Crisis Anatomy — Part VI: Conclusions. Minds and hearts of crisis remedies

In the concluding chapter of the series of articles devoted to the “anatomy of crisis” we are trying to summarize the main outcomes of the three years of extensive efforts by the EU authorities and the member states to overcome the crisis' negative impacts. We have looked in the previous chapters at the numerous crisis dimensions: through politics, economics, finances and legislation, as well as risk assessment. We are fully aware that our analysis might be incomplete, but we preferred to show our readers our version of the “anatomy”.

Over the past 50 years, the EU has achieved remarkable success in harnessing the increasing interconnections arising from globalization and in achieving economic prosperity and stability on a continental scale. The EU has become one of the world's key economic engines, accounting for about 30% of global GDP and 20% of global trade flows, while the euro has emerged as a key international currency. As a result, many parts of the world are looking to learn from the EU's experience in regional integration (1).

There could be drawn three outcomes, or lessons, from the present economic and financial crisis. First, the economy and markets return to a previous situation, so to say, everything returnes to the starting point of governance. In this case, the things revert back to initial stage, i.e. state authoritis and the governments remain less involved in governance, while market forces (and, to a certain degree civil society) shape the economic and social development to their liking.

Second, in case the fall-out of the crisis continues to depress economies, support for the global markets could well dwindle further. Big governments powered by demanding civil society forces would come to the fore. The ensuing response to the crisis would be a plethora of local solutions.

Third, and most probable, when the pendulum swings back: while the economy is getting improved, the memory of the crisis lingers. This will provide governments and supervisors with the necessary political support for a less pro-cyclical financial system.

The prevailing philosophy will be that with stricter regulation it is possible to reap the benefits associated with the dynamism of markets while avoiding the excesses and disruptions.

There will be watchdogs everywhere. Current account positions will to some degree be managed. Financial markets will be kept under close scrutiny. The financial system will become a slower but more stable engine, less prone to costly hard landings.

Increased regulation and oversight will mean less downside risk but also less medium-term upside potential. Increased supervision will reduce the intensity of competition in parts of the economy, facilitating a continuation of the existing market conditions. Growth will be stable but not stellar. In the long run this will help the economy to reach its potential over the cycles. Rule-based central banks will broaden their mandate to include financial stability, and have to work a bit harder to keep inflation in check.

This outlook, and present valuations favour equity-type assets and risk-taking. In terms of the investment backdrop, this is a fairly stable world with relatively modest risk premiums in the long-term and bond yields of around 4-5 per cent. Longer term equity investors will do relatively well as spoilage of their capital will be less than in the roller coaster economy that we have seen during first decade of the new century.

Lessons from the global efforts for recovery. Since 2007 the following two lessons can be learned from the worst financial crisis in a generation in order to return the global economy to a path of stability and growth.

- The first lesson is that of confidence: when Lehman Brothers collapsed on the 15th September 2008, the global economy was hit by an abrupt and unparalleled loss of confidence. The speed and the scale by which this loss of confidence spread through financial actors and economic agents worldwide was unprecedented. Stock markets collapsed, banks stopped lending to one another and public trust in financial markets was shattered. It has quickly become clear that restoring confidence was a prerequisite for a stabilisation of the financial system and a recovery of the global economy.

- The second lesson is that of global interdependence of regions' economies. The US, alongside the EU and all advanced economies, is experiencing a sharp drop in GDP and unemployment is rising rapidly. Likewise, emerging and developing countries have been seriously hit by the combined effect of declining capital inflows, commodity prices and exports. Global trade has become one of the primary transmission mechanisms of this crisis and global factors are driving this downturn.

This means that solving the crisis with domestic policy instruments alone is not working: hence, the global coordination to counter the worldwide downturn is overwhelming. Several global summits, e.g. the G-20 summit in London (in the middle of the crisis, in April 2009) represented important step forward in the international community's response to the crisis.

The Summit produced three particularly important results:

• The agreement to implement economic stimulus measures immediately, and in a way that strikes a balance between fiscal expansion and long run fiscal sustainability.

• Concrete steps to strengthen the regulation and supervision of global financial markets.

