How much time has the ‘European Union of last chance’ left?

Ahead of the 18-19 December Summit of the 28 EU leaders, the European economy dives deeper in recession and disinflation. Brussels sources estimate that November inflation plunged again to 0.3% from 0.4% in October, widely diverging from the institutional target of below but close to 2%. There is more to it though. According to Eurostat, in the 18 member states Eurozone growth during the third quarter of 2014 was decimated to a derisory 0.2%. No wonder why the European Union is reprimanded by the rest of the developed world for constituting the main obstacle to global economic development. Even the German economy is trapped in stagnation for a second quarter in a row, with France faltering widely and Italy plunging once more to recession. Those countries account for more than two thirds of the Eurozone economy. Unbelievably, this is the bright side of things. In the dark part of the moon, Greece, Spain, Portugal, the Netherlands, Cyprus, Belgium, Austria and Finland are either plagued by disastrous unemployment rates and recession or are stuck in stagnation. Which policy mix? At the same time the European Union is caught in a disturbing dispute between Germany and its satellites on the one side and France, Italy and the rest of the south on the other about the right policy mix to see the euro area out of its malaise. Germany insists that incomes austerity and zero deficit budgets can establish a sound base for a sustainable economic policy mix in the long run, whereas the other camp cries out that in the meanwhile the Union might perish. France and Italy have already compiled government budgets for 2015 with deficits exceeding the allowed margin of 3% of the GDP. Under the new strict economic governance rules, established in 2013 by the ‘two pack directories’ to protect Eurozone from excessive sovereign borrowing, disproportionate deficits may trigger heavy penalties from the European Commission. So far the Commission hasn’t decided to apply the rules to the letter and Paris and Rome maintain that they need more time to bring their state finance in line with the new rulebook. France and Italy demand more Paris and Rome have also made clear that Brussels and the European Central Bank have to do more in order to help the euro area economy start growing again, in order to escape from the disinflation zone. The obvious way to do so is by tolerating relaxed fiscal and monetary policies. Berlin opposes such policy options. It seems however that the German government can accept some kind of compromise between fiscal-monetary orthodoxy and relaxation. Wolfgang Schäuble, the Federal Minister of Finance, has already announced an extra investment plan to support his country’s infrastructures. Nevertheless, the German minister was very careful with money and cited a rather disappointing €10 billion extra spending of public money over the next three years. By the same token though, Berlin has taciturnly accepted ECB President Mario Draghi’s expansionary monetary policy initiatives, despite the vigorous reactions by Germany’s central bank, the Bundesbank. Buba’s President, Jens Weidmann has always been opposing monetary easing in order to support the real economy, but Berlin hasn’t backed him all the way. Looking for new stimuli The urgent need to devise additional stimuli to revive the European economy has led the newly elected European Commission President Jean-Claude Juncker to promise a €300bn investment programme. The question is though if this will constitute a new financial instrument or if it will be procured from existing sources, like the approved EU budgets for the next seven years. This can be narrowed down to a rearrangement of existing credit lines. Commission sources say that an adroit use of public money can mobilise 10 times more of private capital. Then they argue that the extra public money needed doesn’t look that monstrous as Junker’s initial announcement. Conversely, the French don’t share this approach. Paris asserts that a meaningful accomplishment of the Junker investment plan needs at least €80bn of new public spending. Cheap money alone can’t do it Whatever the outcome around the new investment plan, the truth remains that so far the cheap money policy with the close to zero interest rates, introduced in the European financial system by the ECB a long time ago, hasn’t galvanised Eurozone’s growth capacities. It becomes clear then that monetary policy alone cannot reactivate the economy. Consequently, the €300bn investment package has to be implemented with maximum sensitivity vis-à-vis the millions of the unemployed. If this is to be the case, the 28 EU leaders’ Summit of 18-19 December has to take immediate action on two fronts, investments at EU level and structural reforms for member countries, including Germany. Only then ECB’s quantitative easing (albeit restricted) is to have a noticeable impact. If not, Eurozone will continue to tremble every time Greece is heading for bankruptcy. It is equally true that Italy, France and Spain cannot tolerate politically, socially and financially the fiscal and monetary austerity any more. What are the stakes? And it’s not only that. Marine Le Pen has already aligned her National Front with Putin’s Russia, the same is true for Viktor Orban’s Hungary, while Nigel Farage can amputate the Union with his UKIP. All these are direct outcomes of Europe’s economic sickness. If an effective cure is not introduced right away, soon there won’t be much left to revive. Juncker said that his is the ‘Commission of last chance’. He is more than right, actually this is the ‘Union of last Chance’.