SOME OF THE BOOKS I ENJOYED IN 2011

I have been travelling a lot during 2011, and  that has given me time to read  some good books.

I find that it is only when one has a limited choice of things to do, that one can concentrate on reading a book  and enjoy it fully, and there is a limited choice of things to do on a airplane.

The best book I read in 2011 was “Napoleon in Egypt” by Paul Strathern.

It is about the invasion, in 1798, of an Egypt that was then nominally part of the Ottoman Empire, by an army of Revolutionary France, led by General  Napoleon  Bonaparte.

 Napoleon brought with him a large number of French academics and scientists, and his plan was to bring the benefits of the European enlightenment to this part of the world and, in his own mind at least, he intended to use Egypt as a jumping off point for an invasion of India,  and the eventual  establishment of a global empire.  He modelled himself on Alexander the Great.

 Napoleon was an atheist, in the French revolutionary tradition, but he put himself forward  to the Egyptians as a friend of Islam. He wanted  to make the invasion acceptable to the locals, some of whom initially welcomed the overthrow of the previous Mameluke military regime.

He told them that the “French are true Moslems”.  But, as time wore on, the main local support for the French came from the Christian and Jewish minorities, who suffered most when the expedition eventually failed.  As is the case today, there was a wide divergence of values between French secularists and devout  Muslims, and for all his efforts Napoleon never bridged that gap.

The Mamelukes, who Napoleon initially defeated, were  a military caste who had  been created by the Ottomans  from  among people they  enslaved in European  parts of their Empire. The Mameluke  system of administration had been  corrupt and unpredictable.  Napoleon tried to modernise it,   and, to assist in the process, he brought the first ever printing press to Egypt.  The French also opened first  shops in Egypt  where prices were fixed , rather than to be bargained.

Napoleon’s soldiers were the first Europeans to travel to the upper reaches of the Nile, and to see some of the glories of ancient Egypt, like Luxor and Thebes. The French also discovered the Rosetta Stone, which eventually explained the ancient Egyptian language.  They assiduously mapped the plant and animal life of Egypt.

 Militarily, the expedition was doomed, when Nelson defeated the French navy at the battle of the Nile and thereby cut Napoleon off from supplies from home. His communications with France were haphazard after that, and most of his reports back to Paris were captured by the British Navy.

In an attempt to break out of this situation, Napoleon invaded Palestine and Syria in the hope of getting  back to Europe by fighting his way through Turkey to the Balkans.  But, as in Russia in 1812, he overextended himself and lost many soldiers from exposure to harsh weather conditions. While in Palestine, he issued a proclamation describing the Jews as the “rightful heirs of Palestine”. It is not recorded what the locals living there at the time thought of that.  He certainly felt he could remake the world without too much concern for the views of local inhabitants.  Napoleon eventually abandoned his army in Egypt to return to France, and insert himself successfully into French politics. About 15,000 Frenchmen were killed or died of disease during the two year occupation.

I read “Earthly Powers” by Michael Burleigh. It deals with the clash of religion and politics from the French Revolution to the Great War.

The French Revolution was strongly opposed to Christianity.   By 1794, masses were only being celebrated in 150 of France’ s 40,000 pre Revolutionary parishes , and  monasteries had all been broken up. In the suppression of the Catholic  anti Revolutionary risings in western Franc e, up to a third of the population in some areas were put to death.  I saw a monument to some of these people on a visit to Angers during 2011.

The Revolution’s rejection of religion removed  restraints on human behaviour, and contributed to disorder. One of Napoleons first initiatives  to restore order when getting power was to  negotiate a Concordat with the Catholic Church . Under it the Concordat, a new episcopacy was formed, some of whom included bishops who had cooperated with the Revolution and some bishops who  had remained loyal to the Pope. Clergy were obliged not to marry couples without a prior civil ceremony, something that remains the case in France this day.

Burleigh argues that the Concordat reduced the pre existing role of the laity in the French church, a role that they had been forced  take on while the church was being actively persecuted by the Revolutionary authorities.

In Britain, socialism and Christianity were frequently allied, whereas on the continent Christianity was more frequently allied with conservatism, perhaps in reaction to the excesses of the French Revolution.  In working class areas of London in 1900, 15% of the population still went to church on Sundays,  whereas only 1% did so in similar areas of Berlin.

I found the subject fascinating, but the book to be a bit too long, and diffuse.

I read “China, the Fall and Rise of a Great Power, 1850-2009” by Jonathan Fenby.  I strongly recommend it to anyone visiting China, as I did during 2011. When one reads of the chaotic conditions that existed for much of China’s recent history, one comes reluctantly to understand why authoritarianism has a certain appeal.

