Tag Archive: Eurozone


Newly Revised EU Financial Regulation Emphasizes Fiscal Accountability in Member States

In the midst of the ongoing reforms to the Eurozone in response to the economic crisis, the second, and newest, revision of the Financial Regulation was ushered into existence on October 27, 2012. The Financial Regulation governs core principles of the EU budget and expenditures of EU funds. It originated in 2002, but has been modified only once until now.

This most recent version was designed to simplify the process by which the EU funds European businesses, towns, individuals, students, and other recipients, as well as make the funding process more efficient and accessible by reducing the administrative burden.  Specifically, it promotes innovative measures such as EU trust funds, a greater emphasis on lump sums and flat rates in the grant program, the use of loans, equities, and guarantees to increase the impact of EU funds, and more advanced information technology.

More crucially, however, is the emphasis on fiscal and budgetary accountability. This newest revision of the Financial Regulation coincides with the unprecedented expansion of the Union’s authority over fiscal matters as a reaction to the Eurozone crisis. The destabilization of the Eurozone has led to a consolidation of power in EU institutions in an effort to resolve the crisis and prevent future recurrences, such as the European Stability Mechanism. Accordingly, an official European Commission press release published on Monday links the new Regulation with the crisis, stressing the need for more centralized oversight and accountability over the expenditure of EU funds. Thus, the new revisions correspond to a heightened sense of fiscal responsibility in the Union, such as the tentative plans to impose strict budget deficit limits on member states.  Reflecting this trend towards responsibility, the new Financial Regulation implements more thorough oversight on the budgetary management by the member states. Member states, who manage up to 80% of EU budget expenditure, must now produce annual management declarations which state that funds have been used correctly and are subject to independent audit.

The fact that the Financial Regulation has only been modified twice subsequent to its adoption indicates that changes to it do not come lightly or frivolously. As evident from the contemporaneous economic climate, as well as the content of the Regulation, the Commission deliberately crafted these changes as a reaction to the Eurozone crisis. They signify a larger shift in the EU framework to a more economic centralized authority where member states must further delegate sovereignty over economic matters to EU institutions in order to guarantee the future stability of the EU.

UK Decision To Opt Out of EU Criminal Justice Provisions Has Long-Term Implications

The United Kingdom occupies a unique place in the European Union. While a member of the EU, the UK is not a member of the Eurozone and retains its own national currency. The UK’s tenuous position in the EU came into greater focus this week, when Prime Minister David Cameron announced that the nation would be opting out numerous criminal-justice provisions and measures before they become binding on member states. These agreements include the European Arrest Warrant (EAW), Europol and Eurojust, prisoner transfers, and access to EU police databases. UK’s decision has been met with consternation and condemnation within the EU, especially as the UK is widely recognized as a leader in criminal justice and security.

When the Lisbon treaty was enacted in December 2009, these agreements were non-binding. Under Protocol 36 of the Treaty, they are enforceable by law, and thus binding, starting in 2014. The general consensus is that member states, including the UK, are suspicious and critical of arrangements such as the EAW, which some argue is costly, overly-sweeping, and subject to the caprices of member states. The UK government has additionally disapproved of a EU-wide prosecutor with sweeping powers, highlighting concerns with protecting its own citizens.

However, some speculate that the UK’s decision runs deeper than dissatisfaction with particular institutions or regulations – specifically a general unwillingness to submit to the EU’s supreme authority over criminal-justice matters if it were to opt into the system. Rather, the UK wishes to preserve autonomy over an area at which it is an undisputed leader. For instance, the Economist’s article references a sentiment that “there is growing annoyance at what many see as the subcontracting of British justice to European courts.” This resentment is a microcosm of the British reluctance to fully integrate itself in the European Union, most visibly in regard to the Eurozone.

In fact, critics of the UK’s participation in the EU, commonly known as Eurosceptics, are increasingly calling for the country to remove itself from the Union altogether. Under TEU Article 50, every member state of the European Union has the option to withdraw from its membership in the Union. Public discourse regarding the UK’s membership in the EU has become so prominent that a potential referendum on leaving the EU has become a legitimate political issue.

