Jun 27th 2014

Looking Beyond Juncker

LONDON – The European Union appears to be capable of concentrating on only one problem at a time. This summer it is the question of who will succeed José-Manuel Barroso as President of the European Commission. British Prime Minister David Cameron has found himself fighting a rearguard action to try to block the appointment of the arch-federalist Luxembourger Jean-Claude Juncker.

The Commission presidency is no doubt an important job. The Commission retains a monopoly on proposing new legislation, the character of which is heavily influenced by the president. But new legislation is something of a luxury for Europe these days. Rather than contemplating exciting new directives on the desirable characteristics of, say, lawnmowers sold in the EU, Europe’s leaders must complete three urgent and interlinked tasks.

The first is political. In the recent European Parliament election, a quarter of voters in the United Kingdom and France backed parties that are hostile to further integration and committed to restoring a Europe of independent member states. Even in Germany, a euroskeptic party did surprisingly well. The center-left and center-right federalists have responded by making common cause to secure a majority for Juncker.

That is not a stable outcome. Defenders of the European ideal need to engage more directly with its critics and articulate an inspiring vision, rather than sticking their heads in the sand and intoning the words “ever closer union” at every opportunity.

They would find it easier to win over euroskeptics if they could point to more solid and durable economic achievements. Eurozone growth remains sluggish, at 0.7% over the last year, while unemployment, at 11.7%, is unacceptably high. These averages are depressing enough, but some parts of the continent are in far worse shape. Spanish unemployment is above 25%, and the Italian economy has barely grown since the euro’s introduction.

Economic recovery is being held back by financial problems – the third hot topic that EU leaders must address. The single financial market broke down four years ago and has not yet been repaired.

To be sure, the European Central Bank has done what it takes to narrow the borrowing cost differences between European sovereigns. For much of 2012 and 2013, the Spanish and Italian governments were paying 5.5-7% for ten-year money, while the German rate was below 2%. Today, the differential is much lower. Spain and Italy are paying only around 150 basis points more than Germany. ECB President Mario Draghi can take credit for that.

But from businesses’ perspective, things look rather different. For a Spanish or Italian small firm, the interest-rate differential remains as high as it was. An unsecured business loan will cost a Southern European firm two percentage points more than its counterpart on the Rhine, even though the two companies have a similar credit rating. Until 2010, the gap was just a few basis points. It exploded in 2011 and has not narrowed since.

That is a serious competitive disadvantage to add to the penalty of being at a greater distance from the EU’s center of economic gravity. If it persists, it will reinforce the growing division of Europe into “haves” and “have-nots.”

How can such a differential persist in what is supposed to be a single, integrated financial market? The answer, of course, is that the eurozone is no such thing, at least not yet. The crisis of confidence in the EU banking sector that erupted in 2010 has not yet been resolved. European banks are still reluctant to lend to one another, especially across borders. They suspect that some of their counterparts are weak and vulnerable, and have little confidence in the willingness of national bank supervisors to reveal the truth and demand remediation. So German banks with surplus cash would rather deposit it at the ECB than put it to work in Italy or Greece.

The banking union was agreed in order to correct that problem, with the ECB front and center as the single supervisor of all major European banks. But the market is clearly signaling that the banking union has not yet done its job – indeed, that it is by no means complete. There are doubts about the lack of a unified deposit-protection scheme, about the availability of funds to resolve a failing institution, and about whether the ECB’s approach will be rigorous enough to identify the lame ducks, force them to recapitalize, and thus rebuild confidence.

The key test will come this autumn, when the ECB reveals the results of its asset quality review. I expect the supervisors to be rigorous: their institution’s credibility depends on it. But national supervisors and governments retain a significant role. Will they be prepared to be honest and, more important, willing and able to help the walking wounded raise capital?

