EU prosperity at stake in crisis disunity

By Paul Taylor
December 3, 2008

Paul Taylor Great Debate– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

The global financial crisis has been a stark reality check for the European Union, exposing divergences over economic policy and highlighting the European Commission’s growing difficulty in enforcing common rules.

The European response to the turmoil shows that most real power still resides with member states, not in Brussels. Even after 50 years of integration, governments instinctively reach for national solutions at the risk of harming EU partners.

The 27 EU leaders, especially the big three of Germany, France and Britain, need to take a deep breath before next week’s summit and measure how much damage they could inflict on future prosperity and on Europe’s credibility in the world if they continue down this path.

The EU united briefly in October behind a plan to avert a meltdown of the financial system and a call for a global summit to reform financial supervision, incorporating the emerging economies of Asia, Africa and Latin America.

But since then, forces pushing towards a re-nationalization of EU economic, fiscal and competition policy seem to have gained the upper hand over forces working to unite and coordinate Europe’s response to the crisis.

“It may be that measures taken nationally will break community rules and we will not recover,” said Tommaso Padoa-Schioppa, former Italian finance minister and president of the Notre Europe foundation.

“What we observe now is that both forces are at work — an extraordinary effort at coordination and a strong diversity of measures taken at national level.”

SMOKE AND MIRRORS

In two months, countries such as Ireland, Britain and now France, have cast aside the EU’s budget discipline rules in favor of massive deficit spending.

Who seriously believes that the deficits which those countries will run next year, way in excess of the EU’s limit of 3 percent of Gross Domestic Product, will be brought back into line within a year or two, as Brussels says it expects?

Likewise, the 200 billion euro ($252.8 billion) economic recovery program proposed by the executive European Commission last week was largely an exercise in smoke and mirrors, aimed at creating at least a facade of unity.

It totted up money already spent, or about to be spent, by national governments, with just 30 billion euros in proposed EU funds, some of which finance ministers blocked this week.

That may be inevitable since the EU budget is a mere 1 percent of the bloc’s combined GDP, while national budgets average about 40 percent of GDP.

The Commission hoisted a European flag of convenience over often divergent measures that member states were taking anyway, in the hope of dissuading them from making more unorthodox, protectionist or beggar-thy-neighbor moves.

But it cannot mask the fact that the three biggest EU economies are heading in separate directions.
Britain has thrown fiscal caution to the wind and cut sales taxes, France is on the brink of announcing a big boost in public spending but orthodox Germany, Europe’s biggest economy, is holding out against a bigger stimulus for now.

EACH FOR HIMSELF

EU restrictions on state aid to banks have been eased, with a further softening in the pipeline as Brussels faces pressure to be ever more indulgent. Even pro-market Sweden’s finance minister this week urged the Commission “to call off these legions of state aid bureaucrats”.

The single market at the heart of Europe’s economic success is starting to fray as a result.
“Each country is acting for itself, also in the impact of bank rescues,” said Daniel Gros, director of the Center for European Policy Studies.

“There are different conditions on help to the banks, different interest rates on state loans to banks, different governance arrangements, different conditions on lending.”

An earlier free-for-all over guaranteeing bank deposits led some savers to withdraw money from solvent institutions and place it in troubled ones such as Britain’s Northern Rock or Irish banks that had an unlimited state guarantee.

Now France is fighting Brussels to be allowed to pump money into healthy banks in return for commitments to lend more to the “real economy”, while the Commission demands that ailing banks reduce their activity as a condition for state aid.

EU officials are worried that the each-for-himself mentality will weaken the European position in global climate change negotiations, the latest round of which began this week.

EU leaders are due to adopt ambitious plans next week to make good on their pledge to cut greenhouse gas emissions by 20 percent by 2020, reduce energy consumption by 20 percent and draw 20 percent of energy from renewable sources.

But a fierce battle is under way to water down or delay implementing measures because of the financial crisis. That would weaken the EU’s green leadership ambition just as a more climate-conscious U.S. president takes office.

GOLF CART BLUES

Historically, European integration advances through crises. The 1970s oil price shock led to the creation of the European Monetary System. The 1989 fall of the Berlin Wall made possible the establishment of the euro single currency.

And the Sept. 11, 2001 attacks on the United States hastened the adoption of a European arrest warrant, replacing centuries of cumbersome extradition proceedings for criminal suspects.

The financial crisis may yet spur another leap forward for the EU, perhaps convincing Irish voters next year to reverse their rejection of the Lisbon Treaty and allow a reform of the bloc’s creaking institutions.

But this crisis could also deal Europe an enduring setback. If budget discipline and competition rules fray further, it will be hard to get the toothpaste back into the tube when it’s over.

One image from the last few weeks summed up the EU’s uncertain state as it struggles to find a common path.

At crisis talks in Camp David with U.S. President George W. Bush in late October, French President Nicolas Sarkozy, the rotating president of the EU member states, rode in the front of a golf cart with Bush, while European Commission President Jose Manuel Barroso sat glumly in the back, facing the wrong way.

Diplomats said Barroso was offered a seat in the second cart alongside Secretary of State Condoleezza Rice, but he was determined to stay in the front cart, even if that meant taking a back seat.

For more columns by Paul Taylor, click here.

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One comment

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Mr. Taylor, you make a convincing argument for either cooperation amongst nations or a world government. In either case, with the present balance of power in the U.N. resting with only those members of the Security Council, how do the voices of the poor in developing nations bargain for their needs of prosperity? In desperate times, humans often invoke desperate measures. I suspect you are a fervent capitalist, how do you feel about the prospects of a world government? And who’s sensibilities should prevail in the plan to lead civilization back to some definition of economic prosperity? Call me old fashioned, I prefer the musings of John Locke.

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