Re-Define commentary on the statement from the Euro Leaders' Summit
We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States. We also reaffirm our determination to reinforce convergence, competitiveness and governance in the euro area. Since the beginning of the sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro is based on sound economic fundamentals. But the challenges at hand have shown the need for more far reaching measures. (Re-Define Comments are in italics. For Press Release Click Here and for a PDF version of this commentary Click Here.)
The recovery in the Euro area is not well on track and in fact remains very fragile with some possibility of a double dip. Moreover, our banking system remains weak both in terms of structural maturity mis-matches in funding and capital adequacy.
We may have better economic fundamentals than some other economies at an aggregate level but our decision making has been exposed as being far too slow and has seriously dented our credibility.
In December 2010, Re-Define produced one of the first blueprints for the European Stability Mechanism "An Optimal Design for the ESM" targeted at EU policy makers. After more than six months of discussions and political wrangling, today the ESM treaty was signed in a ceremony in Brussels. Now is an ideal time to evaluate the final shape of the ESM and to compare it to our blueprint. This short policy commentary, part of our new series of publications, aims to do exactly that. First we highlight the proposals Re-Define made, then we discuss what the ESM treaty actually provides for.
The legal form
Re-Define suggested that though it may be preferable embed the ESM in the legal structure of the EU (as is the case for the European Investment Bank), it was probably much easier to set it up as an international financial institution based on an intergovernmental treaty between Euro area member states using the EBRD as a model.
This is the model the Euro area member states have chosen and the ESM will be set up as a treaty based international financial institution located in Luxembourg with Euro area member states as members.
Re-Define suggested that the ESM should have a lending capacity that is enough to meet around a third of the Euro area's sovereign issuance for a period of two years – between Euro 600 bn and Euro 750 bn. We also suggested that an upward flexibility should be included in the agreement in case of contingencies.
Europe has a banking crisis, not a wages crisis - EU Observer Op-Ed by Sony Kapoor
EUOBSERVER / COMMENT - To a hammer every problem looks like a nail. EU leaders are once again proposing familiar solutions driven more by what is possible, even convenient, than by what the problems actually are.
Given that recent rhetoric has almost exclusively been about competitiveness fiscal and sovereign debt problems, one could be forgiven for having already forgotten that this was first and foremost a financial crisis.
The fact of the matter is that our leaders have proven incapable of understanding and tackling the financial crisis. Their inability and unwillingness to tackle financial sector problems upfront have put us in a bigger mess where both the financial health of EU banks and sovereigns is suspect. Now the solutions they are proffering could make things even worse.
The world economy is at a critical point where 1) continuing economic uncertainty, 2) sustained economic imbalances, 3) re-emerging fragility in the financial sector and 4) an emerging divergence amongst major economies in the world on approaches to financial regulation all pose serious risks to achieving sustainable growth.
While on the one hand, some emerging economies face the danger of overheating and are having to confront massive capital inflows and raise interest rates much of the ‘old’ developed world remains under the shadow of anaemic growth, decimated public finances and high unemployment. Many low income countries are somewhere in between but remain prone to many risks. The world economy is unlikely to recover on a sustainable basis with just one engine of growth.
Investments that are growth-enhancing, that generate employment and that improve the sustainability of the economy are good and desirable. However, even before the crisis hit, the European Union suffered form a lack of optimal levels of investments in infrastructure, green energy and energy efficiency measures and small and medium sized enterprises. This was driven by a number of factors inherent to these kinds of desirable investments for example high upfront costs and long payoff periods in the case of infrastructure investments and a lack of policy certainty on carbon price for green investments. An additional problem was misallocation of resources by the financial sector because of excessive short-termism and crowding out by speculative investments.
The crisis exacerbated the paucity of investments flowing to these desirable categories. However, policy makers have been handed a unique opportunity to address many of these deficiencies for example through a more informed reform of the financial system and through the introduction of new and innovative sources of financing. This Policy Brief for the European Parliament identifies the main obstacles that impede desirable investments in the real econmomy and puts forward a set of concrete suggestions on how to tackle these and stimulate more investments in infrastructure, energy effeciency, green energy and SMEs.