Recent debt issues by the Italian bank Monte dei Paschi di Siena and others have shown that financing for banks is expensive. Investors need to be offered heavy discounts to persuade them to part with their money. As a result, some banks that suspect that their balance sheets will be revealed to be weaker than they have so far acknowledged are cutting back on lending. The continuing credit constraints are one reason that parts of the European economy remain weak.

So the three problems that Europe will face in the second half of this year are closely connected. The EU will need the strongest leadership team that it can find to steer through treacherous waters and implement crucial financial reforms. Just now, the signs are far from promising. There are few new faces or ideas on the horizon. We must hope to be surprised.



Copyright: Project Syndicate, 2014.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Oct 22nd 2021
EXTRACT: "Powell was charismatic in the true sense of the term. Nowadays, this description is too often used to indicate an ability to attract supporters or generate celebrity interest. Internet lists of those who are regarded as charismatic include characters as varied as Adolf Hitler, Bono, Donald Trump, George Clooney, and Rihanna. But the ancient Greeks and Saint Paul used “charisma” to describe values-based leadership infused with a charm capable of inspiring devotion. The Greeks believed that this quality was a gift of grace, while Christian theology regarded it as a power given by the Holy Spirit."
Oct 17th 2021
EXTRACTS: "But property-sector woes are not the only economic danger China faces in 2021-22. The Chinese government’s mounting crackdown on the country’s burgeoning tech sector may pose an even greater threat." ---- "According to a recent study by McKinsey & Company, the share of Chinese urban employment supported by private enterprises more than quadrupled between 1995 and 2018, from just 18% to 87%. The share of exports generated by the private sector more than doubled over the same period, from 34% to 88%. And private-sector fixed-asset investment jumped from 42% to 65% of the total. The message in the data is clear: clamping down on the private sector and threatening innovators is not the way to ensure sustained rapid growth. Chinese entrepreneurs can read the writing on the wall. They understand that their political and regulatory room to maneuver is shrinking, and that the balance has shifted in favor of state-owned firms and public officials. And they understand that this uneasy atmosphere is likely to persist."
Oct 16th 2021
EXTRACT: "We designed a programme that incorporated data from over 300 million buildings and analysed 130 million km² of land – almost the entire land surface area of the planet. This estimated how much energy could be produced from the 0.2 million km² of rooftops present on that land, an area roughly the same size as the UK."
Oct 6th 2021
EXTRACT: "Britain in the 1950s was wedded to the US, acting as a partner rather than leading the charge. Now, while the UK continues to support the US, the influence it has seems negligible. While it may bring comfort to the UK to feel it is a partner to a superpower, being its stooge or subordinate is an unpleasant place to be, no matter how much you tell yourself it values your opinion."
Oct 6th 2021
EXTRACT: "That was then. Now, the Chinese government has doubled down, with President Xi Jinping throwing the full force of his power into a “common prosperity” campaign aimed at addressing inequalities of income and wealth. Moreover, the regulatory net has been broadened, not just to ban cryptocurrencies, but also to become an instrument of social engineering, with the government adding e-cigarettes, business drinking, and celebrity fan culture to its ever-lengthening list of bad social habits. All this only compounds the concerns I raised two months ago. The new dual thrust of Chinese policy – redistribution plus re-regulation – strikes at the heart of the market-based “reform and opening up” that have underpinned China’s growth miracle since the days of Deng Xiaoping in the 1980s. It will subdue the entrepreneurial activity that has been so important in powering China’s dynamic private sector, with lasting consequences for the next, innovations-driven, phase of Chinese economic development. Without animal spirits, the case for indigenous innovation is in tatters."
Oct 5th 2021
