A Long and Troubled Way to Redemption: The Stakes of Today's European Council
Written by Samantha Scarpa Ferraglio
Today Friday 17th July, the Heads of State and Government of the European Union will gather in Brussels in their first physical meeting since the CoVid-19 outbreak for a difficult, although cathartic, summit. The agenda is basically two-fold: the need for a common agreement as regards the recovery instruments to be deployed in order to counter the ‘brutal’ covid-19-led crisis and, in parallel, the details of the next EU Budget in the context of the Multi-Annual Financial Framework.
At first glance, the summit could be easily reduced to a series of questions around money: how much, where, to whom, when, why and at what conditions. At the same time, however, this European Council comes after weeks of heated political debate and has all the potential to mark a new page in the tumultuous, spectacular and yet dramatic history of the Economic and Monetary Union (EMU).
In order to understand the relevance of such a time of crisis, and the reasons why the weekend may signal a moment of Redemption, it is necessary to set the clock back of almost a decade, flying over years of crucial metamorphosis which, however, did not succeed in bringing peace and stability around the economic pillar of the Union.
Chronicles, part 1: the past decade
The 2008 crisis struck the European Union with a single, terrifying message: the ‘Maastricht formula’ of the EMU, first established in the Treaties during the 1990s, was completely inadequate to secure prosperity and fiscal discipline within the Eurozone: it soon became clear, for instance, that the legal obligation to join the euro had serious political obstacles (see the Swedish example, for instance). The magnitude and speed of the financial contagion and the sudden rise of spreads – together with the factual insolvency of Member States such as Greece – eventually provided fuel to those sparks of criticism towards the structure of the framework in place at that time. First, the existence of a legal division between economic and monetary competences, with the latter strictly in the hands of the European Central Bank (‘ECB’) and the former a solid national prerogative, led the Eurozone to cope with 19 different economic policies which could not, in case of asymmetric shocks, rely on tailored tools such as the devaluation of its own currency. Secondly, the political control over the enforcement of macroeconomic surveillance and coordination, based on a reciprocal accommodating stance of the men and women of the Council, was a sufficient Cassandra for the final disaster.
During and after the crisis, the array of legislation, international mechanisms and procedures resulted in an (almost) complete transformation of the framework (Ioannidis, 2016). In this sense, two elements are worth considering here, having regard to their relevance in these weeks’ talks.
The first novelty was the creation of a permanent financial assistance mechanism, strong of the quick realisation that Article 125 TFEU - prohibiting direct financial transfers from Member States or the Union - was to be circumvented. After the setting up of temporary facilities, the European Stability Mechanism (‘ESM’) was created, paving the way for a new dimension in the realm of economic and fiscal policy and, especially, moving the negotiating table outside the EU legal order, the ESM Treaty belonging to private international law. Nevertheless, the presence of two European institutions in the so-called ‘troika’ (the IMF, the ECB and the European Commission) contributed to the consolidation of a legal ‘limbo’, with serious consequences on the transparency of the decision-making process and the accountability of the actors’ at stake (and a series of headaches – inter alia, because of cases like ADEDY, Ledra Advertising, Mallis and Mallis - for jurists and judges in Luxembourg, too) (Repasi, 2016).
The second element was what could be defined as the introduction of a ‘conditionality paradigm’: the systematisation and justification of austerity conditions imposed on Member States in dire straits in exchange for a bailout. This ‘paradigm’ soon turned the need for a stronger convergence among fiscal policies into a political riddle based on a noisy blame-game. The weak Member States, which have disregarded those same parameters under EU law, had to pay the price for their behaviour if they wanted to secure other countries’ help. Little did it matter that those same rules, however to different extent, were equally disregarded by countries such as France or Germany. Little did it matter that austerity sparked social unrest both within and outside peripheral Member States, or that the unencouraging figures demonstrated that austerity measures did not achieve the expected results. The ‘conditionality paradigm’, implicitly sanctioned by the Court of Justice, had thus officially replaced the former status quo of indulgence and laxity typical of the first decade of the twenty-first century.
The result is a major overhaul of control and enforcement mechanisms: while the (in)famous Memoranda of Understanding (MoU) (art. 13(3) ESM Treaty) between the recipient Member States and the troika (on behalf of the ESM) laid down the detailed reforms on taxation, public administration, pension funds to be implemented when requesting financial assistance to the ESM (O’ Gorman, 2019), other “in-house” tools such as the European Semester ensure a constant review of budget drafts and prompt ‘country-specific recommendations’ (CSRs) to be spelled out publicly by the European Commission.
