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Michael Hüther in "Süddeutschen Zeitung" Contribution 29. August 2015

Stop dreaming

Many still long for a politically united Europe. This is not feasible, writes Michael Hüther, head of the Cologne Institute for Economic Research, in an essay published in "Süddeutsche Zeitung". Rather, we should celebrate what has been achieved so far: a banking and a fiscal union.

The debate on institutional solutions for Greece has reached a level of maturity that requires a clarification of the respective lines of arguments, although one might have the impression that everything has already been said and done. Matching the beginning of autumn, this is evocative of a line from an Abba song from 1981: “When the summer’s over and the dark clouds hide the sun, neither you nor I’m to blame when all is said and done.”

Concerning the way ahead as well as the question of how Europe is supposed to look in the future, reviving the argument from five years ago leads nowhere. From today’s point of view, it is particularly easy to criticise the eurozone’s decisions from the years 2010 or 2012. Often the fact that Europe was lacking the institutional tools to combat the crisis is ignored, apart from the (erroneous) belief that financial markets would sanction unsustainable fiscal policy. The entire set of possible solutions – including inactivity – violated the European framework. It is similarly unhelpful to use erroneous historical comparisons in order to justify the demand for a Greek haircut in an attempt to make a statement, as Jeffrey Sachs recently did in an essay published in this newspaper.

It is important to realise that no “blueprint” solution exists for Greece. Every alternative needs comprehensive consideration: plausible expectations of Greece’s adjustment performance and its economic implications have to be weighed against each other. There is no certainty about the success of the crisis policy or the (spill-over) effects of a possible Grexit. Those, in line with Hans Werner Sinn, who claim that Greece’s labour market issue can only be resolved by an exit from the currency union are mistaken. There are always several options though obviously coming at different costs. This is what should be talked about.

The third economic adjustment programme for Greece is based on the assessment that finally it is more appropriate for European countries to take significant adjustment measures within the European framework. Apart from purely economic evaluations, which are justifiably criticised, a solution must be determined by political convictions that should not be ignored by economists.

The willingness to support each other beyond predetermined contracts and rules in the course of extreme situations is part of European history right from the start. In fact, even as early as the end of the 1950s, political representatives of the European Coal and Steel Community (ECSC) – the predecessor of the European Commission – showed this kind of solidarity when they suspended the prohibition of state aid paying adjustment assistance to Belgium. Back then, the ECSC’s rules were not suitable in the face of an extraordinary crisis, constituting a state of emergency for its member countries. Obviously, exceptional measures during extreme situations should not be abused to legitimise permanent exceptions to prudential rules. However, it must be clear: rules cannot simulate an emergency.

Every cooperation strategy in Europe assumes that, in spite of all disputes, European states are willing to work together with respect to the big picture. This did not hold for the Tsipras government in the first five months after their election, during which an exit from the eurozone remained a realistic scenario. Now, things are different. There is an actual chance that Greece will reroute, deleverage its state finance and strengthen the competitiveness of its economy, if Mr Tsipras returns as president with an altered mandate after September 20th. Although many of us remain puzzled by the events going on, everybody should have the opportunity to change their mind – a learning curve is everyone’s right.

Especially with respect to the protest movements in southern European crisis countries, Tsipras’ and Syriza’s majority’s surprising change in approach is meaningful. It is true that there are alternatives to the current crisis policy, but these alternatives promise no faster and no better successes, unless one expects a free lunch, which other parties are hardly willing to pay for.

Undoubtedly, Greece’s road is long and the sustainability of its debt – understood as the return to the capital market – lies far in the future if the Greek economy accelerates significantly. Calculations run by the Cologne Institute for Economic Research show that given stark political reform and strong economic acceleration, a ratio of debt to GDP of 100 per cent can only be reached by around 2040. Additionally, this requires a maturity extension of 20 years. Such an extension will be designed in a way that does not bear any costs for ESM or European taxpayers. The chances of gaining the IMF for the third package have risen significantly.

The crisis policy is based on the assessment that for Greece – as for Ireland, Portugal and Spain beforehand – it is more promising to implement reforms as a member of the eurozone, on a level playing field with its partners concerning monetary policy. It appears to be less plausible that an exit would strengthen the willingness to reform, especially given the dramatic welfare losses Greece would experience in that case. Instead, the government’s eagerness to implement reforms might diminish, as we have seen from the experience with currency devaluations in other countries. The devaluation of the Italian Lira in 1992, for example, could only temporarily cover the structural lack of competitiveness.

The simple conclusion of these considerations is that the third economic adjustment programme should be implemented resolutely and the payment’s maturities must be extended. Finally, Greece’s partners need to focus on the legitimacy of the government. Any attempt to create a different Europe, either with historical references or excessive criticism, can be countered with reference to the European partners’ tremendous solidarity payments and Greece’s changed political will.

The question beyond the current solution remains unsolved: what must change in Europe for Europe? Several propositions from different political camps exist with the aim of directing more responsibility to Brussels. On the one hand, there are those aiming for a transfer union including the idea of a European unemployment benefit. On the other hand, ordoliberal politicians suggest a common European secretary of finance or even a Europeanisation of financial policy. It is often overlooked that exactly these people, in charge of regulatory policy, are paving the way for or even legitimising a transfer union.

These kinds of suggestions are often regarded as if they were the only possible price to be paid in order to guarantee the currency union’s sustainable success. Dennis Snower made it clear, in this newspaper, that no European identity has been formed yet and it will take significant time to evolve. The absent European identity can also be interpreted as a lack of European publicity, a lack of a common European space. This, however, is a serious issue, as are the doubts that it may not be possible to communitise certain sovereign powers due to each country’s national constitutional legislation.

The exploitation of the Greek crisis as a tool for a political union must fail due to the reality of European nation states. The breakdown of the iron curtain 25 years ago did not lead to a transnationally structured Europe. In contrast, sovereign states have experienced a revival. Nations and nation states have – given their usual history driven by violence and repression but also by breakthroughs in freedom and self-determination – until now been part of an indispensable societal and political organisational model.

European integration, despite its undisputable advantages and progress, could not alter the national-centric nature of European states. The European Union is built on divided sovereignty. The crisis brings up the fundamental question of how Europe’s division of sovereignty is democratically legitimised and accepted. The lack of identity cannot be filled by political institutions that are again lacking a solid democratic foundation. In fact, this would lead to conflicts with national constitutions and would also not be economically feasible. Moreover, it remains to be seen how a European secretary of finance would legally be legitimised, given that the European financial supervision could not be backed by an amendment of the European treaties.

If Europe is to go beyond its current architecture, expected advantages have to be pinned down clearly. Here and now, this has two implications: Europe must learn to cope with the new rules and institutions – banking union and fiscal union – including making use of their full potential. Demanding the inauguration of a common secretary of finance plays down what has been accomplished so far and creates constitutional chaos.

Secondly, the possibility of a common European policy of defence and security needs to be evaluated. A European defence community – actually an old idea – and a European refugee policy would constitute a more comprehensive foreign policy and answer pressing political questions. Furthermore, these steps would accomplish new perspectives with regards to European values. This, however, requires intensive discussion.

Anyway, precipitance is inappropriate, as stated in the Abba song: “Standing calmly at the crossroads, no desire to run, there’s no hurry any more when all is said and done.”

The article on sueddeutsche.de

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