It is hard to predict how the crisis will develop, but there is a real risk that it will be deep and long lasting. After the general ballooning of debt and speculative profits over a long period of time, the debt reduction and balance clearance processes will impact the whole world and be of substantial scale in the United States and most European countries. The rush on liquidity has generated a risk of deflation, which the central banks are trying to contain by squashing interest rates. But they cannot prevent recession when the banking system is no longer fulfilling its role.
In the face of a shock of unprecedented magnitude for the European Union, the initiatives taken by the French Presidency have stimulated the coordination of national policies. The banks will be offered considerable support. The G20 summit underlined the need for global coordination and recommended expansive budget policies and new financial regulations.
Many European political leaders imply that in this context the economic situation may improve quickly, as soon as the end of 2009 or the beginning of 2010. The risk attached to such a statement is that it significantly minimises the appreciation of the extent to which public intervention and reforms are necessary to secure the way out of the crisis.
In our opinion, the French Presidency marks the beginning of a European political commitment, which should progress resolutely. However tensions are high within the Union. The attempt to coordinate budget policies in Europe and the proposals to shore up economic activity are running into major obstacles. The recession is exacerbating intra-European competition. The risk of fragmentation in the internal market is growing. There is a lack of solidarity towards new member states that are particularly vulnerable. Some countries are raising barriers against greater, macroeconomic and, above all, structural public intervention.
Under these dramatic circumstances, we must all try to keep the European interest in mind. Therefore, Confrontations Europe is contributing to the political management of the crisis, pointing out in particular the need to consolidate the Economic and Monetary Union.
It is now urgent to endow the Union with a viable political management capacity, so that it can respond quickly to this event, anticipate and plan for the future. This should result in an agenda that is comprehensible and attractive to all citizens.
The Union needs a cohesive macroeconomic policy, implemented through reinforced coordination programmes between the different states and specific European tools. The recapitalisation and restructuring of banks will take a long time : public control must be stepped up and clearly defined to ensure that credit is granted according to the general interest. The budgetary policy must be used to sustain short-term demand and, at the same time, medium and long-term growth engines should be developed. Therefore, the stability pact cannot just be made more flexible and then re-enforced as if nothing had happened. It is essential to revise the pact and develop a real European budget. We also need to anticipate the medium-term risk of exchange rate shocks, renewed inflation and hikes in long-term interest rates, which would make the recovery process chaotic and uncertain : the monetary policy - and especially its external dimension - must be re-examined. Finally, the major social difficulties that will emerge in 2009 will force the Union to define its own specific role in the social management of the crisis.
The next step could be to define the Union’s growth, competitiveness and employment strategy for the medium and long term. But if we move too quickly, we run the risk of repeating the strategy mistakes made in the 2000’s, especially the inefficient coordination of national policies in essential areas. There are prerequisites to designing and successfully implementing a renewed strategy. The first is obvious : the successful development of a joint macroeconomic policy to deal with the crisis. However, this means substantially changing the governance system of the EU and even the contents of the EMU pact. Of course, we need to assess what can be done immediately under existing treaties, but we should also go ahead and investigate the possible future consequences of partially modifying these treaties. Furthermore, and this is not only a question of culture but also of sound decision-making, the member states must come to an agreement regarding “the transformation of capitalism”.
The driving force behind capitalism is the generation of profits coupled with the accumulation of capital. It is essential to bridge the gap between indecent financial profit expectations and actual returns on investments, and to re-establish a connection between productivity gains and salary progression. However, many believe that “tweaking” the financial regulation system will be enough, as if new growth cycles should continue to be driven by investors in search of greater profitability. On the contrary, we believe that the very structures of capitalism need to be reformed to create a more far-seeing, less greedy and more equitable financial system : this will require long-term investors, balanced and long-lasting public-private partnerships, and a form of globalisation in which public players will be more economically efficient and private players more socially responsible. We cannot deny the fact that, in these circumstances, the struggle between global financial markets and state intervention will be bitter.
We will now review these options and discuss concrete proposals regarding a few of the essential issues.