The picture sketched above gives a small but salient glimpse of the post-crisis mindset and framework. The Eurozone, with its European Central Bank and its Eurogroup, had to act quickly and do whatever it took to save the euro (Draghi, 2012). They indeed reached a whole new level of coordination and dismantled, once and for all, the assumption that economic policy is and should remain a purely national matter. At least de facto.
Notwithstanding the prominent role of the European Commission and, more broadly, the troika in monitoring and pressing Member States on putting forward significant economic reforms (Viterbo, 2016), the Treaties remained basically untouched, thus representing a failure in acknowledging de iure the necessity for an ‘Economic Union’ and the integration and coordination of macroeconomic policies at the EU level. While some of the reasons for this reluctance can be found in strict constitutional restraint in some Member States – such as Germany’s art. 79(3) –, this inconsistency had two negative consequences.
On the one hand, informality and lack of transparency are still a big issue in the negotiations of conditionality requirements, which usually take place at the troika level within the ESM (and therefore outside the EU legal order) as well as in the Eurogroup (whose legal status is still seriously under debate, cfr. the Chrisostomydes case (Markakis and Karatzia, 2020) currently before the Court of Justice). Accountability of the key players in front of the European and national parliaments, and therefore to European citizens, is seriously jeopardised, a worrisome example of failure to ensure the rule of law in the realm of EMU (as was pointed out also by Timothée Ceurremans in his first post).
On the other hand, as a consequence, if the law cannot be bent and if the biggest decisions are to be taken behind closed doors (as Varoufakis peculiarly showed when releasing recordings of the Eurogroup meetings), politics happens to play, almost paradoxically, an even bigger role than before the crisis. Some examples of this renewed importance of political proactivity at every corner of the Eurozone could be witnessed in the new role of the European Central Bank, from the ‘Trichet letters’ to Italy and Ireland (Viterbo, 2016) to its involvement in the troika negotiations (Dermine, 2019), as well as in the events that brought the Greek Syriza government to the famous negotiating table in July 2015 and in the unrest and protests of European citizens, from Syntagma Square to Frankfurt.
The conundrum between political interests and economic reality contributed to the failure of the austerity narrative, the demonisation of the ‘conditionality paradigm’ and the ESM, as well as the rise of dissatisfaction and distrust against the ‘Eurocrats’, feeding the rise of populism throughout the continent. The political exploitation of the ‘necessary sacrifices’ erased the possibility of a serious and pivotal debate on the future of the Economic and Monetary Union and deepened the crack in the continent between North (the ants) and South (the grasshoppers), making a decade-long noise while condemning the EMU to a legal and institutional stalemate.
Chronicles, part 2: the past months
The Covid-19 outbreak and the realism of the new ECB President Christine Lagarde on the seriousness of the new crisis shed the light on some of the unsolved issues which, even when the dust of the 2008 financial crisis had settled, remained largely unaddressed. Crucially, the new dynamics of the crisis cannot hold – at least not as much as in the past – a narrative of punishment against speculation and deliberate mismanagement: both the EU institutions (in the persons of Ursula Von der Leyen, Charles Michel and David Sassoli) and the Member States (strikingly, German Chancellor Merkel and French President Emmanuel Macron) are aware of the extraordinary nature of the crisis and the emergency. The battle between the old and the new, between the continuation of the post-crisis setup and the necessity to enhance solidarity and build on new tools to ensure support throughout the continent, is nevertheless far from being over.
There are, this time, certain clear elements of change: in primis, the use of the ESM. While the procedure under Article 13 of the ESM Treaty remains in place, foreseeing the same opaque negotiation for the request of financial assistance and the consequent imposition of macroeconomic conditionality, the main novelty deals with the possibility to request, under Article 14 of the ESM Treaty, a Pandemic Crisis Support, on the basis of the Enhanced Conditional Credit Line (ECCL), up to 2% of the ESM member GDP. The main feature of this precautionary credit line lies on the fact that the only conditionality attached to its use is that ‘euro area member states requesting support would commit to use this credit line to support domestic financing of direct and indirect healthcare, cure and prevention related costs due to the COVID-19 crisis’. The vagueness of the wording is a clear strategy to avoid strict conditions and provide quick money at very favourable conditions: such lax requirements had even required a green light by the Council Legal Service as regards the compatibility of the proposal with Article 136 TFEU and its ‘strict conditionality’ caveat. In order to access the profitable loans, therefore, no strict conditionality is now requested.
