Fortunately, the EU does have mechanisms at its disposal for addressing financial turbulence within the Union. However, weak leadership in the Lisbon Treaty’s newly created offices, ineffective political processes within the EU, a lack of unity between members, along with weakness and inconsistencies within the Treaty itself have retarded the EU’s ability to deal with the unfolding economic situation. It is not, however, too late for the EU’s, and the Lisbon Treaty’s, potential to be realized and exuded.
The Contenders
As mentioned, there are six countries within the Union that are experiencing the most significant financial difficulties. Spain is currently the largest economy in the EU to find itself in economic turmoil. After 15 years of above average growth, Spain fell into a recession in 2008 in spite of its conservative oversight and logical responses to unemployment increases. The protective measures taken, however, failed to insulate their markets from the world economic crisis and their gross domestic product (GDP) real growth rate further declined in 2009 to -3.6 percent. With the 12th largest economy in the world, according to a study by Banco de Espana and an analysis by the International Monetary Fund, Spain’s economic situation is a direct result of a decline in competitiveness within the country coupled with the highest unemployment rates in the EU (19 percent as of 2009), and not governmental mismanagement.
Italy has also been unsuccessful in their attempts to insulate their markets from the economic turmoil circulating through the EU. Sitting in a slightly more advantageous position than Greece, Italy’s public debt now rests at 115 percent of their total GDP. Plagued with a steadily decreasing population growth rate of -.05 percent, Italy’s poor economic situation is exacerbated by the countries dwindling tax base and the deep divide between the more industrial North and agricultural, welfare dependent South. While previously slow to implementing reform measures, Italy’s effort to collect previously untaxed assets brought the government $135 billion in 2009. Unfortunately, this did little to ease the unrest felt in the international market and as of February 2010 Italy remained at a AA- speculative grade indicating increased levels of credit risk. Despite their future outlook being quoted as stable (Fitch Rating Agency), with long-term issues, such as a dwindling tax base and high public debt, Italy remains a solid contender for future EU bailouts.
In March of this year, Ireland’s Finance Prime Minister Brian Lenihan was quoted saying, “Our worst fears have been surpassed,” as Irish banks announced they would need an additional $42 billion in assistance this year to help write down their bad loans. With much of the capital needed to cover the additional expenses being provided by taxpayer dollars, coupled with wage reductions for all public servants, the working-class Irish are bearing the brunt of the burden. This, along with harsh budget cuts in 2009, had some speculators calling Ireland’s new political approach “draconian” with the extent of their effectiveness questionable at best. The success of other efforts to manage the crisis, such as the creation of the National Asset Management Agency in 2009 charged with the task of acquiring property and development loans from Irish banks, has yet to be evaluated. Once known as the Celtic Tiger, Ireland too may soon be fighting with Greece for EU-funded aid.
In Portugal, support to implement programs that would help finance future crises comes as no surprise. Portugal is often likened to Greece as they too have continuously been forced to allocate funds to pay off their debts, allowing investors drive up the cost of government borrowing. Quoted at a banking conference in March, Finance Minister Fernando Teixeira stated that, “Once the recovery of the financial system is consolidated, we should consider the possibility of progressively putting in place a fund at the European level.” With decreasing real growth rates, high unemployment rates, and a projected negative outlook given by Fitch Rating Agency, Portugal too finds itself in a position where aid will be needed in the foreseeable future.
Finally, experiencing the world’s lowest real growth rate in 2009 (-17.8 percent), it is difficult to believe that only two years ago Latvia’s growth rate was soaring at near 10 percent. In the past two years, however, Latvia’s per capita GDP (which was already only slightly more than half of that of the average EU state) dropped nearly $4,000. Latvia was the first EU member recognized as being in a dire financial situation after a 27.8 percent drop in real GDP growth was coupled with a 9 percent increase in unemployment. However, Latvia has yet to adopt the euro. This makes the debate surrounding assistance to the small country a very different one as non-euro-zone members are able to more easily access EU aid.
