Protesilaos Stavrou

Inflation in Germany is not an automatic remedy for the periphery's economic woes

2013-05-17T21:39:00.003+02:00

While having already addressed the argument which asserts a mechanical alleviation of the economic duress in the eurozone's periphery by virtue of spontaneous or instigated rising inflation in the core, Germany in particular, I continue to feel an inclination to restate my position on the matter, after having been stimulated or inspired to proceed thus by a discussion I held with a friend earlier this day, which reminded me of the assemblage of questionable assumptions still prevalent in certain political or intellectual circles, concerning ideas on the most optimal response to the eurocrisis.

What I shall venture to deconstruct and to unmask its underlying tissue of fallacies, as I see them, is none other than the essentially europhobic and dubiously self-contained proposition that against the backdrop of the single currency there can be no genuine and sustainable recovery in the periphery unless the core tolerates relatively higher inflation rates for an extended period of time. Inflation is, in this context, regarded as the single most important factor for development and, moreover, as the midpoint of any and all measures that can and may be adopted with the two-fold objective of planting the final nails to the coffin of the crisis and setting the foundations for a future that will realize a more robust, inclusive and just economic model.

My critique of this understanding of the political economy of the euro area, which is often peddled as the most benign and expedient alternative to the inane orthodoxy of austerity, while occasionally being embellished with nebulous patriotic palaver, shall be separated in three sections concerning economic thought, with the tacit recognition that the broader political-institutional picture must also be accounted for, if one is to reach a holistic understanding of the interplay of forces in operation. The economic issues to be examined herein are as follows (each section has its own permanent link which can be copied, bookmarked or shared separately):

1. Zero sum games as antithetical to the endogeneity of increasing economies of scale

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The conventional wisdom in macro-economics, in any and all of the schools of mainstream economic thought found therein, is concentrically fastened upon the chimerical general equilibrium of Léon Walras, adherence to which necessarily forces a remorseless analyst to draw the erroneous inference that economics is essentially all about a static approach to the optimal allocation of scarce resources. Consequently and against this backdrop, one beholds the emergence of a restrictive interpretation of the economic world as an inescapable antagonism between options on the management of a fixed world, where inevitably the competition for resources resembles what game theorists refer to as "a zero sum game", i.e. a process in which one must necessarily win at the expense of the other and, conversely, where it is impossible for both to realize a simultaneous or mutual increase in utility or returns.

Thus, we are faced with the dubious assertion that the euro area's periphery may only realize gains as against the core; a postulate that casts to the wind the insight that equilibrium and its fixed conceptions are irrelevant in an economy with perpetually new capital and labor divisions, combinations and interrelations; and that the trade which is necessary for these particularizations and specializations to be meaningful and possible, is beneficial for both sides, at least in an ex ante sense, by increasing the availability of resources that would have otherwise not been brought into being.

The error in the standard understanding exists in the fact that it blithely ignores the direct impact of labor and capital division in increasing returns that would have not been realized in the absence of these new and evolving inter-subjective structures while also neglecting the endogeneity and related variability of these impulses; for as Allyn A. Young correctly suggested in his Increasing Returns and Economic Progress and whose validity was further acknowledged by Nicholas Kaldor in his The Irrelevance of Equilibrium Economics it is pointless to labor under the illusion that a robust objectivity, the general equilibrium, is what determines economic progress, in the presence of the processes that engender capital combinations and their internal capital/labor ratios. As Young puts it:

It is generally agreed that Adam Smith, when he suggested that the division of labour leads to inventions because workmen engaged in specialised routine operations come to see better ways of accomplishing the same results, missed the main point. The important thing, of course, is that with the division of labour a group of complex processes is transformed into a succession of simpler processes, some of which, at least, lend themselves to the use of machinery. In the use of machinery and the adoption of indirect processes there is a further division of labour, the economies of which are again limited by the extent of the market. It would be wasteful to make a hammer to drive a single nail; it would be better to use whatever awkward implement lies conveniently at hand. It would be wasteful to furnish a factory with an elaborate equipment of specially constructed jigs, gauges, lathes, drills, presses, and conveyors to build a hundred automobiles; it would be better to rely mostly upon tools and machines of standard types, so as to make a relatively larger use of directly applied and a relatively smaller use of indirectly applied labour. Mr Ford's methods would be absurdly uneconomical if his output were very small, and would be unprofitable even if his output were what many other manufacturers of automobiles would call large.

[...] Modified, then, in the light of this broader conception of the market, Adam Smith's dictum amounts to the theorem that the division of labour depends in large part upon the division of labour. This is more than mere tautology. It means, if I read its significance rightly, that the counterforces which are continually defeating the forces which make for economic equilibrium are more pervasive and more deeply rooted in the constitution of the modern economic system than we commonly realise. Not only new or adventitious elements, coming in from the outside, but elements which are permanent characteristics of the ways in which goods are produced make continuously for change. Every important advance in the organisation of production, regardless of whether it is based upon anything which, in a narrow or technical sense, would be called a new "invention," or involves a fresh application of the fruits of scientific progress to industry, alters the conditions of industrial activity and initiates responses elsewhere in the industrial structure which in turn have a further unsettling effect. Thus change becomes progressive and propagates itself in a cumulative way.

The gist of the argument thus far is that what really matters is the size of the industry or of the market and the forces that are at play in allowing for labor and capital division. In this respect, the very idea of inflation qua factor for recovery is specious, since there is nothing intrinsic to it that could, in and of its own, determine the existence, manner, function and end of capital-labor constructs and contribute to the real expansion of industries and/or markets in which these will be made operational and, above all, there is nothing inherent in either inflation as such or the legal-cultural, political-economic and institutional morphology of the Economic and Monetary Union that provides evidence to the existence of a causal relation between the rise of aggregate nominal prices in one part of the monetary union with recovery/growth in another. To understand why that is so, we may proceed to the next section on the subjectivity of the inflationary process.

2. The subjectivity of the inflationary process as a primary factor for credit allocation

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Inflation, just like everything that exists in the human world, the inter-subjective world or, to use a term of Edmurd Husserl, the lifeworld, is the product of a complex, interweaving web of factors traced to the actions, decisions, expectations and perceptions of individuals, in an incessant process of created-and-creating differentiation. While this philosophical tenet of thought may beg for further elaboration, I shall abstain from treading in such fields and, instead, venture to pit further stress upon two notions familiar to economists, expectations and incentives, as couched in the terms of the inflationary process. Contrary to conventional economic wisdom, or rather to the belief that has been bestowed upon us as a re-branded version of the quantity theory of money originally developed by Nicolaus Copernicus and the medieval scholastics, the phenomenon of inflation does not attain the form of a universal, proportionate, equilibrated and uniform expansion in some unrealistic abstraction called "the price level", but rather appears as a series of ripple effects, of gradual, cascading, cumulative increases in the amount or velocity of transactions in some industries or even classes of goods as against others in the passage of time, something than even John Maynard Keynes, whom many claim to be followers of, had recognized in his The "Ex-Ante" Theory of the Rate of Interest.

New media of exchange, which in a fiat monetary system usually make their first appearance in the expansion of the money supply by the central bank that injects liquidity through the credit channels all the way to the real economy, do not have a single destination and, even if they did, their reaching that end does not take place either instantaneously or simultaneously. Put differently, the credit canals from the central bank to the real economy, which pass through financial intermediaries—banks—do not necessarily furnish credit to the real economy in a one-off expansion; for in between the central and the presumed destination of the new money—the real economy—a number of incentives and expectations of widely dispersed economic actors exists, exerting a powerful influence on the prior direction of this liquidity into the markets for sovereign bonds, commodities, capital goods and money before any issuance of loans to the real economy is considered.

To avoid a lengthy and tedious exposition of the theoretical underpinnings of this proposition and to rather appreciate it in more concrete terms, one may only be reminded of the failure of the European Central Bank's Long Term Refinancing Operations to not only restore the then-and-still crippled credit channels, but most importantly to smoothly transmit the approximately €1 trillion to the real economy. In addition, the very fact that the ECB proceeded with the introduction of the Outright Monetary Transactions programme while it currently is contemplating ways of raising additional credit to SMEs, which comprise the vast corpus of the European economy, are evidence of the fact that certain powerful and pervasive expectations and incentives are in force which decisively contain the injection of new money to the financial system. For as long as these psychological, subjective factors remain in operation, any inflationary impetus can only feed into a bottomless pit or else a liquidity trap, with all its concomitant side-effects and the sub-optimal outcomes it may lead to.

Generally speaking, it is the lifeworld's factors that determine credit allocation and in the specific framework of the Euro Area's political economy one could identify and enumerate the following three parameters, which in no sense constitute an exhaustive list:

capital adequacy: new regulation that requires banks to increase their capital adequacy ratios provides the incentive—or rather constitutes an edict—for investment in sovereign bonds of a fair quality, which necessarily entails a misdirection of credit away from the real economy and into state coffers,
zombification: the crippling of the credit channels is both caused by and causes mistrust between banks, impelling financial institutions to opt for remaining dependent on ECB liquidity, so as to be on the safer side, effectively confining credit to the rigid boundaries of the financial system; which by the way is a clear indication of a dangerous trend towards the zombification of the European banking system,
regime uncertainty: the manner in which economic integration in the midst of the eurocrisis is realized leaves much to be desired in the areas of predictability and foreseeability of institutions, thus fostering a regime uncertainty that forces those who gain first access to ECB liquidity, in the time context, to place money in unproductive areas that are presumed to be more robust to the vicissitudes of the market with its increased risks manifested across the real economy and the financial system.

The incentives and expectations may vary substantially, but what remains is the realization that their impact on the actual allocation of credit in the inflationary process through the passage of time cannot be dismissed, nor can their function be sacrificed to the altars of a spurious method of inquiry on the subject matter. Lastly, as Ludwig Lachmann put it in the introduction to his Capital and its Structure:

The fact remains that the two greatest achievements of our science within the last hundred years, subjective value and the introduction of expectations, became possible only when it was realized that the causes of certain phenomena do not lie in the ‘facts of the situation’ but in the appraisal of such a situation by active minds.

While this may appear as a superfluity arising from the recognition or presupposition of is self-evident character, at least to anyone conscious of the profound distinction between the social and the natural sciences, it should be stressed that inflation is not and can never be tantamount to a law determining the behavior and movement of liquids in communicating vessels that a researcher diligently searching for a new discovery would identify by holding controlled experiments. Adherence to the monolithic prejudice in the talismanic impact of inflation in the eurozone's core being the prolegomenon and the prerequisite to the periphery's recovery, appears to be an oversimplification of reality, to the point where it distorts the very picture it seeks to paint. This should not strike us as a surprise, for there exists an even more profound and egregious misunderstanding underlying this conception of that monetary aggregate, and it is none other than the conviction in the quasi-natural, ontological existence of macroeconomic magnitudes, as independent from the forces and the historical-institutional context that engender and sustain them, to the variable extent, manner and duration that they do. This theme shall be outlined in the following section.

