Draghi joined Macron in telling Germany how Eurozone must be reformed

French President Emmanuel Macron delivered a momentous speech after receiving the Charlemagne Prize. Sited behind Macron, ECB President Mario Draghi a former laureate of the Charlemagne Prize, looks on. Aix-la-Chapelle, 11 May 2018. (French Presidency work – snapshot from a video).

Mario Draghi the President of ECB, speaking at the European University Institute in Florence, on 11 May 2018, must have been under the influence of the idealistic aura of this Florentine learning institution. He went as far as proposing political policies, bravely overstepping his role as central banker of Eurozone. Draghi asked for an effective “European deposit insurance scheme”. He also proposed the creation of “an additional fiscal instrument to maintain convergence during large shocks” in Eurozone.

Those are two clearly set ideas. The first is about a credible and adequately financed common euro area bank deposit guarantee scheme. The second one is tantamount to a Financial Ministry and minister in Brussels, with a macro-economically important budget. Both proposals are identical to Emmanuel Macron’s ideas about how to reform and save the European Union. The French President reiterated and amplified his well known proposals on 10 May in Aix-la-Chapelle, while receiving the Charlemagne Prize in front of an audience comprising Angela Merkel and other top European leaders. This time, Macron didn’t chew his words and told the German Chancellor, who was sitting just a few meters from him, what her country must do. Let’s take one thing at a time.

The Italian banking crisis

Returning to Florence, we find Draghi asking for the creation of a true ‘Banking Union’ with a powerful Single Resolution Fund (to resolve failing banks), backed by the financial powers of all the sovereign governments of euro area, including the one based in…Berlin. Currently, this Fund is financed by small annual contributions paid by the lenders, being overtly incapable of confronting a real banking crisis, but this arrangement is totally inadequate and cannot save even the smallest bank. During the last three years, this was evident in the case of Italy.

During that period, Italy, despite been over-indebted, was forced to alone save a number of failing banks. In this way the Italian government dived deeper into debt and consequently was unable to adequately support economic growth. This had devastating effects on the country’s political developments. The result is an impossible government, being currently about to be formed by the ‘5 Star Movement’ party led by a comedian, plus the anti-European, extreme right populists of ‘Lega’. All of them promised greener grass, to win the 4 March elections.

They will end up blaming Europe for their treachery and the failure to honor promises. Politically then, it’s not an exaggeration to predict that Italy’s future in the euro area is at stake. Such a dreadful prospect may trigger the unravelling of the entire euro money block.

An effective backstop

Obviously, this is what Draghi wanted to avoid, when he said “What is still missing, however, is a backstop for the Single Resolution Fund. That is why in all the other large jurisdictions, such as the US, the UK and Japan, resolution funds are backstopped by the fiscal authority”. He expertly identified here a critical deficiency of Eurozone. Clearly, the euro area lacks a real banking union, with a dependable risk sharing mechanism, backed by all member states’ financial resources.

If such a mechanism existed, it would have reduced the country risk for all and every member state. In 2014, Germany blocked the enactment of such a powerful financial instrument, by compromising the Single Resolution Fund. As the Fund was finally shaped in June of that year, currently, it cannot handle in an orderly and low cost way the resolution of any bank.

What is missing?

Undeniably, if there was a common EU and strong fiscal authority and a euro area bank deposit guarantee system in Brussels, the Italian banking crisis would have cost much less. By the same token, it wouldn’t have produced today’s political stalemate, which may prove to be a bomb in the foundations of Eurozone and the EU.

Germany is the only economic power which blocked the creation of such a pan-European and effective Single Resolution Fund. In 2014, Berlin opposed the creation of such a Fund, fearing that it will be only Germany to pay for it. Now however, Macron says France is ready to undertake the proportionately right part of the financial burden to mend that, so Germany cannot go on stubbornly using this argument.

France can fund it

Last week in Aix-la-Chapelle, the French leader said it clearly, speaking after he received the prestigious Charlemagne Prize. He stated, “C’est pourquoi je crois dans un budget européen beaucoup plus ambitieux, dans lequel la France prendra sa part de contribution…défendre une convergence économique, fiscal… C’est pour cela que je crois à une zone euro plus forte, plus intégrée, avec un budget propre permettant les investissements et la convergence parce que c’est le seul moyen de permettre à tous les États qui souhaitent aller de l’avant, d’aller en cette direction”. (“That’s why I believe in a much more ambitious European budget, for which France is to undertake her contribution…to defend an economic, fiscal convergence…That’s why i believe in a much stronger euro area, more integrated, with its own budget which will support investments and convergence because this is the only means to open the way to all member states who wish go forwards, to go in this direction”).

He had more to say though. Macron also pointedly said that the German surpluses are the deficits of somebody else and this cannon go on: “en Allemagne, il ne peut pas y avoir un fétichisme perpétuel pour les excédents budgétaires et commerciaux parce qu’ils sont toujours faits aux dépens de certains autres”. (“In Germany, the ongoing fetishism for budget and trade surpluses cannot go on any more, because they are always accumulated on certain other people’s expenses”).

