Blog Post

Europe: small steps and giant leaps

We were expecting eurobonds and we got economic governance. According to Angela Merkel and Nicolas Sarkozy the great leap forward would perhaps be the culmination but for the moment small steps are the order of the day. The question is obviously whether small steps serve any purpose.   To answer this, we need to go back […]

By: Date: August 21, 2011 Topic: Macroeconomic policy

We were expecting eurobonds and we got economic governance. According to Angela Merkel and Nicolas Sarkozy the great leap forward would perhaps be the culmination but for the moment small steps are the order of the day. The question is obviously whether small steps serve any purpose.  

To answer this, we need to go back a little in time. Until the end of spring the sovereign debt crisis was confined to three small countries, Greece, Ireland and Portugal. Spain had succeeded in limiting its spreads with Germany to about two percentage points. But by mid July the cost of borrowing for Spain and Italy was nearing four points and France’s borrowing conditions were rapidly worsening. The spectre of a fully blown crisis was starting to haunt markets. But the euro area was not equipped to deal with this. The stability fund created in 2010 had a lending capacity of a little more than 300 billion euro, ample for the peripheral countries but too little to help even Spain alone. Disaster threatened.  

On 21 July European leaders attempted – belatedly – to cure this vulnerability. They increased the capacity of the stability fund to allow it counter the Spanish and Italian risk and authorised it to act before the outbreak of a crisis by intervening on secondary debt markets in order to reduce bond rate spreads. The fund is not equipped to deal with a simultaneous crisis in Spain and Italy but it can try to prevent them happening. More accurately, it will be able to do so once national parliaments have ratified the agreement. In the meantime the European Central Bank is intervening in its stead, quite successfully until now : the tension has eased markedly since it began buying bonds on 8 August.  

This response is based on the hypothesis that, unlike the Greece crisis which is a genuine case of insolvency, the Spanish and Italian crises are mainly attributable to self-fulfilling speculation. Here, markets are guided by groundless fears which are nonetheless perilous because they have a negative impact on borrowing conditions. In such a case, limited and credible intervention should suffice to flip the trend, but there is no guarantee. And if intervention fails, even boosting the fund to 1 or 1.5 trillion euro would be inadequate because there would be a crippling domino effect on the countries standing guarantee for others : a Spanish crisis would affect Italy, an Italian one would hit France, and a French  one would leave Germany as virtually the sole guarantor of a debt burden which it would be unable to bear.            

Issuing eurobonds would mean replacing the strategy of ‘every man for himself’ by one of ‘all for one and one for all’, as it would enable joint borrowing by euro countries. Each would benefit from the guarantee of all its partners, and only the aggregate situation of the euro area would count, which is significantly better than that of the US, Japan or the UK. The idea is attractive but it must be realised that a joint guarantee implies, for each of the participating countries, giving partners access to their own taxpayers, who may be required to stand in for a defaulting borrower. This arrangement is unthinkable unless there is an extremely robust counterpart, for example prior scrutiny of national budgets. In concrete terms, a country may be faced with the choice of having a finance bill adopted by its parliament but deemed insufficiently cautious repealed, or facing the withdrawal of the joint guarantee.   

Decisions of this nature cannot be left to a committee of technocrats nor to a conclave of ministers. They can only be taken by a body with analogous democratic legitimacy to that of a national parliament. In other words, issuing eurobonds entails setting up a kind of federal system of government, recognised as such by the states and peoples of Europe.  

No doubt Angela Merkel and Nicolas Sarkozy find this prospect highly unattractive. But their proposal may in practice boil down to a response in two parts. In the immediate, bolstering European governance by appointing Hermann Van Rompuy as a permanent chairman of the euro area conveys a signal about the cohesion of the euro area designed to calm markets and support the strategy of 21 July. If this were to prove inadequate and a more ambitious strategy were to be needed, the existence of a governance structure, or at least the beginnings of one, would form the basis of more elaborate machinery.      

With luck, the first part of the response will be enough, because it is far from certain that the second would be politically acceptable. But the decision lies only partly with governments themselves. Since the outbreak of this crisis they have been continually forced by events to push European integration further than they had initially envisaged. It may well be that these small steps lead in the not-too-distant future to the great leap.    

(A version of this column was published in Le Monde)


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

May
25
14:30

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

May - Jun
31-1
10:30

MICROPROD Final Event

Improving understanding of productivity, its drivers and the way we measure it.

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Wolfhard Kaus, Javier Miranda, Steffen Müller, Verena Plümpe, Niclas Poitiers, Andrea Roventini, Gianluca Santoni, Valerie Smeets, Nicola Viegi and Markus Zimmermann Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic
 

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article Download PDF More on this topic
 

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More on this topic
 

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article Download PDF More on this topic More by this author
 

Working Paper

Measuring the intangible economy to address policy challenges

The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends.

By: Marie Le Mouel Topic: Macroeconomic policy Date: April 11, 2022
Read about event More on this topic
 

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article
 

Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read article More on this topic More by this author
 

Opinion

The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
Load more posts