The Main Event
Greece is in a class all of its own. Years of under reporting and mismanagement have resulted in a deficit four times greater than that allowed for by the European Union’s Stability and Growth Pact (SGP). Cheap lending and uncontrolled spending has lead to the first EU-IMF bailout of a euro-zone member. Following a period of economic growth between 2003 and 2007, due largely to infrastructure spending for the 2004 Athens Olympic Games, Greece entered into a recession in 2009. A result of the world economic crisis, the country tightened credit conditions and increased government expenditures and neglect. Any confidence in Greece that was restored after successfully meeting the criterion in 2007-2008 was quickly lost when the nation again violated the SGP in 2009 and 2010 with their budget deficit reaching 12.7 percent and 13.6 percent, respectively.
While Greece currently maintains that they are not ready to accept the “on-standby” aid package, most reports state that it is unlikely that the government will be able to meet its repayment obligations. In an attempt to rein in the country’s deficit, earlier this year Prime Minister George Papandreaou implemented several aspects of his austerity plan, which included tax increases on fuel, tobacco, and alcohol. Many question if these new taxes will in fact help the Greek economy whose tourism industry accounts for approximately 15 percent of their total GDP. Other aspects of the highly controversial plan included raising the retirement age, imposing across the board wage freezes for public sector workers, and reducing allowances that account for a near 4 percent pay cut for those same individuals.
Protests, strikes, riots, and walk-outs have rocked the nation over the last year with demonstrations being held by workers in various fields including healthcare, transportation, and education. In one demonstration last year, more than 20,000 people gathered in Athens to protest the government’s spending cuts. The protest resulted in vandalism, arrests, violence against police, and the use of tear gas on a crowd of civilians. The most recent display of public aggression came on 5 May as angry demonstrators threw rocks and gasoline bombs at Parliament and other government buildings. One building attacked during the riot was the Marfin Egnatia Bank, where three employees perished in the flames. However, public unrest over the financial situation are not a Greek issues alone, as protests and strikes have been held in several other EU countries as well, such as France, Spain, Portugal, and the Czech Republic.
In April 2010, Greece’s credit rating was lowered to BBB with a negative outlook, making the country a near black hole for foreign investors. However, a shred of light at the end of a very dark tunnel came later in the month when Greece experienced a successful sale of short-term treasury bills. This act of renewed investor confidence came only after the announcement of an EU-IMF rescue package of more than 110 billion euros. While part of the Greek crisis can be traced back to extenuating circumstances, such as a lack of competitiveness, the many feel that corruption and governmental mismanagement is really to blame. This aspect has created deep divides between EU member states on what is an acceptable means of assistance. Some, like Germany, stand firmly that because the situation was not caused by circumstances beyond their control, Greece needs to face the consequences of their irresponsible actions. In contrast, members such as France maintain that the unity and stability of the EU must be protected at all costs.
Rules of the game
While public opinion over how to handle the economic crisis in the EU has changed significantly over past weeks, one assertion has become clear: Inaction is not an option. For months government officials, experts, and scholars have gone through the newly passed Lisbon Treaty with a fine-toothed comb searching for evidence that may support their take on the situation. Those against aid have frequently cited Article 125 of the Lisbon Treaty as the key component blocking the EU’s ability to provide financial assistance. Under Article 125, the EU and individual member states are explicitly prohibited from “being liable for or assuming the commitments of any other member state.” What has come to be known as the “no-co-responsibility provision,” Article 125 has been the platform of the German objection to aid.
While Article 125 clearly states that the EU, or individual member states, cannot assume the financial commitments of any other member, the situation has hardly come to the EU taking over Greece’s financial commitments. The misinterpretation of this Article has hampered political unity and action as the over-application of its language has lead many EU citizens to believe that any assistance would effectively mean an assumption of Greek financial responsibility. Germany, being the largest contributor to the Union, would have good reason to protest aid if this were the case. However, what was recommended, and eventually offered, makes credit available to the Greek government at reasonable interest rates. This is therefore not an assumption of Greek financial commitments but rather a safeguard of the EU’s own stability, and an opportunity to promote cooperation and unity between members.