At the expenses of others

Every year, Germany turns out a trade surplus of some tens of euro billions with her EU partners. Unfortunately, she hoards those colossal funds and refuses to recycle them. Thus in the long run, this country inhibits the entire euro area’s economic system from functioning properly. Actually, Germany neutralizes the abilities of her trade partners to grow. The political side effects have been evident in the periphery of Eurozone. During the past few years one after the other Italy, Greece, Spain, Portugal and Ireland have been politically functioning on the brink of the abilities of their party systems.

As noted in the introduction, Draghi completed his vision for Europe, proposing also the creation of a common pan-European fiscal instrument, he said … “such an instrument (a Eurozone budget) could take: from the provision of supranational public goods – like security, defense or migration – to a fully-fledged fiscal capacity”. It may not be by chance that with a difference of a few hours -10 May for Macron, 11 May for Draghi – the two proposed detailed and identical reforms about how the Eurozone can avoid being wasted away in a few years. Each of them explained what is needed to be done, the way they knew best; Macron in political terms and Draghi with solid economic reasoning.

The question remains though, if they can force Germany to accept the reality that Eurozone cannot go on creating surpluses only for this country.

 

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Italy solves the enigma of growth with fiscal consolidation: The Banking Union

This start-up is recycling abandoned wooden homes in Baltimore

From Shadows to Sunlight, Paraguay’s Road to Transparency

Empathic AI could be the next stage in human evolution – if we get it right

UN, Egypt help avert another Israel-Palestine war in Gaza that was ‘minutes away’, Security Council hears

Who will win the AI race? If countries work together, then the answer could be all of us

Safer products: EP and Council close deal to beef up checks and inspections

It’s time for financial services to embrace the Fourth Industrial Revolution. Here’s why

How to promote Primary Healthcare to the Young Healthcare Workforce?

These are India’s cleanest cities

Security Council approves ‘historic’ political Haiti mission, ending UN peacekeeping role in the country

From Israel’s ‘start-up nation’, 4 lessons in innovation

Inequality triggered protests across Latin America. Here’s how the youth can help

How robotics can help humanitarians bridge the digital divide

Impressive African health gains at risk from changing trends: WHO report

These 4 leaders are working to improve integration in Southeast Asia

This is the IMF’s latest take on the economy in 2020

Eurozone: Economic sentiment-business climate to collapse without support from exports

Coronavirus: Commission welcomes Parliament’s quick green light for proposed new resources to protect lives and livelihoods

Meet the robot fighting back against coral reef destruction

India is failing 175 million of its young people. Here’s the solution

Movius @ MWC14: Discussing novel Communications Applications over a “CAFÉ”

EU budget: Commission proposes major funding increase for stronger borders and migration

Commission publishes the first report on the issuance of a Eurobond

From Sweden to India, School climate strikes have gone global

OECD and European Commission join forces to further support structural reforms in European countries

How the world can gear up for the fight against cancer

How responsible businesses can step forward to fight coronavirus

4 bold new ways New York is going clean and green

Google strongly rejects EU antitrust charges and now gets ready for the worst to come

Brazilian public health system and universality: a forgotten right!

Tax evasion and fraud threaten the European project

G20 LIVE: “ISIL is the face of evil; our goal is to degrade and ultimately destroy this barbaric terrorist organisation”, US President Barack Obama cries out from Antalya Turkey

Media and entertainment in flux: it’s time for the close-up

State aid: Commission approves €200 million Danish loan in support of the Travel Guarantee Fund for travel cancellations due to coronavirus outbreak

This cheap, 700-year old solution could change billions of lives

EU confronts environmental threats as global leaders attempt to revive the global sentiment at NYC climate week

Antitrust: Commission launches sector inquiry into the consumer Internet of Things (IoT)

Africa is creating one of the world’s largest single markets. What does this mean for entrepreneurs?

Minding the information gap and why it’s important in tackling COVID-19

Young people are not a nameless, faceless mass. So why do we treat them as such?

High-flyers: China is on top of the world for skyscraper construction

Commission disburses €8.5 billion under SURE to five Member States

How the world can ‘reset’ itself after COVID-19 – according to these experts

Theresa May’s global Britain against Philip Hammond’s Brexit fog

As we switch to cleaner energy, there are three dangers we must not overlook

OECD: Mind the financial gap that lies ahead

The smartest cyber investment is collective action. Here’s why

Draghi’s ‘quasi’ announcement of a new era of more and cheaper money

Idai disaster: Stranded victims still need rescue from heavy rains as UN scales up response

Human Rights Council election: 5 things you need to know about it

Member states jeopardising the rule of law will risk losing EU funds

Solitary Britain sides with US aggressing Russia and chooses hard Brexit

Investing in working conditions and quality jobs

Eurogroup president swallows statement on savings confiscation

Why are Black people in the UK more at risk from COVID-19?

Security Council condemns attacks on Afghan security forces which killed at least 27

Migration crisis update: lack of solidarity not only among EU leaders but also EU officials

‘Crippling to our credibility’ that number of women peacekeepers is so low: UN chief

Central Asia bloc has important role in ‘peace, stability and prosperity’ beyond region, says Deputy UN chief

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s