“The Quants ,”  by Scott Patterson who shows how some of the financial innovators, who devised the  innovative financial products that helped bring about the  2008 crash,  had stated their lives as mathematicians applying Maths  to professional gambling in  Las Vegas.

In fiction , I enjoyed  two books that explore human relationships and keep the readers interest right to  the last page, by Irish author , Deirdre Madden,  “One by one in the Darkness”,  and “Molly Fox’s Birthday”.  I also greatly enjoyed “The Help” by Kathryn Stockett.

Interview by Dermot Murnaghan for Sky News

ANY QUOTES USED MUST BE ATTRIBUTED TO MURNAGHAN, SKY NEWS

DERMOT MURNAGHAN:
Now then, the Irish economy shrank by an unexpectedly large 1.9% in the third quarter of this year, part of a litany of bad financial news across Europe that has renewed worries about the continent’s ability to survive it’s debt crisis and currency crisis. Well John Bruton is Ireland’s former Prime Minister and he joins me from County Mayo on the West coast of Ireland, a very good morning to you Mr Bruton and can we talk specifically first of all about the Irish economy because it was seen, and I know the phrase is overused, as a bit of a poster boy for austerity in terms of taking the medicine early on and taking it without too much social unrest and was showing signs of growth, has that now all been set back by these growth figures?
JOHN BRUTON:
Well I think the difficulty is that Ireland is an export economy, we are one of the most modern export economies in the world but if the markets into which we are selling are facing uncertain times, obviously that feeds back into Ireland very quickly. I think that‘s what we are seeing, a loss of dynamism. I think also the uncertainty about how the euro is going to be managed and about how the sovereign debt crisis in Europe is going to be managed and the failed attempts to deal with that, that’s hurting consumer confidence as well in Ireland and Irish people themselves are not spending as much in the shops as they might normally do because they are not sure how safe their savings are as long as the problems go on in the eurozone. I think it is very important that Europe’s leaders get their act together quickly and resolve this and resolve it once and for all.
DERMOT MURNAGHAN:
Talking about Europe’s leaders, one of the most powerful ones of course is David Cameron from the United Kingdom, what’s the Irish view on the use of that veto and should the British voice be at those tables?
JOHN BRUTON:
Well I think the people in Ireland would be of the view that the summit was rather hastily prepared in the end and people left their initiatives and their proposals to the last minute and they didn’t get the time even to listen to one another and negotiate properly because they were up against a self-imposed deadline and that’s no way to do business. We run the European Union unfortunately increasingly on the basis of the European Council which consists of, as far as Europe is concerned, are part timers, they are heads of government whose full time job is running their own countries and then they come together occasionally to run Europe on a part time basis. Well that’s no way to run something as complex as the European Union and I think it’s unfortunate that the heads of government didn’t leave more of the initiative to the Chairman of the European Council, Herman Von Rompuy, who is full time at this job, rather than having individual countries touting their own solutions and trying to impose those on others. That’s not the way to go forward in a situation as complex as the European Union’s problems are now.
DERMOT MURNAGHAN:
Mr Bruton, in terms of the structures going forward as the eurozone certainly moves towards some form of closer fiscal union, what about Ireland? How would that be treated there, a country which, as I say, has taken the medicine for nearly four years now, would there be those who say something as important as this, the idea of for instance eurocrats looking and having the power of veto over the Irish budget, we’ve got to have a referendum on this?
JOHN BRUTON:
Well we may have a referendum on this but already without any referendum, very substantial changes have been made in the governance of the eurozone within the existing treaties, which will make it much more severe for countries if they breach the targets that they have agreed for debts and deficits. I think we probably should be allowing those measures to work first before we contemplate further measures, those measures only came into force last week and I think it would be probably wiser to allow them to work rather than plunging forward as I think we are proposing to do in respect of treaty change which in my view probably isn’t actually necessary at all.
DERMOT MURNAGHAN:
Do you think the euro can survive in its current form, the eurozone can hold together? I mean there are those that feel a restructuring is coming round soon.
JOHN BRUTON:
Well I think Europe has a problem, and would have had a problem anyway, of sovereign debt because of the ageing of our societies and the gap between what we have to spend and what we can take in as revenue as our societies get older. We were going to face that, euro or no euro. I believe that the cost for any country of leaving the euro would be so high that nobody will actually do it and that we will find a way to keep the euro going. It is going to be difficult, there is going to be austerity, there are going to be moments of uncertainty but I think the euro will not only survive but ultimately it will prosper.
DERMOT MURNAGHAN:
Okay, Mr Bruton, thank you very much indeed for sparing the time to talk to us. John Bruton there, former Taoiseach, speaking to us from County Mayo, beautiful County Mayo this time of year.

