FEDERALISM, THE EURO AND COOPERATION
     

CEPS Annual Conference 2012 provided discussions on federalism and economic governance, chaired by Giuliano Amato, prospects for the euro with views from Yves Leterme and William Kennard, and on how non EU-member states could bring their contribution to bear with Iain Begg.

With the opening words "we were wrong", Guiliano Amato, former Prime Minister of Italy, recalled expectations at the time of the EMU construction, pointing out that economists and politicians at that phase of integration were keen to make progress and hopeful that imbalances and high levels of debt would subside through a deep process of convergence within the euro-area. "In the early years, the euro was a shield", but the expectations were not fulfilled and now the euro crisis offers an opportunity for further integration.
Amato argued that an intergovernmental approach is still present but communitarian integration will gather momentum through the integration of economic and fiscal policy as well. The concept of trust was raised for the first of many instances during the conference. The hostile response to austerity measures plainly shows that trust between the peoples of Europe is wavering. Politicians are faced with the goliath task of demonstrating that European integration benefits all and that its main focus is growth not austerity.

Amato further emphasised that a 19th century federal state is no longer adequate and two Europes with different speeds of integration will emerge more clearly than before, where some countries take part in selected aspects of integration while others subscribe to the entire packages.

Panel member Beatrice Weder Di Mauro, Member of the German Council of Economic Experts, expanded on the notion of trust and gave insights into the debates currently being held in Germany, and how new integration steps such as the Fiscal Compact can facilitate trust. Weder Di Mauro further pointed out the existence of conflicting goals concerning the fiscal and financial architecture. With regard to the financial architecture, she argued that the completion of the cross-border financial market can be achieved alongside national interests of maintaining control over the national banking sector, but that a third target of financial stability may conflict with the other two. The same conflict applied to the fiscal architecture i.e. no bail-out, no exit option and a no-transfer system.

Phillipe Gudin de Vallerin, Director of Macroeconomic Policies and European Affairs of France’s Ministry of the Economy, highlighted the integration achievements of the troublesome past years e.g. the ‘six-pack’, the European Semester or Fiscal Compact. He emphasised that a deep reform of economic governance will be politically difficult but is nonetheless necessary. The agenda must now include enforcing the new rules and even more importantly explaining them in order to gain citizens’ support.

To launch the next debate on the day’s agenda, moderator Daniel Gros, Director of CEPS, remarked on the necessity of coordination for the stability of the euro, in order to create, for example, robust financial markets. Gros further elaborated that coordination took place but not always positively, as he reminded the audience of the Franco-German cooperation to break the Stability and Growth Pact or when the real-estate bubble in Spain was widely ignored. Finally, Dr. Gros stirred up some controversy by stating that the possibility for a member country to leave the euro area is present and that Greece could vote to leave the eurozone. After a lively debate a metaphor was struck, comparing the exit option with a house: there might not be a proper door (explicit option) but there are windows to jump out of.

Hereafter the debate lingered on the conflict of economic growth and austerity. Prof. Amato reaffirmed his belief that the image of the EU should not be dominated by austerity measures but by growth and stability, mentioning a few tools such as a European Monetary Fund or the infamous Eurobonds.

Weder Di Mauro highlighted in this context the role of the European Central Bank and confirmed that the ECB already functions as a transfer system and has helped to restrict the banking crisis. Correction of the macroeconomic imbalances, however, is far more difficult, according to Amato, since it depends not only on fiscal behaviour but on household and business behaviour as well. The panel members concluded that some progress had been achieved, displaying both an intergovernmental and communitarian approach, but that more lessons need to be drawn from past mistakes.

As Di Mauro pointed out, it is not enough “just to do anything, but to do the right thing”.

In his keynote speech in the second session, former Belgian Prime Minister and current Deputy SG of the OECD Yves Leterme set the scene by asking the provocative question posed in the panel’s title. In the ensuring discussion, all three of the other distinguished speakers responded to the question in the affirmative, predicting a continued future important international role for the EU and the euro.

