It looks very much as if Iceland’s obligation to recompense the UK and the Netherlands for reimbursing depositors following the collapse of Landsbanki in 2008 is headed for years of litigation in the EFTA Court – not good news for those hoping for Iceland’s early EU membership. The question is whether the two creditors will allow the issue to be parked while membership negotiations proceed to a happy ending.
The Reykjavik government had negotiated much less aggressive repayment terms following the 93 per cent rejection in last year’s referendum and these had been approved in the Althing by a two thirds majority. The €3.8bn repayment timetable was extended from 8 to 22 years, out to 2046, and the interest rate cut from 5.5 per cent to 3.5 for the UK and 3 per cent for the Netherlands. Yet voters still resented having to compensate for the deeds (or misdeeds) of private banks and have thrown out the package.
Enlargement talks are due to begin again in late June, but even if difficult negotiating issues like mackerel quotas and whaling can be resolved and the negotiations brought to a successful end, Icelanders will still be asked to approve EU entry in a referendum. An Icelandic “yes” is no foregone conclusion, despite the economic arguments. Indeed, a sceptic might ask whether Ireland inside the eurozone is any better off than Iceland outside it, except that Iceland may find it more difficult to borrow on international markets until the new repayment schedule is agreed.
The people of Iceland are in good company in resenting the medicine which their leaders are forcing upon them. After its defeat in parliament, Portugal’s caretaker government is plunged into new talks with the European Commission, the ECB and the IMF as it applies for bail-out treatment under the European Financial Stability Facility.
This will mean tough new measures, such as more flexible employment laws, a further retreat from social support and a major privatisation programme, yet with no guarantee that an incoming government following the June 5 elections would support the package.
The Portuguese bail-out faces a further obstacle: the leader of the eurosceptic True Finns party has said that his party will vote against Finnish participation in a Portuguese bail-out following the Finnish general election on April 17, much to the consternation of Commissioner Olli Rehn, who fears that his home country could jeopardise the eurozone economic recovery programme.
The British government will also come under domestic pressure to minimise its contribution to the Portuguese bail-out package, and is playing down its potential liabilities, although it has a fundamental interest in a stable euro. I see that – together with Sweden – Britain has politely declined the invitation to participate in the co-ordinating principles of the Euro Pact, thus opting out of any opportunity to influence policy.
It does strike me that this opt-out further weakens Britain’s influence over evolving financial services legislation, where the atmosphere is already poisoned by the sentiment that financial markets are to blame for all our troubles and by the feeling that even the pressures on the eurozone are caused by conspiring money markets rather than by economic reality.
However, despite the troubles of the “peripheral” trio, the economic climate does seem to be improving. The German economy continues to grow rapidly, boosting imports as well as exports, and Spain seems likely to weather Portugal’s bail-out crisis without any domino effect – Madrid was able to sell three-year government bonds at less than 4 per cent interest on Thursday and Spanish borrowing is at manageable levels. It is the unemployment level which is the biggest worry for Spain.
The euro continues to strengthen against the dollar, suggesting that market confidence is growing, albeit helped by the quarter point rise in interest rates. Maybe the markets are becoming convinced that the eurozone will indeed take all necessary measures to secure its future. The political will is unswerving. Sadly this is no guarantee of the economic recovery which is vital for the future stability of its weaker member states.
It was evident from the beginning of the eurozone crisis that the only way to discipline recalcitrant member states in the face of enormous budget deficits was to involve the International Monetary Fund, an independent, external organization which was definitely not part of the family, a body which could lay down tough conditions for winning its support, and could pull the rug out if necessary.
So it was little surprise to see the forthright tone of the IMF team when they left Luxembourg on June 7, having completed their analysis of the situation. Their report makes quite a contrast to the gentle reassurances of the eurozone ministers at their meeting on the same day.
The IMF report doesn’t mince its words. It may be familiar language for failing economies in Latin America, but for the eurozone! Take a few phrases: “Policies need to move urgently from crisis management to fundamental reforms”, “strengthen economic governance of EMU” “longstanding problem of anaemic growth in the euro area must now be addressed”, “the euro area fiscal framework needs to be substantially strengthened”, “more ambitious changes are needed”. And so on, with detail. The fundamental theme is that European countries must transform their economies, slash government spending and drive for economic growth.
