“The real issue at stake is how the EU can maintain its influence and its relevance in a changing world”, said Lord David Howell, UK Minister of State for the Foreign and Commonwealth Office, in his keynote speech of the conference. “There is no distinction between Eurozone and non-Eurozone members at all”.
by Karl H Richter, Euclid Advisor on Social Impact Investment, reporting for Euclid Network on the conference (8 March 2012) organised by the European Commission, Policy Network, City of London Corporation, and hosted at Bloomberg EU HQ.
According to Lord Howell, “The two-part challenge is to address the “Eurozone crisis and respond to the relative shift of economic power both eastwards … and southwards. [We need] to address both these trends if we are to compete in the global economy and maintain the level of prosperity to which we have become accustomed”. In trying to mend fences, he was unequivocal that there is no place for isolationism of EU Member States – the UK is a central part of Europe.
The UK must seize its opportunity to engage wholeheartedly in shaping a stronger EU Single Market, but it will not succeed amidst the escalating perception that the UK is sitting on the sidelines, happy to reap the rewards but not put in the toil. If the UK wants to be part of the EU leadership then it must engage in proactive action that will benefit Member States as well as the fragile European project itself.
Predictably, there was much talk of the anticipated solution to the Eurozone crisis, the Fiscal Compact signed in March by 25 of the 27 Member States (the Czech Republic later joined the UK in abstaining). The ‘Pact’ is built around a ‘balanced budget rule’, which means the 17 Eurozone countries will be legally bound to keep their national budgets in balance or in surplus. The Pact also requires this principle to be enshrined in domestic legislation as a prerequisite for the receipt of financial assistance from the European Stability Mechanism bailout fund.
Persistent surplus targeting by Member States is at best naive and at worst reveals a fundamental economic failing of the Pact, undermining the Single Market. Instead of saying this, UK Prime Minister David Cameron made a fool of himself and the British ambition of leadership within the EU. In explaining the reason for exercising his veto, he said that he went to Brussels “to protect British national interests” and seek “safeguards on the Single Market and on financial services”. He is partly right about the Single Market but by accident only. It was amateur politics and lacked deeper economic understanding.
If Cameron wanted to show leadership and solidify opinion about why the Pact is bad for Europe – and on that I agree with him – he should have pointed out what was said at the London conference by Greek policy expert Loukas Tsoukalis, president of the Hellenic Foundation for European Foreign Policy in Athens. I find the irony immensely titillating!
Tsoukalis said that within a currency union, countries with persistent budget surpluses are economically as dysfunctional as those with deficits, unless there is a fiscal transfer to keep the system in balance. He rightly said that we will be locked into a negative-sum game if adjustments are only undertaken on the part of deficit States. Cameron should know this – he presides over a currency union.
For a positive-sum game we need both structural reform as well as a coherent investment strategy. Tsoukalis continued, “something must give: keeping the current political union requires a new currency union, keeping the currency union requires a new political union”.
The principle of fiscal transfer is often misleadingly referred to as the ‘Transfer Union’ and fervently resisted by Angela Merkel as she tries to placate domestic political discontent. I find it astounding – but not surprising – that Merkel and Cameron both prioritise myopic politics over the bigger picture.
The term ‘transfer union’ creates the impression that hardworking nations must permanently give handouts to the lazy ones. The point should be better articulated to explain that these fiscal transfers are temporary – and a necessary precondition for a currency union to work – until the sluggish economies are boosted sufficiently to balance their budgets.
But balanced budgets alone don’t make for healthy economies, for that we need investment designed to boost socio-economic prosperity. Instead, we find ourselves in a cul-de-sac where EU governments have had to bail-out the private banks and the private banks are taking ‘hair cuts’ on their blind lending to EU governments. The ‘people’ have seemingly been sidelined.
What went wrong? Not understanding the basics of economics, like the difference between equity versus debt, vis-à-vis investment versus lending. Equity and debt are different types of capital that have distinctive characteristics, differentiated because equity requires an ownership stake in the underlying venture whereas debt does not. Investment and lending on the other hand are two different ways of deploying capital. Investment requires a participation in the underlying success (or failure) of the venture, whereas lending (i.e. usury) is largely agnostic to the underlying venture and mostly dependent on the perception of the borrower’s ability to repay. In short, debt can be either invested or lent, but equity can only be invested – and not lent.
Much of the fault lies with the hubris of lending whilst not focusing enough on building the real economy. It turns out that the perceptions of credit worthiness were simply too optimistic. We should have been more focussed on investing (not lending) to strengthen the weaker economies, and make them more competitive and prosperous.
There is hope. This important distinction has been recognised by the European Economic Social Committee in their proposal for “the introduction of two complementary but distinct EU bonds: Union bonds for stabilising debt [i.e. lending], and Eurobonds for recovery and growth [i.e. investment].”
Unless our leaders in Brussels understand the causal relationships of these economic concepts, I fear we will continue to see more useless grandstanding at EU level by Statesmen and Stateswomen who only force-feed their domestic political agenda to the rest of Europe. Tsoukalis is right, something must give.
If persistent budget surpluses within the Eurozone are as dysfunctional as persistent deficits, why presume that only deficit countries should pack their bags?