The Lisbon Treaty has been tested over last few months, and weaknesses have been exposed. However, there are mechanisms spelled out in several articles that, if properly activated, would have softened the impact of the crisis, not only for Greece but other EU countries as well. Article 121, for example, gives the Council the power to enact broad economic policy guidelines for individual member states and the Union as a whole. Using these guidelines, the Union can determine whether a member state is acting in a manner inconsistent with EU aspirations or in a way that jeopardizes the proper functioning of the economic and monetary union. Unfortunately, the procedures spelled out in Article 121 have been carried out in a “too little too late” manner for countries such as Greece who desperately needed EU pressure to increase transparency and accountability within their government.
Serving as yet another underutilized safeguard to economic deviants, Article 126 details the repercussions of violating the Treaty’s limits. Under this article, the Commission is to monitor member states with excessive government debts in order to identify errors in management or execution. The Commission would then prepare a report which would be submitted to the Economic and Financial Committee for consideration and recommendation. If the member state continued to violate EU limits and recommendations, the Council may give the member a specified timeframe to reduce their deficit, after which penalties would be imposed. Such disciplinary measures may include requesting that the European Investment Bank (EIB) reconsider their lending policies toward the member state, requiring the member state to submit additional information to the Council before issuing revenue generating bonds and securities, requiring a no interest-bearing deposit be made with the Union (until, in the Council’s view, the excess deficit has been ameliorated), or lastly, and most popular amongst members like Germany, to impose “appropriate” fines.
However, intuitively, it seems that most of these penalties would actually compound problems in an economically distressed nation. For example, asking the EIB to reconsider lending policies toward nations who are already experiencing increased interest and repayment rates could exacerbate their negative circumstances further. Furthermore, asking a member state to make a no interest-bearing deposit is comical considering that the nations in the direst situations, Greece and Portugal, are far below the EU domestic savings average of 20 percent. Sitting at 7 percent and 10 percent, respectively, Greece and Portugal are below troubled Ireland, 17 percent, and Spain, 19 percent. Finally, imposing fines on a fiscally stricken economy seems about as effective as the reparations were for the German economy at the end of WWI.
While Article 143 does not apply to the Greek, Spanish, Portuguese, or Irish crises it has been incorrectly cited enough in the media that a clarification of facts is in order. Article 143 provides legal documentation of the ability of the Union to offer medium-term financial assistance (MTFA) to non-euro-area members only. While MTFA under the Treaty is not available to euro-zone members, they are still able to access International Monetary Fund (IMF) assistance. This segregation undermines the Union as a whole while making recovery even more difficult as often IMF economic policies, which aid recipients are required to adopt, are not in line with EU economic guidelines. As articulated in the policy brief, Two Crises, Two Responses, issued in March 2010 by the Brussels European and Global Economic Laboratory, Bruegel, “Euro-area members remain members of the IMF and therefore have access to conditional assistance. It would be illogical for the EU to ban assistance to its members while allowing them to get assistance from the IMF.”
Last to be named, yet the most relevant to the euro-zone crisis is Article 136. This Article provides specific guidelines on coordinating budgetary discipline and setting out economic policy guidelines. Under this Article, the euro-area countries, acting by qualified majority, may adopt measures that ensure proper functioning of the economic and monetary union. One proposition rapidly gaining popularity, and finding some legal justification under Article 136, is the creation of a European monetary fund that would help finance future crises.
This solution was echoed by Juraj Draxler, associate research fellow at the Centre for European Policy Studies. “The current crisis is a combination of a financial crisis caused by the use of financial derivatives and of long-run economic problems related to current modes of economic growth. In terms of reacting to short-term economic problems of the members of the euro-zone, I believe the creation of a facility similar to a European Monetary Fund, as suggested recently by my colleague Daniel Gros and since then accepted by many politicians, would be in order as well as the extension of the powers of Eurostat to verify items in the national accounts of the member states.”
Qualified referees
While there are undeniably many fingers to be pointed, little else was done prior to the bailout. Time would have been better spent addressing the institutional problems within the EU created by the Lisbon Treaty, and increasing transparency and accountability at the national and international level. The offices of the President of the European Council and the High Representative of Foreign and Security Policy have fallen under intense criticism as the appointment of what some have deemed under-experienced political obscures left many in the international community questioning the EU’s motivation behind such nominations.
