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A new Treaty for the Eurozone?

by Frank Schnittger Wed Sep 14th, 2011 at 12:03:39 PM EST

Angela Merkel has several times remarked that a new Treaty is required to prevent a recurrence of financial crises like the current one. Many economic commentators point to Eurobonds as an essential part of any solution. The German Constitutional Court appears to have ruled out the issuance of Eurobonds without specific approval by the Bundestag.  This implies that the issuance of Eurobonds is beyond the scope of current European Treaties as such Treaties are subject to adjudication by the European Court in Luxembourg, not the German Constitutional Court.

Not so long ago we had an attempt to create a new Constitution for the EU.  This eventually boiled down to a much reduced Lisbon Treaty which was ratified, not without some difficulty, by all member states. The Lisbon Treaty was at first rejected by the Irish electorate in a low turnout referendum in 2008.  After much political manoeuvring, it was eventually passed by a second referendum in 2009. Opponents castigated it for representing the thin end of the wedge of a new European Superstate.

In reality, the Lisbon Treaty represented no such thing. It made some minor adjustments to governance rules to reflect the fact that the EU had expanded to 27 Member states. In fact, even before it been ratified, it was rendered almost entirely irrelevant by the global financial crisis which erupted in 2008. What difference have the new powers for the European Parliament made? The power of Petition contained in the Treaty has not even been implemented. Has the European Council become any more effective with the appointment of a full time President of the Council?

Instead we have seen the usual fragmented, uncoordinated, shambolic lurching from one phase of the crisis to the next with European institutions largely sidelined whilst a dysfunctional Merkel/Sarkozy national leadership partnership struggles to achieve any kind of coherent policy analysis, never mind an effective solution.


The jury is out as to whether or to what degree a new Treaty would actually be required to issue Eurobonds with the Barroso Commission due to publish its proposals for Eurobonds soon - some of which are said not to require a new Treaty.  However the jury is also out as to whether Eurobonds would be an effective or sufficient response to address the current crisis.  Most economic commentators agree that much more fiscal integration between Eurozone member states would also be required. Whilst much of this may be possible through inter-Governmental cooperation and coordination without requiring a new Treaty, many go further and insist that, for example, Greece should not receive further "bail-out" funds without much more intrusive interventions in its economic and political sovereignty.

Of course many also have much more fundamental objections to the Euro and how it has been constituted. Scepticism about the Euro used to be confined largely to British Eurosceptics and monetarist economists.  However I have been surprised at the degree to which Modern Monetary Theorists and neo-Keynesians like Krugman have also argued that the Euro is fundamentally against the interests of many of its members, and particularly against the interests of its more peripheral members.

The gist of those objections seems to be largely that monetary Union without a large degree of political, economic and fiscal integration is simply not possible without the systematic impoverishment of more peripheral Eurozone economies. The catastrophic imposition of austerity on an increasingly wide range of members appears to bear this out, although it should be noted that non-Eurozone members including the UK and the USA are also implementing austerity policies for a variety of different reasons.

The underlying dynamic may have much to do with a secular decline of "Western" economies generally, the rising costs of increasingly scarce energy and other strategic commodities, the increasing disparity between rich and poor in almost all western societies, and the ongoing globalisation of capital, which, through the medium of sovereign debt and other markets is increasingly able to dictate domestic political policies regardless of the democratic mandates of the Governments currently in power.

The question of whether a new EU Treaty is required is therefore not just a technical one - to address lacunae in current Treaties which prevent the formulation of effective EU policy responses to the crisis.  It is also a strategic question as to how democratic societies can reassert control over their economic destinies in the face of increasing global corporate and market forces which appear to inexorably extract resources from the majority to the benefit of a smaller and smaller ultra rich minority.

There is no doubt that the failure of EU institutions and Governments to effectively address the crisis has also resulted in a popular crisis of faith in those institutions.  It is hard to think of a worse political time to attempt to draft and secure ratification for a new Treaty.  The insulting manner in which Sarkozy and some other EU leaders like EU energy commissioner Guenther Oettinge have treated the Irish people in response to the Irish people bailing out the French, German, and British banks which made bad lending decisions to Irish based banks means that many Irish people would probably oppose any new EU Treaty almost as a matter of principle.

