The most important decisions of the EU Summit held in Brussels in June 27-28th were the opening of accession negotiations with Serbia and the confirmation that Latvia will join the euro next January.
We have almost forgotten just a few years ago the Balkans were at war. The prospect of EU membership, realized just today for Croatia, has been a major driving force behind democratic consolidation and political stabilization. The opening of the accession negotiations finally removes the “stain” of the “war-criminals-harboring pariah state” from Serbia. This development, together with the accession of Croatia, is a useful reminder of what good is Europe for….
Moreover, the decision by Latvia to join the euro serves as a confirmation of the argument put forward by EU leaders that the “systemic crisis” for the euro is over and the doubts over the long-term prospects of the currency are fading. As I will explain later, though, I am not sure if this is the case.
Coming to the two major issues of the Summit (youth unemployment, and credit conditions), the outcomes were poor, to say the least. One cannot help noticing the discrepancy between the choreography of most EU Summits and the actual content of their conclusions (the Summit of June 2012 was a notable exception). The residents of the Brussels bubble may have gotten used to it, but the gathering of 27 heads of state and government is a rare and extraordinary event by international standards. So when these leaders vow to “mobilise all available instruments in support of youth employment” and then they come out of the Summit, having decided that they will upgrade a jobs web portal (EURES), then a feeling of disappointment among journalists and citizens alike is to be expected. The EU leaders also confirmed previous decisions, like the meager Youth Employment Initiative, worth 6 billion euros, and the “full use of the recent capital increase of 10 billion euros by the European Investment Bank”. But was there a need to call a Summit, just to confirm previous decisions? Did it worth the carbon footprint left by the heads of state and government to come to Brussels?
The aforementioned question is not just about theatrics and media coverage. Each time a Summit ends with trivial results, the widespread impression held by the public opinion in Europe that the EU is not something important, but just a bureaucratic exercise, is reinforced. The roots of this image are to be found in national politics. Each time things don’t work out well, national governments blame Brussels “Eurocrats” for their failures to tackle seminal problems. And each time solutions are found, the governments congratulate themselves, as I suspect it will happen if the “unemployment summit” which is being held in Berlin, on Wednseday, July 3, produces tangible results. The outcome of this political game is that Euroscepticism is on the rise throughout Europe, and it is more likely than not that next year’s European Parliament be dominated by Eurosceptics.
This is not to say that the EU Commission’s work is flawless that there is no shed of truth in the German accusation that Brussels is addicted in an endless “commitology”, which causes severe delays. But on the other hand, one should not forget that the EU budget, the only instrument that the Commission has in order to implement strategic decisions is less than 1% of EU GDP. Hence the financial backstop for policies, like youth employment for example, is just 6 billion euros. In other words, Brussels lacks the resources to make a real difference and is doomed to fail to meet expectations.
The same is true for the European Investment Bank (EIB). A 10 billion euros capital increase may sound impressive, but if one looks at the 2012 EIB report will see that most of the lending goes to the core and the East of the EU. The EIB is obsessed with safeguarding its AAA status and, hence, countries like Austria get much more cheap loans per capita, than countries like Greece or Spain, which need it the most.
In fact, the most important impediment to growth in the periphery is the continuing credit crunch, and the EIB has not done much to ease the situation. To cite an example, almost 30% of total deposits were withdrawn from Greek banks during the crisis, and have not returned. In fact, the haircut imposed on uninsured deposits in Cypriot banks has stalled the gradual return of deposits, due to the increased uncertainty. At the same time, non-performing loans (NPLs) ratio continues to rise, due to the deepening recession. And Greek banks have already taken a near deadly hit, by the sovereign debt restructuring of 2012. As a result, the private sector in Greece, especially SMEs, has effectively lost access to credit, due to the dire state of the country’s banks. In fact, the ongoing recapitalization process, supported with Eurozone funds, is unlikely to significantly improve credit conditions for the foreseeable future, because of the uncertainty, continuing rise in NPLs, and lack of investment. How can an economy grow when SMEs are asked to pay credit card interest rates? And in Cyprus, how can an economy grow when the cash reserves of perfectly legal domestic companies held in the country’s two largest banks were effectively wiped out? To my knowledge, the answer to those questions is yet unknown. What we know is that the ECB is planning some sort of intervention next Autumn, but its people do not expect that it will make much difference.
Of course, the optimists’ assumption seems to be that the integrity of the Eurozone is all but secured and the systemic crisis is behind us. Countries hardened by years of continuing contraction will easily withstand another hit, this argument goes. However, this hypothesis is risky. If unemployment levels continue to rise and recession in countries like Greece, continues into 2014, as the OECD and the IMF project, then a breaking point will sooner or later be reached. The accelerating rise of extreme right (“Golden Dawn” Party) demonstrates that this breaking point is close. The situation in the South is so tense right now, that it will only take a small spark to start an uncontrollable fire. Especially Greece is trapped in a vicious circle where weak economic activity leads to political turmoil, which in turn undermines any prospect of recovery. And the mood in Cyprus borders collective depression. If the Bank of Cyprus meets the same fate as Laiki, and all its uninsured deposits are wiped out, then both its people and the government see no incentive to remain in the Eurozone.
To conclude, there are two possible scenarios for the immediate future: the first is that governments and people in the South will hold tight, until the storm goes away. The timid measures adopted by the EU Summit on unemployment and liquidity will provide a cushion for the next 12-15 months, until growth enhancing reforms, the slow return of confidence, and the improvement in the regulatory framework start paying out.
The second scenario is that an unexpected event triggers destabilization in one country and creates a domino in the periphery, or even France. The muddling through strategy hence fails and the systemic risk will come back with a vengeance. The only way to avoid this scenario are immediate aggressive measures to restore liquidity in the South (perhaps through massive bilateral agreements or a Eurozone budget), and incentives (e.g. tax breaks) for companies from the North to invest in the South. Only direct investment will restore the unity of the single market and speed up recovery in the job market. But whether such intervention is politically feasible, you will have to ask the governments of the North…