EXTRACT: "Wartime nostalgia plays an important part in Britain’s instinctive fondness for the special relationship. Like former Prime Minister Tony Blair in the run-up to the invasion of Iraq in 2003, some British politicians might believe that the United Kingdom is the only European country with serious armed forces and the political will to use them. Prime Minister Boris Johnson, like Blair before him, seems to fancy himself a modern-day Churchill. Unfortunately (or not), Britain’s military power is insignificant compared to what Churchill could command in 1944. Wartime nostalgia has drawn Britain into several foolish American wars, which other European countries were wise to avoid."
Sep 24th 2021
EXTRACTS: "We have found that 47 million American adults – nearly 1 in 5 – agree with the statement that “the 2020 election was stolen from Donald Trump and Joe Biden is an illegitimate president.” Of those, 21 million also agree that “use of force is justified to restore Donald J. Trump to the presidency.” Our survey found that many of these 21 million people with insurrectionist sentiments have the capacity for violent mobilization. At least 7 million of them already own a gun, and at least 3 million have served in the U.S. military and so have lethal skills. Of those 21 million, 6 million said they supported right-wing militias and extremist groups, and 1 million said they are themselves or personally know a member of such a group, including the Oath Keepers and Proud Boys." ----- "..... the Jan. 6 insurrection represents a far more mainstream movement than earlier instances of right-wing extremism across the country. Those events, mostly limited to white supremacist and militia groups, saw more than 100 individuals arrested from 2015 to 2020. But just 14% of those arrested for their actions on Jan. 6 are members of those groups. More than half are business owners or middle-aged white-collar professionals, and only 7% are unemployed."
Sep 11th 2021
EXTRACT: "That long path, though, has from the start had within it one fundamental flaw. If we are to make sense of wider global trends in insecurity, we have to recognise that in all the analysis around the 9/11 anniversary there lies the belief that the main security concern must be with an extreme version of Islam. It may seem a reasonable mistake, given the impact of the wars, but it still misses the point. The war on terror is better seen as one part of a global trend which goes well beyond a single religious tradition – a slow but steady move towards revolts from the margins."
Sep 11th 2021
EXTRACTS: "Is it not extraordinary that in a country that claims to be as enlightened and advanced as ours, the combined wealth of three individuals – Amazon founder Jeff Bezos, Microsoft founder Bill Gates, and investor Warren Buffett – exceeds the total wealth of the bottom half of Americans? One has to return to the days of the pharaohs of Egypt to find a parallel to the extreme wealth inequality that we see in in America today." ...... "The top tax rate remained above 90 percent through the 1950s and did not dip below 70 percent until 1981. At no point during the decades that saw America’s greatest economic growth did the tax on the wealthy drop below 70 percent. Today it is somewhere around 37 percent. President Biden’s American Families Plan would increase the top tax rate to 39.6 percent – a fairly modest alteration, albeit in the right direction. It is true that there was a time when the top marginal tax was even lower than it is today: in the years leading up to the Great Depression it hovered around 25 percent."
Sep 7th 2021
EXTRACT: "But Biden can’t be blamed for the rise of the Taliban, or the fragile state of a country that has seen far too many wars and invasions. The US should not have been there in the first place, but that is a lesson that great powers never seem to learn."
Sep 4th 2021
EXTRACT: "The world is only starting to grapple with how profound the artificial-intelligence revolution will be. AI technologies will create waves of progress in critical infrastructure, commerce, transportation, health, education, financial markets, food production, and environmental sustainability. Successful adoption of AI will drive economies, reshape societies, and determine which countries set the rules for the coming century." ----- "AI will reorganize the world and change the course of human history. The democratic world must lead that process."
Sep 1st 2021
EXTRACT: "Although the Fed is considering tapering its quantitative easing (QE), it will likely remain dovish and behind the curve overall. Like most central banks, it has been lured into a “debt trap” by the surge in private and public liabilities (as a share of GDP) in recent years. Even if inflation stays higher than targeted, exiting QE too soon could cause bond, credit, and stock markets to crash. That would subject the economy to a hard landing, potentially forcing the Fed to reverse itself and resume QE." ---- "After all, that is what happened between the fourth quarter of 2018 and the first quarter of 2019, following the Fed’s previous attempt to raise rates and roll back QE."