• Agreement to reinforce the mandate of the IMF and to increase the International Monetary Fund's resources. The EU's contribution of € 75 bln (or about $100 bln) in new lending arrangements to the IMF was a clear signal of global commitment to this objective. It opened the way for deeper reforms of the international financial institutions, which would, on one hand, ensure strong institutions' role in monitoring global economy, and on the other, ensure an appropriate voice and representation for emerging and developing economies.

European actions. The European countries have shared interests and a strong incentive to work together to counter the economic downturn. And this cooperation has been evident throughout the EU response to the crisis.

The structure of European response confronting the global economic and financial crisis was formulated by the former commissioner Economic and Monetary Policy, Joaquin Almunia in April 2009 (he is presently commissioner for competition and Commission's vice-president).

In Europe, consistent actions were based on close coordination between the EU-27 members, which formed a common European approach to the crisis. For the EU highly integrated economies, coordination is vital to maximise the actions' impact. It was also necessary to safeguard the fruits of more than 50 years of European cooperation and common assets which form the cornerstones of the EU economy and provide a valuable platform for recovery. This includes the European Single Market, which is a vital driver of trade and prosperity in the EU.

The EU single currency, the euro, was a success during first decade of its existence. For a decade the Economic and Monetary Union, EMU has anchored macro-economic stability in the EU and shielded its members from external shocks and turbulence.

Presently, the euro is facing the first recession in its history and the years 2009-10 have been a stress test for the European single currency: for example only during the 4 th quarter of 2010 the euro against dollar reduced from 1,4 to 1,35. At the second quarter in 2011, the corresponding figure was almost the same.

In the difficult times for EMU, the euro continues to provide a stabilising anchor for its members. Although critics often pointed to the widening spreads between euro area member countries, speculating on the possibility of a break up, yet without the credibility that EMU brings, these spreads would be even higher. The euro has eliminated the possibility of volatile exchange rates that in the past hit trade and investment and generated political tensions. EMU is shielding those smaller and more vulnerable economies that would otherwise have seen speculative attacks on their currencies by markets.

Some EU countries in Central and Eastern Europe (outside of the euro-area) have been most heavily affected by the crisis. At the same time, they were stepping up preparations to join the single currency so that they may share in the stability offered by the world's second most important currency. The euro area has already expanded from 11 to 16 members since its introduction, with the 17 th member (Estonia) from 2011.

The EU approach is characterised by complex actions: first of all, to stabilise financial markets and prevent a collapse of the banking sector. The EU has injected nearly €300 billion euro worth of recapitalisations and €2,5 trillion euro worth of guarantees into the financial system. These actions have delivered some successes: the EU managed to avoid a Lehman Brothers effect in Europe. Despite the fact that the sector on the whole remains fragile, financial markets have gradually stabilised with notable improvement in some areas such as interbank lending. Several European countries have provided relief on impaired assets totaling more than €580 bln and further action is being planned by other member states. These measures have been taken according to common guidelines set down by the European Commission; there is a close convergence between these EU guidelines and the framework endorsed by the G-20. This is a complex issue and coordination worldwide is vital for the effectiveness of interventions.

Second, the EU is making major progress to strengthen the system of regulation and supervision in financial markets. This action, which forms a major strand of the EU response, is aimed at creating a more resilient financial system supporting economic growth and preventing a crisis on this scale from happening again. On the short term, effective and targeted financial reforms can also provide a much needed boost to investor confidence. They are vital to restore public trust in the European financial system. At the same time, the EU has brought forward proposals on credit rating agencies, on capital requirements and accounting, as well as a second wave of initiatives to strengthen financial regulations (e.g. legislation on hedge funds and private equity to address the systemic risk posed by the investment vehicles).

The EU will also tackle the derivatives and other complex structured products that played a part in amplifying the current crisis. This means that the EU financial sector will not operate in the shadows. The EU is working on a revamped system of supervision better adapted to oversee the extensive cross-border operations that take place in Europe's financial markets. By detecting risks to financial stability at an early stage and triggering effective corrective action, it will form a key component of the beefed up system of macro-financial surveillance proposed for the global economy.