An editorial in the New Statesman illustrates the perils that accompany a UK renegotiation – or exit –from the EU for the Community as a whole.  If the UK were to disengage from serious EU legislation under the pretense of protecting its national interests, the flood gates for other member states to do the same could open, wreaking havoc on the internal market and undermining the efficacy and legitimacy of EU institutions, in turn irrevocably harming the framework of the EU.

Germany’s Rejection of European Stabilization Mechanism Threatens Economic Recovery

After the recent declaration of a proposed European Stabilizing Mechanism (ESM), and Germany’s subsequent approval of such a measure, it appeared as though a potential resolution to the persisting Eurozone crisis was approaching. These hopeful sentiments have quickly receded, as Germany, Finland, and the Netherlands have now backtracked on their commitment to the ESM, instead introducing troublesome stipulations which have inflamed the Community and cast clouds on any hopes of an imminent resolution to the crisis.

A joint statement by the finance ministers of Finland, Germany, and the Netherlands issued on September 25th promulgated two controversial proposals. First, the statement calls for national governments, not the ESM, to be responsible for ‘legacy assets.” This essentially calls for delinquent states- specifically Spain and Ireland- to take care of their own current and previous financial woes, rather than be recapitalized by the ESM. Instead, the ESM would only deal with costs incurred after its enactment. The second proposal advocates using private capital first and public capital second to recapitalize the national banks of member states, with the ESM as a purely last resort.

Some implications of this announcement are addressed in an editorial by economist Karl Whelan, who states that Germany, Finland, and the Netherlands are basically telling Spain and Ireland to “drop dead.” Whelan describes the ominous consequences these proposals would hold for Ireland, which he argues would be denied any serious debt relief by the ESM.

Likewise, the Economist details the repercussions for Spain’s national debt if this proposal is enacted. Currently, Spain’s banks are roughly 59 billion Euros in the hole, and Germany’s plan would tremendously stifle the relief which Spain seeks from the ESM. This may very well throw into jeopardy any potential of economic recovery in Spain.

The immediate reverberations of Germany’s decision to reverse its commitment to the ESM will be financial, as evidenced by the Spain’s precarious national debt. Ultimately, however, its impact may be existential for the European Union and the Euro. The continued reluctance of economically strong states to lend to weaker states has transitioned to flat-out refusal, which some may argue is a betrayal of the precept of solidarity central to the Community, as explicated by Title IV of the Charter of the Fundamental Rights of the European Union. The refusal to cooperate emphasizes the growing disillusionment of member states with being roped in with delinquent states, which a growing chorus of political voices argues threatens national sovereignty. These political and inter-Community tensions threaten to not merely prolong the common market’s economic malaise, but dissolve the Union altogether.

Is “Grexit” the Answer?

On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece to help stabilize the country’s economy. However, this was insufficient to help reduce Greece’s debt and in October of 2011, Eurozone leaders agreed to offer a second €130 billion bailout loan for Greece.

Recently it has become clear that this second bailout is also insufficient and that if a third bailout is not given to Greece then it will default on the conditions of its loans. Reports have indicated that Germany, as the main contributor to the bailouts, and the IMF have signaled that they will not take part in any additional financing for Greece.  If an additional bailout is not given, Greece will be forced into bankruptcy and possibly forced to be removed from the Eurozone. This exit of Greece from the Eurozone has come to be known as “Grexit.”

Although the Eurozone has no legal mechanism for removing member countries, the Eurozone may have an indirect way of forcing Greece’s removal. The European Central Bank (ECB) controls the monetary policy of the Eurozone and would have the ability to cut off Greek banks from the liquidity provided by the ECB. This would mean that the euros held by Greek banks would become separated from the euros in the rest of the Eurozone and over time would turn into a separate currency. Because the Greek banks are entirely reliant on the ECB for liquidity, they would become insolvent as soon as the money stopped flowing. The Greek government would have no choice but to create new banks, with substantial government involvement.

