EMU fatally undermined by the Koenigstedt Declaration

Has all the progress over the last 6 months been undone? The painfully slow summitry of the European Council has proven to be an inadequate firefighter, but there had been some movement towards a banking union and a working economic union. The biggest criticism was that European leaders were putting in the safeguards against the next crisis rather than trying to deal with the crisis we're currently in, but in last June's Euro Area Statement, the European Council finally seemed to have got it (PDF):

"We affirm that it is imperative to break the vicious circle between banks and sovereigns.

[...]

When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly."

Finally! Banking union and economic union are based on this logic: that the financial markets are too big for the Eurozone Member States to deal with on their own, and that there needs to be a common regulatory policy, and the means to deal with problems posed by the banks. The statement even signalled support for breaking the link between sovereigns and existing banking debt as a way of  lessening the debt burden for crisis-hit states (especially Ireland and Spain, who stuck to the Stability and Growth Pact criteria):

"The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally."

However Germany, Finland and the Netherlands have not only set out to turn back the clock on this progress, but to fatally undermine the rationale behind banking union as a concept. In Koenigstedt the three countries declared not only that there will be no deal on existing banking debts that have been taken on by European sovereigns, but that national sovereigns will have to take on banking debt until they have reached their capacity before the ESM should step in to fund the banks directly:

"We agreed that the implementation of the European Semester, including budgetary discipline and targets, in all countries remains key to ensuring financial stability; the ESM and the other crisis mechanisms can only play a supplementary role to these policies that are decided at the national level.

[...]

 Regarding longer term issues, we discussed basic principles for enabling direct ESM bank recapitalisation, which can only take place once the single supervisory mechanism is established and its effectiveness has been determined. Principles that should be incorporated in design of the instrument for direct recapitalization include: 1) direct recapitalisation decisions need to be taken by a regular decision of the ESM to be accompanied with a MoU; 2) the ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities; 3) the recapitalisation should always occur using estimated real economic values; 4) direct bank recapitalisation by the ESM should take place based on an approach that adheres to the basic order of first using private capital, then national public capital and only as a last resort the ESM.

[Emphasis mine]"

 Far from breaking the link between banking debts and the sovereign, this reinforces it. It states that the order of debt responsibility in the Eurozone is: private, national sovereigns, then the ESM, creating an order for future crises that follows our current debt and banking crisis. Far from pointing towards a sustainable solution for the crisis and a workable Eurozone, this wilfully ignores the lessons of the past 4 years and tries to cement the current Eurozone order.

Why then should we have a banking union at all? The idea behind the banking union is that the financial sector is truly European (and global), and that it needs to be regulated and controlled in common - national authorities are too small and weak to deal with the sector own their own anymore. If it is to be a national responsibility for now and all time - the Konigstedt direction - then why bother with European regulation and oversight? Where is the added value or common purpose to this?

Why this step? Is it because of the ECB's open commitment to bond-buying, and the (current) creditor states want to seize back as much control and initiative as possible? Whatever the reason, it's hard to see this unilateral redirection of the Eurozone as any help for any sense of common purpose at European summits. What's the point of Ireland, Italy, Portugal and Spain waiting for summit time to try and shift the consensus constructively if other Member States start undermining the process of common negotiation? At this rate, they should start holding summits and economic seminars of their own to promote their alternative vision of economic union and crisis resolution - after all, Germany et al have shown their contempt for common decision-making.

It's truly mind-boggling to think how self-absorbed the ministers at this Koenigstedt meeting must be. Not content with vague signals and behind-the-scenes work, they've simply decided to wreck all agreement up 'til now. Diplomacy is not the word.

Schengen Wars 2

Romania and Bulgaria's Schengen aspirations are being put on hold again, with the Netherlands and Finland opposing the phased introduction of the two countries into the border-free zone due to concerns over their levels of corruption. Before the vote, Romania blocked tulips from being imported across its border. Their accession was blocked earlier this year in January, which also saw inept diplomacy by Romania.

So are the concerns over the levels of corruption in Bulgaria and Romania justified? The Commission helps and monitors the reform and implementation of changes in the justice system required by EU membership through the "Co-operation and Verification Mechanism" (or CVM). The latest reports on Bulgaria (PDF) and Romania (PDF) were delivered in July. Both reports documented progress, but there's still a long way to go.

The Bulgarian report raises concerns over corruption and over accountability of the judiciary (p.3-4):

"Since last summer, a number of acquittals in cases involving high-level corruption, fraud and organised crime have exposed serious deficiencies in judicial practice in Bulgaria. These deficiencies have not been properly analysed or followed up by the leadership of the judiciary, the Supreme Judicial Council, the General Prosecutor and the President of the Supreme Court of Cassation. Although the revised Judicial System Act adopted in December strengthens the judiciary's accountability, the law has not yet been implemented as intended. The quality and transparency of several important appointments within the judiciary since the beginning of this year have been questioned, leading to unprecedented public protests and a debate on possible constitutional amendments. In addition, allegations of corruption within the judiciary are still not pursued in a systematic way as recommended by the Commission.