THE EURO AREA FISCAL COMPACT

A new fiscal compact was announced on 9 December  by the  Euro area  Heads of Government,  as a means of protecting the stability and integrity of the  Economic and Monetary Union,  and of the  European Union as a whole.

This is a vitally important goal, especially for Ireland which has gained more than almost anybody else in terms of market access, funds, and influence since it joined the European Union in  1973.

It is most important for Ireland that this fiscal compact be credible with the markets, and also  understandable  by the electorates of all 27  EU member states.

AUSTERITY WAS COMING ANYWAY, BECAUSE OF THE AGEING OF EUROPEAN SOCIETIES.

A fiscal crisis in Europe was always on the cards around now, even if there was no single currency, because of the ageing of the European population.

 Repeatedly, the European Commission has produced reports that said that, with unchanged policies, the debt to GDP ratios of many European states were going to reach  500% by  2050,  simply by virtue of the increased size of the likely  retired elderly population relative to the  working age population.

 During the boom, these reports were ignored by bankers, bank regulators, bond market participants, Finance Ministers, and political parties.

 But if you want to understand the rationale for   German attitudes today, you have only to look at the prospective ageing of its population.

 Germans are worried that the savings they have put aside for their retirement will be devalued by inflation generated by excessive monetary easing by the European Central Bank, or by fiscal irresponsibility by other European states that are unwilling to balance their current budgets.

Critics of Germany do have a point when they say that, in the short term,  Germany is asking a lot of some other  euro area countries(like Italy and Greece) when it demands that they must  suddenly become more competitive, increase their exports, and thereby earn the money to pay off their debts when, at the same time, their major market (Germany) is retrenching and reducing its demand for imports. 

But the motivation for the German caution is the ageing of their own population, as much as it is fear of a repeat of the hyper inflation of the 1920’s. And Greece and Italy also face the ageing of their population too, so they would have had to retrench anyway, whether Germany insisted on it or not.

It is also important to keep a sense of proportion about “austerity”.

 Admittedly expectations and prices have risen in the meantime,  but austerity in 2012,  is not quite the same as austerity was in the  1930’s , or even the 1980s, because  almost all European  countries are starting from a much higher income level that applied in the  1930’s or  in the 1980’s.

IT IS IMPORTANT TO RESPECT BASIC ARITHMETIC

 It is also important to respect basic arithmetic.

 For example, Ireland could not expect to have a welfare state as generous as that of Sweden, at tax levels similar to those of the United States.

 As the late Garret FitzGerald pointed out on many occasions, and it did not add much to his popularity, Ireland is not, overall, a heavily taxed country.   Pay, benefit , and pension levels paid from public funds are also  higher than  those in many  other EU countries for  comparable situations.

 A choice about the distribution of benefits and burdens has to be made, and these are the most difficult questions of all. They are the ones politicians, who are usually trying to build the widest possible coalitions, prefer to avoid if they can.

During the boom these questions were  easily avoided by borrowing, and by funding permanent expenses with temporary revenues.  That is now over.

 Even if the EU had no fiscal rule, the markets have now woken from their long slumber, and are demanding that those, to whom they lend , show how they will balance their books,  and repay what they owe when it is due.

 In that sense, the new EU fiscal compact is almost superfluous, in that  markets will be imposing discipline anyway, euro or nor euro, pact or no pact, Britain in or Britain out.

The choice is between slow, negotiated, and slightly less destructive austerity, imposed by the EU compact, or fast,  and much more destructive,  austerity imposed by the markets.

Therefore, I argue that it is best for Ireland that there be strong and credible EU rules. It is important, however, that these rules be as operational as possible, as credible as possible and as understandable as possible.

In that spirit, I raise one or two questions about the detail of the  proposed compact.

HOW, AND BY WHOM, WILL THE NEW STRUCTURAL DEFICIT RULE BE INTERPRETED?

In paragraph 4 of the EU leaders statement, they say that the annual structural deficit shall not exceed 0.5% of GDP and that that this rule shall be introduced into member states legal systems at “constitutional or equivalent level”. 

This is separate from the Excessive Deficit Procedure, under Article 126 of the existing EU Treaties, which provides for fines if deficits exceed 3%, and which is being strengthened under proposals that come into force this week. It is also separate from other changes, which require no Treaty or constitutional change,  which will  penalise countries for excessive debts as well as  excessive deficits, and which will require  countries to reduce debts progressively by a fixed amount each year

 This 0.5% provision    is something new and different,  not published before, which is   to be introduced into the domestic constitutional arrangements  of all member states.

