A new arrangement between Eurozone’s haves and have-nots

The next European Council which is to take place in Brussels on Wednesday 22 May will be pivotal for the European Monetary Union (EMU), that is the Eurozone. Despite the fact that according to high-ranking Council officials there won’t be any decision on the EMU this month, there is evidence that the 17 Eurozone leaders will set the base for the Banking Union a major step forward for the institutionalisation of the Eurozone. Not to forget that Ollie Rehn has asked for an independent representation of Eurozone in international bodies. Officially the agenda for the 27 EU leaders’ next meeting contains discussion on tax policy, with a particular focus on how to “improve the efficiency of tax collection and best tackle tax evasion and fraud with the aim of strengthening member states’ fiscal stance and deepening the internal market”. Another item on the agenda will be energy in the context of the EU’s efforts to promote growth, jobs and competitiveness. Last but not least, the 17 Eurozone leaders will also “take stock of work on the deepening of EMU” as it is officially announced. More monetary union However, if one wants to take meticulously stock of the work on the EMU will be astonished by the divergence of views. As the European Sting has repeatedly said, the Eurozone is now divided in two well-formed camps. The austerity lovers of Germany and those who place growth and the creation of jobs as first short-term priority. Obviously growth and creation of jobs is understood that it will be financed by a bit higher government deficits and more sovereign lending. God help us, the devil itself for Berlin. This is largely facilitated by the new development in the capital markets, where investors offer very cheap loans to Eurozone borrowers. It is characteristic that Portugal yesterday returned to the capital market and sold 10 year government bonds for the first time after years at a comfortable interest rate of 5.26%. The ‘growth seekers’, favoured by capital markets which offer now low-cost loans to Eurozone governments, have already conquered Brussels. However on the other side of the fence, Germany is not standing idle. It takes as much help as it can from a newly coined ally, the President of Eurogroup and Dutch minister of Finance, Jeroen Dijsselbloem, coming from a socialist party. Obviously the difference between the two sides, namely the ‘austerity lovers’ and the ‘growth seekers’, is to produce a cost for Germany. That is why the Berlin officials don’t even accept to discuss over that. They know that once in this table they will be obliged to give something for the first time. In any case they will not avoid it at the end. There is no win-win for Berlin In reality Berlin after having mathematically gained a lot of money from the financial consolidation of countries like Greece, Portugal and Ireland is now trying to also gain from the European Banking Union. The plan is gradually taking a concrete form and Dijsselbloem almost revealed it speaking in a Brussels debate hosted by the European Commission. Given that the place was an ‘enemy camp’ he had to be aggressive. He went like that: “The EU must not waver in its commitment to achieving sound public finances. The future of the Economic and Monetary Union, but also the future of the European social model, depends on us recognizing clearly that we cannot spend and borrow our way to recovery in a sustainable way. Future investments in education, healthcare and active labour markets policy, are all predicated on sound public finances. Fiscal consolidation may weigh on growth in the short-term, but it is an absolute condition for the EU’s prosperity in the middle and long-term”. This was Dijsselbloem’s monologue in defence of austerity and an effort to place fiscal consolidation ahead of growth, jobs, education, health care and active labour market measures. The obvious target was Commission’s Vice-President, Ollie Rehn, who some days before speaking at the European Parliament had reversed the order of priorities, placing growth first. The Dutch minister however had more to say in favour of the German banks. He said this: “But the prosperous future of the EMU also depends on us rebuilding and restoring confidence in the banking sector… The Single Supervisory Mechanism will place all systemically important Eurozone banks under the direct supervision of the European Central Bank. It will also ensure that when banks are in trouble the alarm bell is sounded early, immediate action is taken and the worst can be avoided”. Who is systemic? Understandably the Single Supervisory Mechanism will place under its direct supervision the systemically important lenders. This is not news however. What is news has to do with the difficult negotiations about which banks are to be considered as systemic and which not. Not to forget that the systemic banks will pay much less for their financing and they will be considered as offering better security to depositors. So who is going to be systemic and who is not? The price in not small. For example are systemic the four biggest Greek banks recapitalized recently by the European Financial Stability Facility/ European Stability Mechanism (EFSF/ESM) to a generous 12% of assets to capital ratio? The problem with them is that they are…Greek. On top of that the Germans and this Dutch do not want southerners in the systemic bank club. In this was the differential capital cost between the ins and the outs, will be larger and Berlin wants it this way. The Commission thinks differently At the same time, though, European Commissioner, László Andor, responsible for Employment, Social Affairs and Inclusion was saying exactly the opposite from the Dutch minister. Andor, speaking at the London School of Economics clearly favoured nothing less than a fiscal unification of Eurozone. Another dangerous devil for Berlin, just read the following text from the Commissioner: “So long as there are no fiscal transfers within the monetary union, this divergence is likely to continue. In the end, everyone is worse off, because as we have seen since 2012, the recession in the periphery engulfs also the core as total demand falls. Recovery would have been closer if the monetary union had transnational automatic stabilisers in place, for example a European unemployment benefit scheme”. What Lazlo said in reality is that, God forbid, the German taxpayer should pay unemployment benefits to the Greek and Spanish unemployed. In a few days, on 22 May in the European Council, it will be clear that a new compromise has to be struck in Eurozone. The Germans cannot deny for ever that they have nothing to do with the Spanish unemployed and the over-borrowed Greeks.