A growing perception is that the EU, and particularly the ECB, is now being run for the sole benefit of the financial elites in core EU member states. It would take some Treaty to redress that imbalance and persuade many people to vote for a new Treaty once again. However there is also a great deal of residual goodwill toward the EU, and a conviction that current global problems require global solutions, and failing that, at least solutions at a broader European level.

No doubt any debate on any new Treaty, were it to get off the ground, will be dominated by EPP parties and "Austrian" economics.  There will be much talk of ensuring that "errant" member states like Greece can be brought to heel and effectively taken over if they misbehave again. Mechanisms will be sought whereby local (National) democracy can be formally abrogated to ensure that the interests of the Euro financial elite are secured and advanced. European "integration" may come to mean something similar to a Euro dictatorship driven by Germany and France.

But it need not be so. There is also a progressive case for greater European integration allied to greater democratic transparency and accountability.  So before the "Austrian" economists monopolise the debate, perhaps we should set the ball rolling by thinking about what a progressive new EU Treaty should contain.

Clearly any such Treaty will have no chance of being ratified in such disparate polities like Germany, France, Ireland and Greece unless it addresses some pretty fundamental problems with our current institutions - the ECB mandate would have to be widened beyond using interest rates to control inflation for example. There would also have to be a clear articulation of why it is in the interests of German "taxpayers" to ensure a stable and functioning EU and Eurozone as a whole.  It can be taken almost as a given that traditional Eurosceptic powers like the UK and Czech Republic will not wish to be part of any new Treaty embodying further integration mechanisms. So what we are probably talking about is an explicitly two speed Europe with the faster tier centred on surviving Eurozone members.

So what elements should a new Eurozone Treaty contain? Here are some suggests taken from my earlier comment:

1. A euro wide legal framework for bank restructuring in the event of failure to abide by Basel III capitalisation requirements - specifically ruling out taxpayers as guarantors of last resort - and making adequate provision for currency risk and a harmonised hierarchy of risk sharing amongst investors..

2. Fiscal harmonisation between member states

3. Policies and institutions specifically designed to combat structural/regional - e.g. trade - imbalances

4. Eurobonds and other financial instruments to capitalise on economies of scale and a stable Euro's increasing status as a global reserve currency.

5. European Bank regulation and dismemberment of TBTF banks

6. A fuller remit for the ECB providing for full employment and productivity/income equalisation as well as asset and consumer price inflation control

7. A Tobin tax to disincentivise speculators and other incentives to create volatility or game the system

8. Social harmonisation (health/education/social welfare) between member states

9. Environmental, infrastructural, and Energy investment fund

Keep dreaming you might well say. However if we let EPP leaders and Austrian Economists make all the running in the discussion of a new Treaty, we cannot be surprised if the outcome is very disappointing from a progressive point of view. I would be interested, however, in hearing why key voting blocks within EU Member states should oppose or support any such proposals, and in how we can make the case that a progressive reform of EU Treaties is in the interests of a majority in all member states.

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As a Yank who stops in on occasion to get a sense of what is happening across the pond, you have touched on the common threat:

A growing perception is that the EU, and particularly the ECB, is now being run for the sole benefit of the financial elites in core EU member states.

Although US media and politics are focused on the antics of the radically insane conservatives, that is a sideshow which distracts from the fact that the US is now being run for the sole benefit of the financial elites. What saddens me is I have always thought/hoped/wished that you folks in Europe would keep the light shining brighter than we have.