As stressed by Mr. Leterme, necessary actions would have to be taken in order to overcome the crisis. At the EU level more should be done to increase trust in the EU’s ability to halt the crisis and head off contagion from the periphery by reforming eurozone governance. Mr. Leterme acknowledged that progress had been made with the latest rescue package for Greece, but called for more action to establish a credible firewall to stop the crisis from spreading. He added that further credit tightening by banks should be avoided, while at the same time making the banking system more resilient to losses. At the national level, Mr. Leterme argued the need for further fiscal consolidation in some countries and continued efforts to step up structural reform of products and labour markets. This would enhance future potential growth, but, importantly, welldesigned structural reforms also have the ability to deliver short-term gains in growth performance, as shown in recent analysis by the OECD. The Commission could play a role by ensuring further strengthening of the internal market, in particular regarding services. H.E. William E. Kennard, in his address, underlined the importance of the EU to the US, not just as a major trading partner, but also as an ally more broadly on the international scene.

Concurring with the positive sentiments of Mr. Leterme, he also saw progress on several fronts. However, while the current direction and speed of reform were encouraging, he worried that the present sense of urgency throughout the EU will disappear, as soon as the crisis starts to abate. This concern conveyed his central message: an important post-crisis task will be to keep reforming and searching for a viable model that will ensure longterm.
growth.

H.E. William E. Kennard, in his address, underlined the importance of the EU to the US, not just as a major trading partner, but also as an ally more broadly on the international scene. Concurring with the positive sentiments of Mr. Leterme, he also saw progress on several fronts. However, while the current direction and speed of reform were encouraging, he worried that the present sense of urgency throughout the EU will disappear, as soon as the crisis starts to abate. This concern conveyed his central message: an important post-crisis task will be to keep reforming and searching for a viable model that will ensure longterm growth.

Striking a positive note, Brazilian Ambassador Ricardo Neiva Tavares expressed no doubt that the euro would survive and went on to note the importance to Brazil of a prosperous EU. Listing some of the important economic achievements of Brazil in the last decade, he highlighted the success in reducing poverty in his home country. Even if the EU is more prosperous than Brazil, poverty is an issue that the EU has to take seriously. He cited Eurostat figures showing that more than 100 million people in the EU are at risk of poverty and social exclusion. And while acknowledging the differences in starting points and institutional structures, he suggested that this might be an area where the EU should study the Brazilian experience.

The Turkish Ambassador, Izzet Selim Yenel, observed that the euro crisis is followed very closely and with intense interest in his country. He too expressed confidence that the euro would survive and also predicted that the crisis would ultimately lead to a deeper union with more solidarity among members. He stressed that, from his point of view, Greece will have to be saved and kept within the union, suggesting that it was of key interest to Turkey to see how the EU handles a member in grave difficulties.

The third session was opened by Stefano Micossi, Director General of Assonime and Member of the CEPS’ Board of Directors, who described the noneurozone members as being on a rollercoaster they have no means of steering. Yet, the panel participants managed to elaborate on possible contributions and influence of their nations within the euro crisis. From the perspective of the United Kingdom, Iain Begg, Professor at the London School of Economics, identified three dimensions of contributions: ideas (e.g. concerning the institutional design, employment policies or the completion of the single market), political facilitation or rather non-obstruction and the third dimension ‘cash’, which is without doubt the most difficult one. As he pointed out, however, Britain has indeed already contributed through the Irish bail-out.

Jesper Berg, Head of Financial Stability at Nykredit, explained how Denmark’s fixed exchange rate to the euro has disciplined the country to limit debt increases and stabilised the balance of payments in order to sustain the exchange rate. Thus, similar welldesigned mechanisms could facilitate rebalancing in the eurozone. Jan Zahradil, a Czech MEP, objected to treating ‘noneurozone countries’ as one coherent group, since there is a clear split between ‘old non-eurozone countries’, i.e. the UK, Denmark and Sweden, and the ‘new noneurozone countries’ such as the Czech Republic. Zahradil asserted that New Europe was no longer eager to join the euro area and it had become apparent that the “eurozone is not for everyone”. The Czech Republic will not sign the Fiscal Compact, but public expenditure will be cut by national forces while at the same time reducing dependence on the eurozone. Thus, the Czech Republic contributes by showing an alternative route in contrast to deeper integration.