But this may not be the best result for the Eurozone. First, a Greek exit from the Eurozone would deny any chance that the IMF and supporting countries of ever recouping the monies they have invested in the Greek economy. Second, would be erosion of any type of trade relation with Greece and Eurozone member states. Third, could be the direct effects that an exit will have on remaining Eurozone members. The United Nations International Labor Organization (ILO) has published a study showing the effects a Greek exit from Eurozone would have on Germany, which include a jump in unemployment from the current 6.8 percent to 9 percent in 2014, according to Ekkehard Ernst who heads the ILO’s Employment Trends Unit. Finally, a Greek exit may have severe political implications. Portugal, Italy and Spain have also been experiencing similar economic problems. How would a Greek expulsion affect them? A Greek expulsion will leave these troubled Countries in a state of unrest and fear as to whether or not they will share the same fate as Greece if they are unable to pay back its loans. Macroeconomist  Andreas Sachs has stated “A Greek exit would be accompanied by significant uncertainty in financial markets,” he said, adding that such a scenario would again raise the question whether Italy or Portugal would also leave the shared European currency. “That means the sale of government bonds from these states would become a problem, leading to renewed austerity measures in these countries which, in turn, would almost certainly strangle their economies. l An expulsion of Greece may lead to instability in the Eurozone as a whole, which might lead to dire consequences to all members.

Greece may also decide to voluntarily withdraw from the Eurozone. This would require them to print their own money and establish new banks to support their currency.   The fact that Greece does not export substantial amount of raw materials and finished products will result in a devaluation of the currency as a medium for international trade. The largest industries in Greece are the service and tourism industries will take severe financial damage as skilled service members will flee the country and the cost of tourism will significantly drop.  Furthermore, foreign investment will significantly decline. A Greek exit from the Eurozone might have dire consequences for Greece in both the long and short term.

It is clear that a Greek exit from the Eurozone will probably have a negative impact on all those involved. The question is whether or not there is a viable solution to allowing Greece to declare bankruptcy short of their removal from the Eurozone. Greece must have some type of sanction for not meeting their financial obligations but not at the cost of destroying the solidarity that the Eurozone was created to build.

 

 

 

 

As the Eurozone crisis persists, the European Union is exploring dramatic options to stabilize the economic crisis which threatens to irrevocably fragment it. An article in the Economist documents the ‘continued need for wavering private banks to be bailed out by their national governments. A proposed measure to mollify the banking emergency is a ‘banking union,’ which would inject failing banks with capital, alleviating the burden of weaker member states. On September 12, the European Commission put forth a proposal for a ‘Single Supervisor Mechanism’- a preliminary step towards this hypothetical banking union. Under this Mechanism, the European Central Bank would supervise all banks within the banking union, allowing it to uniformly apply a single set of rules across the European Union market.
However, this proposed Single Supervisor Mechanism magnifies the tension between preserving national autonomy and the stated principle of solidarity at the core of the EU. The economic disaster has brought to the forefront the opposition of economically sturdy and powerful member states such as Germany to be held accountable for delinquent states such as Greece and France. In the instant case, as described by the Guardian, the news of such a EU banking union has furthered mutual distrust between Germany and France. Germany has essentially accused France of attempting to shift its own perceived financial irresponsibility to the EU, whereas France views Germany’s hesitance towards the proposed banking union as proof that it seeks to retain undue influence apart from the Union. Essentially, Germany wants to maintain control over the majority of its banks.
This dynamic highlights a power struggle between member states (mainly Germany) and the EU governing apparatus. As noted by the Economist, important questions remain, especially regarding the scope of the European Central Bank and whether it will have the power to probe any bank, or to issue or revoke banking licenses. Such questions understandably concern Germany, which does not want to see its domestic influence dissipate because of weaker member states such as France.
As economic uncertainty reigns, the fault lines of the European Union may continue to be exposed further. Germany’s potentially hostile reaction to having its own authority weakened by struggling member states may undermine the delicate balance between sovereignty and solidarity on which the EU is dependent.

Proposed Expansion of European Central Bank Power

The European Commission has called for a mass overhaul of the current banking system in the Eurozone. It involves the European Central Bank being allowed to monitor banks in each of the 17 countries that use the euro. This in an attempt to deal with the monetary crisis in the Eurozone.

