It was a quintessential case of good and bad news: on the one hand, the 15-16 October European Council agreed on the financial rescue package, thus sending a loud and clear message about EU leaders’ determination to tackle the crisis. On the other, they displayed growing disunity over the energy and climate package, thus sending a much less clear message to the outside world about their willingness to lead by example in this area.
20-10-2008
It was a quintessential case of good and bad news.
On the one hand, the 15-16 October European Council marked a potentially crucial turning point, with the EU-27 agreeing on the financial rescue package that had been outlined the previous Sunday in Paris by the 15 members of the euro zone plus the UK, thus sending a loud and clear message - across the Atlantic and beyond – about their determination to tackle the crisis.
On the other, the same EU-27 displayed growing disunity over the energy and climate ‘package’ they are due to finalise by the end of the year, thus sending a much less clear message to the outside world about their willingness to lead by example in this area.
In both cases, at any rate, much remains to be done – and they will have their work cut out to achieve the necessary follow-up in the weeks to come.
The Summit came after two very intense and even dramatic months, characterised first by conflict in Georgia and then by the onset of the banking crisis which began in the United States. Neither was wholly unexpected, although both happened earlier and more rapidly than probably imagined, but both galvanised the EU – with an extraordinary European Council on 1 September in response to the particular challenge created by the conflict in the South Caucasus, and this Summit was largely dominated by the new economic climate created by the credit crunch.
Trial, error, and qualified success
The first symptoms of the financial pandemic had already manifested themselves in September, especially after the shocking collapse of Lehman Brothers. Initial reactions in the EU were driven by a marked ‘national’ logic, starting with the UK and Ireland and continuing with the Benelux countries. Quite soon, however, it became apparent that it was not a crisis in the system but of the system, and that case-by-case and isolated rescue operations were not only ineffective but also potentially counterproductive, as the contagion continued to spread at alarming speed.
The French EU Presidency, which had demonstrated its activism and decisiveness in the Georgian crisis, thus moved to elicit some sort of coordinated ‘European’ response. This time, however, it did so without a clear plan of action and by picking up ideas and proposals along the way.
The first summit meeting convened by President Nicolas Sarkozy in Paris on 4 October - with the so-called G4 (the European members of the G8) was a failure: its appropriateness was questioned in many quarters (especially in those countries, like Spain or the Netherlands, that felt unjustly excluded) and its outcome was disappointing. France came up with an ill-defined proposal for a common ‘fund’ to bail out big banks in trouble that was immediately rejected by Germany, based on its well-rooted fear of having to pay for other countries’ shortfalls.
The day after, however, Berlin realised that it was not immune from the contagion – despite previous claims to the contrary by Finance Minister Peer Steinbrück – and had to rush to the rescue of mortgage giant Hypo Bank Real Estate.
After that, a better appraisal of the nature of the crisis and the need to act jointly won the day: the European Central Bank (ECB) acted swiftly to lower interest rates (in unprecedented coordination with its counterparts in the US and Japan), showing a flexibility that surprised many observers; and rather than making premature announcements, the leaders of the euro-15 and the UK convened again in Paris on 12 October - for the first-ever meeting of the euro-zone members at this level - to deliver a new massive ‘package’ intended to inject liquidity into the system and counter the loss of confidence and resulting panic on financial markets.
The plan, initially outlined by British Prime Minister Gordon Brown, was quickly adapted and adopted ‘at 16’, and then passed on to the ensuing European Council. The US administration also borrowed some elements of it to complement the Paulson Plan of late September.
The 15-16 October Summit ‘EU-ised’ the approximately €2,000 billion package and topped it up with guarantees of assistance to those countries which are not yet in the euro zone and find themselves exposed to marginal shocks and risks. The most relevant case in point is Hungary, which suffered a serious liquidity and solvency crisis right before the Summit and has since been offered a crucial credit lifeline by the ECB.
More generally, the euro has provided a key element of internal stability and proved itself an influential bloc in the financial turmoil of the past weeks, preventing a currency and devaluation crisis on top of the credit meltdown, and demonstrating the merits of being part of the euro zone to non-members like Denmark, battered Iceland and – to a lesser extent – Sweden. Most of the new EU Member States which are still outside the euro zone (starting with Poland) have recently manifested their determination to join it sooner rather than later. Even the UK has opted for coordination with the euro-15 - and successfully so.
At the same time, the crisis has also highlighted the residual limits of monetary union, starting with the persistence of separate (and often different) national supervisory systems and rules for the banking sector, and shown all too powerfully that trans-border operations and groups require trans-border authorities to monitor them.
Hence the push towards the establishment of a “financial crisis cell” (to include representatives of the EU Presidency, the European Commission, the ECB, the Eurogroup and the Member States) and to improve coordination among supervisory bodies, adapt accounting standards and overhaul the rules governing rating agencies as well as company executives’ pay - all reflected in the Summit’s Conclusions.
