I had the opportunity to take part in a round table as a panelist on 13 September 2018, invited by the FEPS and the Jean Jaurès Foundation to join a further reflection exercise on where politics should take us, alongside Peter Bofinger (German Council of Economic Experts), Marco Buti (Director General of DG Ecfin) and Gesine Schwan (political philosopher). Here are my thoughts on the discussions points.
The main question was around reforming the EU: From Reflection to Political Action. What is the Meseberg Agreement worth?
It might sound severe, but it is probably too little to late. Let me explain what I mean before I come to the more technical issues.
The generation who agreed on the internal market, who created the Euro did this with the best intention but with the expectation that a ever closer political union, cooperation and solidarity would follow.
That’s not so much the case today and the generation now in charge is framing the problem like a prisoner’s dilemma. As everybody knows, if you frame a problem like a prisoner’s dilemma, the outcome is a non-cooperative, sub-optimal solution.
It is my generation that will have to sort out this mess, to pay the price for the lack of trust and courage to find a cooperative solution.
What we need to demonstrate to the people, especially in the upcoming elections is an Union that provides systemic safety, reduces the risk of crisis, and not only solidarity on a case by case basis against painful adjustment programmes. That’s the roadmap.
That is the perspective from which I assess Meseberg and more broadly the current debate.
Let’s start with the Meseberg roadmap on the Banking Union. This is key, as the aim is to be prepared for the next financial crisis, bearing in mind that we are just celebrating the 10th anniversary of the fall of Lehman Brothers.
First, the European Deposit insurance Scheme. Lack of progress on the EDIS is not a surprise – there has been no progress on the EDIS since 2014, and the Meseberg agreement is playing the clock – relegating the EDIS delivery by 2024 and only if conditions are fulfilled… Meanwhile, the so called third pillar of the banking union was on the table from day one and its principle already agreed upon.
Germans or Dutch think it would amount to “bailing out” the populists. This is the opposite of the truth. It would work to keep Italy in the euro and the EU at a time when its populist leaders are looking for an excuse to take it out.
In truth, conservatives are here as populists and anti-europe as the populists. In different ways, but the result is the same.
It is time to take pride in protecting citizens against the risk of a crisis, instead of letting the euro-skeptics make it look like they are the ones protecting honest citizens. The EDIS deserves a big popular campaign for the European elections. It would prove the euro-skeptics wrong. And may be the start of a solution against euroskepticism.
Second, the ESM common backstop.
In the form described at Meseberg, the backstop is too small and restrictive, – studies, modeling shows that more money would be needed to cover the failure of a big bank or several small banks, and if we know it, markets know it. If too small it would lead to national bailouts anyway. Think 2008 – doing the same thing, expect a different results; that’s the definition of madness.
The restriction put on the mechanism defies the very purpose of a backstop. The idea is to offer unconditional guarantee… so it gives enough trust and confidence that you don’t even need to use it.
It also emphasizes the governance issues. Clearly, the intergovernmental governance is risky – leaving the final say to the german parliament for the use of the backstop for italian, greek, spanish or french banks, would lead to severe popular backlash and to off-the-roof results for nationalists. This will be seen as a casus belli! And create massive divisions. Exactly like it happened with Greece and the Eurogroup. Try again, fail better.
The roadmap here is very much conditional to more progress on balance sheet cleaning and Non performing assets. Well, according to a lot of countries, and even to the ECB, there has been enough already.
Having said all this, it is clear that the road to a eurozone budget sounds far away, given the difficulties on smaller pooling tools such as EDIS. Bearing in mind here that we are not even talking about public money, but private money.
We are facing a political problem that can’t be solved without a bit of perspective, and probably also with a lot of pedagogy towards citizens. Here’s my food for thoughts.
The European Level IS the right level to tackle systemic banks, GSIBs, cross border institutions etc.
The high level objective of letting the banking sector deal with its own failures, instead of using taxpayer money, is great, at least on paper.
However, by moving from national to european level, we took the risk of DE-PO-LI-TI-CI-ZING the matter. Indeed, for most citizens outside of the Brussels bubble, what happens in Brussels stays in Brussels.
However, dealing with banks cannot be separated from its public service objective, and strong ties with economy. And the european level is lacking leverage on this – no european budget, no clear european objective on this, just the sum of national economies, which create a huge imbalance.
That why this is more political that it seems and not purely technical. We are talking economy convergence, strategy at the continent level, social cohesion, and not only vague financial stability. Plus, these days, financial stability is at risk mostly because of political uncertainty!
This emphasized the strong need to involve citizens in this construction before it blows up from a popular misunderstanding backlash.
Because not only citizens are not on top of what’s going on or how it works, but if kept in the dark they will have a very natural, sticky tendency, to imagine the worst and to be very distrustful about it.
How to get there ?
Manfred Weber said yesterday after the state of the union speech, he’s proud of what his EPP did in the face of the financial crisis. “We rescued Europe and the euro,” he said, claiming that other political groups did not offer adequate solutions themselves. The truth is that not much was done, because populists are strong and they don’t even need to be in power, as they make current leaders not move on anything, not daring to lose anymore of their decreasing share of vote.
But banking union and eurozone reform is not complete. We are barely prepared for another hit, a hit that is not unlikely, and the dust from the previous financial crisis has not totally settled yet, clearly!
Neither conservatives nor populists want progress on this, but for very different reasons. Unfortunately, the end will be the same. And if there is a crisis tomorrow, populists will use the lack of progress, the lack of protection against us.
On the other hand, if we built stronger security nets, they will be proven wrong when people will see that we have built something solid. And it is time for progressists, left wing european politicians to cut the intermediaries, to go back on the field, and explain what we are building, instead of leaving this to national politicians, eurosceptics
Whatever the reason, not involving the people is risky: Let’s take a concrete example, by looking back at what we said about the common back stop. It could be a lose-lose situation without having the people on board, because it will be interpreted as negatively as a bail out and free money for banks without a bit of pedagogy. I can already see the headlines “European Union unlocks 50 billions for Societe Generale or Deutsche Bank”.
I spent the last 7 years in the UK and I can tell you this: one (of many) explanation from Brexiteers is « we never had our say on this »… While the vote is actually mostly rooted into the Tory government austerity and disengagement in poorest regions. COMMUNICATION IS KEY.
Time to embrace a more proactive, voluntaristic, slightly protectionist European NARRATIVE on this. Of course, it would be much easier to achieve and get popular support if these plans would, at last, be more proactive on having more social objectives, such as reducing inequality, foster investment, fiscal and social justice…