Third, the EU' massive direct stimulus to the real economy to boost demand and kick start growth. About 3% cut in interest rates by the European Central Bank during 2009 has contributed to the worldwide monetary stimulus. On the fiscal side, the EU countries have launched an unprecedented budgetary stimulus of between 3 and 4% of GDP including €400 bln channeled into initiatives to help industry and businesses, to support public investment projects and to give a direct boost to household purchasing power.

This fiscal support also reflects the operation of automatic stabilisers – the increases in social welfare payments and the declines in tax revenues that occur as growth slows and unemployment rises. Important to mention that these stabilisers play a large role in the EU as a result of European strong social welfare system; it will play an even larger role if the downturn deepens.

The EU key task is to implement current measures as quickly as possible, ensuring a good level of coordination between international partners, so that the results begin to take hold.

The EU Stability and Growth Pact, together with the new EU-2020 strategy, helps countries plan a credible path back to healthy public finances once growth returns. This is imperative for two reasons: in the short term, to maintain public confidence in governments' ability to manage the crisis and its fallout; in the longer term, to safeguard the sustainability of public finances. The challenge of population ageing looms large, and the impact will be particularly acute in Europe, where fertility rates are decreasing faster than in other parts of the world. Thus, the EU cannot let its actions today place an unbearable burden on citizens tomorrow.

Most of the EU focus presently has been on doing everything necessary to generate global recovery: i.e. learning past lessons and repairing the damage brought by this crisis. At the same time the EU must look forward to: devising adequate exit strategies from the crisis – withdrawing the fiscal and monetary stimulus and unwinding public support for the financial sector will be complex tasks that the EU needs to start planning.

Moreover, the EU must prepare for the challenges of a post-crisis world. The financial sector will not be the engine of growth it has been over the last decade. Reduced leverage and less dynamic financial markets mean that the EU will have to look to the real economy to find new sources of dynamism. It means that sustainability must be the foundation of the EU crisis response: all EU actions to stimulate recovery in the short term must be consistent with the long term goals to build a more prosperous, equitable and greener world for tomorrow. These actions are the headlines for both the EU leaders and the member states alike.

Additional efforts. There are several pre-requisites to achieve the future perspectives.

First, a fair and open multilateral trading system and free flows of cross border investment is essential. A surge in protectionism gives a lasting damage to global economic growth and to prospects for development (i.e. G-20 leaders have pledged in 2009 and 2010 to avoid economic nationalism at all costs and to pursue Doha negotiations).

Second, a renewed emphasis on structural reforms to strengthen resilience and boost productivity is needed. There is much to be done in Europe in order to boost the economic dynamism: increased investment in research and innovation, more flexible markets and a better environment for business are some of our key priorities, which will lead to better performance and productivity to seize the opportunities of globalisation and to manage population ageing. The re-vamp of the EU's reform strategy – the EU-2020 strategy – has been successfully adopted in Spring 2010 with directions towards inclusive, smart and sustainable development.

And third, a transition to a low carbon economy should be at the heart of Europe's reform process. Carbon reduction is an environmental imperative; but green growth also offers innumerable economic benefits for business and industry. The EU is currently a world leader in terms of targets for carbon reduction and renewable energies; some new investments have been made in energy infrastructure, in energy efficiency and in cleaner technologies. The EU is determined to ensure that climate change initiatives transfer into global steps towards a low carbon future.

The international community has set down a clear agenda to tackle the crisis in economies and financial systems. The challenge now is to focus on implementing each aspect of that agenda in a coordinated and resolute manner. Europe has launched fiscal actions to resuscitate its economy, pushing through a roadmap of targeted measures in financial markets in order to shape the world that will emerge from this global crisis. A new global leadership is based presently on cooperation and an engagement of all partners to build a stronger economy for the future.

The present economic and financial crisis has been both unique in a number of ways, and different from other crisis in some key respects. It engulfed almost all regions and parts of the world and all society's strata (as well asset classes). The crisis struck a fierce blow at the heart of the free-market capitalist system, its financial sector. It created a “balance sheet recession” where countries' economic potentials and resources were devoted paying down debts. Finally, unpredictable vision followed of how to proceed further in optimal feedback between reformed asset markets and the real economy (2).