Whether this new awareness will translate into a new phase of monetary union and economic integration, complementing the euro-zone Stability Pact with an agreement to deal effectively with instability and global turmoil, remains to be seen. It may ultimately depend on the aftershocks of the crisis itself and their repercussions on the real economy, which are all still relatively unclear.
But it will also depend on the willingness of other players to cooperate, starting with the US. It is not by accident that Presidents Sarkozy and José Manuel Barroso flew together to Camp David immediately after the European Council to convince President George W. Bush to engineer a sort of ‘Bretton Woods II’ capable of performing the role in the global economy of the 21st centuryplayed by the 1944 arrangements in the post-war international system.
The US President showed little enthusiasm for such an ambitious project, probably reflecting partly his personal views and partly institutional and political weakness. As a result, a summit with other world leaders and players (a sort of G8-plus also open to the directors of the main international institutions and the US President-elect) is likely to be convened – probably in New York, where the crisis originated – in late November or early December to discuss a possible roadmap.
This may lead to a major overhaul of the International Monetary Fund next spring, on the occasion of its 65th anniversary.
As happens increasingly often, the media have sought to identify winners and losers among EU leaders (and beyond) in this crisis. Yet it seems more appropriate to speak of a collective success, if qualified and still fragile, for the EU and in particular the euro zone.
Leaders have contributed to this success to varying degrees but all by trial and error, so to speak: President Sarkozy’s activism came up against the complexity of the situation and the need for effective responses to be negotiated with the main EU partners, and German Chancellor Angela Merkel’s reluctance to act swiftly and in a coordinated fashion had to give way to a more realistic and shared approach.
Even Prime Minister Brown’s plan - publicly hailed by the fresh Nobel laureate Paul Krugman in The New York Times – borrowed from Sweden’s experience during its own banking crisis in 1992, and came after the same Gordon Brown, as Chancellor of the Exchequer, had rejected similar proposals presented years ago (by Germany, incidentally) and promoted large-scale deregulation of the City of London.
In other words, all leaders learned lessons while the crisis was unfolding and eventually converged on a common line of action.
For its part, the European Commission has kept a low profile on this issue. It has also been quite economical with words, although its ‘body language’ implied that it would be pragmatic and fairly flexible when it came to assessing compliance with the deficit rules of the Stability Pact after this crisis and in the likely ensuing recession. Only when it became increasingly clear that case-by-case and piecemeal rulings would be meticulously scrutinised for possible national and political bias did it come up with better-articulated principles and guidelines.
On the whole, the Commission was conspicuous by its silence – in particular, the prolonged silence of the relevant Commissioners. It is of course true that its executive powers in this area are limited, and that the College may be suffering from the first signs of ‘lame duck’ status as its term draws to a close - or, at best, as looking for a new mandate. Yet its proposals have been mostly reactive so far – and the hardest steps are yet to come.
The other side of the Summit
Alongside unity of purpose in tackling the financial crisis, two distinct sets of related concerns emerged during the Summit.
The first was voiced by a group of countries including the Czech Republic, Denmark and the Netherlands, and emphasised the need to limit the scope of the package in terms of both its duration and possible unintended consequences. This translated into a new wording for Paragraph 5 of the Conclusions, which insists on “continuing to apply the principles of the Single Market” and the “rules on competition policy, particularly state aids” in the face of the new state interventionism triggered by the credit crunch. This could potentially help the Commission though, especially if it decides not to yield to growing national pressures to relax those rules.
Another group of Member States - led by Germany and Italy, and backed by the current Presidency - voiced acute concerns about the repercussions of the financial crisis on the real economy, prompting some amendments to the wording of Paragraph 10 on growth and employment, especially where it invites the Commission to make “appropriate proposals by the end of the year, in particular to preserve the international competitiveness of European industry”.
It is no secret that car manufacturers across the EU, in particular, are concerned about the risk of a long and deep recession, due first to rising oil prices and now to a possible global slump. The €19-billion package of low-interest loans recently approved by the US Congress for American carmakers has only heightened such concerns, to such an extent that President Sarkozy himself insisted that some countermeasures are in order.
Both groups, however, endorsed the Summit’s call for a swift resumption of the World Trade Organization’s Doha negotiations - a last-ditch effort to salvage the Round and counter (or at least mitigate) a possible global recession.
Yet these two ‘lateral’ forms of pressure were nothing compared to the full-scale offensive launched during the Summit after the discussions and decisions on the financial package. The debate over dinner was tense, amid parallel attacks on the draft energy and climate package prepared by the Commission to fulfil the original mandate it received in March 2007, when the new ‘Energy Policy for Europe’ was launched. The package includes specific targets and deadlines for each and every EU country, and triggered a strong reaction from some of them.
