By Alexander Apostolides
Jean-Claude Juncker, the president of the European Commission, has released an agenda named ‘Preparing for Next Steps on Better Economic Governance in the Euro Area’.
It is drafted in close cooperation with the president of the European Council, Donald Tusk; President of the Eurogroup, Jeroen Dijsselbloem (whose inept handling of the Cyprus and Greek crisis has earned him an additional role as president of the board of governors of the European Stability Mechanism (ESM)); and Mario Draghi, the president of the European Central Bank (ECB).
The document itself is a useful summary of the changes to the euro area since the crisis began but it is very disappointing about what still needs to take place.
Weaknesses are hidden
Despite the fact that so many EU organisations (the acronyms involved make you dizzy) are involved, the document is a very flat affair that seeks to celebrate the botched solutions to the eurozone as successes and tries to hide the euro’s structural weaknesses.
It is true that a lot of new mechanisms are in place. For example, one institution that has been created since 2008 is the ESM. It raises debt and disperses money to countries that seek a bailout to stop a crisis in one eurozone country.
The banking union, which puts major banks under the supervision of the ECB, is also a step forward, pushing bank regulation and monitoring farther away from the possible conflict of interests that local regulators may face. Furthermore, a rash of new agreements is in place for better monitoring of the fiscal status of EU countries and to ensure that the agreements they have signed are being implemented.
More repairs needed
Yet the euro system is still in severe need of more fundamental repairs and here the document disappoints. Its thought-provoking questions for the future are mostly on how to increase control and punish rule-breakers. There is not enough on how to solve fundamental issues.
One such issue is how the eurozone will resolve banks that fail. The ECB does not and will not act as a lender to insolvent banks, therefore the real guarantee of eurozone deposits under €100,000 still effectively lies in the ability of a state to finance such an outlay.
It has been suggested to me by a member of the National Economic Council (NEC), in which I also participate, that a Eurozone Guarantee Fund for deposits is urgently needed and missing from the document suggestions.
Another member of the NEC is right to point out that the document seems to be heavy on punishment for negative macroeconomic imbalances, but allows countries with huge balance of payment surpluses, such as Germany, to continue distorting the eurozone by not implementing measures to reduce their surplus and thus aiding the adjustment of those with a deficit.
For me the most disappointing aspect is the insistence of the document that ‘private risk-sharing’, such as the haircutting of Greek Government Bonds (PSI) and the bail-in of Cypriot banks, has been successful. The document aims for discussions to integrate more of such measures for the future.
Risk-sharing lessons ignored
Although I am not against having private individuals pay for their poor investment decisions, the eurozone still insists on ignoring how the PSI and bail-in worked. The truth is that both were poorly implemented, and the magnitude of their effect on the private sector was destructive.
It extended the crisis in Cyprus and Greece through the unnecessary extension of financial uncertainty for at least two years.
What all these European leaders seem to forget is that the basic element that makes a currency is trust, and any action that undermines trust in the eurozone project can lead to its future breakup.
Let us hope that EU leaders learn from Cyprus and Greece and step away from further actions against the private sector.
Alexander Apostolides is a lecturer in Economic History at the European University Cyprus