 The concept of a structural deficit (of 0.5% of GDP) is different from the 3% limit in the Stability and Growth Pact.

If  this part of the pact is to be understandable, workable, and enforceable, one must ask the key  question.

 How easy will  it be to define  the structural deficit at any given time?

If something is to go into a constitution, its meaning must be both clear, and constant.

To see the sort of difficulties that might arise, one should look at  a recent  OECD study on Ireland(OECD working paper number 909, by David Haugh published 2 December 2011).  It said

“Rules specified in terms of cyclically-adjusted balances or equivalently balances measured “over the

cycle” are difficult to operationalise and monitor because they depend on forecasting the size of spare

capacity in the economy, which cannot be observed and is particularly difficult to estimate for a small open economy such as Ireland’s.

The Swedish Fiscal Policy Council found it difficult to assess compliance with the government’s target of a 1% surplus over the cycle (Calmfors, 2010).

 Disputes over when the cycle started and finished were among the most contentious aspects of  rule that operated in the United Kingdom until the end of 2008 (OECD, 2009).

Reliance on such measures may also induce policy mistakes. With the benefit of hindsight, initial cyclically-adjusted fiscal balance measures appear to have given an overly optimistic view of the Irish fiscal position prior to the crisis, which may have contributed to a sharp rise in expenditure in 2007 before the crisis hit”

If economists in the OECD have difficulty with this concept of a structural deficit , as indicated in this  quotation, one must wonder what the judges of  the Irish  Supreme Court will make of it.

 My understanding is that economists often radically revise their opinion, afterwards, about what the structural deficit really was in a previous year. That would  make life very difficult for the Supreme Court!

While the European Court will verify the transposition of the new 0.5% rule at national level, it will be the Irish and other national Supreme Courts that will have the job of interpreting it. If something like this is written into the Constitution, the ultimate decision on whether a  budget for any  given year is compliant with the constitution will have to made by   the judges  of the Supreme Court.  This certainly will bring judges into areas of judgement which are not, to put it mildly, their primary expertise.

There is also the question of what sanctions the Supreme Court could impose, if a structural budget  deficit exceeds 0.5% of GDP .

As far as I know, some countries, like France,  have relatively soft sanctions for breaching the constitution,  while other  countries, like Ireland, immediately strike down as null and  void, something that is unconstitutional.  It may seem fanciful at this stage, but one also has to ask what would happen if Britain, which has no written constitution at all were to join the Euro at some future  time?

When is this new arrangement to come into force?

If the provision is intended to influence the markets, the date cannot be pushed too far into the future. The Commission is to propose a calendar for this. Will it be the same calendar for all members, or will countries with the biggest structural deficits get more time?

According to NCB, even if we follow all of the plan, Ireland’s structural  deficit will still be at  3.7% in 2015, which is well above the 0.5% to be written into our constitution.

 According to Deutsche Bank, the structural deficit of the Euro area as a whole stood at 3.2% in 2011, so the rest of Europe has a long way to go too.

I believe this particular proposal needs to be teased out , rigorously and in great detail, and I have no doubt the Irish Government will  be doing  that in the next few months.

A LIFESTYLE CHANGE MAY NOT BE ENOUGH, THE PATIENT MAY ALSO NEED EMERGENCY TREATMENT!

As I said earlier, the ageing of our populations requires us to follow the path laid out in the fiscal compact.

 Keynes General Theory was formulated for a society with a very different demography than the one  Europe has today.  That is why we have no choice, euro or no euro, but face up to the fiscal challenge posed by the statement of the EU  Heads of Government of the   9 December.

But, as I have  said,  we need to get the details right.

 In the meantime, the ECB must act as a normal Central Bank and provide liquidity for the markets.  The risk now is of destructive deflation, not of inflation. Germans may want to protect their savings, but they also need incomes, and their incomes will disappear if the European economy collapses. 

I hope Chancellor Merkel understands that, and does not stand in the way of emergency treatment of the economy by the ECB.

Lifestyle changes are important and necessary, but the patient needs to be alive, if he or she  is to change  lifestyle! 

It is also important that, now that the concept of the economic cycle is to be introduced into our constitutions, we do not pursue unnecessarily procyclical policies. Some have argued, convincingly, that the Basel Thee rules, as applied to banks, are unnecessarily procyclical.  They are dealing with   yesterdays problem, excessive exuberance, which the markets are punishing sufficiently anyway.