3. Macroeconomic magnitudes as phantasmagorized ontological entities

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Another fundamental misunderstanding of conventional macroeconomics, apart from those mentioned above, is its pretense to intellectuality and the scientism found in the ascription of mechanical interrelations and causalities to macroeconomic magnitudes, which is structured on the questionable predisposition of them being ontological entities in their own capacity, rather than mere accounting figures and, therefore, products of the imaginary. Indeed the plonky macroeconomist of our era, who may also enjoy widespread recognition and a good press, customarily treats such macro indicators as "inflation", "investment", "spending" as decontextualized parameters, hypostesized forces singularly and jointly determining the "optimal" distribution of scarce resources in the context of the profound though unrecognizable exteriority of those elegant curves of supply and demand.

The argument now under scrutiny, assumes the ontological presence of inflation and fallaciously proceeds to concatenate a series of other such aggregates qua beings (in the ontological sense), ultimately reaching the conclusion that inflation in the euro area's core is on its own accord the ultimate determinant to the development of the periphery, and that, conversely, the absence of such inflationary pressures in the core will doom the periphery, in splendid determinist fashion, to years of grinding and irreversible austerity.

The kind of critique a subjectivist and relativist such as the present author may level against this sort of oneiric understanding of the complexity of the world, is to unequivocally reject any quasi-natural, spectralized ontological property bestowed upon these macroeconomic aggregates on the epistemological grounds that such figments, even once provided with the patina of scientific formalism and the veneer of geometry, constrain the potential capacity of our organon, courtesy of their illusory underlying assumptions, rather than contribute to—or facilitate—its unencumbered operation beyond the hermeneutics of stylized facts. In simpler terms, this means to deny the very idea of them having any mechanical interrelations, without however refusing their existence as accounting figures and average measures of an interplay of factors that occur at a much more organic and evolving milieu.

Understandably, a knowledge of the real world and of economics as process, not mechanics or counterfeit physics, can only result in the issuance of the modest pronouncement that inflation as such is irrelevant or of minor significance to whatever dynamics between the eurozone's core and periphery. An increase in the "price level" in Germany does not necessarily result in an equivalent rise in aggregate demand for, say, Portuguese exports nor does it necessarily, by the operation of the mysterious determinism underpinning the macroeconomist's scurrilous misconceptions, impel consumers and producers in Germany to automatically allocate their excess media of transaction to the importing of those specific goods and services that the periphery can provide them with.

Inflation in the core may eventually contribute to rising demand for imports from the periphery, but this can only be known a posteriori, and only as a secondary element, provided that the primary factors discussed in the preceding two sections are favorable to such a shift. There is nothing germane to inflation that "will" or "shall" decisively work its way towards a benign symmetrization of the macroeconomic figures across the eurozone, in what can be visualized as a spectacular ironing out of all imbalances and erratic fluctuations between core and peripheral countries. To assume thus, is to assign to inflation a status of omnipotence layered upon the presumption of ontological presence and, even worse, to disregard the range of possibilities that arise in the lifeworld, courtesy of the decisions, incentives, expectations of individuals and of the specific capital and labor divisions as well as social institutions that all together play their part in the economic process.

Concluding remarks

In conclusion and as a corrective to the erroneous and arid controversies of macroeconomic policy in Europe, the scrupulous critic should turn attention away from incorporealities of national accounting towards the insight that capacity building is a product of the inter-subjective world, manifested in new capital and labor structures, combinations and interrelations, rather than it emerging in nihilo and cum nihilo by a change in the aggregate figures of another state of affairs not sharing insoluble ties with the one under consideration.

Development springs from new combinations of resources, expanded division of labor and capital, in what Eugen von Böhm-Bawerk referred to as "roundabout methods of production", which give rise to new opportunities for further investment by freeing resources for use in more economically productive areas, in a cumulative and self-invigorating manner. In times of economic tranquility this is realized, efficiently or perhaps inefficiently, through the operation of the imaginary institution of the market economy; but in the midst of a severe and persistent depression, where plentiful idle resources exist across all sectors of the economy and where the social imaginaries related to the market are brought into question, the initiation of concerted action ought to be deemed necessary, legitimate and desirable, to solve coordination problems and to engender agglomerative or other forces that can set in motion processes for the formation of a new constellation of capital structures that will absorb unemployed labor and other resources on a solid basis of renewed confidence in these imaginary constructs.

What remains to be noted is that the default response to inflationist calls must be the illustration of the inherent complexity of the lifeworld, as contrasted to the simplistic, mechanistic and thus unrealistic nostrums of those who delude themselves in thinking that a single parameter, an exalted incorporeality, tacitly and perhaps unwittingly elevated to the level of an ontological entity, constitutes the epicenter of any solution to the systemic crisis of the Euro, if not its only panacea. Simplification is a necessary part of learning, but in the absence of a firm understanding of the complexity from which it emanates, can only impregnate ideas whose application would definitely result in adverse effects, sometimes misanthropic and calamitous policies, courtesy of their incompatibility with the given-and-varying state of affairs in the spatio-temporal and political-institutional dimensions.

At any rate, the obstinate concentration on inflation, the "fetishization" (if I may use a very Marxian term) of this macroeconomic magnitude, the exaggeration of its significance as permeating and penetrating all that there is in the macro sphere of the Euro Area's political economy, may only be understood as an opportunity forgone, as a lamentable waste of talent, as a loss of intellectual strength and valuable time in the elaboration of fallacious theorems that can only lead to a robust terminus, a dead end; and if the periphery is to recover from austerity, at least those people who really care about their livelihood and their prospects for liberty and eudaimonia, should consider allocating at least part of their vital energy to the ideas that exist outside the little box they concocted or accepted as a heteronomous, self-alienating given.

Picture credit: Wikipedia | Prometheus chained by Vulcan. Painting by Dirck van Baburen.

Critique on the ex cathedra pronouncement of Barroso that there is no eurocrisis

2013-05-11T12:57:00.002+02:00

The present author finds it pertinent to express the feeling of amazement that is always born in him following an exposition to the Olympian pronouncements of the European Commission's President, Mr. José Manuel Barroso; amazement not in the sense of a positive impression, but rather as a profound bewilderment blended with an uneasiness that stems from the fact that evident truths of the empirical order of things have become the subjects of a meticulous exercise in obfuscation, whose function is to mislead and misinform and whose end is to place the ideocentric foundations for the top-down policies to come. After having abused and distorted the term "federation" and its derivatives, inwardly transforming it from a firm political position against nation states to an intergovernmental, confederalist conception where the nation state lies "at the heart" of the whole venture, Mr. Barroso has now taken it upon himself to deny the systemic aspects of the localized economic crises witnessed across the Euro Area, in propounding the well-known conservative postulate of certain powers of the establishment, that "there is no such thing as a eurocrisis". The present critique shall be forwarded against the remarks included in Mr. Barroso's speech at the State of the Union conference in Florence on May 9, 2013. On the issue of the eurocrisis qua trapping of some leftist's or "populist's" imaginary, Mr. Barroso spoke thus:

The point is to demonstrate that our policies go in the right direction for the long term, that the European alternative is the best one, the one to be trusted most. Of course, this is not easy because the populist discourse manipulates anxieties and pretends to bring simple solutions to complex problems. But we should not shy away from exposing the complexity of the issues we are dealing with.
Let me take just one example. According to some of these discourses, Europe and the Euro are the cause of the problem. Let's be intellectually honest and let's spare no effort to explain again and again that while known as the 'euro crisis', this is not a crisis of the euro itself. The euro remains a credible, stable and strong currency.
This is an economic and financial crisis in individual countries that impacts on the rest of the euro area. And the financial crisis was also not euro-specific, for it affected countries in the Eurozone and outside, inside the European Union and outside, as the case of Iceland clearly shows.

Before even beginning to be enumerative on some of the most evident manifestations of the systemic crisis in the Euro Area, we ought to provide a textual exegesis to the conflation of populism with the debate on the eurocrisis. At first, there is no intrinsic connection between the two, for populism has existed even against the euro and against specific member states or peoples, while the proponents of the eurocrisis as being a systemic crisis of the euro bear no such feelings towards the euro as such and certain groups of people. Besides, let us not remain oblivious to the fact that the political actions at the early stages of the crisis were dominated and heavily influenced by the distasteful stereotypes associated with the PIIGS, the obstinate opposition to a coherent and holistic strategy against the crisis, the denial of the inadequacies and shortcomings of the Economic and Monetary Union; all of which formed part of the panoply of falsehoods that "populists" and their technocratic counterparts put forth at every given opportunity.

It is true that populism in all member states is deleterious for the EU as a whole and even for the peoples to which it is addressed, but a judicious analysis and objective understanding of this phenomenon cannot afford to place under a common denominator the sheer fantasies of certain political forces, with the well-documented interpretation of the economic order that tens of prolific intellectuals, market experts, journalists and academics of the highest caliber have presented. To paint with the same brush those who consistently and wittingly cultivate xenophobic ghosts and nationalistic spectralizations, with the personalities whose only sin is to think differently from the Commission and its flunkies, is dishonesty, if not a crass misunderstanding of the situation. Thus, while one may disagree profoundly with all those esteemed professionals who have at times referred to the eurocrisis as being a systemic crisis, it simply is inappropriate to proceed with tacitly branding them as populists and deriding them on those grounds. What one can only do when faced with a logical and/or factual argument is to expose whatever weaknesses, inconsistencies and fallacies therein, which is something that Mr. Barroso avoids doing, in a statement that can never classify as "academic", "objective" or "well-informed", but which dangerously verges on being "populist" in its own capacity.

It is "populists" or rather those taking decisions at the highest strata of power, who were willing to ignore the evident fact that the introduction of an ill-designed euro ushered in an era of asymmetric inflationism that fostered the widening macroeconomic imbalances between core and peripheral countries and strengthened the dependency and symbiosis between banks and sovereigns. The artificially low interest rates in the periphery, courtesy of the euro's inception in conjunction with the enforcement of the ill-thought Basel Accords on capital adequacy (zero risk for assets such as sovereign bonds), provided the foundations for the distortion of the capital structures by engendering and facilitating the misallocation and misdirection of scarce resources into areas with no long term sustainability, conversely depriving or "crowding out" others from the means to efficient expansion. The numerous bubbles that we all know by hard were directly caused, or at least exacerbated, by the enactment and continuous existence of the Economic and Monetary Union; an EMU that was—and in many ways still is—a monetary union whose fiscal, political and even financial facets are compartmentalized along national lines, which further contribute to the institutional antinomies and asymmetries.