But the real deal lies elsewhere, and this time fully within the EU legal order. ‘NextGeneration EU’ is the name chosen for a temporary recovery package of instruments, based on the ‘emergency clause’ under Article 122 TFEU, which not only would allow the Commission to borrow from the financial markets but also to disburse funds through the combined use of loans and grants. Furthermore, the instrument strives to push for a greener and more digital Europe, while dedicating an important slice of the Recovery and Resilience Facility on the Just Transition Fund.
The side-lining of conditionality requirements and the investment of more than 300 billion € on grants to Member States seems to show that some lessons, at least in times of a pandemic, have been learned. But is it really the whole story?
Chronicles, part 3: the past weeks
Of course, it is not. Although it is undeniable that the spirit is there, at least at the EU level, the same cannot be said for the 27.
As regards the use of the ESM, none of the Eurozone countries has applied for the credit line yet. The reason is simple: no matter how many conditions you may take out from the package, the wrapping paper has remained the same of last decade. The request of assistance from the Mechanism is nowadays a political – and perhaps financial, as the reaction of the markets will hardly be foreseeable – suicide. The scars of what has been witnessed only a few years ago with Cyprus, Greece and Spain are still present in the political clubs and in the European society; a profitable credit line thus comes at a non-affordable political cost. Indeed, while in Italy the debate around the ESM is threatening the stability of the government, fomenting a clash with the opposition, Spanish Prime Minister Pedro Sanchez has already declared that Spain will not take loans from the ESM.
Last, but definitely not least, the details of NextGeneration EU are far from being agreed. A group of countries led by the Netherlands, the so-called frugals – among them Austria, Finland Sweden and Denmark – are strongly opposed to the use of grants and keep on pushing for the attachment of conditions and strong monitoring mechanisms to the disbursement of EU funds. The use of conditions – and a reduction in the volume of grants – is vehemently opposed, however, by the Southern countries, once more the most hit by the economic crisis. The centre-right Prime Minister Mitsotakis, in a long interview with the Financial Times, has strongly reaffirmed the unwillingness to accept strict conditions for the reception of the funds.
Even the strong stance of the Franco-German axis, which stresses the need for solidarity in the Union and defends the proposal in such a ‘historic’ moment, may not be enough. In the context of last week’s election of the Eurogroup chair Nadia Calvino, Spanish finance minister, lost spectacularly against the Irishman Pascal Donohoe. Calvino, who could count on the support of the ‘big four’ – Spain, France, Germany, Italy – was seen as a strategical move to push a progressive agenda founded on major fiscal integration, paving the way for a political steer towards a real Economic Union. Instead, the votes of Northern and Eastern countries were enough to secure the chair for the first conservative President since 2013. With his sympathy towards the so-called ‘Hanseatic League’ of fiscally conservative Member States and his support over the Commission’s proposal, he sees his role as a ‘bridge’ between the two sides of the table, focused on the present but very shy as regards a longer-term, reforming agenda.
This appointment is a sound defeat for the biggest Euro countries, right ahead of a key meeting in which a political compromise has to be found, though not at the price of ending with an empty shell: with Donohoe’s victory, some voices may sound louder than expected.
Out of the political gamble, the fundamental importance of an agreement on NextGeneration EU lies on its impact for the recovery of the continent. If the lessons are learned from the past decade, it will be possible to embrace European Solidarity while supporting reforms, establishing conditions while respecting the Rule of Law, recovering from the pandemic-led crisis while paving the way for an Economic Union. If it is understood that the interest of the Union is the interest of every Member State, a common political vision has the chances to grow into a new European Pillar. If not, Europeans are doomed to perpetual immobility, surrounded by Much Ado About Nothing and caged in a fiscal/monetary paradox: the social, political and economic price of the next economic shock, however, is simply impossible to predict.
Today’s European Council must not be seen as another chapter of a quarrel between North and South, Frugals and Profligates, nor as a mere swinging dance between paybacks or grants: this summit has the potential to become a key battlefield in a long and troubled war between a forward-looking Redemption for the past years’ mistakes and a stubborn Damnation, which would keep the EMU an unsolvable – and painful – riddle.
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- Mario Draghi, speech on 26th July 2012, UKTI's Global Investment Conference.