[...]

Judicial appointments still lack the necessary level of transparency and credibility. An important senior appointment by the Supreme Judicial Council in November 2010 raised concerns as regards the lack of transparency and competitive character. The entry into force of the newly amended provisions of the Judicial Systems Act in
January 2011, has unfortunately not yet improved the situation as regards senior appointments, which have been still carried out under the old rules and lacked real assessment of the professional qualifications, managerial skills and personal integrity of candidates. Furthermore, a recent nomination was followed by allegations of conflict of interest and procedural irregularities in an ongoing trial handled by the successful candidate. As a protest, two members of the Supreme Judicial Council resigned and criticised the appointment decisions as pre-determined. The subsequent mobilisation of professional associations of magistrates and civil society calling for reform of the Supreme Judicial Council sends an important signal of support for judicial reform. Recommendations by civil society to hold public debates and announce the names of candidates at an earlier stage are laudable. The appointment of highly competent and motivated magistrates of unquestionable integrity via transparent procedures, in particular for the new specialised court for organised crime, is indispensable to successfully implement judicial reform.

[...]

Criminal investigations against magistrates are still not systematically launched by the
prosecution upon allegations of corruption. The decision of the Supreme Judicial Council in June to involve a magistrate with a disciplinary record in the recruitment panel for the new specialised criminal court raises serious concerns. Overall, there is a lack of consistent disciplinary practice. These problems remain a major factor undermining public trust in the judiciary."

Policing in the area of organised crime is also an area of concern (p.5):

"In spite of persevering police actions to tackle organised crime, the overall results need to be significantly improved. Although the joint team on organised crime achieved several indictments related to important organised crime-groups and some convictions have been rendered, other important cases have been concluded with acquittals since the Commission's last annual report. In appeal, severe detention sentences have been pronounced but not yet enforced in one emblematic organised crime case. Weaknesses exist in the collection of evidence, the protection of witnesses as well as in investigative strategies, comprehensive financial investigations and the securing of assets. The General Prosecutor should systematically analyse the reasons for acquittals in high level cases, make recommendations for the handling of future cases when shortcomings in the procedure have been identified and appeal the acquittal decisions when it appears that the Courts did not properly assess the evidence provided."

The report notes a lack of "convincing results" regarding corruption, with cases against former ministers and MPs, and cases involving fraud of EU funds ending in acquittal (p.6):

"The analysis of some of these cases by the Commission and independent experts demonstrated serious weaknesses in judicial and investigative practice. These weaknesses mainly concern the collection of evidence, the protection of witnesses and the general lack of investigative strategies, comprehensive financial investigations and securing of assets. Coordination within the prosecution and between the prosecution and the police should be improved. These weaknesses are compounded by an out-dated Penal Code. Court practice is permissive and excessively cautious, overly attentive to procedures at the expense of delivering justice. While the revision of the Penal Code is advancing, immediate corrective measures, such as the use of interpretative rulings by the Supreme Court of Cassation or legislative amendments should be considered, since the new Penal Code cannot be expected to enter into force before late 2013."

The Romanian report shows some significant improvements, as well as highlighting areas that need a lot of progress. I won't quote from the report to the same extent as the Bulgarian one - I'd recommmend reading both to get a fuller picture of the situation in both countries - but I'll quote to summary paragraphes from the start (p.3):

"Since the Commission's last annual report, Romania took significant steps to improve the efficiency of judicial procedures and continued preparations for the entering into force of four new codes which are the foundation for a modern judicial process. In advance of the implementation of the new codes, the Small Reform Law has brought improvements for the celerity of the judicial process. Romania also responded swiftly to the Commission’s recommendation by adopting a new legal framework for the National Integrity Agency. The National Integrity Agency has been operational under this new legal framework and started to re-establish its track record of investigations. Although not part of the CVM benchmarks, the authorities decided to carry out reviews of the judicial system and of public procurement and to make an evaluation of anti-corruption policy. During the same period, the National
Anticorruption Directorate (DNA) showed a continuously convincing track record in the investigation of high-level corruption cases.

Despite this progress since July 2010, consistency and results in a number of areas remain a challenge. Progress in the fight against corruption still needs to be pursued. Several important high-level cases remain delayed in court for several years and have also seen little movement during this period. Urgent action must be taken to accelerate these trials and prevent them being struck down because of reaching statute-barred periods. The fight against corruption should remain a top priority and be coordinated with the help of a new comprehensive and robust anti-corruption strategy. Urgent measures are needed to improve the recovery of the proceeds of crime, the pursuit of money laundering and protection against conflict of interest in the management of public funds. Better results should be demonstrated in the confiscation of unjustified assets and in delivering dissuasive sanctions for incompatibilities."