by US Blues on Thu Sep 15th, 2011 at 11:59:58 AM EST
I think globalisation has trumped national political processes and even major players like the US and EU have not been able to contain that trend. In Europe petty nationalism and xenophobia threaten a clear sighted political response to this - much as the Teapartiers threaten to derail a rational response in the US.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Sep 15th, 2011 at 01:37:15 PM EST
[ Parent ]
I'm beginning to listen to Yanis Varoufakis.  Perhaps all the posturing by the FDP/CSU and dollar liquidity flood (presumably this is only liquidity for bankers rather than the 'real economy'), lies the intention to create a new sittenstreng Euro.  Those who can't democratically agree to the terms of the new EuroMark will be stuck with old Euro and economic disintegration.  From Yanis's blog:

behind all the talk of a German plan to contain a Greek default or to push Greece out of the euro, lies the groundwork for a pragmatic plan that sees Germany bailing itself out; a plan according to which Germany will round up countries it truly deems worthy of sharing its new currency

Hat tip the the Irish Left Review which has been reprinting a number of his blog posts.

by Pope Epopt on Fri Sep 16th, 2011 at 05:40:06 AM EST
But the countries under attack would be better setting up their own common currency with a fiscal authority tied to it (even a formula fiscal authority) than they would being left in the existing ECB while German sets up a new built-broken common currency for the "good countries" (which will magically find that some of the "good countries" are less good than others, and so become "bad countries" in the next round).

Since the Euro is built broken as German would want it to be, better to let them have it.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Sep 16th, 2011 at 01:18:45 PM EST
[ Parent ]
I think you are right that ejecting some members now will be a prelude to ejecting more later. However I don't see any sense in (say) Greece, Ireland, Portugal and Spain setting up a common currency.  We trade relatively little with each other and our economies are quite diverse and follow different business cycles.  Whilst this may matter less within the current Euro because we all trade a lot with Germany/France etc., the whole point of the Euro is that it gave smaller economies access to a global hard currency and avoid the instability of currency fluctuations and manipulation by global currency traders.

Every common currency has its costs.  The question is whether the benefits of reduced currency fluctuation, manipulation, and exchange costs outweigh those costs. At the moment, the answer appears to be no - without some fiscal transfer Union or at least Eurobonds and an ECB which takes more cognisance of the needs of peripheral economies.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 16th, 2011 at 01:54:16 PM EST
[ Parent ]
Which is to say that the "German's take their 'friends' out of the Euro into a new common currency" threatens to be the worst of both worlds ~ a common currency without substantial benefits of improved supply chain planning and elimination of foreign exchange risks but with a dysfunctional lack of fiscal sovereignty in line with the monetary sovereignty.

If Greece and etc. leave the Euro, each to form their own national currency, it lays the foundation for another round of ejections, and the more ejected from the "core club", the greater the prospect for making gains in terms of the a common currency simplifying industrial supply chain planning and reducing FX risks. The game would not be worth the candle, however, unless the currency system is built to be functional in the face of financial crisis.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Sep 16th, 2011 at 11:37:12 PM EST
[ Parent ]
This reminds me of a Kafka story "Community."

http://www.rci.rutgers.edu/~eu/

We are five friends, one day we came out of a house one after the other, first one came and placed himself beside the gate, then the second came, or rather he glided through the gate like a little ball of quicksilver, and placed himself near the first one, then came the third, then the fourth, then the fifth. Finally we all stood in a row. People began to notice us, they pointed at us and said: Those five just came out of that house. Since then we have been living together, it would be a peaceful life if it weren't for a sixth one continually trying to interfere. He doesn't do us any harm, but he annoys us, and that is harm enough; why does he intrude when he is not wanted? We don't know him and don't want him to join us. There was a time, of course, when the five of us did not know one another, either, and it could be said that we still don't know one another, but what is possible and can be tolerated by the five of us is not possible and cannot be tolerated with this sixth one. In any case, we are five and don't want to be six. And what is the point of this continual being together anyhow? It is also pointless for the five of us, but here we are together and will remain together; a new combination, however, we do not want, just because of our experiences. But how is one to make all this clear to the sixth one? Long explanations would almost amount to accepting him in our circle, so we prefer not to explain and not to accept him. No matter how he pouts his lips we push him away with our elbows, but however much we push him away, back he comes.