Zuzana Fellegi, spent ten years working within the Commission and similar governmental structures: “It is not a secret that election of both, Mr. Rompuy and Mrs. Ashton, was a result of political compromise. Apparently there has been a preference for lower profile candidates who would satisfy professional and political requirements and, at the same time, would not overshadow single EU leaders.” As the former Prime Minister of Belgium for one year, Herman Van Rompuy, now the President of the European Council, has the responsibility of chairing and encouraging the work of the Council while promoting, and at times creating, cohesion and consensus within the Council. Unlike Ashton who has been criticized for taking too laid back of an approach, Rompuy has been much more assertive in his role as president, though he too has been unable to escape criticism in the international community.
“The Lisbon Treaty is very vague on the actual functions associated with the position and, in fact, does not give it much explicit power. Thus, while there had been suggestions in the past to leave the post to a highly public figure (such as Tony Blair), it was always very clear that most of the heads of European states were not happy with this solution. At the end, they went to the other extreme, and chose a very little-known politician, who clearly does not have the ambition to be a leader,” Draxler explained.
The creation of the High Representative (HR) combined the positions of the former High Representative with that of the EU External Affairs Commissioner. Articles 23 and 41 of the Lisbon Treaty clarify the responsibilities of the HR which include, but are not limited to, chairing the monthly meeting of the Foreign Affairs Council and representing the EU’s common foreign and security policy internationally. However Ashton, whose previous foreign policy experience culminated in her position as the European Commissioner for Trade, seems to be much better suited for a position in a health or social sphere as opposed to foreign and security policy.
Draxler continued, “The creation of these posts is, then, the result of the fumbling between leaving the EU to be run as it is (essentially a well-run, but highly bureaucratic and to the general public incomprehensible affair), and giving the EU some kind of a hierarchical, well-recognizable structure. It was a move without any clear objectives. Both are weak posts filled with weak figures.”
The increasing pressure to balance interests and ideologies among the north, south, east, and west has made the appointment of candidates more of a horse trade than an election, and the Lisbon Treaty’s vague language that created these positions leaves no point of reference to settle disputes. However, as discussed earlier, the euro-zone leaders are responsible for ensuring budgetary discipline and coordination for their members. While meetings between these leaders took place in the preceding months, action was delayed as Germany took a firm stance against aid until finally conceding in April. While the President of the Council and the High Representative could have been much more active in their positions, the lack of progress is really a result of euro-zone leaders, who are ultimately responsible for approving any aid package, struggling to come to a consensus. However, as Fellegi put it, “It is easier to point two fingers instead of sixteen.”
While action was undeniably delayed and insufficient, the agreement made in early April to offer an EU-IMF aid package may give the Union just enough time to eliminate institutional ineffectiveness and procedural inconsistencies. To offer assistance to non-euro-area members but not to euro-using members, while they are able to access other international aid, is counter-intuitive. This, when compounded by the fact that the euro-members, if they had retained their own currency, could pull themselves out of debt by deflating their currency and increasing their competitiveness, makes adopting the euro seem more like a punishment than a privilege. Yet it is the members that have fully integrated into the euro-zone, that possess the fewest outlets for assistance.
Additionally, due to non-implementation, the Union’s limits seem more like what has been referred to as a “gentleman’s pact” rather than a binding agreement between sovereigns. Yet, while the EU, and the euro, may have lost their first battle, they have not lost the economic war that will likely unfold in the ensuing months. As stated in by the Brussels European and Global Economic Laboratory, “The EU does not need new sanctions to prevent financial crises, but [instead] must more effectively enforce fiscal surveillance provisions.”
Hopefully the reforms that will be implemented will be a product of lessons learned during these early stages of the post-Lisbon Treaty European Union. While structural and institutional reforms, monetary discipline, transparency, and preemptive action will no doubt be the most important topics of future EU debate, we must not forget the importance of ensuring and preserving such virtues as the honesty, integrity, and accountability of our elected officials. One must not overlook the importance of not only the appearance of, but the actual state of being unified, moving forward together pursuing common interests that will better the lives of the citizens of the European Union, and not just those of a select few.
Sara Irwin has studied political science and international business in both the United States (Lincoln University) and the Czech Republic (Anglo-American University).