Though the domestic reasons for blocking Romania and Bulgaria's phased entry into the Schengen Zone may have more to do with political pressure from the far-right, there are real concerns over the handeling of corruption in romania and Bulgaria. It's true that both countries meet the technical requirements for entry, and that adding this judicial and policing requirements is moving the goalposts, but these issues do need to be tackled as obligations of EU membership. While the politicking might be distasteful - and condemned by both the EPP and the S&D groups in the European Parliament - there is truth to the contention that it's harder to get EU Member States to comply with EU conditions once they're in the club.

It's not a bail-out, but it might need to be

Jon Worth has a good post (and also pointed to this great post by Henning Meyer) on why the bail-outs are not actually bail-outs: they are loans to countries which will be paid off, with the creditor countries getting a profit at the end of the process. However, a problem with this can be seen in Meyer's post when he explains this:

"It is a widespread myth for instance that the European bailout fund is giving away money for free to countries such as Ireland and Greece. This is simply wrong! The ‘bail-out’ is a lending facility that lends money at rates with which the underwriting countries will make a profit if the debtor countries do not default. This is far from giving away money for free from presumed ‘responsible’ countries to ‘irresponsible’ countries to support their luxurious lifestyle."

"If the debtor countries do not default" looks like a big if to me. The structure of the bail out is such that it reinforces the austerity model that the debtor countries have been trying to enforce. This has been done with varying degrees of success when it comes to sticking to the programme. However, the plan is to change the EU structure so that countries can have a managed default after 2013, which means that there will be many voices (as there is currently in Ireland) questioning why they have to go through the harsh readjustments of austerity when after 2013 default would be the accepted option. Surely only a fool would go through that pain for no real reason?

It doesn't help that the rescue loans are structured so that they have fairly high interest rates, even if they are below the market rate - Europe seems to be caught in between solidarity and ensuring the hair-shirted redemption of the debtor states through some cleansing punishment. With the rates higher than the growth rates of the debtor countries, it may be that their debt could grow - particularly in Ireland. The Irish case seems to be different from the Greek case, in that the European system has stepped in to prop up the Irish banks to ensure that their debts to British and Eurozone banks are repaid. As they cannot be bailed out directly, the loan facility means that essentially the Irish government borrows money from the EU to give to the banks to pay off their loans to private continental banks, and the Irish taxpayer picks up the tab at the end of the process.

Allowing the private banks in Ireland to fail now is not an option as the ECB ensures that the banks keep running as the lender of last resort, but it is widely accepted that Ireland cannot pay off the debt, and the Irish government is looking to renegotiate parts of the EU-IMF deal, starting with the interest rate on the loans. Eventually Ireland may ask for some restructuring of the debt - which seems to essentially mean that some of it simply isn't paid back. Now that part would be a bail-out.

This is very different from the situations in Portugal and Greece, but with the domestic political pressures building up, it should be borne in mind that default only seems a scary prospect for debtor countries for so long. Once the pain of austerity becomes too much, with too little reward, then the option of default - which would turn the loans into lost money - becomes more realistic.

The current plan for the Eurozone has failed - it doesn't seem to be working in the Member States it's supposed to help out, as it forces them into narrow austerity plans that do a lot of damage to their economies and therefore damage their ability to pay the loans back; and it has failed to stop the debt crisis spreading. The loans have bought time to deal with the Eurozone more comprehensively, but there doesn't seem to be many good or imaginitive ideas on the table.

So while offering - and accepting - the loans was a good idea in order to buy time, if it's not followed up with effective action, then things could get worse. Not offering the loans, however, would have brought about default in the debtor countries, which would have meant that their debt would wash back into the economies of the creditor countries. This would have had an immediate effect on the economies of all the Eurozone members, since the credit originally came from their private sectors, or they would be simply affected by the damaging effects of the debt washing back into Germany and the Netherlands, etc. Which is why I think that mainstream European political parties need to put forward a realistic and effective vision - or at least start vigourous debates on options* - to combat the platforms of the populist parties. There's no excuse not to.



* I know, that will be the day.

Finnish Election

Finland held its general election yesterday, with the right-wing populist True Finns breaking through to become one of the main parties in the Finnish parliament (Finland is unicameral, so it only has one chamber of parliament).

