20 December 2019

Paul Goldschmidt: Quo Vadis Europa ?

The EU finds itself caught in a vice between the legitimate aspirations of its Members and their respective incapacity to make themselves heard on the international scene, as a result of globalization supported by irreversible technological change.

At purely European level, this dichotomy is illustrated by the simultaneous centrifugal tensions aiming at the transfer of national competences to the EU and centipede forces which – at national level in Belgium, Spain or the U.K for instance – aim at devolving more powers to regions if not pushing for outright independence. The result is paralyzing immobility: the most recent major political breakthrough dates back 20 years with the introduction of Economic and Monetary Union (a still incomplete endeavor), while the latest significant institutional reform occurred in 2008 with the Lisbon treaty (not yet fully implemented: viz. number of Commissioners). [...]

The “diagnosis”, identifying the many problems to tackle, has been the subject of numerous analysis by politicians, economists, bankers, think-tanks, business leaders, etc., and more recently by the new class of European leaders; broadly speaking, it is the subject of a fairly wide consensus. However, in the absence of (unanimous) agreement due to the diversity and the dosage of the “prescriptions”, it would be unwise to bank on substantial progress. To the contrary, Brexit, which involves for the first time ever a Member leaving the EU, establishes a worrying precedent which will inevitably be repeated if fundamental reforms fail to be implemented and, should such a withdrawal involve a Member of EMU, lead to the ultimate demise of the EU.

To deal with this predicament, the idea of holding a two year long Conference has been mooted:

“It should address all issues at stake to guide the future of Europe with a view to making the EU more united and sovereign, such as Europe’s role in the world and its security/defense, neighborhood, digitalization, climate change, migration, fight against inequalities, our ‘social market economy’ model (including social rights, industrial and innovation policy, trade, EMU, competitiveness), the rule of law and European values.”

 

The Conference should dedicate the first six months to institutional reform. As President of the European Council, a heavy responsibility will weigh on the shoulders of Charles Michel in guiding its work and daring it to address the recurring controversial topics [...]

Agreeing acceptable solutions to all these questions is a prerequisite to make progress in the overhaul across many broad policy areas for which the need for EU level solutions becomes ever more evident, such as: defense and foreign policy, climate change, immigration, external border controls, EMU, taxation (own resources) norms, etc.
The alternative is the progressive further vassalage to foreign powers; it is already exerting itself significantly in the monetary field (hegemony of the USD dollar) and in the military (NATO). This can only lead to increased instability of EU Member’s economic welfare and security, impeding the enjoyment of civil and political freedoms by their citizens.

Unfortunately, the initial steps taken since the start of the new legislature in some key policy areas are far from encouraging:

In the area of climate change, though the declaration of the Horizon 2050 “objectives” constitute a success compared with the shipwreck of the COP 25 in Madrid, this key priority of the new Commission is already coming up against financing problems which make its implementation tributary to the forthcoming plurennial budgetary negotiations (2021-2028). As a result, this so-called absolute priority is nevertheless being made hostage to the usual budgetary horse-trading requiring unanimity and in which each Member fights his corner; in light of the recognized priority of “Horizon 2050”, such compromises appear wholly unacceptable. [...]

In a third domain, the recent meeting of the Eurogroupe concluded that further progress in the integration of EMU had stalled: the Banking Union remains incomplete as long as agreement on a Eurozone deposit guarantee scheme remains elusive; no agreement could either be reached on even a minor budget for the Eurozone, the future of which will inevitably be folded into the forthcoming plurennial budgetary negotiations.
In the face of these obstacles, one can wonder whether it is worthwhile wasting so much effort on these objectives if one disregards the far more compelling need to accelerate the integration of all EU Members into EMU (in conformity with the treaty) as being the necessary precondition for reinforcing the global role of the €, another of the top priorities selected by the new Commission. As Gita Gopinath, chief economist at the IMF, writes:

“It’s a perfectly fine idea to promote the euro in international markets, but the necessary condition for that is to improve the euro area architecture to strengthen resilience — centralized fiscal capacity, capital markets union, banking union.”

Transforming the € into a currency that represents a credible alternative to the USD, so that the EU can exercise its true “monetary sovereignty” (on behalf of its members) requires fundamental reforms at both ECB and EU levels:

–  “ The ECB must ensure the physical access” of non-eurozone investors to the currency; among other things, the ECB must be more willing to provide swap lines [of euros to other central banks] outside the euro area”, like the US Federal Reserve has done for dollars”, says Elina Ribakova, an economist at the Institute for International Finance.

While this first recommendation is largely technical, (its implementation in 2008 by the FED having escaped the scrutiny of Congress), one should not underestimate the credit risks to which the ECB might be exposed if it followed this route: the USA, benefitting from the hegemony of the $, was able to limit the number of “swap” counterparties to the strongest among world Central Banks; the ECB, might be pushed to accept lesser creditworthy counterparts in its efforts to spread the usage of the € to new users in order to compete with the USD. One can imagine the reticence of some ECB Governors and the possibility of judiciary challenges (Karlsruhe) against the deployment of such instruments.

-“The EU must remedy the scarcity of high-quality marketable euro-denominated assets, and the general lack of liquidity compared to dollar debt markets because of credit downgrades in the previous crisis and a still-fragmented private securities market, the euro has too few of the reliable assets that global investors use as reserves.”

The creation of a “safe € asset” enjoying sufficient liquidity, is restricted to securities issued by borrowers who have unlimited access to the “monetary creation” capacities of their own Central Bank (this does not prevent imposing (revisable) issuance ceilings as in the USA). This objective is far from being addressed through the ill-conceived “Capital Market’s Union” promoted by the outgoing Commission. The issuing capacity of the EU remains highly restricted and the ECB still lacks a suitable political counterpart with whom to coordinate its monetary policy.

Though Ursula vdL’s initiative to instruct her Energy Commissioner to promote the usage of the € in the energy trade is welcome, it will not reach its goal to compete with the $ as long as – to quote again G. Gopinath: “large parts of the world are trading with each other and saving and borrowing in dollars and holding reserves in dollars — all these channels reinforce each other and the dollar’s lead position.” [...]

Full article on Paul Goldschmidt website

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