The European Central Bank (ECB) was created in 1998 prior to the adoption of the euro as common currency for Europe.The ECB’s current role is setting interest rates and printing money, but this proposition would expand its power to allowing the institution to monitor banks more closely in their everyday business practices.  There are staunch supporters as well as those who oppose this proposal for many different reasons.

The opposition includes some non-Eurozone countries that are concerned with the effect that this banking union would have on their banks. For instance Sweden and Denmark are concerned with having to bail out weak Eurozone banks or having to relinquish some of their power to run their own banks. These non-eurozone countries do not want to weaken “national supervision”, and this banking union proposal has caused some countries to re-consider adopting the euro as currency. Moreover some EU officials are apprehensive about the ECB being able to dictate the direction of banking policy and legislation surrounding those policies, and whether or not expanding the powers will actually help.   Some member states want to “keep them {ECB} at arms length as it’s none of their business”.

In contrast some support the expansion of the ECB’s power because of the institutions budgetary reforms and steadfastness during the fiscal crisis.  For instance,  Jörg Asmussen believes that ECB’s approach was necessary but that there must be controls subject to parliamentary and judicial review, and that it’s difficult to have a common currency without common fiscal policies. In addition France’s Financial Minister, Pierre Moscovici, does not think issues surrounding the banking union will prevent the legislation from being passed before the end of this year.

Either way the heads of European Parliament and Council have to approve this legislation before any major changes can take effect, and it seems that this will be a hard fought battle whatever the outcome may be in the end.

EU or National Government Solution To Illegal Immigration?

The economic hardship and uncertainty facing European Union countries such as Greece and  Spain have led to controversial measures to stop the cost and flow of illegal immigration into EU countries. Greece’s crackdown on illegal immigration, with police setting up detention centers to house undocumented immigrants prior to their deportation,  has  human rights groups such as  Amnesty International calling Greece’s policies a violation of  international human rights and “should stop immediately”.  The Spanish Government passed a measure that would deny illegal immigrants access to free health care. Critics of this Spanish measure have taken to the streets, saying that the measure  “will strip the more than 150,000 illegal immigrants in Spain of their national health cards” and that “No human being is illegal”.  Charges of human rights violations have also surfaced, as many protestors have deemed this Spanish measure as “health apartheid”.

Anxiety over uncurbed illegal immigration is understandably higher in Greece compared to many other EU countries.  Around two- thirds of all illegal immigration into the EU enter through Greece . And given Greece’s ruthless recession and economic turmoil,  it becomes  more clear why anxiety over illegal immigration might lead the Greek Government to be more proactive in halting the tide of undocumented immigrants.

It is not a coincidence that both Spain and Greece, two member nations of the EU who are facing possible Eurozone ejectment due to their precarious economic conditions and massive debt, are implementing strict immigration measures to save perceived costs due to illegal immigration.  With opposition from Germany to bond buying debt of Eurozone countries with high borrowing costs, it puts incredible pressure on Spain and Greece (who are among the high borrowing EU nations) to find alternative measures to reduce their costs and debt.  Such measures has come in the form of stricter immigration policies to save costs, whether it be deportation of illegal immigrants (Greece) or preventing illegal immigrants from access to free health care (Spain).  Neither of these two countries wants to be seen as an economic burden to creditor nations of the EU- thus the need to resolve their own economic issues.

It would be interesting to see how the European Union responds to the measures taken by Greek and Spain. Would the EU move towards instituting national borders between European nations to help stop the flow of illegal immigration or simply let the national governments deal with the issue? In 2011, the EU confronted this dilemma where it contemplated establishing national borders between member states.  Most Europeans, according to a poll in Transatlantic Trend, “showed that majorities across the European Union want their national governments, not the broader European Union, to control who enters their country and at what rate”.  Whether Spain and Greek’s new policies will further this trend remains to be seen, as the debate between EU vs. national control over immigration issue will continue to occur.

 

The Future of the EU and the Euro

According to German government sources, German Chancellor Angela Merkel seeks further reform of the Lisbon Treaty (“Treaty”).  Just last month, Merkel convinced her fellow European heads of state to explore the possibility of further economic integration within the EU.   One possible way of accomplishing this further integration, according to Merkel, is through limited Treaty changes.  The central theme of her proposed Treaty changes is to grant the EU institutions greater control over Member State budgets.