The reversal of the erratic capital flows to the periphery, either by capital flight or aversion to new investments, as reflected in the widening imbalances in the Eurosystem's TARGET2 payment mechanism; the realization of convertibility risks arising from structural interest rate spreads between core and periphery; the impossibility of implementing a one-size-fits-all monetary policy to ameliorate the invidious effects of the crisis in material terms manifested in the shortage of funding to the real economy and the disruption of credit channels and inter-bank lending; the non-existence of Union-wide competences on fiscal, social and financial fronts, which has brought about the necessity of producing ad hoc concoctions to cover the evident institutional gaps, and which is a major source of regime uncertainty, brought about by the unpredictability and unforeseeability of the legal-institutional framework, due to the opaque and arbitrary decisions taken at the inter-governmental platforms of the European Council and the Eurogroup; are all manifestations of the common systemic aspects of the otherwise seemingly disparate national/local crises in the euro area. The fact that some states are in deep crisis while others are not, does not mean that the issues are of a purely national/local nature, for as even the theory of the Optimal Currency Area (OCA) illustrates, the impact of an external shock is not experienced symmetrically across parts of the currency union, even in the case where the prerequisites to such an OCA are met: this is what is well-known as an asymmetric shock, which is by definition, a systemic phenomenon and which distinguished economists, including such "neoliberals" as Milton Friedman, had warned against.

To make reference to a systemic crisis in the euro area, is not tantamount to being simplistic and to blithely ignoring the inherent complexities of the situation, as Mr. Barroso erroneously suggests, but to point to the fact that while there clearly are specificities in each case at the political, institutional, legal, macro- and micro- economic fronts, there exists a wider context in which these particularities are made manifest or existent. No serious analyst or scholar who recognizes the systemic features of the crisis in the Euro Area, has ever actually claimed that the root of the problem is only "Europe" or the "Euro"—this is a pitiful strawman that Mr. Barroso has erected to provide a convenient excuse to the arbitrariness of the measures that have been introduced by the surveillance mechanism of the troika in the programme countries and the desperate decisions of the confederal institutions of the EU to proceed with "integration" that would otherwise be undesirable, by exploiting the extreme duress that economic conditions have bestowed upon elected governments.

Notwithstanding all of the aforementioned, the allusion to the stability of the euro as a currency, as if that were evidence of the non-existence of the systemic features of the crisis in the EMU, is specious. While much can be said to expose the fallacy underpinning this argument, one only needs to examine the "stability" of other currencies such as the US dollar and the British pound sterling. There is no doubt whatsoever that these are, more or less, stable currencies that traders use in their speculative operations; but this mere superficiality cannot and should not allow one to draw the inference that there is no system-wide crisis across the United States or the United Kingdom. The stability of a currency is partly related to the international dimension of the crisis that has affected all global currencies simultaneously and because all major central banks have been engaging in unprecedented unconventional measures to provide a backstop to the economies they manipulate, thus preventing investors from adjusting to less inflated currencies from the world's dominant economies. In addition, the currency, apart from being related to the size of an economy, is also subject to radical and swift shocks, for whilst there may be tranquility at one point in time, a severe and persistent internal flaw or a political failure of a monumental scale, can throw foreign exchange investors into disarray and cast the currency into oblivion, as history clearly teaches us with the demise of the gold standard and the Breton Woods system, among many others.

Lastly and to conclude my critique of Mr. Barroso misplaced proposition, a closer scrutiny of this utterance in the speech now under examination, is necessary: this is an economic and financial crisis in individual countries that impacts on the rest of the euro area. The inconsistency in this remark exists in the dubious omission of the feedback loop that is in operation, for whilst the crisis in an individual country causes spill over effects to other member states, it is equally true that the institutional framework of the EMU and the decisions of other member states, or the prevailing economic conditions, further contribute to the vicious cycle domestically and systemically. Moreover, the uniformity of the monetary function in juxtaposition to the incoherence of the fiscal mechanisms, provides the system-wide, institutional setting of a reversed distortion of the capital structures, this time featuring the collapse of the credit supply in the periphery that results in the massive failure of ventures and the destruction of employment positions and profit-generating sources, with the accumulation of savings at parts that cannot yield productive and sustainable returns and which provide the basis for the aggrandizement of new bubbles, this time at the core of the EMU (and/or in London which is outside the eurozone). That the European Central Bank is desperately seeking ways to expand the money supply and to furnish credit to the real economy of Europe, that is mostly comprised of small and medium sized enterprises, is yet another clear indication of the system-wide aspects of the crisis, even though the experiences are not—and in a certain way cannot be—the same across all member states.

Mr. Barroso is of course free to deliver any kind of speech he finds appropriate for the attainment of his ends and in that regard one could claim that he is quite efficient. Nevertheless, a person with no appetite for weaving obscurantist apologia to the political elite, cannot passively receive such proclamations as if they were revelations of the robust, value-free objectivity underlying the mere shadows and figments that "populists" who dare to speak of this ostensible phantomality of the eurocrisis, have been using to delude the public. Populism certainly is ill advised and should be avoided at all costs, if we are to preserve the integrity of the Union and to construct a future where we will be in a position to enjoy greater liberty and eudaimonia. That granted, Mr. Barroso ought to be more careful when implicitly attacking all opposition to the Commission's and the European Council's machinations as mere populism, even when this comes from people who are studious in their field of expertise and who speak in their capacity as academics, market experts, established journalists or public intellectuals, not as unelected technocratic overlords. If nothing else, the crudity of Mr. Barroso's arguments or injunctions is unfortunate and condemnable, at least in the humble opinion of the present citizen.

Picture credit: Wikipedia

The meta ta politika of Europe

2013-05-09T13:35:00.001+02:00

Fellow citizen Ralf Grahn (@RalfGrahn) recently suggested that European bloggers should consider producing an article under the twitter hashtag #MyEurope, in light of the commemoration of Europe Day, on the 9th of May. The idea is to invite the authors to publicize their perhaps idealized conception of Europe, of its politics in their broader sense, so as to participate in—and enrich the—public debate on the present and the future of the European Union (or of the Euro Area) and, most importantly, to provide a renewed impetus to the eurologosphere, the aggregation of all European blogs or "eurologs", to the (re-)consideration and (re-)examination of the immediate issues at hand as well as the prospects for Europe in the years ahead.

As I obviously endorse Ralf's initiative, I ought to inform the reader that in this modest contribution of mine to the general discussion, I shall expound on the meta ta politika, the "metapolitics", of Europe qua abstraction and of Europe qua political entity. Given the vastness of the topic, of discussing "Europe" from one's vantage point, I have taken the liberty to blithely strip away the superficialities of daily politics, especially the arid controversies underpinning them, so as to opt for delving into first politics; the realm where one can roam freely across the fields of thought, whose provinces know no confines and where the thinker is not encumbered by any presupposed terminus to inquiry; a terminus which in this context is customarily manifested in a kind of self-restrained politics, of partisanship or of a quasi-mystical duty to remain subservient to some chimerical incorporeality, or indeed of a pseudo-ethical obligation to conformity with an amalgamation of prejudices and unexamined shibboleths, whose adherence to, effectively renders one hetero-determined to one's own political presence, in the temporal-institutional or historical-cultural context.

Outlines of first politics

Politics concerns the rational determination and allocation of power among or within a collective of human beings; "rational" not in the sense of seeking marginal efficiency gains, but in that it specifies and particularizes means and functions to the attainment of ends, however vague and elusive those may be. This is to say that politics stands in contrast to the jungle method as the distribution of power is no longer—or not necessarily—determined by brute force, or the preponderance of sheer numbers, but by the application of a preconceived model of primary and secondary, implicit or explicit rules, upon which other imaginary institutions and roles are compounded. Such power-determination-power-allocation we may term isxys.

The deviation from the instinctive presence starts with first politics, with the postulation of the "who" and the "what" in the human collective, providing the fundament for the establishment of the arbitrary modalities of isxys, together with their function(s) and end(s), whose created-and-creating differentiation in spatio-temporal and political-institutional terms is the universal midpoint of polity in the abstract.

From the subject-object dichotomy in this primary institution of society, one may single out the first conception of the polity, of the "what", upon which other notions, presumptions and inter-subjective and context-specific realities are fastened upon in a concentric fashion; or depending on the environing differentiated-and-differentiating factors, as structured predispositions, architectures of the imaginary world, or of the lifeworld. Similarly, the identification of the "who" is the determinant to the political system, for it brings to the theater of the spatio-temporal the subject that exercises and defines power, be it the phantasmagorized notion of a collective ontology, of a spectralized otherness, or of an indivisible singularity. The subject of politics is not monolithic though, as it often appears in a multi-layered or multi-faceted form, as a compound of different "whos" which are essentially antithetical to one another, yet which are harmoniously blended together, courtesy of the varying functions of power and the roles thereof.

The politevma, as the derivative of the subject-object conception of first politics, encompasses the primary and secondary rules of the society, as representing a system, a rational taxonomy of imaginary roles and functions which realize isxys, in ways that are necessarily variable, as dependent upon the originary conception of the "who" and "what". The concretization of imaginary institutions, the clear delineation of the first politics, is either conducted with the introduction of hypostesized perceptions exerting an hetero-instituting influence, that can often be manipulated by certain subjects, but which necessarily presents an arbitrary, though robust boundary; or by the application of logical tools that stipulate roles, functions and ends. The former characterizes a politevma where power legitimation stems from otherness, from an unreachable exteriority to society, which renders the "who" and "what" as pre-determined and which, a fortiriori, preempts or deters any differentiating impulse from within the rigid limits of the hetero-instituting element. Whereas the latter, places the source of isxys in an interiority, thus making power legitimation a matter of auto-institution, or in other words, rendering it susceptible to constant change in form and substance.

Common to these is nomos as the instrument that makes institution possible. In an heteronomous politevma, nomos is what the exteriority supposedly instructs, such as in a theocracy, where the word of God(s) is the single or the predominant factor of isxys. In contradistinction, the autonomous politevma realizes nomos as a method of internal change in isxys, since that polity has the limited or full capacity to question and redefine the primary and secondary rules, and moreover, to even reconsider its first politics, its originary subject-object dichotomy. Nomos occurs in the context of second politics or just "politics" (as contrasted to first politics = metapolitics), the process that brings together the subjects of isxys in the polity. Second politics—politics—are the "how" of a polity and come in a variety of forms such as authoritarian or libertarian, conservative or reformulative. Some of the names of such secondary politics, whose specifics I shall not consider in this article, are tyranny, oligarchy, democracy, ochlocracy, anarchy, though it certainly is the empirical case that these never really appear in a pure form, but in numerous combinations and permutations, as is of course the potentially constant variability of first politics.