Building political leadership and the European agenda
Europe must be endowed with a crisis management capacity as soon as at the start of 2009 to ensure internal cohesion and external unity. There are two possible solutions. The first consists in appointing a permanent EMU president and placing the leadership of the Union jointly in the hands of this president and that of the Commission. Their mandate would be decided by the Council, and the European Parliament would have supervisory responsibilities. The second solution is to implement some of the provisions of the Lisbon Treaty in advance : appoint a stable European Council president, a High Representative for all external relations and a joint diplomatic corps.
During 2009, the institutions must draw up and present a political agenda to the citizens. One of the main defects in the Union’s current governance system must be removed, namely the inability to manage timescales : short-term matters must be distinguished from long-term matters so that they can be managed and coordinated more efficiently. This applies especially to investments, which are a blind spot in the current governance system. This agenda could be divided into three areas : develop a cyclical policy to shore up demand, with social management measures focusing on training and employment during the crisis ; reinforce the EMU and open up the debate on how to reform it in accordance with decisions on transforming capitalism ; and develop new, long-lasting engines for growth, competitiveness and employment, involving the definition of strategic interest areas.
Drawing up a macroeconomic policy and managing the social effects of the crisis
The establishment of a macroeconomic policy is hindered, in particular, by the Growth and Stability Pact. Mrs. Merkel’s argument that excessive and poorly adapted public assistance will plunge us back into crisis after a fragile recovery is important. However, it fails to address the unusual characteristics of the crisis, the requirements of solidarity between countries in this context and the need to cooperate for investments in the general European interest, which are sadly lacking at present. Nonetheless, these investments would inject new vitality into the whole European space and make it more competitive. It is true that France and other European countries must make efforts to increase their competitiveness. However Germany, will not be able to ensure its future as a core export country, which enormous trade surpluses relie on its neighbouring countries’ consumption.
Each country defines its own policy to assist banks and support the national economy. These policies are coordinated at a European level by common principles. But this is not enough : The EU should have its own competences for a policy defined in terms of solidarity and investment. A major issue is that the EU has no resources for this purpose. There is not such a thing as a real European budget, which is in fact a budget of the states. But without waiting for the budget reform, which is so long in coming despite being so necessary, and while opening a debate on this topic, the EU could use more extensively its possibility to access credit, establish new funds and reinforce existing funds.
The Commission has tried to question government aid to banks, taking competition issues into consideration rather than the depth of the crisis in this sector. In most of the new member states the banking systems are dominated by the subsidiaries of banks in long-standing member states ; credit availability in these countries could be significantly lacking. These problems must be addressed. The purpose of solidarity is to protect not only the most vulnerable states, but also the general interests of the Union. It cannot be implemented, however, without the right tools. Hence our proposal for a financial solidarity fund. Established alongside the EIB, it would be financed by bonds from this bank and guaranteed by the member states with a view to sharing the credit risks. It could enjoy much lower market interest rates than those currently applied for countries in difficulty.
We should also work towards pooling aid for industry on a European level. Otherwise, the bickering over state aid is going to get worse, and we may well see an unravelling of the internal market and gaps in the value creation chains. It will not be enough for the Commission to condition state aid on innovation and sustainable development criteria. To manage large-scale restructuring, particularly in the car industry, and pave the way for up-and-coming industries, common European support would provide incomparable cohesion and impetus.
As several leading figures or governments have suggested, one of the goals of communitising the recovery policy should be to stimulate investments in the general interests of Europe. For example, many of the human capital initiatives taken under the framework of the Lisbon Strategy – European Research Area, technological platforms, skills hubs to boost innovation – have had little impact so far and are short of funding. The same is true of the large-scale infrastructure projects that have, nevertheless, already been identified. The time has come to set up specific public and private investment groups for projects such as these. Funds from the European budget should be used to provide public guarantees. The Union should also develop a flexible framework for promoting cross-border, public/private partnerships.