Society response. The so-called societal interactions were generally organised along the following main directions:

- First, various sorts of “markets” that foster economic efficiency. During past couple of decades, the main trend in “market economy” was towards supporting markets within increasingly open and globally oriented societies. No wonder, that financial markets were seen as effective mechanisms of risk control and the best way of collective management where institutional reputations were seen as important ingredient.

- Second, “government level” that aim to provide security and stability. Neo-liberal and conservative trends in state governance instigated “non-interference” trends that forced other instruments in regulations to dominate. The most omportant, as for the latter, was the financial and banking sectors being left generally untouched in state regulations.

- Third,”civil society” that pursued fostering social cohesion, formulation of common values and norms.

To secure future economic growth in Europe, the following “improvements” have been highlighted recently:

• In economic governance, the EU-2020 strategy made necessary directions;

• In financial-economic surveillance and coordination (in particular, for the euro-zone states to overcome the divergences in the competitive positions and current account balance among them);

• In investment climate,

• In innovative financing instruments at national and global level, and

• In business and consumer information, used to monitor inflation expectations and other economic variables.

Some features are already quite apparent, e.g. more oversight in financial regulations, less freely available loans at higher costs, etc. It will need a long way to optimal regulation while leverage instruments would come under closer supervision. On one side, safety and prudence of transactions would play a bigger role; on another side, robust growth, low inflation (and associated confidence they generated) would be left behind. Macroeconomic models and policies would shift away from laisser-faire approaches towards more regulated economic policy trends.

As soon as the global economy would be developed at less efficient mode and global (as well as regional) growth would be lower, it would make harder for central bankers to sustain inflation goals.

The EU has no fiscal powers over the member states: thus the need for an independent regulator for the EU-27 financial regulators (3).

The EU Strategic Priorities: directions for up to 2014. The European Commission adopted in April 2010 its first yearly “work program-WP” (for 2010); it reflects the Commission's determination to lead Europe out of the economic crisis and deliver policy that brings direct benefits to citizens. The Commission has agreed on a list of 34 strategic priorities to be implemented in 2010, with another 280 major proposals under consideration during later periods.

Each year the Commission formulates the work program concentrating on the most vital for the EU actions and activities. The 2010 program is a specific one: it is made according to the new tasks accredited to the Commission in the Lisbon Treaty (art. 17, TEU).

Commission's President, Jose Manuel Barroso pointed out at the occasion of the WP 2010, that the EU agreed on strategic priorities and set out numerous initiatives for the coming years to come. “It is time to act. Business as usual is not an option. The work program is an ambitious but realistic agenda for results. I hope that the member states and other EU institutions will match this level of ambition.” (4).

This new Commission's Work Programme (WP), contains ambitious commitments for up to 2014. It tackles issues of immediate concern and sets the policy direction to respond to upcoming challenges, laying the ground for further 5-year's work until the end of the present Commission's mandate in 2014.

The WP has several new features: in its multi-annual part it is aimed at improving predictability of the Commission's work and facilitating cooperation with other EU institutions. The WP has an increased element of flexibility and in order to facilitate dialogue, improve predictability and ensure transparency, there are numerous annexes to the WP (5).

The document contains a list of 34 strategic initiatives on which the Commission commits to deliver in 2010 (annex I); major proposals under consideration during 2010 and beyond, which are tentative prospects for the rest of the Commission's mandate (annex II); and a list of legislative simplification proposals and withdrawals (annexes III and IV).

The WP's revision. The Commission promised to review the WP's multi-annual part each year, setting new annual strategic initiatives and adapting the multi-annual strand where appropriate in the light of new circumstances, including results from preparatory work and review of implementation.

The Commission underlines its intention to work closely with the European Parliament and the Council, as well as other institutions and bodies, to ensure a broad consultation on the overall approach to WP and its individual initiatives. This Commission wants the WP to act as a central building block for the common inter-institutional programming proposed under Article 17(1) of the Treaty of Lisbon.