In the ensuing discussion, a variety of issues was explored, such as a two-speed Europe, the introduction of a financial transactions tax and citizens’ participation, and while country representatives often had divergent views, they agreed that the non-eurozone countries had an important role to play, whether as outside supporters or admonishers of current policies.
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On 29 February Danish Prime Minister delivered an inspiring keynote speech at the Opening Dinner of the CEPS Annual Conference 2012

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Distinguished guests, European friends, ladies and gentlemen,

First of all, good evening all of you. And many thanks to the Centre for European Policy Studies for the invitation to speak here this evening. It’s an honour and a pleasure! And personally – as a former Member of the European Parliament and as a former student at the College of Europe – I am delighted to see so many familiar faces in the room.

Let me first of all thank CEPS, the Confederation of Danish Industry, and CO-Industry for this task force report on the Multiannual Financial Framework. This is very important work. It is our common obligation to ensure that the EU-budget provides real added value and maximum effect for each euro spent. The report is a highly relevant and well-timed input to this discussion. As you know, a final deal on the Multi-annual Financial Framework will not be reached during the Danish Presidency. But we are committed to moving the negotiations forward as far as possible. Your report is an important contribution to our work in the months to come. It does help focus our discussion on how to use our resources.

Ladies and gentlemen,

There is no doubt that our common effort to move forward the project of European integration is taking place against a political and economic backdrop that is dire. Molotov cocktails have been hurled at riot police in Athens. Public anger and work stoppages are gathering pace in several European capitals. The EU’s efforts to confront the debt crisis have not yet succeeded in winning back the confidence of the financial markets.
To be perfectly honest, I cannot recall a point in time during the past 50 years when the values and aspirations underpinning the European project have been tested to the extent that they are today.

Before we turn to despair, it is healthy to take a bigger perspective on the challenge facing the EU. One of the greatest European statesmen still alive, Helmut Schmidt, has a sound perspective on where we are. He has been an inspiration to many – including myself – with his calm and sensible voice in an otherwise high-pitched debate. In his speech to the SPD party convention last year, he said:

“Each one of Europe’s nation states will constitute no more than a fraction of 1 percent of the world population in 2050. This means that if we – the Europeans – want to nurture the hope that we should play an important role in world affairs, then we can only achieve this together. Because as individual countries – be it France, Italy, Germany or be it Poland, the Netherlands, Denmark or Greece – one will not even be able to measure our countries in percentages, but only in fractions of a percent.”

This is the clear-cut answer to all those who question the purpose of the European Union. It also explains why so many of Europe’s Governments work tirelessly to preserve and strengthen the European Union. Because without it, if left to our own devices as small- and medium sized countries, we simply won’t be able to compete and prosper. If we don’t pool some of our sovereignty, stick together and act in concert, we won’t be able to protect our interests and promote our values in a globalized world. That is the big picture. And sometimes, when you are in a crisis, it is important to turn to the big picture.

Fortunately, EU Member States are responding. We are taking a range of important measures in the direction of much stronger economic co-ordination. The steps that the EU is taking are not born out of a federal desire but of fundamental need to strengthen our common decision-making. Our actions were very hard to imagine just six months ago – and they seem almost unthinkable when seen through the perspective of Europe’s bloody history in the twentieth century.

I am talking in particular about the fiscal compact, which 25 Member States, including Denmark, will sign the day after tomorrow. The compact constitutes a crucial stepping-stone in our efforts to address the crisis. It is an absolutely necessary instrument to have in our European tool-box. And I am certain that it will ensure greater fiscal discipline in the future.
Why do we talk about fiscal discipline? We do this because we are committed to protecting the European social model based on the core values of solidarity, safety nets and equal opportunity. It is important to remind ourselves of the unique European model. It is a model worth fighting for!

Right now, we seek to restore fiscal discipline to make that model sustainable. I am certain that the great majority of people understand that change is necessary to keep the European model. They understand that change is necessary, if it is applied with justice. The real challenge is to find the right balance between consolidation and growth and ensure that the social market economies of Europe can be sustained. In fact, there is no contradiction between consolidation that we have to do right now, on the one hand, and growth on the other.
Rather, fiscal discipline is the precondition for growth and employment. Yet in itself consolidation will not be enough to bring us out of the crisis.

