More Europe, anyone?

Robin McConnachie (Oxford Anylitica; Former Senior Adviser, Bank of England) 

The PEFM seminar series at St Antony's continued last Monday evening with another look at the causes of the 2007 /08 financial crisis and the various attempts to deal with the consequences for Europe. What happens now to take this forward? The discussion was led by Lorenzo Codogno, currently a visiting Professor at the LSE , but at the time Chief Economist at the Italian Treasury, who represented Italy on a number of the key committees servicing European Finance Ministers.

Lorenzo's thesis was that contagion from the US sub – prime mortgage failure quickly infected a number of European financial sectors causing a number of different problems which were difficult to deal with simultaneously in the absence of Europe - wide bodies to produce an effective response. He showed a number of useful charts using Italy as an example – in fact Italy had been less severely affected than many other European countries. But there had been a collective deficiency in the European response to the spread of the crisis, which he called a crisis of governance. For the future the answer was to have more effective European institutions rather than a plethora of rules which could not be enforced. The macro imbalances procedures currently being developed should enable countries to see in advance and hopefully take action to avert crises but this approach was not agreed by all, with resistance to large fines being levied on non-complying countries with excessive deficits, the perversity of this throwback to the SGP being particularly objected to. What was agreed was the need for debt deleveraging but this had hardly begun. European growth should be stimulated by exploiting the opportunities created by the single market e.g. the proposed capital markets union but the existing European authorities apart from the ECB were in a state of collective paralysis: there was strong resistance in many countries on important issues like bailing in lenders or creating yet more (costly) European institutions. An agreed roadmap was required to revive the European project.

Lorenzo then described the Five Presidents' report, and assessed what he called its unadventurous proposals as a possible way forward. Banking union should be completed with a comprehensive European deposit insurance scheme swiftly followed by capital markets union – “deepening by doing” in the words of the report. We should then proceed to full monetary union, followed by fiscal union with a unified Treasury, followed by political union in due course. The speaker admitted that he favoured such an agenda but we were currently stuck on present plans. For example there was no appetite for capital markets union and the British Commissioner responsible for it was lukewarm for competitive reasons. What might break the current deadlock was the developing migration / security debate, where countries were radically divided in their approach: if this could be solved there might be a grand bargaining where countries might barter their opposition on individual issues so as to move forward with the European project.

The audience was unconvinced. The question and answer session revealed a fundamental reluctance to sign up to the eurocratic thesis that whatever the problem the answer was always more centralisation, more European institutions and more money. The European Parliament was now active and important and the democratic deficit was in fact increasing. Europe was becoming fissiparous e.g. the referendum in Scotland showed 47% of Scots wanted independence even if it would cost them money through losing a significant subsidy from the rest of the UK. By contrast Italy had stuck together internally despite a permanent drain of resources from North to South. But then Italy had fiscal union which perhaps only showed that it had been a mistake to start with monetary union.

Other points made during a lively discussion were as follows:

a) Despite all the post crisis analysis no universal lessons appeared to have been learned apart from a recognition that problems could spread from a small country e.g. Cyprus or Iceland to a larger one: there was no guarantee that the same thing would not happen again. Indeed the Eurozone could yet break up after another crisis;

b) There was little appetite for a core Eurozone or a two speed Europe;

c) It should be recognised there had been some successes eg banking union, consistent and coordinated supervision of banks ,and the ESM , now with substantial funding;

d) Some people argued that more progress could have been made in total if smaller more soluble issues had been tackled eg true mobility of labour.

e) One academic commentator was of the opinion that some countries had gone further in the direction of a united Europe than they would now think was appropriate.

A good evening, with much food for thought, helpfully illuminated by Professor Codogno's personal experience of contentious discussions in various European committees. Au fond everything depended on the European realpolitik where countries would continue to pursue their national interests.