Finally, the macroeconomic policy should be accompanied by a European social pact. While in recent years the rhetoric on Social Europe has had very little effect and has focused excessively on the legal aspect, we suggest a more dynamic approach through the regeneration of training and employment. The goal would be to set up massive, pan-European retraining and skills development programmes, and to create new links between training and employment for young people. No one State can meet such a challenge alone, and transnational cooperation is vital to share costs and improve quality. At a time when the huge number of retirements is leading to a potentially dramatic shortage of skills, such action would lend credibility to new growth possibilities and reinstate the Union’s social image. These programmes require a substantial increase in the Globalisation Adjustment Fund and the ESF. They must be managed on the ground, and require the participation of all the players concerned. It is particularly important to anticipate and manage restructuring processes : hence we would be freed from the dictatorship of the shareholder value, and could start to change European capitalism. Corporate social and environmental responsibility would take on a new dimension, whereas the unions would be encouraged to participate in a pact based not only on a new dynamic in the employment market, but also on a new link between innovation and compensation. The objection that the Union does not have any competence in the training and employment field should be rejected on the grounds that we can grant the Union shared competence with the member states. In this case, of course, the responsibility of the member states would not be reduced. On the contrary, the pooling of competencies would require greater involvement.
Consolidating the EMU and transforming European capitalism
The historic compromise that led to the Treaty of Maastricht for EMU in 1992 is now essentially obsolete : the globalised world has changed profoundly and Western financial capitalism will no longer be the locomotive for growth in the future. Different political and structural choices are made within different national capitalisms, both in the Union and across the world. One of the main questions is, how compatible are these choices ?
It is crucial to bring the French, German and British approaches closer together : there are considerable tensions and conflicts of interest, which will be exacerbated by greater public intervention. What exactly do we need to share to reduce these tensions and ensure that diversity does not undermine the common interest ?
At present, the Union is sitting on a one-legged stool : it has a monetary policy but not a budgetary policy. Discussions on the post-2013 budget are due to take place shortly ; underestimating their importance or putting them on a back-burner would have dramatic consequences. There are two prerequisite to the creation of a real European budget. In order to put a stop to the abhorrent “I want my money back” attitude the EU should be given its own resources. European resources would have to be used to finance identified European common goods. The CAP is so far the only common policy ; other policies must be defined (or, such as for energy policy, be re-defined). The negotiations must combine the revision of the SGP and the establishment of the budget : on the one hand, if the member states are to maintain strict budgetary discipline, the rules must be countercyclical and conducive to investment. On the other hand, European solidarity and investment require a real European budget. The negotiations must combine these two aspects and ensure that each is conditional upon the other : one is not possible without the other.
The current situation has highlighted the attractiveness of the Euro zone. The Euro is an effective factor of protection against the crisis, and many countries would like to join the zone. How is Europe going to respond to these countries ? It’s anyone’s guess ! Responding to these countries and consolidating our monetary zone are in fact two subjects in one. We can no longer ignore the conditions defined by Robert Mundell for the creation of “optimal monetary zones”, in particular a budgetary policy and human mobility. But we also urgently need an external monetary policy, so that we can present a united front in future, perilous international negotiations. The ECB is going to have to review its doctrine so that it can act countercyclically, and take a fresh look at what it is doing to avoid deflation and what it will have to do to prevent the development of speculative financial bubbles in the future. These bubbles have stimulated unsustainable growth, by generating increasingly serious crises.
Will efforts to develop new financial regulations be more intense in the international arena than within the Union ? We will need to clarify our European regulation model. Regulation meets two objectives : financial stability and the stimulation of growth. The Union must set up a mechanism for supervising financial institutions. We need to pursue and expand financial integration to get over national fragmentation and the fact that the European Union’s “silo” regulations for banks, insurance firms and management funds are weak and not very efficient. A new financial services action plan should also be defined to promote the funding of SMEs, regional development and public/private partnerships.