The WP's four main perspective directions. The European Commission intends to take the following main actions:

1. Tackling the crisis and sustaining Europe's social market economy, e.g. enhanced fiscal surveillance, proposals to repair the financial markets, the five EU-2020 strategy points and resolution of other European challenges;

2. Building a citizens' agenda, which puts people at the heart of European action, e.g. the Stockholm Action Plan, procedural rights for citizens, enforcement of judgments in civil and criminal matters, revision of the working time directive, a Green Paper on the future of pensions, a new biodiversity strategy and the EU's disaster response capacity;

3. Developing an ambitious and coherent external agenda with global coverage, e.g. establishment of the European External Action service, implementation of trade strategy for EU-2020, steering the enlargement process, action plan for the 2015 Millennium Development Goals summit and developing key bilateral relationships;

4. Modernising EU instruments and ways of working, e.g. stronger focus on smart regulation and adapting the EU financial framework to serve policy priorities through the EU Budget Review.

The WP aimed at delivering on the strategic initiatives during 2010. It also highlighted in a non-exhaustive way initiatives under consideration for 2011, thereby combining predictability for the European Parliament and the Council's work, and the necessary flexibility to adapt to changing circumstances. These initiatives are designed both at responding to immediate challenges, which yields rapid effects, and at shaping Europe's future for the long-term benefit of its citizens. In taking these initiatives, the European Commission will set a direction for the EU in the next decade, as highlighted by its EU-2020 strategy, and the activities for the preparation of the next multi-annual EU budget (6).

The US experience has shown that recession (and, consequently, the crisis) can be eliminated through the motions to ease banks position by supportive lending, for example, by offering them financial assistance at incredibly generous terms. The “injection” was of such a magnitude that it looked in Spring 2009 almost like a nationalisation. However, once the big banks started making money again, investors returned to risky and the economy began to grow again. Thus, officially, the recession in the US was declared to be over. As was seen in November 2010, the US housing market, the initial source of the crisis, remained unstable; the only way out was to make money cheaper (it happened through bond purchase, which becomes known as “quantitative easing”, or QE-2) and hope that people would start buying them again in significant numbers (7).

Although the “money trend” seems going the other direction: towards commodities (and resources needed for industry), while the problem remains - cheap money is leading to higher commodity prices. As John Authers says in Financial Times, “politicians might yet brake the impasse, but the most obvious way would be by shuttering the free movement of capital once more” (ibid cit.). This solution was recommended by the G-20 summit in Seoul in November 2010; though the final outcome of the QE-2 solution is quite dubious: if it works, the market will change the situation, if it doesn't, the destruction can continue.

However, at the end of 2010, global leaders agreed to move to more market based exchange rates and enhance exchange rate flexibility to reflect underlying economic fundamentals and refrain from competitive devaluations. In the joint statement by the European Commission and the Council in Seoul (12 November 2010) at the end of the G-20 summit, the EU leaders underlined that “the EU is being in the process of adopting a robust mechanism to address macro-economic imbalances” (8).

“ We have committed to reducing excessive imbalances and maintaining current account imbalances at sustainable levels. Our method to use indicators to trigger an assessment of macro-economic imbalances and their root causes was backed by the G-20 leaders” (9).

The EU is satisfied with the global commitment to fight protectionism in all its forms and complete soon the recommendations of the Doha Development Round. It was important for the EU to place development issue into permanent agenda of the G-20 summits; this notion was included into the Seoul Development Consensus for Shared Growth.

The G-20 summit endorsed the IMF reform and the EU welcomed these efforts. For example, by endorsing the Basel III reform. The G-20 also kept up the momentum for global financial regulatory reform, a key priority for the EU.

The conclusions of the G-20 summit in November 2010 confirmed the global community's willingness to spare no effort to reach a balanced and successful outcome of the climate negotiations.