Antinomies in the institution of Europe

What practically begs to be examined, following this mere introduction to the meta ta politika, is the politics of modern day Europe. The subject in this context is human qua singularity as the most magnificent product of the Enlightenment, as the hypokeimenon of first politics, whereas the object is the polity as being the collective of such individuals; while liberal values and democracy, are the politevma and the set of primary and secondary rules placed upon the subject-object binary. The impressive antinomy of modern Europe exists in the fact that while the subject is defined as a singularity, which enjoys its own rights by virtue of its decontextualized existence, there still exists, as a remnant of age-old institutions a tissue of incorporealities that essentially compete with the subject in gaining primacy to isxys, those being the phantomalized ontologies of nation, terra patria (fatherland), society and state, all in their mystical sense as having the status of indivisibility in their own accord, i.e. as if they were "individuals". This ought not to come as an oddity, for philosophical modernity is replete with theories that attribute the values of the Enlightenment's exalted "human" to these other incorporealities, such as Hegel's claim of the state being the ultimate incarnation of morality, the historical and class determinism of Marx, nationalism as preservation and evolution of the heteronomic element of theocracy and so on.

This peculiar co-existence of the subjects of politics is evident in the current construction of the European Union, with its numerous layers of power, their interconnections and interrelations. The individual in the EU is a citizen, in the legal sense, of two different sources of legality, the national and the supranational. Sovereignty as the exercise of the legal means to coercion, remains a nation-state privilege, even though the confederal edifice of the EU in general or of the Economic and Monetary Union (EMU) in particular, has a considerable degree of indirect or de facto state sovereignty. A similar tension exists with the tissue of otherwise meaningless predispositions inherent in "identity", for there too the individual is more than just a national unit, in the sense of belonging to the whole of the nation qua ontology; but rather is also a member of a broader collective, of "Europe" that still is understood as something cosmopolitan and mundane, that has yet to be branded with the patina of mysticism, as is the case with the "nation", though this will clearly happen if European meta-nationalists have their way in imposing upon all of us their understanding of what is to be European.

Concomitant with this assemblage of core contradictions is the equally dubious symbiosis of both auto- and hetero- nomic elements in second politics; for whilst Europeans adhere to democracy as the politevma of self-determination and self-institution, which allows for the impetus to change to be engendered from within, they nonetheless cling on to the meta-ethics of the exteriorities of such secular superhuman entities as the nation, the state and the terra patria. Characteristic of such a paradox in our era, is the ongoing and persistent existence of state's rights as effectively constituting a separate corpus of law from the one applying to individual human(s) in the political, social, economic and moral spheres.

The European Union fosters this suboptimal combination of imaginaries, whose generative locus is distinct from one another, at a number of levels, from the local to the European, as is evidently the case after having proceeded with an investigation of its legal-institutional morphology, where some portion of isxys is shaped by individuals and their representatives, another part by unelected technocratic overlords and still an additional one by secretive interests of otherwise democratic states ("democratic" in a loose sense).

A mere overview of some of the main EU institutions can illustrate this claim, with the European Parliament being the closest entity to autonomy, the Commission standing as the confederal conclave of technocrats, the Council of the European Union as the platform where those ambiguous "national interests" are discussed by appointed "permanent representations" at COREPER I and II or by still appointed ministers of national governments, and lastly the European Council or its unofficial duplicate—the Eurogroup—as the forum for inter-governmental deliberations, couched in terms of opaque statist (national) interests—and let us, for the sake of simplicity, not introduce in this critical examination the European Central Bank and the numerous European agencies, bodies and quangos.

Against this backdrop, the citizen who presumably is the subject of politics, autonomous politics in this case, at least—or only—in principle, is in effect nothing but a trifle, a minor and often indirect participant in isxys. A clear reflection of this truth in its conceptual form can be found in this slightly naive concoction of the "European year of citizens" where "citizens" and "civil society" are only allowed to be "involved" in some aspects of policies that affect their lives, within the rigid confines of a hierarchical complexity; or moreover, can be identified as the overriding perception that permeates and penetrates the kind of bureaucratic palaver that alludes to a "citizens pillar" to be appended to the EU architecture, which is to say, the erection of a pitiful scaffold to further support the tower of heteronomy that is the EU in its present form.

In this regard, the European Union encompasses and incorporates all of the philosophical contradictions and their inferences that have been passed on to us and which continue to develop further in directions that can lead to both clarity and confusion, or fusion and fission of theories and (meta-)narratives of the truth and the desirable in the inter-subjective world. The metapolitical challenge that currently arises is the termination of the tension between autonomy and heteronomy, the grounding of the former as the central element of the politevma in Europe and the consequent transition from the confederal and heteronomous European Union, to the European organic democracy where isxys is equally distributed among all individuals. Finally, to connect all of the above to the very first part of this article, I must say to any reader who has reached this line, that a change in metapolitics is what I want in #MyEurope. Whether this will happen or not depends on shifts and new impulses in the realms of both theorisis and praxis.

Footnotes on Jürgen Habermas' lecture in Leuven about the European crisis

2013-04-28T11:38:00.000+02:00

On April 26 2013, I had the great honor to attend a lecture on Democracy, Solidarity, and the European Crisis by one of the foremost thinkers of our age, Professor Jürgen Habermas. The event, which can now be watched online, took place at the premises of a very important center of knowledge in Belgium, if not worldwide, the Katholieke Universiteit Leuven and was introduced by the President of the European Council, Mr. Herman Van Rompuy.

The purpose of the present blog post is not to put forward a eulogy to Habermas, nor to engage in a hermeneutical exercise of the meaning underlying his pronouncements, but only to isolate some of the key remarks in his speech and use them as an impetus for propounding my own thoughts on the subjects concerned.

Without willing to dwell on introductory remarks, I shall proceed with the present post that is divided into thematic sections that are based on quotes excerpted from the transcript of Habermas' lecture. Please note that this is a very long piece of text, containing a number of ideas I have on a range of issues and, as such, I would recommend that you consider each section as an article in its own capacity, even though all of them are constituent parts of the same architecture of thought and should be treated as such (I allowed each section to have its own permanent link which you can copy, bookmark or share separately). Parts I, II and III are closely related to actual European politics, whereas IV falls under the realm of political theory, most probably in the Aristotelean sense of the term "political".

Contents:
I. "Postponing democracy is a rather dangerous move"
II. The politics of the Eurocore
III. Germany in the context of an asymmetric Europe
IV. Of the organic democracy and its tension with the heteronomy of the existing nation-state

I. "Postponing democracy is a rather dangerous move"

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On the tension between technocracy and democracy that is inherent in European integration and especially on the Blueprint towards a Deep and Genuine Economic Monetary Union that was put forth by the Commission in late 2012, Habermas spoke thus:

Supranational democracy remains the declared long term goal on paper. But postponing democracy is a rather dangerous move. If the economic constraints by the markets happily meet the flexibility of a free-floating European technocracy, there arise the immediate risk that the gradual unification process which is planned for, but not by the people will grind to a halt before the proclaimed goal of rebalancing the executive and the parliamentary branches is reached. Uncoupled from democratically enacted law and without feedback from the pressing dynamics of a mobilized political public sphere and civil society, political management lacks the impulse and the strength to contain and redirect the profit-oriented imperatives of investment capital into socially compatible channels. As we can observe already to-day, the authorities would more and more yield to the neoliberal pattern of politics. A technocracy without democratic roots would not have the motivation to accord sufficient weight to the demands of the electorate for a just distribution of income and property, for status security, public services, and collective goods when these conflicted with the systemic demands for competitiveness and economic growth. [...]

[T]he steering capacities which are lacking at present, though they are functionally necessary for any monetary union, could and should be centralized only within the framework of an equally supranational and democratic political community.

In as far as technocracy is concerned, I certainly agree with the distinguished professor. Besides, I have already published a scathing critique on the rise of technocracy in Europe (December 15, 2012), as a reaction to the Commission's blueprint and the European Council's corresponding roadmap for the completion of the EMU. Today, under the profoundly intergovernmental principle of "shared sovereignty" or "joint responsibility", decision makers have emphasized on the rules and institutions governing the fiscal conduct of individual Member States. The deficiencies of the original Stability and Growth Pact, namely the effective non-enforcability of its provisions on an ex ante basis, are now being addressed by means of secondary legislation that have introduced such confederal arrangements as the European Semester and which have placed the ideocentric foundations for the installation of a permanent "troika" mechanism of surveillance and economic control, manifested in the euphemistically branded "reform contracts" for "competitiveness and growth".

There is no doubt whatsoever that institutions must be set in place to provide for the application of laws and agreements and to ensure the predictability and foreseeability of political action at the Community level, as well as guarantee a degree of coordination and homogeneity. What has been meticulously omitted from this much-needed reformulation of the legal-institutional context, is the corresponding legitimacy that derives from the sovereignty of the citizens. The reconstruction of the EMU has been limited to the reinforcement of the preemptive and corrective arms of fiscal discipline and macroeconomic symmetry, exemplified in the fiscal compact, the two-pack and the six-pack. In this regard and without having improved the input legitimacy of the institutional architecture, Europe qua technocratic abstraction presents itself as the arbiter of economic prudence and the enforcer of budgetary orthodoxy, without any citizen or collective of citizens having a direct say on the matter; for while the EU is an amalgamation of democratic states, at least in principle or on paper, it nonetheless is not a genuine (representative) democracy as such, since as the fallacy of composition clearly illustrates, the aggregation of the parts is not necessarily equal to the whole; and the "whole" that is the EU unfortunately has as its executive function the Commission, which is non-electable by the citizens, and the European Council that is a platform for intergovernmental deliberations which on their own capacity are devoid of input legitimacy, let alone transparency, as they are an amalgamation of often opaque governmental interests, rather than having an organic form, as ought to be the case in any fully integrated polity, where the popular will is transmitted via the numerous media of political action to the decision-makers and vice versa, in a manner that represents a unified entity in which one part cannot operate without the other; or in other words, in which secrecy and democratic illegitimacy are not tolerated and cannot withstand the test of time.

Underpinning these shifts in European diplomacy from looser inter-governmentalism to tighter confederalism, is the static rationale of incrementalism to integration, which presupposes the passivity of the electorate vis-à-vis the harmonization or approximation of the technocratic aspects of the EU, the corresponding concentration of power at the EU level and the concomitant erosion of democracy at the national level and in whole, manifested in the incapacity of an elected government—any government at any level of power—and a politically-conscious populous to conduct, inter alia, economic policy on a self-determined basis. The most visible change that the Great Recession and the Eurocrisis brought upon Europe is the realization by the people that the European Union, apart from being heavily exposed to the vicissitudes of global finance, shadowy banking and the increasing complexity of financial and fiscal engineering, is of utmost importance in the daily life of each citizen, even at the local level, which suggests that the pervasive indifference that once allowed European politicians congregating some European institution to determine policy in the absence of popular will or even against such a volksgeist, is about to become—or already is—a legacy of the old, probably defunct modus operandi of European integration.