Transforming European capitalism not only means agreeing on the role of public intervention, it also means deepening the internal market and making it more efficient with the help of financial and economic actors who are taking care of their “base camp” in the global world. The struggle to protect national champions is endless. It is understandable that countries want to protect “their” companies, provided that their goal really is to promote employment and activity. But we would like to see more consolidation between European companies and investors, so that competition goes hand in hand with greater cooperation whenever the general European interest needs to be defended. Furthermore, to get out of the crisis we need to redress the balance between capital and debt in favour of equity capital. This raises a number of issues, including determining the responsibilities of professional development funds and corporate governance. It is now that we should be building long-term structures and moving towards stakeholder governance. We should also remember that one of the most serious factors contributing to the fragmentation of the European financial area and the prevailing inefficiency is the lack of tax harmonisation between the member states. Tax havens are an emblematic example of this. In addition, the current tax system fosters debt rather than the development of equity capital.
The explicit definition of joint strategic interest areas such as human capital and sustainable development would lead to the introduction of specifically European regulations and incentives and the rapid growth of cooperation between companies and regions.
Developing new growth, competitiveness and employment engines in the Union
The renewal of the Lisbon strategy will be one of the first issues addressed by the new institutions at the end of 2009. We will say it again : this strategy will only succeed if we reach a consensus on the macroeconomic policy, cohesion in the Union and how to transform European capitalism. All these subjects cannot be set at the same time. We suggest that strategy development should focus specifically on new growth, competitiveness and employment engines. The Union should define common areas of strategic interest : energy and the fight against climate change, sustainable development industries, human capital. Other areas, such as healthcare, food, ageing, co-development, immigration and security should also be scheduled for discussion. Each area has its roots in shared social choices, which will be governed by common policies with both an internal and external dimension. The external dimension is noticeably lacking in the strategy developed in the 2000’s, which failed to predict the huge impacts of globalisation. At present, the Union is not in a position to negotiate investments and joint interest partnerships with other regions of the world. Each member state is trying to do this individually, but none of them have the strength and critical size needed to pull it off. So, where are the European universities in the world ? Where are the investment groups ? The difference between the European Union and the United States is striking. Far from protecting ourselves from investments from emerging countries, we should be looking to develop investments of mutual interest. The concept of reciprocal market access is inadequate, as it is purely commercial. Moreover, the WTO itself agrees to a differentiation in rules given the disparities in development. In fact, the Union is unfavourably out of step with regions that know how to identify and defend their strategic interests.
Renewing the Lisbon strategy like this will require a profound change of method. We need to bring citizens together and mobilise social players and opinion leaders. With this in mind, we suggest implementing an interactive process between the member states and the Union – in 2010 for example – in a public arena designed for the discussion and evaluation of proposals. Hence, the renewal of the Union’s strategy would result in differentiated national commitments and a European policy agenda that is attractive and comprehensible to all citizens.
There are two possible options. The first consists in preparing a new European Single Act, which, twenty years after the decision to create a single market, would endow the Union with public goods and common policies in all areas of strategic interest. The other option is to progress area by area while at the same time developing the Union’s capacity for macroeconomic policy management and discussing the reform of the EMU, as we have suggested. In either case, the Union’s governance must be revised. The governance will have to use its own tools to stimulate and constrain. Its policies should be made much more legitimate by inviting civil societies and social and economic players. The EU ability to forecast and plan will have to be built and coordinated with the creation of national strategic committees.
The political path to cohesive progress on all these fronts must start with the urgent renewal of the Franco-German dialogue and a new impetus in the Franco-British dialogue. In addition, the prevailing attitude of western Europe towards new member countries must be overturned, by explaining to our fellow citizens that enlargement is not the cause of the Union’s decision-making difficulties but, on the contrary, a major opportunity to push integration forward, provided that we maintain solidarity. Finally, given that emerging countries are going to catch up more and more quickly with the West, and that a massive growth in investment in both directions is a key prerequisite to our future prosperity, it is vital to implement the new tools provided for in the Lisbon Treaty. We must make a joint, proactive effort to move closer to these countries.
Emerging from the crisis, strengthening the Union’s cohesion, mobilising societies and turning the Union into a global political player : all these objectives are interdependent and within our reach, provided that we create a momentum based on commitment and participation.
President of Confrontations Europe.
1st December 2008.