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Speech at the Bruegel Institute

Europe is at the most serious of crossroads. Usually, at times of crisis, it rises to the occasion and provides political answers to pressing problems. But today, the Eurozone looks broken and the question arises: is there the will to save it? And if there is the will, is there the way?

There is talk of a bond market that no longer functions, a banking sector with interbank lending virtually at a standstill, entire zones which are cut-off from credit, a run by global investors and an alleged, quiet bank run by citizens. Credit is on the verge of disappearing altogether, confidence is low and decreasing, and governments are forced to adopt austerity measures which, in turn, fuel all the above, increase social tensions and strengthen opposition forces based on populism and opposition to rationalization of finances.

The crisis today can be viewed as the culmination of the first act in a war for global supremacy between financial and political forces. On the BBC, just yesterday, I heard a trader claim that governments do not rule the world, but Goldman Sachs does instead. As a politician, I find that very hard to accept. As a citizen, I refuse to do so. Like all wars it has its victims and, like all wars, the prime victims are the weak, the young, and, often, democracy itself.

The dynamic equilibrium which has held Europe together over the past decades seems to be disintegrating.

The quest for everlasting peace through cooperation and common business was a political as well as an economic statement of intent. The development of a institutional side through the acquis communautaires and the various EU-wide institutional actors (EC, EP, ECJ) were the glue that held the equilibrium together.

The lives of the people were positively affected and we were constantly moving forward. The creation of the Euro however was not accompanied by the necessary institutional arrangements and economic policy instruments. Political realities overrode the economic necessities and we were left with an unstable situation. The inability to effectively deal with the current crisis is the direct result of that weakness.

The crisis highlighted many inefficiencies within the European financial system.

The rules-based system within the Euro regarding Excessive deficit lacked the tools to manage and resolve the crisis. This exacerbated the markets’ response who immediately recognized the inability to respond. At the same time, there is the lack of unified political instruments related to economic policy.

 

However, the creation of the Euro goes beyond narrowly-defined economics and politics. The creation of the Euro has been, and continues to be, more than an economic project; it is also a political and institutional process of integration aimed at achieving a dynamic equilibrium. In that respect, the reactions at the onset of the crisis with Greece at the epicentre were firstly driven by solidarity and a common interest, and hence, provided institutional answers to pressing questions.
The result was an original 750 Billion Euro stability facility which was as unprecedented as it was unexpected. Europe was in a position to demonstrate its political commitment, and its ability, to improve economic governance and economic government.

However, since that moment progress has not been linear and, in recent months we are witnessing a complete institutional disintegration.

Collective action, supranational and intergovernmental negotiation, is being replaced by informal groupings like the Frankfurt Group (Baroso, Rehn, Germany, France, ECB, IMF). The political, collective intervention of 2009-2010 which was based on a hard-earned consensus is being condensed into a game with much fewer players. Today, how many countries are really participating in the discussions and the decisions? Arguably, no more than ten.

I am afraid that this a recipe for disaster. National, social and economic instability which occurs in a crisis like the current one, can only be countered through forceful, principled and democratic political approaches that can inspire the people and intimidate the foes. When the USA lost its AAA status, President Obama counter-attacked and said that the US enjoys a quadruple “A” status. When Spain was downgraded, the European response was timid and focused on the need for discipline and austerity.

People are losing confidence in the reliability of a system that requires discipline but does not deliver hope. The Democratic Deficit, a traditional EU weakness, is exacerbated in the name of a financial dead-end. Decision-making is increasingly in the hands of the few. Social unrest is on the verge of becoming a social explosion. Policy-making is designed and implemented under a damoclean sword of imminent destruction.

The danger to the Euro is unfortunately, but perhaps unavoidably, developing into a danger to the EU. The economic and financial crisis is developing into a political and democratic one.

Discipline is undoubtedly required but it cannot be limited to macroeconomic discipline and austerity. Ratings agencies have helped create a new dogma: that austerity is better than growth if you want to maintain access to capital. That is the conventional logic today and it is permeating political thinking as well. I am not saying that austerity is not crucial and I agree that one cannot spend more than they can afford. I am simply saying that we should not repeat the mistake of the Stability and Growth Pact which focused too much on Stability and very little on Growth. If we do, we are dangerously close to creating a lost generation of young people: Disenfranchised, indebted and jobless.

We need to rebuild our competitiveness. We need to rebuild our institutions. We need to rebuild growth and prosperity.

The discussions about the strengthening of economic governance are welcome and they are necessary. Similarly, calls for increased fiscal discipline are also welcome and form the basis for healthy, long-term policymaking. At the same time, calls for increased condionality linked to structural funds and other financial support mechanisms are also in the right direction but only under certain conditions:

That they do not focus solely on the macroeconomic aspects. That they do only involve punishment. Efforts and relative successes should also be recognized and commended.

