Economic Union and Cyprus

The crisis flared up in a shocking manner this week as Cyprus, long on the list of potential bail-out countries, found itself at the centre of the Eurocrisis after the controversial bail-out deal was rejected by the Cypriot parliament. The ECB has extended its emergency credit to the Central Bank of Cyprus until Monday, giving the country some more time to find a Plan B. Cyprus is increasingly looking to Russia for support (Russia has already loaned Cyprus some money), and there is a media battle over the rights and wrongs of the bail-out conditions. The decision to tax bank depositors as a one-off was always going to have a knock on confidence, and the confusion over who decided what is increasing with a PR war over the decision to extend the tax to depositors with accounts of under €100,000.




The head of the Euro Group, Jeroen Dijsselbloem, was in the European Parliament today to answer questions on the crisis, and European Council President Van Rompuy and Commissioner Maroš Šefčovič were grilled by the Parliament yesterday. The deposit tax was attacked from across the political spectrum:

"My question is: how come all of a sudden small savings and depositors are no longer protected? This is a dangerous precedent. It takes years to recover trust by depositors. Why hit the small savers? The crisis in Cyprus has sounded an alarm bell. We have to speed up the regulation of financial markets. Above all, we need a European solution to the Cyprus problem, not a Russian one." - Corien Wortmann-Kool, vice chairwoman of the centre-right European People's Party.



"The European law is very clear: all deposits below €100,000 must be guaranteed in case of bank failure. We urged the Cypriot government and the European authorities to come up with an alternative solution that protects the savings of ordinary citizens. The EU has made huge progress on strengthening the stability of the eurozone with the recent agreement to set up a single European supervisor to oversee the banks, and the new rules on capital requirements for banks (the so-called 'CRD IV' package). We need to do more by setting up a European resolution mechanism in case of bank failures." - Elisa Ferreira, S&D spokesperson for economic and monetary affairs.



"A banking union must protect the bank customers, especially the ordinary depositors rather than the bond holders and creditors. Nor does the decision do anything to break the link between banks and sovereigns. It is totally incomprehensible and undermines the credibility and legitimacy of the EU and its new financial structures to restore stability." – Guy Verhofstadt, leader of the Liberal ALDE group.



“While it is clear that a bailout is necessary to protect Cyprus from eventual bankruptcy, the tax on bank deposits will risk destabilising the complete structure of the Cypriot banking system, and is an aggressive gesture by the Eurogroup to the population of Cyprus.” - Monica Frassoni, European Green Party co-Chair.

The shambolic approach to bail-outs highlights again that the EU is operating in a piecemeal way to the crisis and has little coherence to its responses. The demand for a deposit tax doesn’t sit well with bank deposit guarantees, the aim of protecting depositors or breaking the link between sovereigns and the banking system as was agreed at the European Council summit in June.



Ironically yesterday the Commission unveiled further plans on economic and monetary union to increase co-ordination on important economic policies including the areas of “competitiveness, employment, market functioning, tax systems, financial stability and fiscal sustainability”, as well as further developing this contractual approach to financial assistance in the form of “Convergence and Competitiveness Instruments” (CCIs). These proposals aren’t yet legislative proposals, but they underline the technocratic approach:

“What would the ex-ante coordination process look like?

A Member State would provide information on a major economic reform plan in its National Reform Programme (on economic policies for the coming year) or at another time during the year. The Commission would assess the plan and deliver an opinion on it. The Commission's assessment would cover the extent to which the reform tackles the specific policy challenges and how it would improve competitiveness and adjustment capacity. The Commission's assessment would pay particular attention to the impact the reform would have on the functioning of the euro area and possible spillover effects on other Member States. These plans will then be discussed by the Council of Ministers and the Eurogroup. The Commission and the Council can suggest modifications to the national reform plan where they could be justified by the expected effects on other Member States and the functioning of the Economic and Monetary Union.”

Without oversight and accountable political decision-making at the European level to decide on what kind of Eurozone we want in the first place, the coordination and the negotiation of the CCIs will be based on a technocratic vision of the Eurozone. If the CCIs are to form a pillar of Eurozone economic and social policy, shouldn’t there be a Eurozone framework drawn up by the European Parliament that identifies economic and social priorities regularly to guide this, rather than technocratic priorities being enshrined? Currently bail-out deals seem to be ad hoc and unprincipled, with disastrous results for policy making.

