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Monday, June 25, 2012
Deeper political, financial unity seen as solution to eurozone crisis
Even after fears of a Greek exit from the euro were eased by the outcome of the country's June 17 elections, Europe remains in crisis as concern lingers that Spain's banks are a potentially bigger risk. Ending the crisis will require European leaders to come up with a longer-term vision for deeper economic integration, experts concurred at a recent symposium in Tokyo.
The issue of forming a eurozone banking union, for example, will inevitably revive some of the fundamental questions left unanswered since the currency union formed, said Hans Dietmar Schweisgut, the European Union's ambassador to Japan, at a June 6 symposium organized by the Keizai Koho Center.
Over the past two years since the onset of the sovereign debt crisis, Europe has adopted "an impressive new framework for dealing with the crisis and economic governance" of the eurozone states, including firewalls to protect members exposed to market pressures and budget monitoring to promote fiscal discipline, the envoy said. But the "very strong consensus" in Europe today is that "we are now at a phase where we have to take steps beyond strengthening of the firewalls and the governance system to a new system of the eurozone which will be more coherent and integrated," he said.
The ongoing problem with the banks has highlighted the situation, where "financial markets in the euro area are deeply integrated but our policies are not as integrated," Schweisgut said.
"National supervisors have only the stability and well-being of their own national banks in mind, especially in crisis situations," the envoy said. "We need to avoid a recurrence of national authorities not wanting to forcefully recapitalize their banks (in a manner) commensurate with their problems in the balance sheets due to their own domestic political reasons."
A model under discussion within the eurozone, Schweisgut said, "focuses on a number of elements of a banking union" comprising a euro area supervisor, a euro area deposit guarantee system that is centrally financed, and a joint institution for winding down and also recapitalizing banks."
It is argued that these measures will break the link between banks' balance sheets and sovereign debts, "and thus guarantee financial stability in the future free from the industrial policy considerations we very often see in member states," he said.
However, the negotiations to implement these measures in the short term are expected to be difficult "because basically what we're talking about is changing the division of labor between the European Union at the central level of the eurozone . . . and the member states" — an issue that goes to "the heart of the constitutional system and democratic legitimacy," the ambassador said.
What eurozone policymakers are now trying to address, he said, is developing a new vision for Europe for the next 10 years. When European leaders assemble for their summit on June 28, they will focus on proposals including a fiscal union, a banking union or even a political union.
"Not all the measures have been spelled out and not all the measures will be agreed on at the end of the month, but I think the direction is there," he said.
Schweisgut emphasized that these arguments did not recently emerge because of the debt crisis.
When the monetary union debuted in 1999, "there were a lot of people in Europe already saying that we need to move beyond the concept of a centralized monetary union on one hand and a decentralized fiscal policy framework on the other, so ultimately this will only be sustainable if we have something resembling a political union," he said.
The issue was not really pursued in subsequent years "because the euro project was too successful" in the sense that the eurozone economies enjoyed higher growth in the first several years of the monetary union than was originally anticipated, he noted.
"Now we have to face the situation that we're not only dealing with a financial crisis but a more systemic crisis — this is why this question of what is the longer-term solution for Europe resurfaces," he said.
Kaoru Hoshino, a professor with the College of International Relations at Ritsumeikan University, said that what is needed to end the crisis is to correctly identify the main cause of the problem.
One theory is the crisis has been caused by the lack of fiscal discipline shown by troubled economies like Greece, which have been accused of excessive spending and failure to institute structural reforms, he said.
The other theory, he said, is that the main cause is reckless lending by the European financial firms whose loans went south with the collapse of real estate bubbles in many countries. In that sense, this is essentially a financial crisis in need of solutions that should include eurozone-wide efforts to recapitalize banks, introduce a regional deposit guarantee system and possibly issue a common euro bond, he said.
Hoshino said the banking crisis in Spain is a much bigger problem than the Greek situation because nonperforming real estate loans at banks is a problem common in most eurozone countries — except for Germany — and could spread to the others.
One argument within the eurozone is that Germany and other northern European countries need to do more to support the tough austerity steps being taken by the troubled economies in the south. A consensus remains elusive, however, as Germany and others are insisting that structural reforms must come first, Hoshino pointed out.
One of the root problems behind the standoff, the professor said, is the growing gap — as shown in opinion polls — between policy elites and the public in many eurozone countries, including Germany. This divergence will have to be reconciled if Europe is to come up with a long-term vision for weathering the crisis.
Katsuhiro Shoji, a professor at Keio Law School, said that a two-speed or two-tier approach will become inevitable as Europe gropes for a way out.
If the member states try to deal with the crisis through fiscal austerity and structural reforms, their policymaking capabilities for implementing the measures will hold the key, Shoji said.
On the other hand, if they pursue a "European federation" type of solution, such as creating a common form of debt, to survive the crisis, the political will of each nation will be tested, and their governments will have to convince their citizens to back the treaty revisions needed to make those steps a reality, he said.
Through the crisis, it has become clear that some member states either lack the ability to form and implement policies or political will, Shoji said. In the medium to long term, European integration will have to proceed at two speeds — with the core group of countries armed with policymaking knowhow and political will taking the lead, and the second group trailing behind, he said.