As I have noted before in my critique of European meta-nationalism and the usually oneiric exogenous impetus to integration it makes judicious reference to, the magnificent phantomality of "More Europe", the vagueness and nothingness it entails, cannot delude vigilant citizens for much longer, for it has already been understood that state power must be counter-balanced by popular control and meaningful participation, rather than the pitiful scaffolds appended to the EU architecture on the institutional "involvement" of citizens within the framework of the year 2013, the "European year of citizens"; implying that a thoroughgoing democratization of the EU edifice is necessary in present time, not as a groundless wish or a figment for the years to come; because as soon as citizens witness, for instance, the annual budget of their elected government being vetoed against by the Commission, following the proceedings of the European semester, they will no longer be keen to proceed with "more Europe", as that phraseology will rightly offer them the impression of granting even more power to unelected overlords and economic tzars. A genuine EMU pre-requires the institution of a true European democracy—and it needs it now, before the euroscepticism of our time blends naturally with the exuberant europhobia that technocratic oversight over daily political life will certainly engender.

Alas, if one is to read through the aforementioned Commission Blueprint for the EU, will see on page 35 the clear intention to obfuscate and to hide the fact that the we are already living in a democratically inadequate European entity; in a piece of text which, in addition, provides the grounds for the derision and vilification of anyone willing to extend a critique to the citadel of technocracy that is gaining shape in Europe. The said text of page 35 of the Blueprint reads as follows (emphasis mine):

The Lisbon Treaty has perfected the EU's unique model of supranational democracy, and in principle set an appropriate level of democratic legitimacy in regard of today's EU competences. Hence, as long as EMU can be further developed on this Treaty basis, it would be inaccurate to suggest that insurmountable accountability problems exist.

I am afraid to point out that such Olympian pronouncements have nothing to do with reality and as a matter of fact they are a panoply of misinformation and falsehoods. The EU's democratic legitimacy is largely inadequate and if there is no Treaty change, ideally a true European constitution, or at least a proto-contistution, it will be impossible to remain silent to the accountability and power asymmetries that will arise or be aggrandized and the problems resulting from them be exacerbated. Professor Habermas is certainly correct in saying that postponing democracy is a rather dangerous move, especially in these times where people across the land are becoming ever more loud and vociferous in asking for justice and democratic legitimacy, properly understood.

II. The politics of the Eurocore

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Habermas clearly is in favor of a European democracy and he believes that this can or must emerge within the EU rather than being a democracy of the EU. He stated the following:

What is necessary in the first place is a consistent decision to expand the European Monetary Union into a Political Union (that would remain open, of course, to the accession of other EU member states, in particular Poland). This step would for the first time signify a serious differentiation of the Union into a core and a periphery. The feasibility of necessary changes in the European treaties would depend essentially on the consent of countries preferring to stay out. In the worst case a principled resistance had to be overcome only by a re-foundation of the Union (based on the existing institutions).

I term this kind of approach, which I essentially disagree with even though it is the zeitgeist in many influential circles, the politics of the "Eurocore", for it clearly advocates the formation of a politically integrated core that will stand against or in juxtaposition to the rest of the EU's Member States, presumably exerting a power of attraction on them, which is nonetheless a mere hypothesis of an optimistic sort. I have taken note of this tendency in many of my previous articles, such as "The (euro)crisis of nationalism" (August 6 2012) and "The failure of ideology, not Germany" (December 12, 2012).

The very existence of the Euro area, as a stage of closer state cooperation within the European Union, constitutes a turning point in the history of European integration. Its significance exists in the shift in approach the governments of Member States adopted with respect to the diplomatic means used for the further development of the European project. The principle of unanimity, which once was the condicio sine qua non for integration, was decisively swept into the dustbin of history with the signing of the Treaty of Maastricht and the consequent Treaties, which introduced the possibility of a number of states to proceed with further integration, leaving others behind in the process. The creation of the Euro as a de facto "enhanced cooperation" of certain Member States was the manifestation of this change in principles.

The euro was and is a stateless currency, yet it is crystal clear that the imaginary institutions of a fiat monetary system and a sovereign state are so inextricably bound up together, both conceptually and historically, that no monetary union per se may ever be made sustainable on a long term basis, as has already been proven to be the case with the eurocrisis; and, conversely, no unified state may ever be truly sovereign as state without a fully and properly functioning common currency in place. Historically, logically and practically the Euro has always been the conduit to a European federation, with the tacit understanding that "federation" in this respect means nothing more than a mere re-allocation of state functions across the various layers of government, without entailing some of the ideologically-intensive elements that the original federalist and democratic movements envisioned. Should a federation of this de-conceptualized version emerge in Europe in the years to come, it will most likely spring from the Euro area and might not necessarily encompass the EU as a whole but only a collective of states, who will effectively usurp the European Union or completely reshape its institutional morphology.

In light of the politics of the Eurocore and to appreciate the significance of the Euro in the concatenation of events leading to a European federation, it is of paramount importance to remind our selves of the original approach governments had to European politics. Ever since the early years of European integration, from the 1950’s onwards, the governments of the six founding Member States of the European Community thought it expedient and politically pragmatic to proceed with incremental and orderly steps for the harmonization of certain economic policies along the lines of the Aristotelian golden mean or, more fully, by adhering to the principle of unanimity as the only suitable way for the materialization of the project for an ever-closer community of states in the post-WWII Europe.

The process was excruciatingly slow, sclerotic and inefficient, requiring laborious efforts from all sides involved, in finding common grounds for agreement between all six governments whose commitment to economic protectionism was still quite strong and readily apparent. Protectionist mentalities did indeed hamper European integration in its early decades, preventing the implementation of important agreements on the single market. Had it not been for the broad interpretations of the Treaties from the side of the European Court of Justice, it could well be said that the political deadlocks could persist for years, making an already cumbersome process ever more inflexible and unworkable.

For reasons that transcend the boundaries of the present essay, this approach was effectively, though partially, discarded with the ratification of the Treaty of Maastricht in the early 1990’s. It then became possible, especially theoretically or rather in terms of political strategy, for certain Member States to proceed with deeper integration while other states could choose to remain outside of the process, clinging on to their sovereignty and the specificities of their national agenda. This change in diplomatic conduct did in effect signify the end or the beginning of the end of the principle of unanimity or consensus as the precondition to integration. Most importantly it effectively separated the European Union as such from the objective of a European federation. The two were no longer considered identical or necessary parts of one another, litanies to the contrary notwithstanding. Though never admitted in the open, it was implicit in the 1990's agreements that European integration could and would thenceforth mainly be predicated on the basis of the intergovernmental cooperation of a number of consenting states, who would in effect establish a permanent majority within the broader European Union architecture, to forward their own understanding of a European political union. Such a permanent majority has been no other than the euro area’s Member States, which in the passage of time have shown signs of acting more like a unified bloc rather than an amalgamation of otherwise squabbling states; in spite of occasional differences in opinion, approach, tone and objectives. The opt out clauses from the euro area that the UK and Denmark received were the first signs of this seemingly timid and cautious yet profoundly radical shift in political approach. Their exclusion from the monetary union made it evident, even though it remained tacit, that under certain perhaps pressing conditions some states could choose to proceed further in pursuit of any common objective deemed essential for the continuation of the European project, while others could decide not to be involved, remaining therefore at an outer ring, so to speak, of the evolving European Community.

The inferences that could be drawn—and were drawn—from the application of this principle were and still are quite far-reaching. For if it were legitimate or expedient to introduce opt-out clauses for certain states under a given political, economic, social and legal context, with the aim of allowing other Member States to commit to further integration, then it could be claimed, using the same tenets of reasoning, that a complete federation of a sort could emerge within the European Union, not necessarily from or of the European Union. The creation of the euro had set in place a precedent that would—and did—put two irreconcilable world views on European integration, in a collision course, where only one would prevail, leading us to either a loosely confederated, slightly hermaphrodite political system centered around the single market and its related areas of policy; or throwing us into a political milieu where the states in support of full integration would gain the upper hand, and by exercising their majority power, would gradually but systematically usurp the existing complex, multi-tier European superstructure.

Such a scenario can be particularly plausible once considered within the framework of the institutional but mostly political dichotomy within the European Union architecture between Euro area Member States and non-members. The EU as a whole, the one which transcends the boundaries of the monetary union, has in fact no real reason—no pressing need—to pursue any ambitious political end, for its very existence is not directly dependent on the degree of harmonization of policies its Member States may achieve, nor on the scope of such policies. As amiable as the EU, this sui generis political entity, may be for many people, as lofty as the principles underpinning it undoubtedly are, it must be stressed that its very form or main function is rather limited to the maintenance of a certain degree of conformity to some general guidelines of economic policy. The EU's raison d'être is in practice to maintain a relative free trade zone in Europe, a quasi-single market, always by respecting one of the oldest meta-ethical doctrines of European political thought, that of the national sovereignty of all of its Member States. It is almost impossible for the EU qua single market organization to circumvent the obstacles that national sovereignties pose towards a transitory process for genuine federalization.

In contrast the euro area, for it to be economically but mostly socially and politically sustainable as a monetary union or as a union per se, may sooner or later only follow either of the two paths:

the suboptimal one: the one leading to the orderly disintegration of the euro and the gradual re-introduction of national currencies, or to the creation of two or more homogeneous currency unions, to cater to the particular needs of the states involved, as a counter-measure to the impracticable one-size-fits-all approach in the absence of a surplus recycling mechanism,
the optimal one: to the genuine federalization of the euro area, which implies the formation of a banking union, a fiscal union and a democratic political union to complete and to render workable the euro as a common currency and as a shared political cause.

With the above in mind, it is crystal clear that what Habermas suggests, is but a re-affirmation of the principle that has been carefully and consistently applied over the last two decades or so. The politics of the Eurocore are the standard of our time, be it a desirable one or not, thus the problématique which arises, at least for those willing to remain open to the greater picture, is to make them as workable as possible, so that they do not end up being divisive and to result in the kind of fission that characterizes European political history. Understandably the implicit "we-they" approach to integration and the accompanying introduction of ad hoc opt-outs or other institutional arrangements that compound the complexity of the broader edifice, shall place a time bomb at the foundations of the European polity, by producing varying and inconsistent classes of states and of citizens.

III. Germany in the context of an asymmetric Europe

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Habermas also elaborated on his views about solidarity and the role of Germany in the present European context, saying that:

The leadership role that falls to Germany today for demographic and economic reasons is not only awakening historical ghosts all around us but also tempts us to choose a unilateral national course, or even to succumb to power fantasies of a “German Europe” instead of a “Germany in Europe”. We Germans should have learned from the catastrophes of the first half of the twentieth century that it is in our national interest to avoid permanently the dilemma of a semi-hegemonic status that can hardly held up without sliding into conflicts. Helmut Kohl’s achievement is not the reunification and the reestablishment of a certain national normality per se, but the fact that this happy event was coupled with the consistent promotion of a policy that binds Germany tightly into Europe.