The BBC reports the predicted seats for the main parties (out of 200) as:

"National Coalition Party - 44

Social Democrats - 42

True Finns - 39

Centre Party - 35"

Percentage-wise, the True Finns will have gone from 4% to 20% of the vote. Their platform is eurosceptic and anti-immigration, with the bail-outs of Greece, Ireland and now Portugal helping to boost their popularity, as the idea of sending money over to other EU Member States doesn't seem to have been defended very well: it's a lot easier to sell a simple rejectionist message than explain the complex economic case for supporting other countries. That's not to tsay that there isn't a need to challenge the current approach to the European debt crisis - and the worrying signs of satisfaction at the measures taken so far. Though the methods and ideas so far haven't been far-sighted enough, going into reverse gear would make the situation worse.

"The party's candidates are a motley crew and amongst them there are distinct anti-immigrant views. Neither does the party leadership have much sympathy for a place for the Swedish language and Swedish teaching in Finland. Nor for development aid, climate policies and so on. The general impression is that of deep conservative values and a nationalistic spirit. The word extreme right is not used in Finland. The party's future shape depends however on which of the party's candidates finally win a place in parliament." - EU Observer.

Given how close the seat numbers arre for the 4 biggest parties, it is possible that the True Finns could even end up in government. Again, it's hard to know whether the best approach would be to freeze them out of coalition possibilities or not (which takes us back to the question of how to deal with such parties generally). I haven't been following Finnish politics closely enough to know how extreme the True Finns are in their rhetoric and policies, but from what I've read they seem quite extreme. I hope that the mainstream parties start digging in and re-vitalising their grassroots.

Virtual Political Clashes

There have been a few web-based political clashes recently, mostly PES-related. All of the European Parties are being denied the "oxygen of publicity" during these elections, but there are a few sparse glimmerings of something approaching a political political campaign online - though sadly "sparse" is the key word here, and many of the online battles are far less interesting to read than the "Letters to the Editor" pages in newspapers. A little more passion or vision, please?

The PES have gone for a cross-group attack (though still quite focused on the EPP) in their "12 Terrible Candidates" press release, attacking its rival groups on the basis of the kind of fringe membership they have. It hasn't entirely worked, with the Economist (which I read via Julien Frisch) criticising the PES for including the former Minister for Justice of Romania, Monica Macovei, in their list. Macovei has a good reputation for fighting corruption, and her inclusion in the list has perhaps reflected more on the Romanian branch of the PES than on their EPP rivals. The EPP has dismissed the list as another aspect of a populist campaign by the PES in similarly combative language.

On the ELDR front, Poul Rasmussen has criticised the ruling ELDR-aligned government in Finland for its response to the crisis and for simply copying the policies of others:

"...why is the liberal Finnish Prime Minister, Matti Vanhanen, just copying the inaction of conservative leaders such as Merkel and Sarkozy when it comes to fighting the worst economic crisis for generations? ... [T]he tax cuts that he has enacted are just not enough. According to current estimates, by next year 250,000 people will be unemployed in Finland."

The Finnish PM has defended his government on the ELDR site, saying:

"...fiscal policy is in Finland one of the most expansionary in the OECD area. Discretionary stimulus measures amount to over 3 per cent of GDP in 2009 and 2010. For example, infrastructure investments are higher than ever. My government is committed to increasing resources for labour market policies as needed. Most recently, this week, 61 million € were added to labour market activities. Similarly, we have taken several measures to help municipalities in their financing difficulties.

At the same time as we are handling this acute crisis, we look further ahead. We need to manage the huge debts we now take without burdening too much our children. Therefore my government has continued efforts to improve our educational and innovation system, taken initiatives to lengthen working careers and launched a new growth project, among other things. Unfortunately Mr. Rasmussen's Finnish colleagues have not been very helpful in these efforts."

It's a political battle of sorts (though Rasmussen didn't advance specific policies in his blog post; he just supported his Finnish allies), but how relevant is it? Has it made an impact? I doubt much has been made of Rasmussen's attack in the Finnish media (though I may be wrong), but the engagement of the Finnish PM shows that the European Party-level could have some relevance to the campaign. Does anyone know if the Finnish PES party has played up this PES attack on the government?

Rasmussen has also been attacked by ELDR over some comments on the Estonian government's handling of the crisis, with the ELDR claiming that he wants Estonia to remain out of the Euro by increasing its debt (and breaking the criteria).

In the end I think that it will take a big effort of the European Parties' respective leaderships over the course of the next EP to raise the public awareness of their groups and themselves. It is nigh on impossible to generate a political campaign out of thin air, and despite the possibilities the internet opens up for politics, without the mainstream media reacting to a European political debate, there's almost no point in having one. Or in trying to generate one.


[Out of the 3 major EP political groupings - EPP, PES and ELDR - I think that the PES has made a good effort online (it seems the most active to me out of the 3), with ELDR's website not looking too bad, even if it's campaign is quite sketchy. The EPP-ED's site is functional, and the EPP have set up "Dialogue TV".]