The odd thing is that after searching for the story by its title and not finding it, I remembered the first few lines, and so I searched and ended up at a page about EU Enlargement!!

by Upstate NY on Sat Sep 17th, 2011 at 12:03:21 AM EST
[ Parent ]
The factor I don't understand is how or whether applies the oft stated necessity of banks and many businesses declaring bankruptcy upon abandoning the Euro, whether it be Germany or Greece. It would seem that in either case, were the exit system set up prior to transition and in place on day one that the situation might well be handled. This, of course, presumes that the new currency union had a CB that would create liquidity as needed. I CAN see that this could be a problem for the German, or neuro group, as Germany would not want the CB to create money in general, certainly not as financial stability requirements dictate. Else why not just have the existing ECB do just that. Likewise, peripherals leaving to join a seuro would see their currency devalued against the euro or neuro, which would be what they want, while Germany would see its currency appreciate, which would be very bad for exports. So it seems to me that an exit by the peripherals would be a boon to them and a bane to Germany and those who aligned with Germany.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Sep 17th, 2011 at 12:04:48 AM EST
[ Parent ]
The factor I don't understand is how or whether applies the oft stated necessity of banks and many businesses declaring bankruptcy upon abandoning the Euro, whether it be Germany or Greece.

If debts are not converted to the new currency upon exiting the €-Mark there will be no benefit to exiting the €-Mark, since the economy will be just as dollarized as it was under the €-Mark.

Converting debt from one currency to anther on the basis of a largely fictional exchange rate is a default.

It would seem that in either case, were the exit system set up prior to transition and in place on day one that the situation might well be handled.

If the creditors are smart, they'll accept the default and set up a reasonable transition regime that will preserve the maximum going concern value of the defaulting economies. This increases the amount of debt that can be sustainably maintained post-default.

Such an exit mechanism may define a unilateral currency conversion as a not-default event. Such an exit mechanism may also define the tail on a dog as a leg. The dog will still have only four legs: A tail does not become a leg simply because the law says it does.

So it seems to me that an exit by the peripherals would be a boon to them and a bane to Germany and those who aligned with Germany.

Not necessarily. A successful exit - one that avoids widespread food and fuel shortages - would be a boon to the exiting countries, because it would stop the German, Dutch and Austrian economies from exporting unemployment to them.

An exit would be a bane for the G-D-A economies under current policies, because current policies make sense only under the assumption that you can export the unemployment they generate without encountering retaliatory exchange rate movements. However, exiting from the fixed exchange rate regime would also give the G-D-A economies the option to end their demand and wage suppression policies, which would make them richer than they are now.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Sep 17th, 2011 at 04:04:52 AM EST
[ Parent ]
Converting debt from one currency to anther on the basis of a largely fictional exchange rate is a default.

That is the datum whose absence was confusing me as I had forgotten it from prior explanations.

exiting from the fixed exchange rate regime would also give the G-D-A economies the option to end their demand and wage suppression policies, which would make them richer than they are now.

I can see that ending present policies would make the majority of their populations richer, but not the elites in whose interests the policies have been operating. And what is the likelihood of the obsessed EVER abandoning their chief obsession - inflation?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Sep 17th, 2011 at 11:36:31 AM EST
[ Parent ]
At the moment Euro notes have European symbols one one side and the national symbols of the country issuing them on the other. What is to prevent Greece declaring that "its" Euros will henceforth float against other Euros?  Greek debt would then continue to be denominated in "Greek Euros" whose value will be determined by the markets.  Greece would benefit from the default and devaluation and hopefully recover.  If the value of the "Greek Euro" ever approximated to that of the Euro again it could possibly rejoin at parity (though no doubt of stringent terms).

The problem, of course, would be that whether someone has "Greek" Euros in their pocket at the moment of rupture could be somewhat arbitrary.  Most Greek notes would undoubtedly be in circulation in Greece, but you can imagine the confusion throughout Europe as people tried to offload any Greek Euro notes they happened to have at parity.

