At a private meeting in Rome of the Nicolas Berggruen Institute's Council on the Future of Europe, the dominant note was of nervousness at the state of Spain's financial system, combined with resolve to rally German opinion behind greater fiscal coordination, debt mutualization, and moves toward reviving the political structures of united Europe.
The group was initially addressed by Mario Monti, Italy's prime minister (and a Council member), followed by substantial interventions from Gerhard Schroeder, Doris Leuthard, Nouriel Roubini, Peter Sutherland, Niall Ferguson, Guy Verhofstadt, Jean Pisani-Ferry, Nicolas Berggruen, Alain Minc, Juan Luis Cebrian, and Robert Mundell. The meeting took place on May 28.
Most of the discussion focused on the current financial difficulties and possible solutions for them. There was general agreement that the European crisis had entered a new stage. The possibility of a Greek exit, while clearly real, was not seen as decisive, economically or politically. The main concern was with Spain and, to a much lesser degree, Italy. Spain (like Italy) had undertaken significant reforms and cut government spending. Yet markets continued to price in very significant misgivings about Spain's ability to service its debt without decisive foreign intervention -- in effect, foreign economic management, which Prime Minister Mariano Rajoy was sworn to oppose. Spain appeared to be running out of time. The Council's general view was that this would force the more prosperous members of the Eurozone, in particular Germany, into some sort of political reckoning.
"Waiting for Weidmann"
One participant described Spain as "just waiting for Weidmann," in reference to the head of the German central bank. This gave urgency to the discussions of Eurobonds, debt redemption funds, fiscal consolidation and structural EU reforms.
The Council's consensus opinion was that a debt redemption fund, along the lines of that proposed by Germany's Council of Economic Experts, was probably the best option for stabilizing sovereign debts across the Eurozone. It is an imperfect solution and would have to be designed with care to avoid creating classes of senior and junior debt that could lead to unintended negative results. Many members preferred other methods, such as a "red/blue" bonds proposal. But the GCEE's debt redemption fund was seen as most likely to get German assent, without which no Eurozone-wide debt stabilization would be possible.
A debt-redemption fund might seem to lead, rationally, to actual Eurobonds. But as one participant emphasized, with some irony, the time for rationalism in large-scale European policy making had probably passed; political and emotional factors had become too strong for any Olympian view to have a chance of prevailing. And as another participant pointed out, the euro had itself been born from an act of political calculation -- by Helmut Kohl, who believed that an elusive political unity would follow in the train of an achievable currency union.
So Council members agreed that some form of debt mutualization was necessary for Eurozone revival, and that whatever means to that end was most likely is the one that should be chosen.
Debt mutualization would almost certainly lead to a type of fiscal consolidation. States would have to provide confidence-inspiring explanations of where the revenue would come from to service their shares of the mutualized debts. They would, perhaps, have to dedicate specific sources of revenue. These would constitute small but significant steps toward Eurozone fiscal consolidation. Several participants noted that if the choice for a government was between giving some of its sovereignty "upward" into Europe, or accepting a far greater loss of sovereignty by submitting to the economic management of the European Central Bank, the International Monetary Fund, and the European Financial Stability Facility (the Troika), then the government was likely to pick the first option. In other words, in the current political and economic situation, to cede some sovereign fiscal authority upward into Europe was seen as the most likely way to preserve national autonomy.
Finally, there was general agreement that some sort of collective European capitalization of banks, and possibly collective deposit guarantees, was needed to keep Europe's weaker banking systems from collapsing. The analogy was to the American Troubled Asset Relief Program (TARP) of 2008, which forced systemically significant banks to join it. The Council's emphasis was on additional capital rather than loans, which would worsen national balance sheets; and on a Europe-wide response rather than one focused on some immediate source of alarm such as Spain. From the Council, Nouriel Roubini and Niall Ferguson undertook to write an essay bringing together these key policy recommendations.
Niall Ferguson also spoke of how he believed Europe was at a "1931 moment" -- equivalent to when, in that year, the Austrian bank Credit-Anstalt was allowed to fail, which quickly led to other failures and the beginning of a new phase in the Great Depression. He further believed that Germans were unaware of how dire the historical moment really is.
German opinion, public and elite, was a topic of much discussion by the Council and the source of some puzzlement. On one hand, members with close knowledge of the German elite believed that awareness of the crisis's severity was very strong, that Germany's political and business leaders were very alive to the immediate and long-term dangers and the need for German action, and that the broad German elite view was indeed one of closer fiscal and monetary union, including through the much-anathematized (in Germany) Eurobonds. On the other hand, German elites did not exert themselves very much to advocate these views or explain them to the public -- while much of the German media likewise was failing to educate the public.
The centrality of Germany to any progress in Europe was a notable feature of the Council's discussion. With the Netherlands in some turmoil, and with a new French president keeping his distance from the Franco-German condominium of "Merkozy," Germany appeared at once more dominant than ever and more isolated. If progress was to be made, policy choices must be expressed, as one participant said, "in German conceptual categories."
Council members agreed that reaching out to German public and elite opinion should be the group's top short-term priority in advocating policies to ease the current crisis.
The Structural Challenge
"Maybe the crisis will force a political union," said one participant. "But if not, I don't see how Europe can survive."
Mention was made of one study that showed growing European support for Europe-wide solutions. This did not necessarily contradict the surge of populist, anti-austerity, and seemingly anti-European political groups, in both poorer and prosperous countries. As several participants pointed out, the anti-European vote was in many places the only anti-establishment vote available, since by now all the status-quo parties were pro-Europe. "It is not true," one Council member said, "that the public is anti-federalist."
Members also emphasized that progress has been made in many European economies -- a Lisbon Council study was cited in support.
The Council on the Future of Europe was generally for federalist solutions, including an elected executive. Switzerland was cited both as an example of a state that was rigorous in analyzing and sharing out governmental competencies, and as a political federation that encouraged real competition among its member cantons rather than seeking to harmonize everything.
Much tighter fiscal coordination within the Eurozone, including on taxes and other revenue streams, was widely accepted by members as inevitable.
The way forward clearly involved engagement with the political realities of major European member states in a gradually federalizing movement that might prove to be as much de facto as de jure, and would eventually require a strong but rigorously limited central government. If increased sharing of fiscal sovereignty was inevitable, it necessarily implied greater political union. For that to advance, Europe needed more democracy, probably through parliamentary elections that would nominate a single leader for Europe, who would put together a cabinet. The European Council would become something more like a Senate: more deliberative and legislative than executive. NBI Council on the Future of Europe members generally (though not uniformly) believed that the existing European governance architecture needed to be significantly overhauled for European unity to be preserved, European values to be advanced, and European democracy to be reinvigorated.
Follow Scott Malcomson on Twitter: www.twitter.com/smalcomson