Five Presidents Report

Experts survey: Five Presidents’ Report

European Commission officials are surveying experts regarding the “Five Presidents’ report” (June 2015). ADEMU Scientific Coordinator Ramon Marimon (EUI) offers his replies to the survey questions.

Read this interview on the European Commission DG Research & Innovation website

1. Will the measures presented in the Five Presidents’ report be effective to guarantee the intended goal, i.e. economic growth and financial stability in Europe? Is the plan, in your view, ambitious and yet realistic enough?

The measures in the Five Presidents’ report (2015) further develop most of the measures already outlined in the Four Presidents’ report – also known as van Rompuy’s report (2012). In this respect it is a step ahead towards the policy and institutional consolidation of the Euro area. Unfortunately, this does not necessarily imply that they guarantee economic growth and financial stability in the Euro area. More precisely, some of the measures and institutions already in place – mainly, ECB and ESM, -­‐-­‐ or being put in place (Banking Union), have proven fairly effective in enhancing financial stability in Europe, except in situations outside the scope of these institutions (Greek crisis). Therefore, one should expect that developing these institutions (ESM, Banking and Financial Union) should strengthen the financial stability of Europe. However, in my opinion, there are still two exceptions: i) if serious fiscal or socio-­‐political disruptions emerge, and ii) if the increasing sovereign debt overhang of the existing institutions – mainly, ECB and ESM – is not adequately resolved.

Economic growth will crucially depend on three factors. First, the capacity of member states to fully implement the reforms that have been outlined since the Lisbon Treaty (2009) and re-­‐emphasised in this report. Second, the growth capacity of the global economy in which Europe is an important actor. Third, the fiscal and political capacity of the EMU to manage the ‘two exceptions’ mentioned above.

2. What political measures do you think must go hand in hand with these economic and monetary measures in order form them to be truly effective? What political obstacles do, in your view, exist?

A main weakness of the EU and EMU construct has been, and to a large extent still is, its inability to ‘draw the lines’ between what can be achieved within the EMU and what cannot be; to ‘draw the lines’ between what should be provided by the EMU and what should not be. I can take the metaphor of immature or insecure parents who cannot set and stick to clear rules and fail to draw the line between their children’s freedoms and duties. This has been a source of confusion, time-­‐inconsistencies and has led to exacerbation of tensions.

The Greek crises saga is a good example. The first rescue package was designed as if all Greek sovereign debt could be made sustainable, provided proper measures were to be implemented. While this reassured creditors, it created a lot of confusion between what could be achieved through reforms and austerity measures and what could not be achieved even with the best moral intentions and ‘good behaviour’. Politically it blurred the lines between what should have been sound technical advice to define Greek credible policies and what appeared as a ‘European diktat’. The second rescue package was accompanied by a ‘haircut,’ which is a form of ‘drawing the line,’ but confusion persisted; in particular, no action was taken – other than exclusion to ECB ‘sovereign debt buyouts’ – although it had become clear that the package conditionality conditions could not be met. It is not until the third package in June 2015 after the referendum (with most of the winning NO votes being, in fact, an unconditional YES to EMU) that the Grexit line is drawn. In sum, ‘lines have only been drawn’ in extremis by the EU Council; nevertheless, the ECB lines have proved to be effective in isolating the Greek problems within the Euro area.

It follows that there is a need for political measures and institutions that are more effective in dealing with ‘medium size problems and risks’ like the Greek case. A policy of avoiding risks at all costs can only contribute to building large – crisis prompt – risks. A similar problem exists in the European Banking Union construction: the idea that financial stability means no financial risks is an illusion. Financial stability should mean small and medium risks are accepted by investors and depositors (above some threshold) in return for negligible large Euro-­‐wide risks (currently, sovereign debt risks have been ‘taken up the ladder’ to the ECB and ESM balance sheets).

3. Most of the measures presented in the report are very technical to the general public, how will they actually impact people’s realities? How will they, for example, impact employment rates and income inequalities?

EMU rules affecting citizens must be simple and clear. At the same time, we have to accept the great variety of national situations in the EU. The EMU construct has given the impression that with the EMU (and the Maastricht criteria) ‘EMU convergence’ will be achieved. As the recent Euro crisis has reminded us, diversity remains the norm. ‘Simple and clear’ does not mean unconditional, it only means that there cannot be too many conditions and when ‘conditions are not met, consequences are felt’. But this is not the case. The general public has difficulties understanding why the ‘Fiscal Compact’ or the ‘Macroeconomic Imbalance Procedure’ are systematically violated (the only cost is an official remark by the EU Commission). The EMU ‘peer pressure’ is at most felt by politicians who participate in EU or Euro zone meetings, but there is no ‘general public learning’. The Greek tragedy has been precisely this: there has been almost no public learning through a long history of ‘exceptionality’, of external – mostly EU –support often depicted as an imposition. Dignity and empowerment played a role in the NO vote of the referendum, but the subsequent YES of the Greek Parliament to the 3rd rescue package is not an act of empowerment and, therefore, the generous Euro Area support can also be seen as an imposition. Again, even if the IMF has called for ‘drawing the line’ on how much debt can Greece sustain, the line has not been drawn and the resulting burden of the accumulated debt may leave very little margin for empowerment. What will be learnt from this extremely devastating crisis?

4. What is your evaluation of this present report and the measures it presents compared to the 2012 Four Presidents’ report?

As I said, the Five Presidents’ report (2015) develops most measures which already existed in the Four Presidents’ report (2012). In fact, the euro crisis has, on the one hand, accelerated the implementation of some of the measures in the Eurozone – for example, regarding the Banking Union – and, on the other hand, it has made more explicit the need to design institutions and policies for ‘a heterogeneous EMU’. Both elements are reflected in the Five Presidents’ report and make them more credible. The Greek crisis has also brought a double lesson: i) further institutional build up is urgently needed in the Euro zone, and ii) to be a member of the Euro zone cannot be taken for granted. In particular, the Five Presidents’ report sets a more explicit calendar in three stages and, for the first time, makes reference to some foreseeable components of the Euro zone Fiscal Union – in particular, the Advisory European Fiscal Board and the Euro zone Treasury.

The more explicit reference to the Fiscal Union is a strength of the Five Presidents’ report, but it may also be one of its weaknesses. In particular, the Four Presidents’ report had made clear reference to “the need to create a shockabsorption function at the central level”. Such risk-sharing mechanism cannot be identified with the ‘crisis prevention’ European Stability Mechanism. In my opinion, it can hardly be ‘built on the European Fund for Strategic Investments’ as proposed in the Five Presidents’ report. In sum, the Fiscal Union and the corresponding risksharing mechanisms, fiscal instruments, role of the Euro Treasury and so on remain largely undefined.

5. How do you assess the role and responsibilities of the European Central Bank in light of this report and in light of some critics’ demand for a clearer role ascribed to the ECB?

The main problem of the ECB is the weakness of the rest of the Euro zone institutions. The Eurogroup remains ‘an informal body’. What is the status the ‘Five presidents’ report? The ECB is called to take political decisions without clear mandate or backup from other Euro zone institutions (for instance who should decide how much support should be given to Greek banks?). Therefore, one cannot elucidate the ECB responsibilities without defining and developing the responsibilities of other institutions and, as a consequence, the exact format of the Euro zone Fiscal Union is a key element. Beyond this complex inter-institutional issue there is another issue more specific to the ECB, but common to all Central Banks, which is: what is a mandate for financial stability?