“The European Union in a globalized world – Strategic prospects”
Presentation of Pierre Sellal, Secretary General of the French Ministry of Foriegn and European Affairs at the Institute of Security Studies
(Pretoria, 2 February 2012, 16h30)
“The European Union in a globalized world – Strategic prospects”
In the last few months the financial crisis has put the European Union to the forefront, first of all in Europe itself where it has fuelled, among its citizens, a crisis of confidence in the European project and its capacity to deliver growth and employment. It has also been a matter of concern for the EU’s external partners which had for a long time considered the Union as a model of regional integration to get inspiration from.
This comes at a time of an increased consciousness of a changing world in which emerging economies, such as South Africa, are gaining more strength. The fact that Europe can no longer see itself and be considered as the centre of the world has sometimes been interpreted as a proof of a European decline.
What is the reality behind these impressions ? What initiatives have been undertaken, in the last few months, in order to cope with the crisis and make it possible for the European Union and its member States to get out of it, strengthened and more united ? What are the consequences for Africa and other developing countries ? I will try to answer these three questions.
1/ First, let’s come back to the origin of the crisis
In 2008, the failure of Lehman Brothers revealed the weaknesses of the banking sector and led to a crisis of the private debt. In order to minimize its impact on the world economy, the European Union, while France was holding the rotating presidency of the council of ministers, was at the origin of a coordinated response in the framework of G20. The choice was clearly made, through vast public investment schemes, to avoid the collapse of the banking system and to stimulate growth, with a view to avoid an even deeper recession. This led to the current development of the crisis which has transformed into a crisis of sovereign debt.
In fact, during this period, public debt ratio in Europe jumped from 66,4% of GDP to 105%. At the same time, it rose from 62% in the US to 105% and from 188% in Japan to 238%. These figures show that the sovereign debt crisis is not a European specificity and that, to a large extent, the fundamentals of European economy, which is still the world’s largest, can be favourably compared to those of other developed countries.
Nevertheless, the Euro area has experienced, in the last few months, high tensions which can be explained, beyond structural causes affecting all countries, by a conjunction of factors :
First, a few countries are confronted with specific difficulties, such as uncontrolled fiscal policy in Greece, the burst of the real-estate bubble in Spain or Ireland and the lack of competitiveness in Portugal. Some of these countries required assistance from the EU and the IMF and it took a little bit of time to put it in place.
Second, the private sector involvement in the restructuring of the Greek debt, which became necessary, had an impact on the market and its confidence in the ability and determination of other Euro area countries to repay their debt, in spite of the fact that this involvement of the private sector is strictly limited to Greece.
Third, building the Euro area was based on the assumption that a single currency would lead naturally to common economic and fiscal policies. This turned out to be unrealistic as, on the contrary, the protection deriving from the euro led to unreasonable behaviours from member States, encouraged by insufficient surveillance at the European levels of national policies.
Fourth, this came along with the fact that the European central Bank has no capacity to act as a lender of last resort, as compared to the Federal Reserve in the United States or the Bank of England in the UK. This was a deliberate choice made by the time of the creation of the Euro. But it led to this consequence : sovereign debt is no longer considered by investors as without risk, leading to a general increase of interest rates and widening spreads between Euro area members.
All in all, the virtue of the current situation for the Euro area and the European Union as a whole was to make it possible to identify clearly all the shortcomings and to pave the way for solutions to address them.
2/ On the basis of this lucid diagnosis, the European Union has put in place a comprehensive set of measures which will result in further European integration, in other words to more Europe.
These measures are based on the very core principles on which the European Union is founded :
Responsibility : the single currency is the common property of all the Euro area member States. It is up to them to protect this achievement, by abiding by the same rules. This is why one of the main tasks was to strengthen common disciplines and macro-economic surveillance, with a view to restoring market confidence in the euro. This has been achieved by giving the European Commission more power to look into national budgets and to sanction member States that do not respect their budget deficit reduction targets. The fact that a qualified majority of Euro area members will be required to overrun the Commission’s proposals will give automaticity to these sanctions and make them an effective deterrent against misbehaviour by member States. The introduction of a joint balanced budget rule in each member State, at constitutional level, will complement these very powerful measures.
Solidarity : support has been granted to member States requiring assistance. Put in place in 2010, the European Financial Stability Facility has made it possible, with a lending capacity of up to 440 billion euros, to provide assistance to Greece, Ireland and Portugal and to avoid contagion to other Euro area countries. It will give way to a permanent crisis mechanism, the European Stability Mechanism, which is now ready for signature, with a view to its early entry force in July 2012. This mechanism will have a wide range of tools available and a strong financial basis, with a capital of 700 billion euros. Furthermore, Heads of States and Government have agreed to reassess in March the adequacy of resources under those two instruments. At the same time, with due respect to its independence, the European Central Bank has played its role on the market, both vis-à-vis the banking sector and by buying sovereign debt.
Convergence : a framework has been put in place in order to make it possible for national policies to come closer together. In 2011, for the first time, the definition of national budgetary strategies and the establishment of growth and employment priorities at European level have been synchronised, in the framework of what is called the “European semester”. In March 2011, the Euro Plus Pact was established in order to strengthen the economic pillar of the Economic and Monetary Union and achieve a new quality of economic coordination, with the objective of improving competitiveness and thereby leading to a higher degree of convergence. This Pact includes all Euro area countries, as well as 6 non euro member States. It remains open for others to join.