The Summit did not address the banking problem at all, and this is a pity. The difficulties of banks are at the heart of the problem. Society needs banks, and some banks are well worth saving, because banks are the repositories of our savings, and the engines of our economy

 But Martin Wolf was right when he wrote in the “Financial Times” last March “The German Government should tell their people that they are rescuing their own savings under the guise of rescuing peripheral countries”.

 I do not have the sense that that has happened yet, and that is why the 9 December Summit is not the final word on the crisis.

Remarks by John Bruton, former Taoiseach, at an event of the Dublin Chamber of Commerce, in DIT Cathal Brugha Street , embargoed for 8am  14 December  2011.

 

THE IRISH BUDGET FOR 2012.......KEEPING THINGS IN PROPORTION

A FEW  IMPORTANT NUMBERS

The media in Ireland are full of fear laden stories about prospective cutbacks in spending in the budget to be announced  tomorrow and  on Tuesday.

It may help, to  keep this in proportion, to reflect  how much spending increased in recent years.

Stephen Collins, one of Ireland leading political journalists, pointed out in the “Irish Times” yesterday that , since 1997,

*The standard Old Age Pension  rate had increased by 120%

*Unemployment benefit rate had increased by 130%

*Child Benefit rate   had increased by 330%

*the public service pay and pension bill had increased by 400%

BUT the cost of living only increased by 40% in the same period, he said.  

This meant that the real value of these payments increased by the amount by which the  rate increase exceeded 40%, which in all cases was a lot.

The so called Bord Snip, chaired by Colm McCarthy, report for the previous Government pointed out that , between 2000 and 2006 alone ,

*numbers employed in the health sector (nurses, doctors, administrators) increased  by 20%

*numbers in the education sector (mainly teachers) increased by 27%

*numbers in Justice sector ( Gardai and prison officers) increased by  22%

*numbers in the civil service by 7%, but the increases in numbers in the higher grades were much  greater.

All the above were financed by taxation or borrowing.

It is fair to ask if service improved in the health, education,  and policing sectors by the same percentage,  as numbers employed in those sectors did and if not, why.

It is also only fair to point out that, in 1997 and 2000, before all these increases in spending took place, the country in general was not suffering acute hardship.

In 1997, the country  was living within its means. It is not doing so today.

But increases in service, or payments, once granted, are very hard indeed to reverse. This is the unenviable task that the government has inherited from its predecessor.

.  

THE EURO CRISIS—WHAT COULD GO WRONG?

The  European Union is facing a crisis because of the loss of confidence in the debts issued by several member states. This is related directly to the problems and activities of Europe’s banks.
On 9 December in Brussels, the Heads of Government of the 27 EU member states meet, yet again,  to come  forward with a solution to the  escalating loss of confidence in the debts owed by European  banks and  governments. Each time leaders meet, and come forward with proposals that, within days,  prove to be inadequate, further confidence is lost  both in the leaders themselves, and in the  European Union, as a functioning  and competent  political authority capable of managing the  affairs of its peoples. 

This is corrosive. It undermines political solidarity within and between Europeans, and it encourages   reversion to 1930s style nationalism, and to  general  anti politician sentiment, which could eventually erode the tolerance that is essential to democracy itself.
There is a limit to the number of failed government bond auctions we can endure. Many further such bond auctions are due in January and February. In February there will be a General Election in Greece, and the campaign in that election will be critically influenced by the perceived effectiveness of present EU arrangements and the  steps Greeks are having to take to comply  with these arrangements. If there is to be a good result in that election, the EU needs to show electors that it is in control of the situation.

THE ECB CAN ACT NOW, AND SHOULD DO SO

The European Central Bank needs to take note of the situation. It has a mandate under EU Treaties to maintain price stability, defined as around 2% inflation.  There is a growing risk that the problem Europe will face next year will be deflation, not inflation.
If industrial orders and consumer confidence continue to decline, prices and incomes will start to fall, and the situation of those in debt will worsen further because, even if they pay all interest, the real value of their debts  will increase as a consequence of the  fall in prices and incomes relative to the unchanged level of their debts.
If these circumstances are likely to arise, the ECB has a duty, in the interests of price stability, and in full accord with its Treaty mandate, to initiate quantitative easing to prevent it. An immediate statement to that effect from the ECB would go a long way towards resolving the short term crisis.

