European integration, Greece and Euro-skeptics
European Integration—acting on the Five Presidents’ Report
A doomed enterprise? Wolfgang Munchau (FT) argues that the introduction of the euro and EU enlargements were two interconnected mistakes—as EU enlargement gave non-eurozone EU a majority, and prevented the enactment of reforms key to the adequate functioning of the eurozone. Munchau predicts a slow death for the EMU. Paul Krugman (FT) adds to Munchau’s argument that the interaction of deflation and debt, i.e., attempting to adjust through falling wages would worsen debt problems, was underestimated.
The institutional response, stage 1. The June 2015 Five Presidents' Report sets out plan for strengthening the EMU to integrate more deeply the single currency area and avoid future crises. The Report sets out three different stages: (i) Deepening by doing, (ii) completing EMU, (iii) provide a stable and prosperous place for all citizens of the EU Member States (European Commission). According to Renaud Honoré, the first stage is the most important.
The European Commission proposed concrete measures to implement Stage 1. The package includes a revamped European Semester; an improved toolbox of economic governance, including the introduction of national Competitiveness Boards and an advisory European Fiscal Board; and a more unified representation of the euro area in international financial institutions. Meanwhile the ECB urged European policymakers to prioritize completing the Banking Union to enhance the market-based adjustment capabilities of member states.
Difficult hurdles ahead for Greece
Uncertainties are high around the first review. The Greek government and international creditors failed to reach an agreement to unlock the first credit tranche (Foreign Policy), with two main disagreements on the VAT on private education and on the threshold for home foreclosures (EuroIntelligence). Analysts write that only 14 out of 48 milestones required from the Greek government have been taken (Sueddeutsche). The necessary measures constitute the first serious political test for Alexis Tsipras’ new government (Macropolis).
And financing is needed, including for bank recapitalizations. The ECB’s 's health check of Greece's four big banks revealed a €4.5bn capital shortfall in the baseline scenario, and €14bn in the adverse scenario (for example, FreeExchange, EuroIntelligence and Danilo Masoni), after substantial deterioration in the last year (Reuters). Silvia Merler (Bruegel) recalls that the estimate is the starting point for the recapitalization to be carried out soon as part of the program. The additional capital needs that cannot be raised from private investors will reportedly be covered by the Hellenic Financial Stability Fund with a mix of new shares and cocos, as explained in the recapitalization bill.
Pending issues weighing on the economic outlook. Merler writes that the stress-test delays finding a solution to Greek banks’ reliance on sizable Deferred Tax Assets (DTAs). EuroIntelligence notes that a recapitalization will not end capital controls, as there has been no recovery in deposits (the increase in domestic overnight deposits was matched by a similar drop in domestic term deposits) nor to confidence in the banking sector. For Capital Economics, with a lack of access to cheap funding and depressed deposits seriously restricting banks’ liquidity, weak lending looks set to weigh on economic activity for a long time to come.One key question is whether the bank recapitalization should be linked to the first review, as desired by the Germans (Protothema). The Silver Bullet has an interesting piece comparing Greece to Puerto Rico.
Euro-skeptics electoral victories–should we be worried?
This time it is Poland: the historic election of Law and Justice (PiS)—which got an absolute majority in the legislative election. For the first time since the end of communism (Slawomir Sierakowski in Project Syndicate), a single party will form Poland’s government. Despite a solid economic performance (Eurostat), Pawel Swidlicki writes that Poles cast a protest vote against still low standards of living, or were motivated by a desire for change (Jacek Rostowski). Its electoral platform includes social benefits and more expansion policies (EuroIntelligence), to be paid for through better tax collection (Pawel Swidlickir in OpenEurope). The new government also plans to convert foreign exchange housing loans to local currency (IIF).
How much euro-skepticism to expect? Nouriel Roubini, in Project Syndicate, associates the PiS victory to a recent trend in Europe: the rise of illiberal state capitalism, led by populist right-wing authoritarians (Putinomics in Russia, Órbanomics in Hungary, Erdoğanomics in Turkey, or a decade of Berlusconomics). For Roubini, the associated risks make avoiding a break-up of the eurozone or the EU ever more vital. On the surface, PiS calls for greater national sovereignty, a more flexible EU and limitations on refugees (Financial Times), possibly in line with David Cameron’s narrative (Open Europe)—opening new dividing lines in the EU (EuroIntelligence). Yet, the KORWiN party, which had a true anti-EU campaign, did not get any seat in the election and Poles remain committed to the EU, according to a GfK Polonia poll last month. And Poland has joint interests with the EU in the Ukraine crisis and as the first beneficiary of EU structural funds (EIU).
The UK and Brexit negotiations. As part of its strategy to renegotiate its relations with the rest of the EU (FT), the UK is seeking special guarantees, a new version of the Ioannina Compromise: a blanket non-discrimination guarantee against non-eurozone members; a specific recognition that the EU is a multi-currency union; a guarantee that non-eurozone countries would not be saddled with eurozone bailout costs; the right to opt out of policies adopted primarily in the interest of eurozone integration. For EuroIntelligence, such a compromise could be equivalent to granting a veto to the UK.
And the complex question of secessions… At its inaugural session, the new Catalan regional parliament registered a proposal for a declaration calling for independence (EuroIntelligence), to lead to an independent Catalan Republic, and the introduction, within 30 days, a Catalan Social Security and a Catalan Treasury. This was condemned by non-secessionist Catalan parties and by both major national parties (The Guardian), in relative EU disinterest. Mariano Rajoy called the Spanish general election for December 20 (El Periódico).