Capitalism: assessing various versions during the crisis. The global financial crisis of 2007-10 ruined businesses and banks, individuals and even nations. It made an almost mortal blow to popular understanding of capitalism as a system. The “movements” in the theory of capitalism have been during last hundred years around two poles – market and governments, and something in between. It seems, however, that capitalism was not destroyed, rather it was irrevocably altered. In order to see how the crisis affected capitalism's perceptions, we need to put capitalism into historical and theoretical retrospective. A certain categorization of “capitalism” can be seen through the history (10).

In the capitalism's “theoretical start”, i.e. so-called “capitalism 1.0 version”, it was a sort of “laisser-faire” development concept; the economic policy was dominated by classic The Wealth of Nations assumptions leading to the Great Depression in the US in the start of the 20 th century. The start of capitalism was marked by the creation of classical 19 th century capitalism with almost independent (public, on one side) and private forces (on another side) in human, social life and economic development.

Rising military forces and emerging powerful vested industrial interests turned the first capitalism version into number two, i.e. capitalism 2.0. The second version, the reflection on the Depression (from 1930 th onwards), was a product of interdependence of politics and economics. Governments acquired a strong role in macro-economic management and in industrial policies. If years 1965-85 can be deleted from history, the 2.0 version worked quite well. However, the 2.0 version fell apart in the “inflationary malaise” of 1970s.

The policies of R.Reigan in the US and M.Thatcher in the UK, marked the 3.0 version of capitalism – a return to market fundamentalism (markets are always right) with strong push for financial sector (governments are distrusted). The turning point for the most recent version of capitalism came on 15 September 2008 when Lehman Brothers collapsed, setting off market chaos which, had it not been for government bailouts and guarantees, would have toppled every bank in the Western world, an incident which set off the fourth major systemic transformation in capitalism's history – Capitalism 4.0.
The “capitalism 4.0” version is the modern kind of “state of capitalism”, when its economic and political structures are at a crossroad. Present crisis has recognised that “governments and markets can both be catastrophically wrong”. (11).

Version 4.0 provides control on government spending but prefers Keynesian stimulus to budget-balancing austerity. It favour free markets, but with critical approaches (a sort of “distinct 2.0 version” but pragmatic and modernised).
Understanding “capitalism 4.0” will be critical to the continued recovery of European and global economies. Putting recent financial events into historical and ideological perspective, we can distinguish the emerging features of the new capitalist model. Basically, we have to explain how it differs from the previous versions – and how it will change politics, finance, international relations and economic thinking in the next decades.

The European leaders still think that the crisis is far from over, e.g. in the mid-November Van Rompuy acknowledged that the EU was “in survival crisis” (12). Important aspect of the present chapter is the acknowledgement that the present crisis has shown the failure of both straight orientations to market fundamentalism and government-directed dominance; the optimal paradigm is somewhere in between. Tracing the development of capitalism from the late eighteenth century through three distinct historical phases, we can see how at each of these transitions the existing economic order appeared to be fatally threatened. But the debate is going on the nature of the market economy and practical failures of market fundamentalism.

The forces that precipitated the crisis are now contributing to the evolution of a new, stronger version of the capitalist model. Therefore, “rumors of capitalism's demise may be premature”. The hope is that capitalism has abilities to reinvent itself and emerge stronger than before.

Euro+Pact: a new EU integration formula. In the efforts to r einforce the EU monetary and economic union, the European Spring Council (March, 2011) has shown the EU member states' desire to strengthen Union's integration. Six countries, including Poland, Latvia and Lithuania with other states outside eurozone joined the new formula, i.e. Euro+Pact. The Council has also underlined members' strong support for deepening of the Single Market's reforms and performance.

The EU-27 leaders, with the help of all EU institutions have done a good and important job towards more stronger Union. The main aim was to make closer links between the monetary and economic “unions”. A political headache caused by the Portugal's crisis darkened the work of the summit. With the idea of saving the euro with efforts -“whatever it takes”, the EU member states have shown that the important things are the structural reforms needed to transform un-competitive economies.

Main directions. The Council made a real game-changer in terms of economic governance. The Commission's President explained that the European Commission has been working hard to develop a comprehensive response to the crisis and stressed that the Commission together with the European Parliament would play a central role in the implementation of the Council's decisions. That was an important message showing the critical role of the European Parliament in political and economic life of the Union.