Governance : in the last few years, heads of States and governments have been directly involved in the management of the crisis, through regular meetings of the European Council and of Euro area members. France had for a long time emphasized the importance of establishing a true economic government for the Euro area. The decision has already been taken to institutionalize summits of Euro area member States that will meet at least twice a year, as well as to appoint a permanent president for such summits and to strengthen the body in charge of preparing such meetings.
All these principles also form the basis of the Treaty on stability, coordination and governance in the Economic and Monetary Union, the negotiation of which was finalized last Monday on the occasion of the meeting of Heads of States and Governments in Brussels. This treaty, which will be signed in March by all EU member States, except the United Kingdom and the Czech Republic, represents a major step forward towards closer fiscal and economic integration and stronger governance in the Euro area. It will significantly bolster the outlook for fiscal sustainability and euro area sovereign debt and enhance growth.
While looking back at what has been achieved in the last few months, one has to acknowledge a few things :
First, of all, the European Union has gone a long way from where it stood originally, with a lot of pragmatism. From the no bail out clause in the Treaty, implying no shared liability over each member State’s debt, we have been able to invent solidarity mechanisms. Similarly, the strong and long-lasting opposition to an economic government for Europe and to specific summits of the Euro area members has been overcome.
Second, the value of the decisions taken lie in their comprehensiveness and consistency. Solidarity is only possible if member States commit to the same rules and discipline and put in place the mechanisms to enforce them. Strengthened governance is required for crisis management purposes, as well as for monitoring efforts towards more economic convergence. All this forms a delicate balance which is absolutely necessary if we want to succeed.
Third, contrary to what has been said, there has been no shift from the original method on which the European project is based and which naturally combines the political leadership of Heads of States and governments with the role of the supranational institution that is the European Commission. It is perfectly the role of the Commission to verify that the common rules are implemented. It is up to the European Council, which is indeed a European institution, to give the political impetus and to act as the economic government for Europe.
Fourth, one might object that a “two speed Europe” is being shaped. One has to remember that some European policies include, for a long time, a limited number of Member States, as it has been the case for the Schengen area since the beginning. Then, who can really argue against the necessity of a deeper coordination between countries sharing a single currency ? Furthermore, the member States who decide not to join in the first place can always do so later. And, finally, bridges can always be established between the Euro area summit and the European Council, through for instance the designation of the same president for both of these instances.
3/ Furthering European integration will benefit the international partners of the European Union, including Africa.
- The G20 Summit in Cannes last November was somehow overshadowed by the crisis of sovereign debt in the Euro area. Presenting Europe as a matter of concern has indeed the effect of relieving pressure on other fronts and, at the same time, is misleading. No one can deny that we are experiencing a crisis with global implications, rooted in the major imbalances that characterize the world economy. These need to be addressed through more international cooperation, in the appropriate framework. This was the objective of the French Presidency of G20 last year and this continues to be our priority, as well as the priority of the European Union.
- Indeed some progress has been made, in Cannes, with a view to better regulating the financial sector. A mechanism has been put in place in order to monitor the implementation of previous decisions regarding banking solvency ratio (Basle III) and the limitation of compensation practices. Similarly, measures regarding institutions, which difficulties may have negative effects on the whole banking system, the so-called systemic banks, have been adopted. Principles on regulation and surveillance of the shadow banking sector and derivates on commodities have also been agreed and a reflexion on the functioning of credit default swaps markets has been launched. The European Union is fully committed to follow up on this important agenda.
- The risk for developing countries lies before all in the contagion effect of slow growth or recession in Europe and other advanced economies through the trade channel. This is why it is so important not to limit ourselves to budget consolidation and to address, at the same time, the issue of growth, bearing in mind that there can not be sustainable growth without sound fiscal policies.
- The European Summit at the beginning of this week had growth on its agenda and will come back to it early March. The decisions at European level will be complemented by policies implemented by national governments. In France, for example, President Sarkozy announced, last Sunday, a whole range of measures to strengthen the competitiveness of the French industry and to stimulate investments, in particular in the area of real-estate.
- Coming back to the issue of trade, the European Union has constantly resisted protectionism and is determined to continue to do so. In the context of increased pressure from public opinions, it needs to be able to demonstrate that commitment to free trade is part of a balanced approach to its relations with its external partners. This is why, in September 2011, the European leaders have included reciprocity among the basic principles of the EU external action, in particular with regard to its strategic partners.
- Last but not least, the commitment to development of the European Union in general and of France in particular remains unchanged. Let me illustrate by a few facts :
The French Presidency put a great emphasis on development issues on the agenda of G20. It also succeeded in reaching concrete results in the very sensitive area of food security.
Fiscal consolidation in Europe has not prevented member States, including France, from maintaining their flows of development assistance. As far as my country is concerned, there was a clear decision from the highest authorities to exempt ODA from cuts in public expenditure.
The European Union and France, in particular, remain at the forefront in the discussion on innovative sources of financing for development. My country was the first to implement a levy on air travel which is funding an international program to combat HIV/AIDS. The European Commission recently presented a proposal with a view to introducing a tax on financial transactions and President Sarkozy is committed to implementing it as soon as possible. We look forward to working closely with South Africa on this issue.
Finally, the European Union has not given up on the fight against climate change which seems to become less of a priority in those days. Together with Africa and thanks to the leadership demonstrated by your own country, the determination of Europe has contributed to paving way, in Durban, for a comprehensive agreement that is a requirement if we want to avoid major adverse consequences which will affect before all developing countries.
Overall, a stronger Europe will be in an even better position to move all of this agenda forward.