Return of the Currency Commissioner?

The Commission has just launched a blueprint for Economic and Monetary Union (PDF). I haven't had time to read it yet, but from the EUObserver article, it looks like the idea of a Currency Commissioner has returned:

"This time frame would also see "further budgetary coordination (including the possibility to require amendments to national budgets or to veto them)," says the paper.

[...]

Other steps to consider would be giving "clear competence for the EU level to harmonise national budgetary laws and to have recourse to the Court of Justice in case of non-compliance." Final steps to full economic and monetary union would only be taken in the "longer term" and would require "major treaty reform" suggests the paper.

This would likely include a possibly large central budget with stabilisers – meaning money would be transferred to member states in trouble.

“As a final destination it would involve a political union with a central budget as its own fiscal capacity and a means of imposing budgetary and economic decisions on its members.”"

Back in October Germany's Finance Minister, Schaeuble came up with the idea of a currency commissioner that would be able to veto national budgets. It was wrong then, and it's wrong now - federalism does not mean this sort of centralisation. As I wrote last month:

"You cannot "depoliticise" the fundamental matter of national budgets, because you cannot pretend that budgets and economic issues are simply matters of technical wizardry, with expert options being implemented for desired outcomes - desired outcomes are political matters, and deserve a meaningful airing in a publically accountable body: the national parliament. While there is an argument for certain budgetary contraints on Eurozone Member States to ensure the functioning of the common currency - in exchange for solidarity between Member States, it should be stressed - at the end of the day Member States should be able to set their own budgets.

Rather than trying to come up with tighter and more rigid and better enforced rules for the Eurozone, we should be working to divorce banks from the sovereigns to make banking a European matter within the Eurozone, and creating a system where Member States can go bankrupt, without endangering the system and with some support for recovery after bankruptcy. A flexible and politically accountable system would work much better than Schaeuble's approach - there needs to be political accountability for national budgets at the national level, and at the European level for those elements of European solidarity."

This idea should be killed off, and killed off quickly.

Employment and Social Affairs Committee on Economic and Monetary Union

The European Parliament's Employment and Social Affairs Committee adopted an opinion last week on its position on economic and monetary union, pushing, naturally enough, for employment and social matters to be given more weight when it comes to European economic policy. You can read it here: PDF. The non-binding opinion was adopted on a vote of 27 for, 16 against and 1 abstention.

The Committee's basic attitude is reflected in this paragraph (p.6):

"...any upgrade of the role of the Commissioner for economic and monetary affairs will need to be echoed by an upgrade of the role of the Commissioner for employment and social affairs so as to ensure a balanced approach of the social market economy, in the same spirit the EPSCO Council [Employment, Social Policy, Health and Consumer Affairs Council in the Council of Ministers] should be upgraded and organized in a euro zone formation."

The opinion calls for minimum social benchmarks and for the Commission to look into the feasibility of introducing a minimum unemployment allowance for the Eurozone. The Committee also calls for an "integrated employment and social policy framework", and that increased worker mobility should be complimented with access to social protection and the portability of pension rights.

The recommendations reflect some of the amendments in the parliamentary reports on the 2-Pack of legislation: a Social Pact, employment and social benchmarks to make up part of any troika programme, for there to be a representative of the International Labour Organisation added to the Troika, and making the European Semester more accountable to the European Parliament. Cooperation on tax is also cited as necessary to prevent the free movement of capital from undermining tax systems - probably the most controversial idea if it gained any ground in public debate: tax competition versus certain common bands to prevent an undermining of tax systems within the internal market.

The European Conservatives and Reformists hit out against the opinion:

"The document also called for a minimum unemployment allowance and integration of civic initiatives, trade unions and other social groups at all levels of political decision-making. Such a populist proposal would, however, cut back on powers of democratically elected representatives in favour of lobbying organizations."

While I don't agree with everything in the opinion (there's a crazy paragraph on linking access to capital to the potential for employment in the investment) , I would support support some minimum social standards. The problem we face at the moment is that the policies at the EU level are far too focused on sovereign debt and the banking system, to the determent of employment and social policies (and the internal market has by definition a social dimension) - and while introducing minimum social standards is necessary to make the internal market work for all and to help preserve the Member States' own powers in this area, there needs to be political debate and support for these programmes.

I hope the parties that voted for this opinion will put these ideas and policies into their manifestos come election time so we have a chance to vote on them.