Besides, the EU leaders endorsed the Commission's call for a comprehensive safety and risk assessment associated with the European nuclear power plants and those in the EU neighboring countries. In view of the present nuclear power problems in Japan, the EU leaders endorsed the Commission's call for a comprehensive safety and risk assessment associated with the European nuclear power plants and those in the Union's neighboring countries. These assessments must be done on the basis of clear, common and transparent criteria, underlined the Commission.

Comprehensive package. In the conclusions of the Council to the EU-27 delegates from the General Secretariat of the Council on 25 March 2011 (EUCO 10/11), a comprehensive package of measures to eradicate the crisis and actions toward sustainable growth has been formulated.

The package includes measures on economic policy, with implementing “European Semester's” measures aimed at fiscal consolidation and structural reforms.

The European Council welcomed the Commission's intention to present the Single Market Act for adoption by the end of 2012, bringing new impetus into market's performance.

Among other things, there are proposals for completing the Digital Single Market, reducing all sorts of burden to SMEs and implementing services Directive.

On issues of economic governance, the Council adopted a package of six legislative proposals to ensure enhanced fiscal discipline and avoiding excessive macroeconomic imbalances, including a reform of the Stability and Growth Pact.

A new “quality of economic policy coordination”, so-called the Euro Plus Pact was agreed by the member states and 6 courtiers outside the eurozone joined the pact, including Latvia, Lithuania and Poland. The Euro Plus Pact provision are included into the Annex I of the final summit document.

In restoring a healthy banking system, the Council agreed on introduction of global financial transaction tax; the Commission will make a report on the issue by autumn 2011.

Guiding rules. Euro+Plus pact is based on four guiding rules, aimed at:

• Strengthening existing economic governance in Europe, in addition to already existing instruments, e.g. EU-2020 strategy, European Semester, Integrated Guidelines, Stability and Growth Pact, as well a new micro-economic surveilance framework;

• Reviving actions towards development of priority economic areas essential for fostering competitiveness and convergence, in particular, where economic competence lies within the member states;

• Assessment of the member states' national commitments through best practices and performance within the EU-27 on the basis of the Commission's yearly reports;

• New commitments towards the completetion of the Single Market as a key and fundamental factor of enhancing European and global competitiveness.

The Euro+Pact objectives. The above mentioned rules are desired to reach the following objectives:

- foster competitiveness: among the efforts in this objective are wage and productivity (but respecting national traditions of social dialogue and inductrial relations), improving education systems and promoting R&D, innovations and infrastructure. Additional measures to improve business environment, mainly for the SMEs through elaborate bankruptcy laws and the EU commercial code;

- foster employment through promotion of flexicurity system (used in Scandinavian countries), life long learning and tax reform;

- contribute further to the sustainability of public finances with additional attention to such issues as adequacy of pensions and social benefits, e.g. limiting early retirement above 55;

- reinforce financial stability.

 

Stability mechanism in eurozone. Recalling the importance of financial stability in the eurozone states, the European Council adopted the decision to amend the Lisbon Treaty with regard to setting up of the European Stability Mechanism (the changes will take place before January 2013). The ESM is expected to have an effective lending capacity of € 440 bln; the signature of both agreements is expected before June 2011.

Before the June 2011European Council, the Commission will present the country-specific opinions on both stability/convergence programs in the member states and the national reforms programs.

It seems that the Council has shown the way to reinforce the EU monetary and economic union and make new steps towards closer integration.

 

Economic governance

Some new signs have appeared in approaching economic governance in the European Union. They have been revealed during the European Council summit that took place in Brussels (February, 2011). It is about additional intergovernmental approach to national economic and financial policies.

Some say, that the EU economic governance will cure all the Union's ills. Probably. The question is how to achieve this “governance” for both the eurozone and the rest of the Union member states. The existing “community method” is clearly not enough; therefore Germany and France suggested something else: more intergovernmental control and cooperation. German government hopes that balanced budget laws at national level; including changes in constitutions (if necessary) will be the only solution.

