14 October 2013

Paul N Goldschmidt: Europe - Which Europe?

Goldschmidt outlines his thoughts following the three-day meetings organised by the Nouvel Observateur and Le Soir in Brussels on “Reinventing Europe”.

One should avoid focusing the main debate on the relationship between Member States and the Union (as promoted  by both David Cameron and Marine Le Pen in their identical triptych: renegotiation – referendum – exit (?)) but rather subordinate that relationship to the geopolitical challenges that confront the Union within a globalised world. It is only after defining the policies which, by their nature, should be a competence of the Union that one can agree on the optimal structure of the institutions that should ensure their implementation.

It is necessary to convince public opinion by emphasising that, in many respects, only the Union can bring true added value in defence of many important voters’ interests. The poll should not become – by default – a referendum on the Union’s relevance, which is being constantly put into question. The observed growing disaffection of the Union by its citizens is being heavily abetted by a broad spectrum the political establishment, which blames “Europe” (avoiding carefully defining which Europe) for many of its own shortcomings.

One should focus the debate on the political options open to the Union and which can only be implemented at this level, insofar as the necessary powers are conferred upon it and that the European executive is held accountable to - and can be sanctioned by - the democratically elected Parliament. The stakes of the election would then become apparent instead of being an arena for stigmatising national governments whose weaknesses are conveniently attributed to Europe or Brussels.  The genuine “eurosceptic” stance added to regular criticisms by national governments of policies previously endorsed in Brussels,  leaves very little room for projecting an inspiring European project.

To illustrate my point, I will develop a single instance of a European policy that should, in theory, benefit from a widespread cross border support, in particular within the eurozone but which has little chance of gaining any traction.

The partial “shut down” of the American government added to the psychodrama created by the threat of a default on the US sovereign debt, the consequences of which are potentially catastrophic, demonstrates the extent to which the rest of the world is dependent on the goodwill of a bunch of American politicians over which we exercise not the slightest sway. Most authorities at the highest levels believe that a last minute solution will emerge as they deem it “inconceivable” that American politicians could be that stupid! Nevertheless, even if reason is likely to prevail and once again – because this is a recurring situation – a compromise is reached, are we not the ones who are “stupid” enough to allow ourselves to be held hostage to American whims? Should the principle of precaution not impose on our political masters the obligation to enforce urgently the necessary reforms to shelter us from American arbitrary decisions which encroach on our sovereignty and increase our degree of subordination?

Regardless of the recommendations of those who advocate – in the name of sovereignty – the reinstatement of national currencies, the only answer to this question lies in ensuring that the euro becomes a credible alternative to the US dollar. This implies accelerating the finalisation of the Economic and Monetary Union by creating a significant common budget financed by specific “own resources” and administered independently from participating Member States. Thus endowed by construction with an autonomous borrowing capacity, EMU would become the privileged counterpart to the ECB. The latter could then deploy successfully the full range of monetary tools available to a fully fledged Central Bank, including its role as lender of last resort to the “EMU Government” and the hands on management of an appropriate exchange rate policy. The euro would progressively be able to enjoy the same privileges which are currently the exclusive prerogative of the American currency.

It is fairly easy to demonstrate the absurdity of the arguments put forward by those who – like Marine Le Pen – believe that a similar result can be achieved by reinstating national currencies in place of the euro; gaining access to the monetary printing press would in no way protect France, for example, from being attacked by financial markets: if Le Pen undertakes to maintain the existing parity there is no obvious reason to exit the euro; on the other hand  if she intends to resort to devaluation to absorb in part the necessary adjustment process to make France competitive once again, refinancing the existing stock of debt in the new “national” currency will command a significant “risk premium” – in addition to the extra significant burden of repaying the existing “euro denominated” debt; indeed, it will be necessary either to attract foreign investors (owners of a considerable amount of the extant French debt stock) who will want to be compensated for the devaluation risk, or to insure  substitution by domestic savings which will lead in turn to higher costs because of the increased volume as well as to crowding out any private domestic issuance. France could, of course, resort to borrowing in part more cheaply in foreign currencies, as was the case prior to the euro: in such an environment the possibility of being subjected to attacks by financial markets would reappear with a vengeance, all the more that the solvency of the country would then be based exclusively on its own resources rather than being anchored, as is the case of the euro, to the wealth of the world’s richest economic area. Believing that markets will stand by idly waiting for the outcome of an “orderly” exit is an additional phantasm.

The chaos that would be created by a “euro exit” by one or several Member States, or by the currency’s implosion due to external factors, would be of a magnitude at least as great – if not greater – than the dire consequences of an American sovereign debt default. Nevertheless, I would not dare to bet that such an outcome is impossible, as believed by many responsible authorities, simply because it is irrational and/or “stupid”: if the “Tea Party” was able to elect a significant number of irresponsible Members of Congress, it is just as likely that, failing a major effort, the “eurosceptic” political parties will be heavily represented within the next European Parliament leading to the total paralysis of the Union.

Nine months remain to convince the voter who is both rational and far from stupid, that “Europe” is not the cause of our present difficulties but that – to the contrary – its transformation towards a resolutely “federal” structure is an inescapable element of any solution. As Paul Henri Spaak once said: “It is not too late but it is high time!”

Paul N Goldschmidt, Director, European Commission (ret); Member of the Advisory Board of the Thomas More Institute

Tel: +32 (02) 6475310 / +33 (04) 94732015 / Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be / Web: www.paulngoldschmidt.eu

© Paul Goldschmidt