The eurozone ministers did formally launch the €440bn European Financial Stability Facility at their June 7 meeting, but that’s definitely “crisis management”. The EFSF has been established as a limited company under Luxembourg law and will work in conjunction with the IMF to guarantee support for eurozone members if their credit position should weaken.
The question still remains as to what the eurozone can do to strengthen its effectiveness and meet at least some of those IMF demands. An intriguing game of smoke and mirrors has been played since the Special Purpose Vehicle and the associated IMF support were announced on May 9, a game designed to convince the markets that Europe is getting a grip of its profound economic crisis. The reality is that everyone has a different idea of what needs to be done and what can be done in the longer term.
Economic government for the eurozone. That’s the catch phrase. President Van Rompuy has used it, French Economy Minister Christine Lagarde has used it and Chancellor Angela Merkel has almost used it – “economic governance” is the closest she has come (also a phrase used by the IMF). President Sarkozy has spoken of a Eurozone Council. But a closer look at how it would work reveals something like a beefed-up version of what already exists.
The argument that a European single currency can only survive if there exists a common economic policy, common fiscal policy and common budget policy may prove to be correct in the long run, but it is clear that this is not what Europe’s present leaders mean when they talk of economic government.
France wants a formal decision-making structure where heads of state and government agree on fiscal discipline and maybe impose sanctions on recalcitrant member countries. Germany in effect argues for a stronger commitment to the stability and growth pact (and has announced budget cuts of €30bn over the next four years to do its part). Luxembourg Prime Minister Jean-Claude Juncker, president of the eurozone group of countries, believes that eurozone governments should vet each other’s budget plans. But nobody contemplates the transfer of fundamental tools of economic management to a supranational European policy-maker. Maybe the IMF is a different matter?
So what of the euro crisis? At least the decline of the euro is seen as a positive, making European goods more competitive and – perhaps – boosting domestic demand within the crucial German economy. What is also evident is an increased determination to cut government spending sooner rather than later, reflected in the G-20 meeting. And of course these are not challenges faced only by the eurozone; the UK’s new coalition government has a massive challenge ahead in reducing spending and boosting growth. A poisoned chalice indeed!
The European Commission communicated with the people today. In fact, it launched an online poll, asking us to vote on the design of a commemorate 2 EURO coin. The coin will be released on 1 January 2009 to mark the 10 year anniversary of the Euro.
I’ve never seen an online poll of this nature being launched by the Commission before and I can’t help but think that this could be a useful way to sell the EU concept to the average man-on-the-street. And at last a bit of direct democracy in action. Actually, couldn’t the same principle be used to decide the fine details of legislation? But then again, asking the public to choose the exact auctioning percentage allowance given to industry under an emissions trading scheme probably wouldn’t catch the public’s imagination.
Also is this a dangerous game by the Commission, given the new Lisbon Treaty provisions regarding citizen petitions? If a million people suggest one coin design, win or lose, surely the Commission will legally have to consider it.
Anyway, back to the poll and I’d like to make four points:
Firstly I’ve had to enter my details to vote even though a key democratic principle of voting is that it is anonymous. However, there is a trade-off. By registering my details, I get entered into a prize draw for a high-value set of euro collector coins. I wonder how high “high-value” is. The world’s most expensive coin – the ‘double gold eagle’ coin – was sold in the US in 2002 for almost £5 million. Who knows, in a 500 years, maybe this commemorative EURO coin will be worth the same.
Secondly, coin number 5 is clearly the best.
Thirdly, I’m surprised that UK citizens are allowed to vote. A pre-requisite for choosing the coin must be that you can actually use it in your country. Plus shouldn’t we expect a potential sabotage as UKIP members vote en masse for the coin number 4, clearly the least inspiring.
Fourthly, I’m a little bit disappointed that I can’t submit my own design. One EU step at a time I guess…
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