This position came at a high political cost on May 6, 2012, when both parties lost seats in the state’s legislative election. “The established parties collapsed — they had too much pressure from Berlin and Brussels and the I.M.F.,” said Nikos Xydakis, an newspaper editor and a political commentator, referring to Greece’s foreign lenders.[1] In other words, the leaders of the two mainstream Greek parties sold out their compatriots, having caved in to ultimatums from Merkel operating at the E.U. level. “In a meeting with President Karolos Papoulias, the leader of the leftist party, Alexis Tsipras, ridiculed the leaders of the two main parties whose coalition lost its majority in the parliamentary elections.”[2] Tsipras added that his party would not be forming a government with either party. The New Democracy Party had been unable to form a government in the wake of the election, so it was then Tsipras’ turn to try.

  

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

1. Rachel Donadio and Niki Kitsantonis, “Greek Leftists Rule Out Coalition with Incumbents,” The New York Times, May 8, 2012.
2. Ibid.

Merkel’s Fiscal Box in the E.U. Debt Crisis

Germany was ruling out any substantive shift in its approach to Europe's debt crisis despite a rising chorus of opposition to Berlin's austerity policies that reached a crescendo in the elections in Greece and France on May 6, 2012. On the following day, Merkel “rejected the notion that Europe was on the brink of a major policy shift after Socialist Francois Hollande defeated her fellow conservative Nicolas Sarkozy and Greek voters punished ruling parties who slashed spending to secure a foreign bailout. . . . Merkel herself made clear that, while there was scope to discuss tactics, the overall strategy EU leaders committed to by agreeing a compact on fiscal consolidation was ‘not negotiable.’”[1] That seems a bit presumptuous, considering that the “fiscal pact” had yet to be ratified in enough of the states to go into effect.

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

1. Noah Barkin and Stephen Brown, “Germany Austerity Policies: Berlin Unmoved by Votes in France, Germany,” The Huffington Post, May 7, 2012.

Leadership in Europe: A Recipe for Reducing Legal Uncertainty

Concerning the legal environment of business, the lawyers who teach as full-time instructors in American business schools affirm that managers would rather have a challenging environment that they know than one that is characterized by headlines such as, “Legal Uncertainty Imperils EU Agreement.” At the E.U.’s parliament, which represents the E.U.’s citizens, the president of the European Council, Herman Van Rompuy, said in the wake of the agreement, “An intergovernmental treaty was not my first preference, nor that of . . . most of the member states . . . It will not be easy, also legally speaking. I count on everybody to be constructive, bearing in mind what is at stake.”[1] Investors were “largely dismissive” of the Council meeting  at which the extra-E.U. agreement on strengthening the enforcement mechanism of state deficit and debt limits had been reached at the end of the previous week. Alan Brown, chief investment officer at Schroders Investment Management, which had at the time almost $300 billion under management, said of the results of the Council meeting, “Yes, it was what I expected, and yes, I was disappointed.”[2] Schroders was backing up this view with a modest bet against the euro. Relatedly, Barclays was forecasting the currency to fall from $1.30 on December 13, 2011 to $1.25 by June 2012. Besides the pessimism on the “intergovernmental treaty” as well as a possible increase of funds from the $500 billion cap on the agenda at a Council meeting in March 2012, the sheer uncertainty described by Van Rompuy lowers the value of the announced agreement and the outlook concerning the viability of the euro as well as the E.U. itself.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

1. Steven Erlanger and Stephen Castle, “Europe United, Minus One: A Firm German Imprint on an E.U. Transformed,” International Herald Tribune, December 10-11, 2011. 

2. Matina Stevis, Frances Robinson, and Marcin Sobczyk, “Legal Uncertainty Imperils EU Agreement,” The Wall Street Journal, December 14, 2011; Tom Lauricella, “Euro at 11-Month Low,” The Wall Street Journal, December 14, 2011.

Europe's Political Elite Takes on Popular Sovereignty in Greece

As October 2011 was coming to an end, George Papandreou, prime minister of Greece, “stunned Europe by announcing a referendum” on the latest bailout from the E.U. and set the vote for January 2012. Shocked E.U. leaders were doubtless shaking their heads with a mix of incredulity and frustration, as they had not even been consulted on the prime minister’s proposal. Meanwhile, the yields on Italy’s bonds continued to increase, as did the spread between German and Greek 10-year bonds. The world was left to whether the Greek voters would reject their government’s austerity plans and, relatedly, whether the E.U. would augment its bailout of the state as per the agreement reached only days before the prime minister’s announcement.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Angela Merkel: Leading Germany in the E.U.

In the E.U. state of Germany, Angela Merkel had her work cut out for her in getting her coalition to carry the German House, or Bundestag. In vesting the debt bailout fund with powers had been at the state level. Conservatives feared the deal would “open to the door to relinquishing more sovereignty to the European Union.”[1] Also, the legislators in her Free/Christian Democrat coalition were having trouble justifying the increased cost to their constituents of the expanded fund even though it is geared to keeping the E.U. debt-loads at the state level from spinning out of control—meaning at the expense of the German economy. Economically, it can be argued that expanding the E.U.’s bailout fun is in the economic interest of the state of Germany and its residents.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

1. Vanessa Fuhrmans, “Merkel Faces Test OverBailout Fund,” The Wall Street Journal, August 30, 2011.