Sep 1st 2021
EXTRACT: "Today’s economic challenges are certainly solvable, and there is no reason why inflation should have to spike."
Aug 27th 2021
EXTRACT: "To be sure, they have focused on their agenda, which is totally misguided—not by our own account but by the account of the majority of the American population, who view the Republican party as one that has lost its moral footing to the detriment of America’s future generations, who must now inherit the ugly consequences of a party that ran asunder."
Aug 21st 2021
EXTRACTS: "Now that so many sad truths about Afghanistan are being spoken aloud, even in the major media – let me add one more: The war, from start to finish, was about politics, not in Afghanistan but in the United States. Afghanistan was always a sideshow."--- "....the 2001 invasion was fast and apparently decisive. And so it rescued George W. Bush’s tainted presidency,..." --- "Bush’s approval shot up to 90% and then steadily declined,..."
Aug 17th 2021
EXTRACT: "The Taliban’s virtually uncontested takeover over Afghanistan raises obvious questions about the wisdom of US President Joe Biden’s decision to withdraw US and coalition forces from the country. Paradoxically, however, the rapidity and ease of the Taliban’s advance only reaffirms that Biden made the right decision – and that he should not reverse course. ...... The ineffectiveness and collapse of Afghanistan’s military and governing institutions largely substantiates Biden’s skepticism that US-led efforts to prop up the government in Kabul would ever enable it to stand on its own feet. The international community has spent nearly 20 years, many thousands of lives, and trillions of dollars to do good by Afghanistan – taking down al-Qaeda; beating back the Taliban; supporting, advising, training, and equipping the Afghan military; bolstering governing institutions; and investing in the country’s civil society. .... Significant progress was made, but not enough." ....... "That is because the mission was fatally flawed from the outset. It was a fool’s errand to try to turn Afghanistan into a centralized, unitary state. "
Aug 6th 2021
EXTRACT: "But even in the US, which is more lenient than most countries, the principle cannot be absolute. Inciting imminent violence is not permitted. Donald Trump’s speech on January 6, urging the mob to storm the US Capitol, certainly came close to overstepping this boundary. It was a clear demonstration that language can be dangerous. What the internet media has done is raise the stakes; “fighting words” are spread around much faster and more widely than ever before. This will require a great deal of vigilance, to protect our freedom to express ourselves, while observing the social and legal bounds that stop words from turning into actual fighting. "
Jul 27th 2021
EXTRACT: "When it comes to the Chinese economy, I have been a congenital optimist for over 25 years. But now I have serious doubts. The Chinese government has taken dead aim at its dynamic technology sector, the engine of China’s New Economy. Its recent actions are symptomatic of a deeper problem: the state’s efforts to control the energy of animal spirits." ---- "... the Chinese economy, no less than others, still requires a foundation of trust – trust in the consistency of leadership priorities, in transparent governance, and in wise regulatory oversight – to flourish. --- Modern China lacks this foundation of trust ."
Jul 25th 2021
EXTRACT: "It seems that they are, as the last 18 months have seen a remarkable expansion of the central banks’ fields of activity, largely driven by their own ambitions. So they have moved into the climate change arena, arguing that financial stability may be put at risk by rising temperatures, and that central banks, as bond purchasers and as banking supervisors, can and should be proactive in raising the cost of credit for corporations without a credible transition plan. That is a promising new line of business, which is likely to grow. ---- Central banks are also trying to move into social engineering, specifically the policy response to rising income and wealth inequality, another hot button topic with high political salience."
Jul 25th 2021
EXTRACT: "The EU’s ambitious unilateral climate strategy will transform Europe into a trade fortress, encourage green protectionism worldwide, and give other regions the opportunity to develop using cheaper energy. And without China, India, and the United States on board, other countries will be careful not to follow the EU in its self-appointed role as the world’s green guinea pig. If Europe is not careful, it will risk finding itself in a climate club of one. "