If one wants to preserve the Monetary Union, it is no longer enough, given the structural imbalances between the national economies, to provide loans to over-indebted states so that each should improve its competitiveness by its own efforts. What is required is solidarity instead, a cooperative effort from a shared political perspective to promote growth and competitiveness in the euro zone as a whole.

The element of correctness of this proposition exists in the fact that it recognizes the correlation between national unity and European orientation and that it stresses the importance of the formulation of a European social imaginary that shall provide the foundations for the political solidarity that citizens across countries will show, in having a normative obligation to provide to their fellows whatever they can afford in times of need, expecting for reciprocity in time.

Solidarity, in its political and meta-ethical sense, only exists as the outward manifestation of the imaginary collectivity, as the primordial commandment for political action in the name of the collective, the milieu which furnishes one with all there is, in the socio-political order of things. In that sense, it has nothing to do with the altruistic teachings of wise people of the past and present, but with a tacit political obligation that is embedded deeply in the shared or common tissue of fixed perceptions that pseudo- a prioristic incorporealities bestow upon the acting subject. Solidarity as a self-instituted political act constitutes the cornerstone of the primary rules that ensure the integrity of the polity, along the lines of a constant reaffirmation of the commitment to the political process.

Against this backdrop, one is permitted to proclaim that in the absence of a European shared political perspective no solidarity of the political sort can be sustained, for the present reality of ad hoc fiscal transfers, conducted under the duress of markets and economic constraints, may only give rise to essentially xenophobic and fractionalistic tendencies.

Nevertheless, the formulation of a shared meta-narrative per se cannot be perceived as a remedy in its own accord and in an ex ante sense, for the quality and content of this imaginary is of cardinal importance in determining the longer-term effect on the community, the fusion or fission it will bring about. In line with what was elucidated in the previous section on the politics of the eurocore, the tendency of the present is to provide the first elements to a European metanationalism that necessitates a European identity, unfortunately brought about through the application of the methodological means of nationalism, in the identification of the people with a state of affairs and a given territory.

It is indeed correct to emphasize the need for all participants to account for the others, but this ought to be embedded in an understanding of the whole, rather than as a sectarian power surge that seeks to unite the "us" as against the arbitrarily defined otherness.

The kind of shared political perspective that the German government and others are molding is one that stems from the further integration of the Euro area, along the lines of an ordoliberal conception of the politico-economic order and in the framework of a confederated European institutional environment that introduces different classes of Member States and their people, thus providing grounds for contradiction and separation, instead of offering a benign impulse for the harmonious combination and infusion of the parts into the whole.

Germany cannot have a hegemonic role in Europe, even if that is depicted as a pressing necessity of the times, for that shall bring about the beginning of the end of the community element that is needed to construct a European democracy. There can be no hierarchies of this sort in a Europe that has been plagued by hegemonic syndromes and nationalistic antagonisms, underpinned by superiority complexes and the exuberant or banal racism they entail.

That granted, it is not enough to speak of the need for Germany to proceed with genuine solidarity, in the sense Habermas ascribes to the term, but to call for a novel approach to European politics, one that is inclusive and which is the product of deliberations among equals, rather than a set of edicts from a superior to an inferior in a typical power structure that cannot withstand the pressures a freedom-seeking people will exert upon it.

As such, the idea of a presumably enlightened "leadership role" for Germany is a pernicious folly, as it places the seeds of hegemonism at the heart of the European project, even if the intention is towards the opposite direction. The role Germany and all others need to conform with, is that of members of a community of equals, at the governmental and citizen level; as a collective of people who ought to define mutually beneficial ends, freed from national prejudices and stereotypical perceptions of policy and polity. This differs fundamentally from what we are currently witnessing or from what may be furnished upon us in the years ahead, should a state or group of states decide to impose upon the rest their understanding of "the good", in the name or under the pretense of some mystical "historical" responsibility of theirs to act with an iron will (and fist).

IV. Of the organic democracy and its tension with the heteronomy of the existing nation-state

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Habermas also touched upon the presumed function of the nation-state in the supranational structure of a European democracy and suggested something which appears to be very similar, in terms of substance, to a position that moderately conservative leaders such as Herman Van Rompuy and José Manuel Barroso have put forth before. The following quote is one that I, a libertarian federalist, will subject to criticism:

On the other hand, the step to supranational democracy need not be conceived as a transition to a “United States of Europe.” “Confederation” versus “Federal state” is a false alternative (and a specific legacy of the constitutional discussion in 19th century Germany). The nation states can well preserve their integrity as states within a supranational democracy by retaining both their roles of the implementing administration and the final custodian of civil liberties.

Superficially the argument is plausible, for it suggests the mere addition of a democratic layer on top of the existing administrative architectures across Europe; and in some way, this is already happening to a considerable degree with the piles of European legislation being infused into national law. The presumption is that the democratic legitimation of the European political level can be achieved without substantial material and meta-ethical changes; that is to say without a root and branch reformulation of the imaginary institutions and meta-narratives underpinning the European polity. Such an essentially statist position rests on the age-old perception of the social contract as a pseudo-pragmatic manifestation of an agreement among citizens incorporated in a constitution from whence political legitimacy—sovereignty—springs from. The antecedence of the state and its presupposed legitimacy ex ante was introduced to the history of "Western" thought in Plato's "Crito", in which Socrates justifies his acceptance of the death sentence against him on the grounds of a tacit contractual obligation of his to the polity of Athens. In a similar sense, the constitutionalization per se of the EU edifice which does not necessitate the profound reorganization of the political order across Europe, can provide the legal fundament upon which European democracy will be erected, as yet another application of a theory that attributes sovereignty to the incorporealities emerging from the trapping of the imaginary named "social contract".

The tension, if not antinomy, inherent in that conception exists in the indirectness in which legitimacy is achieved as a one-off deal rather than a continuous process of affirmation and self-institution through inclusive and substantive action on a popular level, via participation and interaction; for if the phantomality of the social contract qua legal fundament provides the patina of legitimacy to the state as such, then the organic interrelation of an autonomous polity is rendered obsolete, by virtue of the hetero-institution of legitimacy as an hegemonic and a prioristic, ex cathedra commandment, which transcends the specificities of self-will and time.

The phantasmagorized hetero-institution of society as a passive recipient of enlightened legality has been the standard method for the allocation of power among the members and classes of the arbitrary collective and has had varying forms throughout its long history, either as theocratic totalitarianism, secular imperialism or liberal statism, as in all cases the logos of legality has been the fictionalized emanation of the upper source, of the elite, in its theological, meta-ethical and meta-political context, as that which stands in contradistinction to the self-determination of the citizen qua individual or collective who is bound by—and who operates within—the specificities of locality, culturality, institutionality and temporality.

Politics as the distribution of power among the members of the organized human society, can only be of an autonomous, organic form once founded upon the basis of a self-instituted-and-instituting collective of sovereign citizens, of self-conscious political actors who are fully aware that legitimacy stems from within, as a continuous affirmation, a confirmation of the popular will, as an ongoing process of creative-and-creating change in the imaginary institutions that permeate and penetrate political conduct, in the primary rules that establish primordial relations and in the secondary rules that stipulate specific conditionalities for given actions.

Organic democracy as the polity of an autonomous society cannot withstand the hetero-institution that constitutionalism, nationalism, theocracy or other emanations of the incorporeal universal collective bestow upon the minds of the participants in the political process. A democracy that springs from the top, or from an exterior source that is indirectly related to the existing citizens cannot be anything than an enlightened version of the oligarchies and other heteronomous concoctions of political control that have dominated the history of humankind; as in those arrangements the meta-political element is that of a robust hierarchy, with legitimacy concentrated in an elitist center of a kind, whereas in contrast the organic polity is the self-determined society that always exists in the present as a continuous affirmation of legitimacy stemming from each and every citizen and which is free from any influence that spectralized collectives may impose upon political drasis and theorisis.

The "who" and the "what" in an organic democracy are determined from within, without any power structure determining the order and manner of that which is, in the way and extent that it is. Consequently, the preservation of the nation-state as the effective conservation of the meta-ethical incorporeality of the nation qua ontology cannot be perceived as anything but a permutation in the spectrum of heteronomy, as yet another manifestation of the exterior "who" and "what" that shapes and animates the society of citizens in ways that transcend individualities, space, time and related particularities. The hetero-institution of this nationalism can only be a hierarchical structure that places the locus of sovereignty in the fantastic realms of nationality and supra-nationality, whose being is postulated as anterior to the citizen and whose superiority to them is perceived as a given, as a quasi-religious conviction whose ethical veneer cannot be penetrated by the logic of the will to autonomy. The nation-state as being the "custodian" of civil liberties is but another application of the heteronomous doctrines that dominate history; it is, in other words, a reconfiguration, perhaps a relative rationalization, of the suboptimality that already exists.

An organic democracy in Europe cannot exist in the presence of such meta-narratives that are attached to the now-exalted notions of "nation" and "state", for their being fictitious universalities introduces the heteronomous element to political action, undermining the self-determination and auto-institution of the citizens' society.

One may only pause to ponder on all of the above, thinking of our present predicament, to choose the kind of future we wish to make out of it, for us.

Picture credit: Protesilaos Stavrou, Creative Commons BY-NC-SA

Europe did not cause the crisis in Cyprus

2013-04-05T14:42:00.001+02:00

The kind of default reaction of many Cypriot opinion molders and citizens to the latest decisions on the country's macroeconomic adjustment programme, has been to put the brunt of the blame for Cyprus' economic demise on "Europe" in general; often drawing insights from valid facts such as the systemic features of the eurocrisis, stemming from the flawed architectural design of the Economic and Monetary Union (EMU), to the inadequate modus operandi and suboptimal decision-making processes of the inter-governmental platforms of the European Council and the informal Eurogroup. It is indeed true that the European level leaves much to be desired on several fronts that need not be enumerated herein, yet an over-emphasis on the shortcomings of the EU/Eurozone in conjunction with a meticulous downplay of the responsibilities of the symbiotic Cypriot political and plutocratic establishment, can only end up becoming, perhaps indadvertedly, an infamous apologetic to the egregious malpractices of both public and private key actors prior to the events that have taken place over the last months/years.