Poland and seven other new Member States - Bulgaria, Estonia, Hungary, Latvia, Lithuania, Romania and Slovakia - protested that their targets were both unfair and unrealistic, based as they are on 2005 figures (rather than those from 1990 which underpin the Kyoto Protocol and are much more favourable to them) and on the ‘pretence’ of a relatively swift move to a carbon-free economy in countries where coal still constitutes up to 90 % of domestic energy consumption (as in Poland) – and all this without any offer of financial aid to achieve this goal. Their objections were well-known, considered at least partly legitimate and also largely expected - although probably not in such an assertive form.
Less expected were the objections aired most forcefully by Italy’s Prime Minister Silvio Berlusconi, which centred upon the need to factor in the impact of the financial crisis on the real economy. This implies, he claimed, that the targets are now completely unattainable and could end up damaging, once again, the competitiveness of European manufacturers vis-à-vis those countries (like India or China) which have not committed themselves to achieving the Kyoto goals.
Italy was probably not alone (as the debate on car CO2 emissions, growth and employment indicated) in harbouring doubts about the wisdom of pushing for such an ambitious package at this very moment in time - a sentiment UK Foreign Secretary David Miliband summed up neatly as “buyer’s remorse”.
But of all the major EU countries, Italy is also the one which has made least progress over the past few years in this area; it is firmly opposed to adopting 1990 emission-levels as a term of reference; and it also used language that hardly contributed to a constructive outcome - calling on the EU not to act like “Don Quixote”, claiming that the commitments had been entered into by another government (now out of office), and threatening to veto the overall package.
As a result, the French Presidency kept the Commission’s draft proposals and guidelines as the basis for a decision, but postponed it until the European Council in December. By doing so, however, it has implicitly submitted the package to the consensus ‘rule’, rather than the Qualified Majority Voting rule in force at the Council level - a temporary concession to appease the ‘revisionists’. This could, in other words, become a recipe for further paralysis in December, which could in turn hamper agreement on the legislation and undermine the overall credibility of the Union’s approach to the Copenhagen United Nations Climate Change Conference in late 2009.
The impression, however, is that both camps (led by Poland and Italy, respectively) may eventually content themselves with a few additional exemptions and sweeteners, or possibly a ”review” clause in 2009, before the whole package goes for co-decision to the European Parliament - where ‘green’ positions are much more firmly rooted.
To be continued...
Finally, the issues that until just a few weeks ago were expected to top the October Summit agenda ended up as short footnotes. The much-debated “European Pact on Immigration and Asylum” – a pet project of the French President – was largely diluted and eventually approved by the General Affairs Council on the eve of the Summit. Its implementation is left to the following EU Presidencies, and in particular to the Swedes a year from now.
The composition of the so-called “Reflection Group” - under the chairmanship of former Spanish Prime Minister Felipe Gonzalez and his deputies Vaira Vike-Freiberga and Jorma Ollila – tasked last December with relaunching the debate on the future of Europe was completed. Nine further members were appointed, including the former Polish President Lech Walesa, former European Commissioner Mario Monti, former French trade union leader Nicole Notat and Oxford Professor Kalypso Nikolaïdis. The group, which was meant to start working immediately after the expected entry into force of the Lisbon Treaty, will now do so “as soon as possible”, under the auspices of the Council Secretariat.
Last but certainly not least, the analysis presented by Irish Taoiseach Brian Cowen to his peers on the results of the June referendum on the Lisbon Treaty did not take long and was confined to a single paragraph in the Conclusions, drafted in what President Sarkozy himself described as “langue de bois”. It states simply that the Irish government “will continue its consultations with a view to finding a way to resolve the situation”, and that the European Council will revisit the issue in December “with a view to defining the elements of a solution and a common path to be followed”.
In fact, Prime Minister Cowen came under strong pressure – from some Member States and, especially, the European Parliament – to call a second referendum sooner rather than later, not least given the complex problems that ratification in late 2009 (if ever) will generate at the institutional level.
The Taoiseach remained non-committal, reminding his colleagues of the intrinsic difficulty of holding a second vote on the same text so soon after the first and in the midst of a recession. The most plausible date remains September/October 2009; i.e. after the European Parliament elections but before British elections likely to be held in 2010 (as a Conservative victory could prove fatal for the Treaty). Meanwhile, ways need to be found to assuage the fears expressed by the Irish voters but without reopening negotiations.
Still, the situation is highly volatile – not least in Ireland itself. The country’s initial go-it-alone reaction to the financial crisis has given way more recently to a much better appreciation of the advantages of its membership of the euro zone. Maybe this is the “common path to be followed” to win back the hearts and minds of the many (especially young) Irish voters who rejected Lisbon a few months ago.
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