The bigger problem is that people would then be looking at the Euros in their pocket and selectively spending their Italian ones...  The bigger problem would be the Euros held in bank accounts - i.e. virtual cash. How would some deposits/transactions be deemed to be Greek and others not?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Sep 21st, 2011 at 07:31:58 AM EST
[ Parent ]
All Euro notes are the same, not so Euro coins.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Sep 21st, 2011 at 07:37:08 AM EST
[ Parent ]
Greek notes have a serial number starting with "Y".
by gk (g k quattro due due sette "at" gmail.com) on Wed Sep 21st, 2011 at 07:38:37 AM EST
[ Parent ]
That is true. However, currently they are all legal tender in all of the EU.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Sep 21st, 2011 at 08:50:22 AM EST
[ Parent ]
The bigger problem would be the Euros held in bank accounts - i.e. virtual cash. How would some deposits/transactions be deemed to be Greek and others not?

Simple: The people who pay the police that collects your taxes determine whether your bank account is in Greek or German Euro. Likewise, the people who pay the police that enforces (or not) your debts and other people's debts to you will determine what currency those debts are in.

In practice this means that the debtor's country of residence will determine the currency of the loan, since sending gunboats to European capitals to collect foreign debts is considered bad form.

If the default and exit are reasonably orderly, I would expect that Greece would simply cease issuing Euro notes and coins, and existing "Greek" notes and coins would be accepted as valid Euros. That seems the simplest way to handle it, and the volume of cash is chickenfeed compared to the volume of bonds and demand deposits.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 21st, 2011 at 05:50:59 PM EST
[ Parent ]
The question of whether a new EU Treaty is required is therefore not just a technical one - to address lacunae in current Treaties which prevent the formulation of effective EU policy responses to the crisis.  It is also a strategic question as to how democratic societies can reassert control over their economic destinies in the face of increasing global corporate and market forces which appear to inexorably extract resources from the majority to the benefit of a smaller and smaller ultra rich minority.

It seems to me that, with the passing of an older generation that forged the monetary union, with the ascendency of the PPP over so much of Europe accompanied by the ascendency of financial capital acting through PPP leaders, and with the dissemination far and wide of NCE/neo-conservative doctrine and TINA that the challenge is establishing a narrative that can be used to successfully challenge PPP dominance. With them in power and with even their opponents operating from their frame of reference there is little hope.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Sep 17th, 2011 at 11:47:52 AM EST
I think we are witnessing a transformation of attitudes to the EU and what it is all about.  I suspect that my positive attitude to it - forged from an understanding of what Europe was like before the EU - is becoming an anachronism and much more cynical attitudes will prevail. Sinn Fein in in Ireland and perhaps the Greens in Germany, are tapping attitudes outside the normal spectrum of centre left/right politics.  It is a rejection of the concordat which used to bind the elite and the masses together.  The elite have taken their money and lifestyle and globalised it - leaving them less dependent on their fellow citizenry, and that citizenry alienated from the elites.  I just hope that that alienation doesn't become the breeding ground for a new form of ultranationalist fascism...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 17th, 2011 at 01:33:11 PM EST
[ Parent ]
The elite have taken their money and lifestyle and globalised it - leaving them less dependent on their fellow citizenry...

And they increasingly are demonstrating utter contempt for even the most basic needs of those below them in the power ranking. In that situation a radical rejection of the system those elites have perverted/put in place is actually a life affirming action.

The challenge is to see that the reaction remains directed at those who caused the problem and not diverted onto scapegoats. Those parties who once represented the broad interests of the general population but that have since sold their souls to the market need either to disappear or to reform themselves so as to again be legitimate vehicles for the interests of the bottom 95% of the population. It is or would be the absence of such viable alternatives that produces the greatest risk of run amok violence.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Sep 17th, 2011 at 06:10:15 PM EST
[ Parent ]
Frank this is a very nice diary. I guess you touch the main points, in essence the EU has to trend towards a Federation with the establishment of Union wide mechanisms such as taxing and budget execution. Internal trade imbalances may not be so bad if the mechanisms exist to physically restructure those economies more dependent on imports from outside the EU.

I believe this road map is being acknowledged by many, even within the EPP (e.g. Barroso). But something more is needed to set it in motion. Perhaps a charismatic leader than can swept the whole community into this design, once and for all leaving the EPP reluctances behind.

Vencit omnia veritas.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Sun Sep 18th, 2011 at 04:12:18 AM EST


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