It is one thing to recognize the contribution of systemic parameters to the ongoing economic duress and another to effectively place the cart before the horse in presuming these factors to be the very primary causes of the crisis, while dismissing with slight contempt and cavalier smugness whatever internal malignancies, political and economic, there existed under or above the surface. Put bluntly, it is both an uninformed opinion and a preposterous proposition to assert that the Cypriot economy was destroyed overnight by the Eurogroup, or "the Germans", or "Merkel" or whichever phantomality a profoundly europhobic and ultra-conservative tissue of unexamined shibboleths may give rise to, implicitly propounding the absurd theory that the crisis manifested itself out of thin air, without any structural and persistent flaws underlying the conditions that have now been laid bare. Hence, while it is desirable to criticize the various facets of the EU for their weaknesses or inadequacies, it nonetheless is of utmost importance to identify and expose the specificities of the Cypriot case, for the sake of being just and precise and, a fortiriori, for finally bringing forth the reformative meta-political action that Cyprus is in desperate need of, at least in the humble opinion of the present author in his capacity as a non-conformist.

This kind of approach, of recognizing the villain in an external source, can be understandable and tolerable when people labor under the influence of exuberant emotionalism. Nevertheless, once the dust sets after a period where emergency decision are taken, sensible and sober thinking must take their place center stage, in order to avoid any degradation of the political climate to the kind of toxic politics we witness in Greece and elsewhere where democracy is either at risk or practically non-existent. As such, the patriotic palaver that often embellishes such views, if it is to be standardized, shall transform the initial over-reaction into a subconscious sense of victimization; a kind of sentiment that already is predominant in the recent history of Cyprus, Greece and the broader region, and which can only impregnate the self-destructive "we-they" polarization in which the sprectalized perception of the "we" is presumed as the innocent victim while the otherness of the "they" as the incarnation of pure malevolence that seeks to grind all of "us" under its evil heel.

To be clear, there probably is nothing untoward with patriotism per se; however it often happens that under the veneer of such seemingly innocent feelings there lurks a xenophobia that provides the substratum to all ethnicist pronouncements. Moreover, the nationalism underlying this hermeneutic patina, provides a convenient mechanism for the externalization of all domestic problems, in a manner that preempts or renders obsolete any critical assessment of the misdeeds of the political class, the flunkies it maintains, as well as the plutocratic interests that are woven together with the stratagems of the state apparatus and its power elite.

Whatever the sentiments for la patrie may be, what practically begs to be examined is the identification of the homeland with the domestic mega-banks. For many, the downsizing of the Augean Stable that was the Cypriot financial system has been perceived as a direct attack on the "homeland". Towards that end, either the Eurogroup or Greece in particular, due to its debt restructuring that inflicted severe loses on two Cypriot banks, are forced to bear the brunt of the barbs of local do-gooders or demagogues. The arguments along these lines are two-fold:

the Europeans did not offer "us" a blank check in recapitalizing our banks via direct bail-outs and therefore they are to blame for the collapse of "our" banks,
the Private Sector Involvement (PSI) that brought about the restructuring of the Greek sovereign debt is the sole reason "our" otherwise resolute banking sector suffered all these loses that evolved into the black holes we are now called to fill in.

Such statements are specious for they ignore the long process that brought the two major Cypriot banks, Bank of Cyprus and Laiki, to their present predicament. As I have already noted before, we must never lose sight of the fact that the formation of the hypertrophied banking system of Cyprus was a conscious, strategic decision of domestic governments and was explicitly or implicitly supported by all political parties hitherto, underpinned by the illusory and megalomaniac narrative that Cyprus would assert itself as an omnipotent financial center in the Eastern Mediterranean and, presumably, the broader region. In other words, the evidently unsustainable financialization of the Cypriot economy through the unbridled aggrandizement of the banking system, was endorsed and systematically facilitated by politicians for several years prior to the crisis and, in fact, before the accession of the Republic of Cyprus to the European Union. Such political reveries, of instituting the financial services as the pillar of the economy, blithely neglected the economic and environmental constraints, resulting into certain bubbles that would eventually burst under their own pressure and not because "suddenly" a group of European politicians congregating some EU institution took the decision to chop down the Cypriot banks.

As for the injudicious allusions to the PSI, it certainly is true that severe accounting losses were written on the books of Bank of Cyprus and Laiki. What is nonetheless omitted from the opinions on this front, is that in 2009, when Greece was entering into the period of sustained market pressure that eventually led to its first bailout, the two Cypriot banks speculated heavily against the Greek state, by buying massive amounts of Greek sovereign bonds at yields that would bring about generous returns, for their assumption was that Greece would eventually receive unlimited financial support from its European partners to pay back in full all of its debt obligations. Put succinctly, the Cypriot banks exercised casino practices and should therefore be held fully accountable for expanding their portfolio holdings of Greek bonds when it was readily apparent that Greece was heading full speed to an international bail-out programme, where debt restructuring could never be ruled out as a possibility, proclamations to the contrary notwithstanding. Consequently, to blame Greece or the EU for the loses the Cypriot banks incurred from their frivolous investments in the sovereign bonds markets is rather weird, to say the least.

In addition, the EU is being depicted as a foe for not having agreed to the direct recapitalization of the Cypriot banks via the European Stability Mechanism (ESM), as if European taxpayers should foot the bill that reckless bankers bring upon them. The ESM has been established with the objective to provide a final fiscal backstop, which is something that has been made crystal clear with the introduction of the Outright Monetary Transactions (OMT) of the European Central Bank that have as their prerequisite an involvement of the ESM, in a troika-style setting that entails strict conditionality clauses. In other words, the ESM is not a cornucopia whose raison d'être is to sustain profligate bankers nor to provide pampers to misguided politicians; but a permanent mechanism that has been concocted to standardize the bail-out procedure of sovereigns, which was one of the institutional flaws in the original design of the EMU.

Carrying the argument further, one needs to bear in mind that a major factor to the economic downfall was the incompetence of the previous government of Mr. Christofias (I don't call them "communists" because they were/are not) to proceed with preemptive measures that would have mittigated or at least ameliorated the shock of the crisis. Instead of that, we had the former Minister of Finance at the early stages of the eurocrisis, Mr. Stavrakis, parading before the local media with confidence to deliver ex cathedra injunctions against anyone who questioned the foundations of the Cypriot economy, making the unrealistic, if not pitiful, claim that Cyprus would not be affected by the eurocrisis, courtesy of its "robust" financial system.

Next, when such fantasies could no longer be maintained by anyone who had a modicum of self respect, the Central Bank of Cyprus took the lead in the inane "extend and pretend" tactic, by propping up a zombie bank, Laiki, with Emergency Liquidity Assistance (ELA) that amounted to some €9 billion euro (GDP of Cyprus is approximately €18 billion), despite the fact that this entity was clearly insolvent. This imprudent infusion of liquidity created the kind of bottomless pit in which good money must now be poured into and which has exacerbated the loses related to the restructuring of the Bank of Cyprus and the breakup of Laiki. As for the politicians who were supposed to pass legislation on the orderly resolution of Laiki, instead of hiding the problem under the carpet of their ignorance, all that needs to be said is that those who voted for them should ask clear explanations before venturing to exhibit their personal bravura in indignant statements against "Europe".

It certainly is easy to go along with the europhobic trend, to adopt the nationalistic tenets of reasoning and to proceed with attributing all faults to "the others", especially when there seems to be an element of truth at the basis of such grotesque lies. Besides, apart from being politically safer, it is a convenient way to absolve oneself of all moral and political responsibility from the otherwise dubious practices that were the norm in domestic politics and daily "business". Alas, to proceed thus is to deny the truth before ones own eyes and, even worse, to subconsciously object in advance to any benign reform. Personally I cannot represent anyone else other than myself, but as far as I am concerned, the crisis in Cyprus was not caused by "Europe", but by a complex cobweb of factors whose source is primarily domestic and which ultimately relates to a long-lasting tolerance of mischief, cronyism and corruption.

If only the people in south Cyprus were more critical of their own state of affairs...

Picture source

UPDATE April 5 at 17:06 CET—Following my arguments on the responsibility of the Cypriot banks, I recommend reading two leaked reports that the Cyprus Mail has published on the reckless investment behavior of the two Cypriot bega-bsnks, Bank of Cyprus and Laiki.

The independence of the European Central Bank and its democratic accountability on Cyprus

2013-04-02T12:46:00.001+02:00

The legal basis of the European Central Bank guarantees its institutional independence in conducting monetary policy, while it also extends the separation of powers to all other central banks comprising the European System of Central Banks (ESCB). In particular, Article 130 of the Treaty on the Functioning of the European Union states thus:

When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the ESCB and of the ECB, neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks.

It is the humble opinion of the present author that institutional independence, stemming from the separation of state functions, as theorised by Montesquieu, is both a central feature and a precondition of a democratic polity, as it guarantees the rule of law and prevents, to the extent that this is legally possible, the abuse of power by the authorities. Nevertheless, the other principle of democratic administration, which is as vital as that of institutional independence, is democratic legitimacy that is subdivided into input and output legitimacy, the latter also known as democratic accountability. For the state to be genuinely democratic, these two constitutional values must be infused in the legal corpus that underpins, permeates and penetrates the polity.

Heretofore the European Central Bank, an indubitably independent institution, does not stand up to the constitutional requirement of democratic legitimacy, which in this case, can only be made manifest in the form of democratic accountability, given the intrinsic technocratic design of central banking (as is also the case with the judiciary for instance). While the ECB does publish a full array of information pertaining to its activities and decisions, there is nonetheless, no parliamentary scrutiny over some of its most important decisions. To draw from a very pertinent issue, I may direct the reader to contemplate on the implicit responsibility of the ECB in the Emergency Liquidity Assistance (ELA) that was provided to the banks of south Cyprus, in particular Popular/Laiki bank.

Under present conditions, prudential supervision remains a national competence, in spite of whatever coordination may exist at the supranational level; and regardless of the fact that the legislative process for the formation and implementation of the Single Supervisory Mechanism, is at an advanced stage. Nonetheless, the ECB is the only entity in the EU/Eurozone that has the right to authorize the initiation of any liquidity injection, including, but not limited to, the ELA, which is in effect, a tool the ECB possesses to provide liquidity even to those banks whose collateral is of a lower quality than the ECB's requirement, but whose underlying condition is that of solvency combined with illiquidity.

In this respect, the case of the ELA in Cyprus, whereby the ECB authorized the Central Bank of Cyprus to use this concoction to support Laiki bank, with a total of €9 billion (total output of Cyprus is approximately €18 billion), despite the fact that that particular bank was evidently insolvent, raises profound questions on both the responsibility of the ECB and the capacity of national regulators to remain neutral to the temptations of domestic cronyism and national politics, in the absence of a genuine banking union.

While it is crystal clear that the brunt of the barbs should be borne by the Central Bank of Cyprus, for failing to exercise its prudential function in a manner that would benefit the general good, there certainly is a case to be made against the ECB, which has hitherto purported to be a pillar of credibility, but which can no longer be perceived as such, given that it was the institution that allowed for the ELA to be used, no matter how frivolously, to the extent of opening huge black holes in the domestic banking system.

