Subject: The EU must step toward fiscal and political union - Peter Mandelson FT A
From: "Michael Andrews" <[email-masked]>
To: "Thad Brown" <[email-masked]>, "Ronnie Mainieri" <[email-masked]>, "Curt Hastings" <[email-masked]>, "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Chris Heinz" <[email-masked]>
Date: Mon, 27 Jun 2011 15:00:37 -0400

Curt -

It would be interesting to see how much leeway Chancellor Merkel has  
to address the crisis.

Michael

The EU must step toward fiscal and political union Peter Mandelson

More than a year after the eurozone first announced support for  
Greece, the country’s trauma and the eventual fate of the euro itself  
remains unresolved.
When the euro was launched, I remember relatively objective  
commentators arguing that, to be successful, the economic side of  
economic and monetary union needed a much stronger political framework  
within which to manage the eurozone’s fiscal policies. They have been  
proved right.

This is not the moment, however, nor is there good reason to abandon  
seven decades of building union in Europe. It undoubtedly remains a  
huge challenge to complete the project. We are attempting to  
reconfigure the largest economic space in the world since the United  
States of America was created. But in a world that is fast tilting  
away from its postwar Atlantic centre of gravity, Europe needs more  
than ever to come together and maximise its competitive strength and  
market power.

While it has not been easy to discern the strategy of Europe’s high  
command in putting out the fire on its periphery, a three-stage  
response is emerging: first, to stop the immediate haemorrhaging by  
means of further transfusions of liquidity to the eurozone’s insolvent  
members; second, accept, finally,  that the fundamental problem,  
certainly in the case of Greece, is one of solvency not liquidity and  
prepare for an orderly reconstruction of their sovereign debt that is  
viewed as inevitable by private debt holders and preferable to a  
disorderly default which would halve Greek living standards overnight  
and remove any early prospect of economic reform and growth in the  
country; and, third, once the immediate crisis has passed, build on  
the tighter fiscal rules, early warning of macro imbalances, greater  
financial regulation and analysis of systemic risk of the past year  
and introduce more far-reaching fiscal interventions and controls  
across the whole area that, in effect, will amount to a significant  
step towards fiscal and political union.

None of this is going to be easy or straightforward to manage for the  
simple reason that Europe is facing not one but four interrelated  
crises.
There is the immediate crisis of insolvency among the eurozone’s  
weaker members but this is complicated by a continuing banking  
crisis.  Many European banks are still carrying real or potential  
significant losses and are heavily exposed to the sovereign debt of  
the eurozone’s insolvent members. We are familiar with Germany’s deep  
hostility to the costs of bailing out these states falling on the  
taxpayer alone. But the fact that is rarely mentioned in this debate  
is that it is a choice between bailing out these states, or bailing  
out the German, as well as other, banks that are their creditors.
These two interwoven elements – insolvency and vulnerable banks – have  
brought to a head the structural competitiveness crisis built into the  
eurozone from the start – the head start that the early member  
northern states had in productivity over the so-called periphery  
states such as Greece, Portugal and Spain. Before the crisis this  
could be papered over with a Europe-wide “structural reform” agenda –  
honoured more in name than action – that aimed to encourage  
convergence in productivity and competitiveness through tough  
industrial and other changes in product and labour markets. There was  
also a hope that a continuing rising tide of economic growth in Europe  
would “lift all boats”.

In practice much of the “lifting” of the economies of Greece, Spain,  
Portugal and Ireland over the past decade was driven by what was  
demonstrably an unsustainable credit-driven boom. A boom that lessened  
the pressure on these economies to address underlying structural  
issues, while lack of adequate financial regulation facilitated the  
recycling of financial surpluses in the form of imprudent lending in  
Ireland and the southern member states. The end of the boom left them  
severely weakened and exposed, with no freedom over their interest  
rates and currency to make any correction.

Challenging as all these problems might be, they would be soluble  
through strong political management and policy decisions, but for  
Europe’s fourth crisis: that developing over the European Union’s  
political legitimacy. And here is the rub. The major step towards  
economic and fiscal union – what the European Central Bank president  
Jean-Claude Trichet has called a “quantum leap” in euro area economic  
governance – however desirable in principle, would take the EU into  
new and highly problematic political territory. It would mean, in  
effect, giving European authorities the right to veto member state  
fiscal and competitiveness plans that fail to match up to what is need  
to deliver “adjustment”. Looking even further ahead, Mr Trichet  
envisages a ministry of finance for the EU.

Whatever the merits of such an approach – and logically the ECB  
president is right – I don’t see such moves easily winning public  
support. In national elections or further referendums, Europe’s  
current “integration fatigue” would almost certainly prevail. The  
German electorate, notably, would be hard to persuade. It could  
certainly be argued that Germany’s whole economic success depends on  
an integrated European economy that is the base for their global  
competitiveness and political stability, and the recreation of a  
soaring D-Mark would be disastrous for its export sector. But having  
experienced a decade of squeezed living standards and labour market  
reforms, following their belt-tightening to bring reunification about,  
Germans will not be keen on being tethered even closer to Europe’s  
underperforming periphery, in particular Greece where real wages have  
gone up 40 per cent in the past decade and yet tax evasion and corrupt  
and restrictive practices are rife. And the German public will not be  
alone.

So what is going to happen? The EU’s response, stretched over the next  
couple of years, is inevitably going to be a messy compromise between  
the urgent need for collective action and the huge political  
difficulty of taking the further explicit steps needed to fiscal union.

In my view, the basic logic and European belief in union will prevail.  
But it is going to be a rocky and hard fought road and advocates of  
greater union will need to be more honest with the public, and more  
sure of their arguments, than they have been in the past. It is  
possible that Europe’s political nerve will fail. But I would not put  
money on it. Few share the British prime minister’s apparent view that  
others can make as big a mess of it as they wish as long as the UK  
does not have to pay anything more – a shortsighted position that  
fails to recognise Britain’s wider economic interests.
There is a strong resolve in Brussels to do whatever it takes and get  
through all the current crises because economic failure would hurt a  
huge amount more than Europe’s amour propre. Politics has a way of  
conforming to political necessity.
The writer is a former UK business secretary and EU trade commissioner