Session 3: The politics of crisis management: common institutions and national policies

Jun 28th, 2010 | Category: Session 3

11 June 2010

The third session chiefly addressed three key issues:

I. Are common institutions at the European level being marginalized in the course of the developing euro zone crisis?

II. Why should we exercise solidarity towards states that do not play according to the commonly agreed rules?

III. To what degree are the rules of engagement changing at the EU level as a result of the IMF’s expanded role and responsibility in crisis rescue operations?

Common solutions and common institutions: It was argued that we distinguish different phases in the euro zone’s crises evolution. An appropriate roadmap for this evaluation concerns the involvement of different actors and institutions, e.g. the IMF, ECB, European Commission and Euro-Group (Eco-Fin) during different stages of the crisis’ evolution.

More specifically, the issue raised inquiries if certain institutions were circumvented or not made use of enough during the euro zone crisis, e.g. regarding the Eco-Fin, European Parliament, or the rotating presidency of the EU? In this debate existing and changing power balances between institutions at the European level play a substantial role.

In this regard, criticism was voiced towards Germany not having taken a European perspective on issues such as fiscal stimulus measures. Moreover, we are witnessing a convergence of economic ideas and policies at the European level, in particular regarding austerity packages. However, there is a simultaneous discussion about what forms the basis for cooperative behavior and solution finding at the European level. Most agreed that this basis is rather rules-based and increasingly less trust-founded.

In conclusion, the crisis management of the past months has contributed to a profound reform debate at EU level, with national solutions and/or economic governance options being advocated in the van Rompuy working group.

Solidarity and Germany: Don’t only blame Greece for fiscal profligacy while ignoring to point fingers towards Brussels for having accepted such behavior far too long. The Greek international financial rescue package is hardly of any use to Greece. Instead, most of the resources (according to some observers roughly €80 billion out of €110 billion package) are for non-Greek banks holding the country’s sovereign debt. The three-year agreement with the so-called ‘troika’ should be used to prepare the insolvency case for Greece because the magnitude of the fiscal adjustment required is insurmountable for the country.

The French obsession with economic governance is regarded as a real problem by some, namely because of its focus on state intervention and management of the business cycle. Instead, an alternative to economic governance would focus on joint fiscal policies and rules such as institutionalizing the German debt brake at a European level.

A different take on Germany argues that it is the anchor country in the euro zone (benchmark bund spreads, GDP level, constitutional debt requirement). In this perspective, Germany’s refusal to assume leadership responsibilities in the EU despite its economic weight and crisis management capacity is particularly striking. What has changed in Germany during the past decade in order to explain this reluctance?

1. Merkel is not interested in the ‘vision thing’ of European affairs. Rather, the focus is on effective, day-to-day management.

2. Germany’s attitude among the public, political, legal and economic elites has dramatically shifted against continuing to be seen as being “Europe’s paymaster”.

3. In Merkel’s view, Germany has achieved its strategic aims in Europe (Lisbon treaty, national unity, internal market and an increase in the country’s weight in the EU). Hence, with the onset of the Greek crisis, her government was unprepared and initially politically unwilling to adopt crisis management mode.

4. A process of de-legitimization of EMU in Germany is gaining ground, reconnecting with fears (Angst) a decade ago about abandoning the Deutschmark.

The IMF’s crisis management interventions and the changing role of the EU: During the past two years the EU has turned from a lender (€150 billion) to the IMF to a net borrower (€307 billion) from the Washington-based institution. At the moment 21 stand-by arrangements with the IMF exist, with the three largest coming from within the EU (Greece, Romania and Hungary). In total, five EU member countries have borrowed from the IMF since November 2008.

In three of the cases (Romania, Hungary and Poland), 2/3 of the borrowing was provided by the IMF and almost 1/3 came from the EU. In the cases of Latvia and Greece this ratio is precisely inverse. Two key challenges follow from this development:

1. Are we witnessing a new model of IMF engagement, where the Washington-based institution engages in lending to individual countries within regional arrangements such as the EU? Put otherwise, to what degree can the IMF ignore regional conditions and economic implications when dealing with an individual country inside such groupings?

2. While the shift in financing and lending is moving towards European countries, the voting balance inside the IMF does not correspond with these developments. This creates a paradox that the solvent Asians still don’t have the [voting] powers and the near-insolvent West still rules.

‘Food-for-thought during the discussion:

• There is considerable German self-interest to bail out Greece, not least for German banks.

• How could one navigate between no bailout for Greece and Greece not going insolvent in March/April 2010? Was it a decision between ‘pest and cholera’ for the European Commission and the ECB?

• Spain entered its EU presidency with a view to be part of the solution but it quickly realized that it became part of the problem.

• Decisions in the euro zone where always taken with a view to 16 members plus (Poland, UK and Sweden).

• European Commission and ECB: Constant back tracking, shifting red lines, running behind events, high degree of improvisation.

• Is the challenge more about stabilization rather than solidarity inside the euro zone?

• Greece has to manage its weakness with its European partners. The same holds for Germany, which has to use its power with/through its EU partners.

Rapporteur: Jens Bastian, ELIAMEP

• Manfred Neumann,“The role of Germany redefined? Economic and political dimensions”

• Wolfgang Proissl, “The Role of Germany redefined”