Consequently, I was pleased that we managed to adopt a declaration on growth and jobs at the European Council in January. The declaration contains many necessary components, such as calling for strengthening our competitiveness. This is essential if we are to create jobs and preserve our social model. Now, the Member States must ensure that the words of the declaration are translated into action – quickly and comprehensively. Not least with regard to increasing the number of jobs and apprenticeships for young people. I am convinced that it we do not act on the alarming number of jobless young people now, we run the risk of losing an entire generation to structural unemployment.
In order to restore momentum for growth in Europe, we must push forward on several fronts at the same time:

Firstly, we need to push for more home-made economic growth through a reform of the Single Market. The Single Market is one of the greatest achievements in the history of the EU. But there is still a large, unexplored potential. And now is the time – more than ever before – to unleash that potential.
Secondly, we will use the European Semester to call for structural reforms not only in the labour and product markets, but also in the public sector. Structural reforms that can strengthen competitiveness and unleash resources for new growth.
Thirdly, we should work hard to redirect more funds from the future EU budget towards growth-enhancing areas where jobs will be created in the future. We must allow for common EU funds to be channelled directly to growth-enhancing areas in the Member States. Areas like research, education and green technologies.
And finally, while strengthening our own position we cannot allow the external dimension to be forgotten. We have to get much more out of our bilateral trade relations with strategic partners like the BRIC countries, Japan and the US. Hopefully, trade with these countries will evolve into a key growth-driver for Europe. There is a potential there. We need to use it!

Dear European friends,

It will probably not come as a surprise to you when I say that we consider the green agenda to be another key instrument in boosting Europe’s economic growth. The greening of our economies is as much about creating jobs and boosting growth as it is about increasing our energy independence and protecting the environment. That is the inherent beauty of the concept of “green growth”.
In recent years, the EU has taken the lead globally on the green agenda by developing a comprehensive energy and climate policy. But the time has come to speed up Europe’s transition to a greener and more sustainable economy.
We have a first-mover advantage. But we must ensure that this advantage is not gradually eroded as our global competitors discover the importance of the green agenda. The EU must agree on new initiatives if we are to maintain our comparative advantage vis-à-vis other regions in the world. Otherwise, we risk that knowledge-intensive jobs and high-tech research capabilities move to other countries.

If Europe is to thrive in a new “world order” – characterized by the rise of countries like China, India and Brazil as well as by increasing international competition to get hold of scarce natural resources – we need to dramatically upscale our research and investments in green technologies, renewable energy and energy efficiency. This is not just about achieving some favorable strategic goal 30 years from now. It is just as much about creating new knowledge-based jobs in Europe in the short term.

In the area of research and development, we must commit ourselves to create those circumstances that will enable European scientists to be among the first to achieve the technological advances. We cannot give up on the green growth in times of crisis, we need to enhance it!

Ladies and gentlemen,

I have tried to make the case that what Europe has done in the past months we have done in order to preserve our unique European social model. Consolidation is necessary – but it must be fairly applied and accompanied by a reform of the Single Market, structural reforms at the national level, a more intelligent and growth-targeted budget, and an increase in trade liberalization. These elements are crucial if we are to succeed.
The fiscal compact, the latest loan package for Greece and the declaration on growth and job creation from the European Council are signs that the EU is trying very hard to make significant progress in all areas. But as I have laid out tonight, even more needs to be done.

Let me conclude by underlining the need for all of us to focus on the substance and to rely on sound judgement in the current difficult situation. The American comedian – Groucho Marx – once said that “a black cat crossing your path signifies that the animal is going somewhere.” That is undoubtedly true. It is a fairly objective observation devoid of superstition and any preconceived notions about what could happen next. In the same vein, I would urge all friends of Europe not to read too much into the doomsday prophecies about the European project.

I don’t pretend that all is well or that we can afford to be complacent. Far from it! I am simply saying that everyone with a stake in the future of the European project needs to remain as level-headed as possible in the current situation. We will do our utmost in the coming months to provide a steady hand in order to help our common European ship navigate through rocky waters. I can assure you that we will continue to work tirelessly in the Council and with the Commission, as well as in close co-operation with the European Parliament, to push for concrete results. That is what we will work for at tomorrow’s Council meeting.
Because, at the end of the day, it is only by working together, by finding common solutions and by achieving tangible results that Europe will be able to work its way through this crisis.

We need to work hard. We need to focus. We need to get results. We need to get out of the crisis. We need to build on the structures that we have in the EU. That is – in a nutshell – my guiding principle during the Danish EU Presidency and beyond.

Thank you.