South4Growth: Time for a ‘Stein and Hardenberg Fund’

True to its history, the EU reacted to the crisis  by admitting the obvious: That it has failed to react in time, and in a comprehensive way, to deal with the crisis as it was developing and before it became too big to handle. But, at the same time, and again true to its history, the EU learned the lesson and moved ahead to tackle the crisis with more integration.

And the lesson was clear: Our problem was that the necessary mechanisms that would generate a single, comprehensive, European reaction, were not in place in the early stages of the crisis.

HardenbergThe banking union, a full economic and fiscal union, meaningful fiscal rules and better protection of the market (that is, consumers) all became part of the EU’s reaction, but only after it was too late.

To be sure, the banking union and the fiscal union being promoted at this point, are no smaller milestones in the history of European Integration than Maastricht was. In fact, with these moves, we are promising to finally complete Maastricht, which was itself a rushed and unfinished response to a different sort of systemic crisis.

At the same time, however, there is something missing.

First, we never had a real union, fiscal or financial. Consider the Country Specific Recommendations, submitted by Commission every year, and agreed in Council. Each MS has been receiving, long before the European Semester was adopted, between 6 and 8 recommendations.

If one looks at these, a simple pattern appears: the Commission drafts its recommendations, the Council waters them down slightly, and then approves them. And, the following year, almost all of these country specific recommendations are again repeated, with the language changing only slightly.

This pattern is clear in the European South- we talked about the recommendations for Cyprus for years before the crisis. Now, they are part of the MoU, in one way or another. But the same is true with Greece, Spain and Portugal.

More importantly perhaps, the same is also true for other countries: France, Belgium, Luxembourg, Hungary, Slovenia, Czech republic, even Germany.

So the first lesson is that a solid implementation mechanism for the problems that are identified should be in place. The European Semester, together with the Two-pack and the Six-Pack are promising to change this.

To the extend that the new mechanisms will be able to prove themselves as a means by which reform actually does take place, this is an important step. And in them, we can see a decision by which the EU supports growth.

But, the new “system” has to first prove itself, and this is still in the future.

Second, and more importantly, the single most important problem of the European South was never tackled. This is a problem that, to dare a prediction, will also become a pronounced and immediate danger in other, core MS of the EU, especially France, Belgium and even the Netherlands and Germany.

And this problem is none other than the need for structural reform. Not only in fiscal governance, which is the mot du jour in the EU these days, but in a wider, macroscopic sense: Ageing, healthcare, social displacements, economic displacements, continuing globalization and the new macroeconomic realities are shifting the mountains on the economic map of Europe and indeed the world. Governments unable to react to these changes end up stifling markets, and especially SMEs – hardly a «policy» promoting growth.

Part of the delay we see in virtually every EU MS in reacting to these shifting sands, is not only political unwillingness to touch the third rails of politics but also the impact that such reforms will have on fiscal figures.

In the European South today, we can easily identify a catch-22 in he Programs: Reforms are needed, but reforms cost a lot of money in the middle of a credit crunch and a sovereign debt crisis.

The European Union’s “transfer program” (if we can call it such) was designed to mitigate the impact of the Single Market on the less competitive members and in this sense it was the twin sibling of the CAP.

But, while SMEs, transportation and infrastructure do need funding, it is much more important for the EU to adapt to the new reality that will spell  trouble our countries –all our countries- for the next decade.

The example of France, which was essentially prevented from moving towards badly needed reforms just before the crisis broke out in 2008, is telling in this respect. The main obstacle to reform, when political will was found in the face of social reaction, was the impact on the fiscal figures.

The situation is similar in the European South today, but only more pronounced, with the problems being more urgent and the fiscal impact being more stifling.

So looking ahead, this is the second major decision that, if taken by the EU, could bring sustainable growth. EIB assistance, protection for SMEs from late payments, better procurement policies and consumer protection, are all useful and indeed worthy of mention.

However, the “umbrella system” under which the EU extends payments, either structural or horizontal, to MS is lacking in one significant respect:

We don’t have a mechanism that will finance  and oversee structural change, extensive reforms, radical improvement of government spending and the support for strong and well functioning institutions, including supervision. We don’t have a “Stein and Hardenberg Fund”. The previous panel delved into the importance of structural change.

Eurobonds are a step in the right direction, but they don’t go far enough. What we need is an internal, intra-European Marshall Fund that addresses the problem, not the symptoms. And the problem today is state structures.

MoUs are treated as purely financial arrangements. But the most important aspect of these programs –aspects that would convince markets, build trust among investors, lenders and depositors, that would lead to a truly sustainable growth and lower financing costs, thus making debt more sustainable- -that- is missing.

And through such a move, the credit crunch could also be tackled.

Examples from Spain, from Cyprus and from Greece are numerous. But, most importantly, on the horizon, we can predict similar examples in several other countries: Belgium, Italy, Slovenia, Hungary, France. This is a European Problem that can no longer be tackled with a solution devised under different circumstances.

Although I would insist that the most important step for growth in the EU would be to include, under existing devises, the financing of structural reform, it would only be fair to note two things that are happening already: The Parliament’s decision to oversee the functioning of the Troika, and, more importantly, the numerous decisions already under way to improve the way the market is working in the EU.

(Notes for my comments in South4Growth, EP’s event Athens Music Hall, 3 Nov. 2013)

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