This control would be distributed among three of the EU Institutions: the Commission, Council, and the ECJ.  The Commission’s role would be strengthened through closer monitoring of Member States under the excessive deficit procedure.  Furthermore, the Member State would submit its draft national budget to the Commission who would then forward the budge to the Council with its recommendations.  The Council would then adopt an opinion on the budget before its adoption by the Member State’s legislative body.  However under TFEU Art. 288, a Council opinion is not binding on the Member State.  Merkel has also suggested the ECJ should monitor the Stability and Growth Pact (“SGP”) obligations that lead to the excessive deficit procedure.  Under this proposal, the ECJ would have the power to review the Member  State’s budget and possibly declare it null and void.

Merkel’s suggestion to grant the ECJ power to declare Member State’s budgets null and void has not been included in her proposals at the EU Summit.  The furthest EU involvement in Member State budgets under the current proposals involves modification of the Treaty to include sanctions for SGP breaches.  This could largely be attributed to a recent ruling by the German Constitutional Court on challenges to the Euro Rescue Package.  In its September 7th ruling, the Court found the current rescue package constitutional.  Yet the Court cautioned that the German Constitution requires full budget sovereignty be maintained through approval by the German Bundestag’s Budget Committee.  It is surprising that Merkel would even suggest such EU intervention into national sovereignty because it seems to be in direct conflict with her own nation’s constitution.  However with the current European debt crisis spreading that in turn leads to more requests for contributions from Germany, she could be just voicing the rising frustration of her countrymen and women.

“Robin Hood Tax”: Proposal To Tax Financial Institutions

Finance leaders from European Union Member States have been debating a proposal to levy taxes on financial institutions throughout the European Union. The proposal is one that might provide revenue as leaders look to address the debt crisis. French and German officials, including President Sarkozy, have strongly advocated for the tax which they consider imperative to raise funds.

A consensus has not been reached, either among leaders from the European Union as a whole or within the Eurozone. Swedish, United Kingdom and Irish governmental officials have all expressed concerns about the tax.

George Osborne MP, United Kingdom Chancellor of the Exchequer, has made strong remarks reflecting his opposition to the proposal. Specifically, his concerns are that this “Tobin” or “Robin Hood” tax would not be paid by financial institutions. Osborne is convinced that the tax will be passed on to consumers.

Within the Eurozone, the reception from Italian and Dutch governmental officials is lukewarm – both governments will further explore the idea within the constructs of the respective national government.

In the absence of a consensus amongl Member States, there is some support for the Eurozone Member States to impose the tax by acting separately from the remaining Member States. This debate illuminates underlying tension among Member States about who should bear the cost of the debt crisis.

The Debt Crisis Impact on the United Kingdom

The continued discussion of the European debt crisis has driven speculation and discussion about what the European Union will look like in the future. In the United Kingdom specifically, news outlets reflect the public eurosceptic sentiment through their coverage of the crisis.

By way of background, the United Kingdom is not one of the Member States part of the “Eurozone,” the seventeen Member States that have adopted the Euro and closer economic ties.

Heightened speculation comes after attempts by some British Members of Parliament, including some in Prime Minister Cameron’s party, to seek a national referendum to discuss withdrawal from the Union. While the proposed legislation failed to garner sufficient votes, the introduction of the proposal to Parliament underscores an internal political debate on the United Kingdom’s future within the European Union.

Reaction to European Union negotiations were addressed in one article which advocates that the United Kingdom distance itself from the Eurozone and the Union itself. The article urges a strong united bargaining front led by Prime Minister David Cameron to protect the interests of the people of the United Kingdom.

Another article foresees Eurozone Member States strengthening the European Union, at least as it applies to economic policy. As of yet, there is not a consensus on what should (or may) be done to unite Members of Parliament in pursuit of one course of action.

While it seems that negotiations on addressing the debt crisis have arrived at some conclusion, at least one question remains. What will come of the heated internal debate which centers on the United Kingdom’s ties with the European Union?

 

 




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