 
CONSEQUENCES OF A BREAKUP OF EURO

Failure to act could lead to a break  up of the euro. This could be devastating , because a lot of the debts owed by Europeans are owed  in euro to other Europeans. With the euro gone, the uncertainty about who owed how much, in what currency, to whom could lead to endless legal dispute.
Governments trying   to establish new national currencies could face huge problems stopping  outflows, which could  lead to  limitations on bank withdrawals, reintroduction of exchange controls, and  tariff walls against their exports by other countries  in the EU aimed at countering  competitive devaluations of one  new currency against another. 
The legal order on which the EU is based could break down. We should not forget how inherently fragile that legal order has always been. If one country refuses to implement a judgement of the  European Court of Justice in an important matter, and gets away with it, the EU has no  meaning anymore because  the EU has no police force to enforce its  rules. Everything is based on consent.
Against this background, one must ask oneself if further EU Treaty change could be part of the answer.  Treaty change could take, at the very least, a year to effect.  But we do not have that much time.  So the best we can hope for is a political commitment  by Governments to seek consent to a Treaty change from their parliaments or peoples.

SPEECHES OF CHANCELLOR MERKEL AND PRESIDENT SARKOZY

There has  been agreement  that a  proposal to improve the  governance of the  euro zone would be presented by the  President of the European Council, Hermann Van Rompuy to the EU Summit on  9 December. In advance of this, the leaders of the two biggest euro area states have set out their requirements. 
In her speech today, Chancellor Merkel has called for Treaty changes that would make sanctions on  states who breach  debt and deficit limits  automatic and  capable of  being enforced  directly through the  European Court of Justice.  It would take the issue out of politics and make it a legal one. This would require a change in the Treaties.
President Sarkozy, on the other hand, said yesterday that European integration must be pursued, and the problem has to be solved , inter governmentally. This is because he believes that only elected heads of national governments have the required political legitimacy to make the necessary decisions.
These two positions are quite far apart, and there are difficulties  with both of them.
The difficulty with Chancellor Merkel’s approach is that it will involve the European Court of Justice in making economic judgements. 

In the case of a disputes, is  the Court really qualified to judge whether  a deficit is excessive by reference to the point at which a country is at in its economic cycle? Can it adjudicate on whether estimates of future revenue are valid or not?
Even economists have difficulty with these issues.  So the framing of a Treaty change in this area will could be challenging.
President Sarkozy’s preference  inter governmentalism  will bring economic judgements into the realm of power politics, the sort of power politics that prevented any  sanctions being imposed on France and Germany when they became the first to breach the original Stability and Growth Pact. His approach would diminish the role of the European Commission.
Both the Chancellor and the President are paying too little attention to what has been already agreed in the “six pack” regulations. These, which require no Treaty change, will already make it more likely that a state, with and excessive deficit ,will be fined,  because a qualified majority (66%) would have to be found to agree NOT to impose a fine.
Neither  the Chancellor nor the President pay enough attention to the huge failure of  EU wide banking supervision that allowed all this foolish cross border lending to take place within the single currency area. Neither of them addressed the lack of implementation, from the very outset of the euro, of the ECB’s responsibilities in the Treaties , to  supervise the  activities of banks and the impact those  activities have had on the stability of  the European economy. Both of them spoke as if the problem  today was solely one of Government finances ,when it is also a problem of  bank finances


THE GERMAN AND DUTCH PROPOSALS TO CHANGE THE EU TREATIES - HOW RELEVANT  ARE THEY TO THE PROBLEMS WE FACE?

But what of the more  detailed proposals for Treaty change  advanced so  far.  How relevant and helpful are they?  It is suggested that  we must amend  the  EU Treaties, because it is argued that the existing  Treaties either

 
a)    prevent  us doing what is necessary to resolve the situation, or
b)    provide us with insufficient assurance that  we will not get into the same difficulties again.

The German CDU has demanded Treaty changes to provide for

• automatic sanctions for breaches of the  Stability and Growth Pact( 3% deficit and 60% debt/GDP ratio),
• a procedure for insolvency of EU states,
• the direct election  by the people of the EU of the President of the European Commission,
• taking away the exclusive right to initiate EU legislation from the Commission,  and allowing the Parliament and the Council  an equal  right with the Commission to initiate legislation,
• more seats for bigger countries in the European Parliament based on their bigger populations.

They also want Europe to unilaterally introduce a tax on financial transactions.
The Dutch Prime Minister has suggested Treaty changes that  would

• allow a European Commissioner for budgetary discipline to force  states running excessive deficits  adjust their policies and
• to impose  sanctions  including reduced payments from Cohesion and Structural Funds, national budgets requiring  EU  approval before introduction,  suspension of voting rights in EU institutions,  and  ultimately expulsion from the  Euro  zone. 