 

Unequal partnership: widening gaps

Plans for further European integration have been again re-assessed in Brussels at the EU summit (4-5 February 2011). The problem is that economic issues are difficult to resolve due to the simple fact: there are different levels of development in the Union.

Macroeconomic imbalances among the EU-27 are great: some eurozone states are highly competitive (Germany) while others are not (Portugal, Greece, Ireland); these countries are at very critical situations in finances too.

Probably the most difficult problem in the EU is an ever widening gap between strong and week member states.

Another “gap” is between the eurozone 17 and the “rest of the EU-10”. It is a failure to admit that 17 members using euro had much greater rights and responsibilities than the remaining 10 members, argued the summit participants.

 

Drive for competitiveness

National budget laws seem to be a strong remedy: major eurozone partners, e.g. Germany and France have little respect for a revamped Stability & Growth Pact, which was discredited by the two states' governments in 2003 violating the Pact's main principles of public debt and budget deficit.

German government presently has another solution instead: underlining the importance of balanced budget laws at the member states' level. This idea, if implemented fiercely (including even constitutional amendments, if necessary) would help to cure both eurozone's and the whole EU's ills.

Some argue that the biggest problem is that monetary union is functioning without an economic union. For example, Jacques Delors, former president of the Commission and father of the euro acknowledged on the eve of the summit that there were existing “imbalance between the economic and monetary spheres” due to the lack of sufficient coordination of member states' economic policies.

Still another aspect of the problem: the EU legislative process, according to German officials, is too cumbersome for eurozone states to reach progress in economic cooperation.

European pact for competitiveness: German-French plan.

The German proposal sets out a three yardsticks to measure European competitiveness. The first is stability of public finances, i.e. within the Maastricht rules on public debt and budget deficit. The second is stability of unit wage costs as an indicator of price competitiveness. And the third is the minimum rates for investments in R&D, education and infrastructure.

The pact for competiveness is based on cardinal reform in economic governance. Six main proposals are on the agenda:

• Scraping wage indexation schemes (common wage system in Europe?);

• Agreement on mutual recognition of qualifications to promote labour mobility;

• Common basis for assessment of corporate/company taxation;

• Adaptation of pension systems according to national demographic trends;

• Making a constitutional clause in the member states to curb public borrowing and excessive deficits;

• Introduction of national crisis resolution regimes for banks.

Thus, the “pact for competitiveness” is aimed at reaching targets for economic convergence. The trend is in line with the two main countries' ideas. For France, it is a long standing demand for “economic government”. For Germany closer economic policy coordination could be better done by finance ministers in 17 eurozone states, rather than through the EU machinery in Brussels. The German chancellor calls it the “union method”, as opposed to existing “community method”, in which the Commission has the sole right for legislative initiative in the EU.

Eugene ETERIS, European Correspondent

 

References:

1. See, e.g. International economic issues, at: http://ec.europa.eu/economy_finance/international/index_en.htm 

2. See, for example: Agbokou D. and Barentsen W. // Financial Times. 08.11. 2009. (Comments in Financial Management Section) P. 6.

3. Some suggestions have appeared in this regard, e.g. in Financial Times, 15.07. 2010. P. 6.

4. Commission's President Speeches, Brussels, 31 March 2010.

5. The WP's Communication Document – COM 2010, 135 Final.

6. See: General information of Commission's WP:

http://ec.europa.eu/atwork/programmes/index_en.htm

- The Commission's WP for 2010 can be seen at:

http://ec.europa.eu/atwork/programmes/docs/cwp2010_en.pdf

7. See: Authers J. In: Markets Section // Financial Times, 14.11. 2010. P. 22.

8. See: European Council's Memo/10/574.

9. See: Memo/10/574/12 November 2010.

10. Kaletsky A. Capitalism 4.0. The Birth of a New Economy. Bloomsbury, Public Affairs, 2010. - 416 pp. ISBN: 9781408807491. The book shows capitalism's present and future, as well as it debunks myths about its development and presents groundbreaking new theories.

11. See: The road to recovery section // OECD Observer, nr. 279, May 2010. P. 24.

12. See: Financial Times, 18.11. 2010. P. 14.

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