This was the approach of the Lisbon Strategy. These indicators were designed to help identify the various national challenges and to constantly evaluate how member-states addressed these challenges. The Lisbon Strategy was intended to spur growth and employment creation:

Innovation, the knowledge economy and social and environmental renewal were supposed to act as triggers of competitiveness and growth and to directly influence the process of integration and EU governance.

All the dimensions that form the competitiveness picture of a country were included: general economic background, employment, innovation and research, economic reform, social cohesion and the environment.

That allowed for the measurement of success or failure and allowed for a relative appraisal instead of an absolute one.      

There is no doubt that we must act and that we must act quickly and effectively. There is also little doubt that the strengthening of EU governance will involve a transfer of power towards EU institutions. This will mean that there will be more European Commission Decisions and fewer Recommendations.

There will be conditions relating to compliance of macro-fiscal rule, surveillance and strict rules relating to deficits and debt but we cannot stop there. When in 2005, the European Commission stopped reporting on the relative progress of the Lisbon Goals, it did so in order to avoid antagonizing national governments. Today, the proposals are at the other extreme: Surveillance and strict rules going perhaps as far as pre-approval of national budgets are directly threatening some of the most basic prerogatives of national sovereignty.  

So we need tools for assessing positive, i.e. relative progress as well. Without these tools (like the Lisbon indicators), there can be no way of exiting the vicious circle of austerity.

 

What the Lisbon indicators can do is to provide detailed goals with both a qualitative and quantitative dimension which allow a continuous, and strict, assessment of investments at the European, national and regional level.

 

But the return to growth also presupposes rediscovering trust, a trust which was severely undermined by the economic crisis. There is little trust in a system when there is growing uncertainty, rising unemployment and lack of prospects.

To rebuild trust, we need to begin by once again placing the principles of transparency, regulation and responsibility at the heart of the financial sector.

We need financial regulation but we also need economic policy.

Investment at the European level is an important aspect of that and we must seek ways to involve the EIB as well. Growth oriented investments, like Trans European Networks are a good example. Transport, telecommunications and energy are crucial for jobs, and for the creation of a united, single market, functioning within a united Europe. But they are not enough.

We also need to develop a New Strategy and a New Contract on the basis of economic growth that is more than just magnification. A growth that is sustainable and green, while providing jobs and being inclusive. For that, developing our innovation capacity at all levels (European, national and regional) is key. To do this we need the cooperation of the public and private sectors; a business environment that allows risk and failure as well as success; education and research with strong links to the national and European economy.

Some of the best basic research in the world takes place in Europe. Yet we still have a relatively lower share of innovating enterprises. The gap between research and the markets is still too wide when the “missing middle” of innovation (companies that typically require between 50 and 200 thousand euro investment) should be dominated by our universities’ graduates. They hardly exist in the market.

Linking Resarch with the forces of production and wealth creation and its collaboration with industry will not harm basic research. Instead it will reposition research as an area of opportunity. It will bring innovation to the market and it will create employment instead of occupying it (in that researchers today are employed by someone, usually a university).

 

The Lisbon Strategy was also an attempt at integrating an innovation support system and of coordinating national resources towards a common objective. It has thus far failed, not only due to its faults, but also due to the more systemic failures we are all aware of today.

 

I believe this story of failures can still become a narrative of success.

 

A note on the institutional crisis

Europe is constantly balancing the short-term with the long-term. The intensifying financial pressure raises the chances of a disorderly default by a government, a run of retail deposits on banks short of cash, or a revolt against austerity that would mark the start of the break-up of the euro zone. At the same time, the Eurozone’s and the EU’s reactions take time which, at this juncture, is not available.

Will the EFSF be able to withstand the pressure? As its main partners include countries which are feeling increasingly insecure, who will save the saviours?

Led by the rating agencies’ dogmas, governments are cutting back at unpredictable rates and with unpredictable consequences.

This is creating enormous social pressures. The rise of populism, national considerations and social unrest is putting the entire European edifice at risk.

The economic crisis is rapidly evolving into a democratic and political one as well. Our common values are increasingly deprioritised. And what is the EU without its values?

Although speed of action is crucial during this crisis, we cannot separate the discussion from discussions about the future architecture of the Eurozone. Hence, Eurobonds, or some kind of other temporary bonds must feature highly. As will the role of the European Commission but with clear rules and specific rule for manoeuvre.

The ECB should also become the lender of last resort. Otherwise Europe cannot compete at the global stage. It cannot provide the political answers which are often required (like Obama did).

Some kind of Eurobond needs to be decided upon. A fiscal union need also be envisaged (although there seems to be precious little time at this point).

The European Council’s decisions on December 9th need to be a compromise perhaps with elements of all three. Anything else would be disastrous for the people of Europe.

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Anna Diamantopoulou, 2012. Content is distributed with a CC A-NC-ND-Gr-3.0 licence

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