It is important that any proposals for Treaty change are based on an honest appraisal of what  our problems actually are, and are not put forward  as  tokens to soothe domestic  opinion in particular countries. Our problems are too serious now for that sort of thing. 

Given that Treaty changes in the EU require all members states to ratify them, the way proposals are put forward is almost as important as the proposals themselves. 

If proposals seem to be one sided, or to emanate from a small cabal of big countries, rather than  from an inclusive process of which all member states have equal  ownership,  then the  proposed Treaty changes may be doomed from the  start, whatever their merits.
On the specifics of the CDU and Dutch proposals, I would  respond as follows.

THE CDU PROPOSALS

The difficulty with automatic sanctions for supposed breaches of the Stability and Growth Pact is that, if the country on  whom they were to be imposed objected, the dispute would go to the European Court of Justice, not to the Council of Ministers for arbitration. Breaches of the Pact would include  questions about whether  assumptions about future economic growth and thus revenue were  too optimistic, the point at which a country was on in its economic cycle, and the like.  These are questions on which economists, who are studying these matter all the time, usually  cannot agree.  There is little chance that the judges in the ECJ, many of whom have no background at all in economics, will make sensible judgements  in such cases.
A treaty provision for the insolvency of states, as suggested by the CDU, will be very difficult to draft and will be highly controversial.  There may be some merit in establishing rules in this field, but I wonder if this is the time to be doing it.  The issue will not be being debated in an academic setting, but in the midst of febrile market conditions. There is a strong risk that the twists and turns  in a public debate on the  state insolvency   will have a  negative and unintended influence on the markets.
 We should not forget that ,when  the issue of so called  private sector involvement in resolving the Greek debt  crisis was first mooted by Germany , it had an immediately damaging effect on the capacity of some other  smaller countries to borrow.

CDU PROPOSAL FOR DIRECT ELECTION OF EU PRESIDENT MOST WELCOME

The direct election of the President of the European Commission by the people of Europe is a vey good idea. I advocated it when I was  President of the European Council in  1996, and again when I was a member of the Praesidium of the Convention of the Future of Europe. Interestingly, the only member of the Convention who gave the proposal any support at that time was George Papandreou. It is very good that the CDU is supporting this proposal now.
A direct election of this  kind is what we need to create a  genuine European  demos, or  sense of shared destiny, among EU  citizens whatever their nationality or language . Without such a demos or  shared  identity, we will be unable to persuade Europeans to make sacrifices for one another, and that is something we need if Economic and Monetary work.

BUT CDU ATTACK ON COMMISSION VERY DANGEROUS

On the other hand, the CDU proposal to take away from the Commission the exclusive right to propose legislation, and  to require it to  share that with the European Parliament and the Council of Ministers,  is a thoroughly bad idea.
It would  weaken the Commission even further than the rampant intergovernmentalism of Europe’s response to the financial crisis has already  done. 

The European Commission seeks to put forward proposals that will command  support  from  all countries , large and  small. It formulates compromises in advance.
If the  Parliament and the Council could table competing legislative proposlas on the  same  subjects as the Commission, this would make the search  for subtle compromises much more  difficult. It would  enhance the power of the bigger delegations of the bigger countries in the  European Parliament  and would encourage  crude nationalistic  majoritarianism in that body. 

The Commission is the protector of the interests of  smaller  member states within the EU, and this  CDU proposal will be seen by them as provocative and subversive of the community method on  which the EU was founded.

CHANGING REPRESENTATION IN PARLIAMENT WOULD UPSET A DELICATE COMPROMISE

The CDU proposal to increase  the relative representation in the European Parliament of  countries with bigger populations, but without reducing the  extra voting weight that bigger countries enjoy in the  voting system of the Council of Ministers,  overturns one of the central compromises reached in the  drafting of the   European Constitution and the Lisbon Treaty.
 The CDU should remember that ,even if the United States which is a fiscal union, all states have equal representation in the  Senate while populations have  equal weight in the House of Representatives.
 Under  the Lisbon Treaty, the EU has struck a similar compromise.  Bigger states have bigger representation in both the Parliament  and the Council, but there is a system of “degressive proportionality” which compensates smaller states by  giving the proportionately bigger representation than their population would strictly  justify.
 I cannot understand why the CDU wants to reopen this  difficult matter, unless of course it want  to use the proposal as a negotiating  weight to gain traction on some other issue. Frankly, I think our situation is serious enough without that sort of gamesmanship being introduced.

A FINANCIAL TRANSACTIONS TAX

The suggestion of a financial transactions tax has populist appeal. It may slow down financial transactions and allow a little more time for reflection in the markets. It would curb automated  transaction systems by making unduly frequent buying and selling slightly more expensive. It could  provide the EU with a new source of revenue, which would be very welcome.
But  It would also lead to  financial sector activities moving out of Europe, and the tax revenues that those  activities generate for  EU states going into the treasuries of   non EU countries. Given that unanimity must be obtained for this proposal to go through, I wonder if it is not, like the proposal to redistribute seats in the European Parliament,  being put forward as a  negotiating  ploy .  Again, one must ask if this displays the sort of seriousness that out parlous situation requires.

THE DUTCH PROPOSALS

Turning to the Dutch proposal to enhance the Commission’s control over the budgets of states running excessive deficits, it is hard to argue against the principle of what they are seeking to achieve.  The CDU has argues that fines for excess borrowing should be automatic.
But one might wonder how urgent  the proposal is.
 Financial markets are already imposing very harsh discipline, through demanding higher interest rates of countries with excessive deficits.
 It will be a long time before any EU country will ever again be able to borrow money at easy rates of interest unless their fiscal policies are demonstrably sound. Do we really need to reinforce what the markets  are already doing with Treaty changes at this stage? 
It is also worth noting that the reverse majority procedure now applies to both the Excessive Deficit and the Excessive Imbalance procedure. So a country, that is liable to be fined for running an excessive budget deficit, or an excessive balance of payments surplus or deficit, will automatically have to pay a  fine,  unless it can persuade a qualified majority in the  Council NOT to let the fine go ahead. Perhaps we should see how that new procedure works before going for Treaty change?
 In any event, levying a fine on a country, that is already in financial difficulty , will add to the difficulties.  It will be too late to be an effective deterrent

CUTTING STRUCTURAL FUNDS?

The Dutch proposal to reduce payments from the Structural Funds to  countries with excessive deficits  will  fall more heavily on poorer countries than on richer ones.
 Excessive deficits or economic imbalances in richer countries can be just as damaging as they can be in poorer countries, perhaps more so. For example, the Netherlands is less reliant on structural funds than is Estonia, so a proposal to reduce structural would hurt  Estonia  proportionately more than it would the Netherlands, even though their  excessive deficits  might be of  the same proportionate scale. That is unbalanced.
The proposal that budgets of deficit countries require advance EU approval is also potentially unbalanced.
 One country can only run a trade surplus if another country runs a deficit. If a country is deliberately managing its economy in order run consistent surpluses, it is contributing to deficit problems of other countries. That needs to subject to EU surveillance too.

DUTCH PROPOSAL TO SUSPEND VOTING RIGHTS IS NEO COLONIALIST

The proposal  by the  Dutch Prime Minister to suspend the voting right in EU institutions of a country which has excessive debts or deficit is tantamount to reintroducing colonialism within Europe, because it  would involve imposing decisions, in which they have  had  no vote, on  countries who joined the EU precisely because they  thought it was a democratic organisation.  The existence in 21st century Europe of a mentality that would make such a proposal is deeply troubling.
I am unclear about the merit of changing the Treaty to allow for the expulsion of a country from the euro zone. It would imply that the euro itself is a temporary expedient. It would aggravate speculative pressure, without any compensating benefits.

CONCLUSION

 
I believe the proposals from the CDU and from the Dutch Governments to  change the Treaties are not adequate to the problems we face, and in some cases are a distraction.
 The so called six pack proposals, recently agreed go a long way to strengthen disciplines on fiscal policy, and do not need Treaty change. They should be given a  chance to work, before we contemplate additional Treaty changes for control of national budgets.
But the CDU proposal for a direct election of the President of the Commission does deal with an important problem that underlies our present problem, namely the lack of a sense ,on the part of ordinary Europeans,  that they can, through their vote, influence the direction of EU policy.
 If citizens could  directly vote the President of the EU  in or out of office , that will give them a much more direct sense of control of the direction of the EU than they get  now from just voting  for their local or national MEPs.
None of the proposals on the table so far deal with the issue of banking, which is at the heart of our economic difficulties today. It was foolish lending decisions be banks that caused our problem.
The original Maastricht Treaty  of 1992 envisaged the ECB taking an overall role in overseeing the prudential supervision of  banks, especially banks that were lending across borders within the euro zone. This provision in the Maastricht Treaty was never brought into effect , because activating the ECB’s powers in this matter required unanimity. Some countries did  want not anyone else enquiring into their banks, and that reluctance continues even  to this day.

 
 Any Treaty change now should include

1.)  much tighter EU wide supervision of  banks,
2.)  restriction on the size of banks, and 

3.)  an EU  wide deposit guarantee scheme.