Understandably all of us European citizens cannot issue any ex cathedra injunction against the ECB, and rightly so; but in line with the constitutional principles of a democratic polity, we do have the right, or rather the obligation, to demand thoroughgoing and effective parliamentary scrutiny over all of the activities of the ECB and of all other institutions, bodies and agencies within the EU (such as Europol). It is lamentable to currently find ourselves laboring in the penumbra of institutional uncertainty as to where ultimate responsibility rests; and, a fortiriori, it is objectionable that we cannot have our own institutions complying with the democratic values we uphold.

Whatever the specifics of the ELA in Cyprus may be, the gist is that without democratic accountability, the ESCB, the Eurosystem and the ECB will never stand up to the rigorous requirements of a democratic community. Thus, apart from knowing the truth on this very case, I am of the view that we ought to also stress the need for a revision of the legal basis of the ECB, so as to make it democratically accountable to the citizens of the Union.

Picture credit: Wikipedia

Europe: A banking union to break the feedback loop between states and banks

2013-03-31T10:17:00.001+02:00

Perhaps the deepest flaw in the Euro edifice has been the symbiosis between banks and states. The insoluble ties that are shared by sovereigns and their domestic banks are to a great extent a permanent feature of the modern (crony-)capitalist system, yet in Europe there is a peculiarity that far transcends common knowledge of modern political economy: the bank-state collusion in the euro area, in itself a lamentable manifestation of corporatism, is couched in an institutional framework of supervision that is compartmentalized along national lines, hence offering perverse incentives to authorities to provide pampers to otherwise questionable domestic business practices, in the name of "national competitiveness", the "national interest" etc. or simply to obfuscate and hide the fact that the local economy is rather malignant compared to its European partners.

Member States would support their banks, either with sweetheart handouts of varying kinds, or with all sorts of rules that would insulate them from the vicissitudes of genuine competition and would place them at an advantageous position in the economy, while bolstering their political clout. In return, domestic banks would happily absorb the bonds their sovereign would issue, both to acquire the presumably risk-free capital necessary for increasing their capital adequacy (see analysis of Basel Accords by Emmanuel Schizas), and for invigorating or perpetuating their cozy relationship with the state apparatus and its non-banking power elite.

Thus, when the great crisis first struck the financial system and one bank after another failed or tittered on the verge of collapse, the shocks were rapidly transmitted to the states, which were supposed to closely supervise—and ideally rectify—the malpractices of these banks. Due to the evidently inadequate institutional arrangement of the Economic and Monetary Union, European decision-makers had little choice but to proceed with the implementation of a series of hasty bail-outs, in a desperate effort to prevent the entire system from a complete meltdown. By doing so, they effectively produced a toxic feedback loop that persists hitherto, namely that of hardly-pressed states supporting quasi-bankrupt banks and vice-versa.

Understandably, this setting is suboptimal and, ultimately, unsustainable. If the eurocrisis is to be addressed decisively, systematically and rationally, this self-reinforcing downward spiral must be disrupted and there effectively are two aspects to this venture, both related to the need of finally proceeding with the establishment of a genuine banking union. Namely:

Supervision and conflict of interest — National or local banks cannot be regulated adequately at the national level, because the institution of banking is such that in times of crisis, where the state wishes to conceal its weaknesses and the potential malignancies of its economy, the rules end up becoming non-enforceable. For the sake of avoiding conflicts of interest, supervision of the banking system should be kept hermetically shut from any and all national policies; and the easiest and most efficient way of doing so, under present conditions, is to proceed with the Single Supervisory Mechanism, which is in effect a "federal" arrangement of bank supervision. Though this will never be ideal either, it clearly has several advantages over the existing order, particularly regarding the clear separation of powers and interests.
Insulating public funds from bank support — The feedback loop between states and banks begins with the state taking large sums of funds out of the public purse to provide them to a failing banking institution or network of such entities. In the process the banks are saved, at least temporarily, at the cost of increasing public debts and budget deficits that put the sovereign on an unsustainable course (which then forces upon it social spending cuts, tax hikes and all that is associated with "austerity"). Since such events are concatenated by virtue of state-sponsored bail-outs, a judicious observer may suggest that an end to the era of indiscriminate bank bail-outs, would also limit, if not eliminate, the very source of the negative dynamic at the heart of the debt crisis. States would no longer be forced to place their finances in jeopardy, nor would banks be laboring under the assumption (or perverse incentive) that the "generous" taxpayer will provide the ultimate backstop to all their unbridled speculation. In a nutshell, there have to be clear delineations between public funds and a bank resolution/support scheme. Towards that end a genuine bail-in scheme, one that is institutionalized by sufficient legislation, strong parliamentary scrutiny, and which is complemented by a Europe-wide deposit guarantee scheme, is a mechanism to be welcomed.

Both of the above have been recognized by European policy-makers and have been incorporated in the broader range of legislative proposals or working documents towards the formation of the banking union. Regarding supervision, the legislative process is at an advanced stage, with the Single Supervisory Mechanism (SSM) being expected to enter into force by early 2014. Notwithstanding technicalities that could be developed and improved further, the SSM is a major step in the right direction of severing the links between states and their domestic banks, at least in as far as prudential supervision is concerned.

Regarding the issue of bail-ins, as I have already noted in all of my previous articles on the SSM, this scheme has already been the zeitgeist in Brussels and will become the new orthodoxy that the forthcoming Single Resolution Mechanism (SRM) will be called to implement. The SRM is still at an earlier stage of development, but with the trend being clearly in its favor, we can expect things to proceed swiftly on this front. Here one ought to stress that the latest Eurogroup decision on Cyprus has little in common with an institutionalized bail-in mechanism, as the latter will not depend on the enervating bargains of the inter-governmental setting of the European Council, but will be a standardized, predictable and transparent framework of administrative praxis. Therefore, as I also noted in my critique of doomsday scenarios on the fate of the euro:

The regime that has been applied in Cyprus has been ad-hoc, ill-designed, unpredictable and opaque, while it has been placed within the context of capital controls (among others), increasing uncertainty and a geopolitical environment that is rather unfriendly. While there is relative calm in Cyprus at the moment, the inference to be drawn from this cobweb of factors is that the case of Cyprus is neither the prolegomenon to a genuine European bail-in scheme, nor the "template" for future policies applying similar techniques, Mr. Dijsselbloem's litanies to the contrary notwithstanding.

Besides, the case of Cyprus is "unique" in as far as the technical features of the bail-in are concerned, because of the size of its Monetary and Financial Institutions relative to total output, as shown on this chart (click on the picture to enlarge).

The yellow bar shows that Cyprus had very little margin to impose loses on bondholders, hence the need of proceeding with unsecured deposits. However, this is not the case for other Euro area member states (let us ignore Luxembourg's banking sector for the time being).

Regarding the bail-in scheme per se, I must admit that I prefer it over the bail-out on both economic and moral grounds. The economic argument is that failure, a key feature of the market, will be born by those who brought it upon their selves. In other words, the bankers and their creditors will have to suffer the costs of their otherwise objectionable shenanigans. This way the perverse incentives of state support will be decisively withdrawn, thus bestowing upon bankers a powerful self-constraint, to ensure the sustainability of their business practices or to suffer the consequences. On the moral front, bail-ins are clearly more just than bali-outs since they only inflict losses on those who were explicitly or implicitly supporting the actions of the failing bank, rather than shifting the pain on to the innocent taxpayer, in terms of placing public finances on an unsustainable footing. The state must not use its monopoly of coercion to protect the bankers, but instead, to safeguard the interests of the many, which in this case, are found in the imposition of loses on those who were really reckless and profligate. As for the ensuing contraction of total output, I would personally not shed any crocodile tears over it, by suggesting instead that it is preposterous to lament the loss of GDP when this derives from the deflation of a hypertrophied financial bubble (recession/depression is deleterious for society if/when it destroys the real economy and tears apart sustainable capital structures, but this is an issue for another article).

A true banking union featuring a genuine bail-in mechanism, a common supervision of banks and a common deposit guarantee scheme is the only means of putting an end to the feedback loop between states and banks, thus making a decisive breakthrough in the efforts to draw a line under the eurocrisis. At this point, I ought to underline the importance of a unified deposit guarantee scheme, which I consider it a conditio sine qua non for the smooth operation of the banking union; as in its absence, depositors in countries that are subject to market duress, will feel an innate uncertainty over the preservation of their savings and will act in exuberant ways that can only exacerbate financial/economic problems. European policy-makers must not make the same mistake they committed when constructing the euro, of failing to proceed with the formation of all the components of a genuine Economic and Monetary Union, including the social ones, such as a unified pension scheme; and in this respect, it is high time the democratic forces of Europe step up their demands for a true political union, rather than issuing a series of apologetics to the incrementalism of the Commission and/or the Council.

UPDATE—March 31 at 16:37 CET: Because there seems to be a lot of confusion as to what is a bail-in, I must point out that it concerns wiping out existing shareholders by the exchange of debt for equity from senior and junior bondholders, as well as the exchange of deposits for shares by unsecured depositors. In this respect it has nothing to do with the original agreement of the Eurogroup to impose loses on secured deposits, below the €100,000 threshold (that is also why I state the need for a Europe-wide deposit guarantee scheme to improve the credibility of the institutional order).

Doomsday scenarios: With capital controls in place, is Cyprus effectively outside the Euro?

2013-03-29T12:42:00.003+01:00

As has been the case with all the other periods of duress in the 3.5 year-old eurocrisis, the case of Cyprus has provided the impetus for the cultivation of a number of doomsday scenarios regarding the fate of the Euro. One of them is that Cyprus is the first case where a country has effectively exited the euro, by virtue of the administrative measures imposing capital controls that have been introduced, which render obsolete one of the key features of a currency area and a single market, namely, unencumbered movement of capital. While I certainly am a fervent detractor of closed borders (and minds), be it in the movement of capital, goods, services or people and, while I would never support the use of the state's monopoly of coercion to protect its cronies in the corporate world and the rest of their flunkies, I nonetheless perceive of this argument on Cyprus' predicament as an exaggeration, which essentially stems from two sources:

Extent of capital controls: In terms of the duration of the capital controls, the argument on Cyprus' effective euro exit, already perceives, quite erroneously, of these restrictive administrative measures as permanent; when it is well expected that they will be relaxed in the very short-term, while their life-span is supposed to be strictly limited, in order for them not to become counter-productive by severely hampering economic activity. While the authorities have promised to lift these limitations within the next days, I do not believe they will be in the kind of position of confidence that would allow them to do so, at least not before they receive the first tranche of loans envisaged in the Memorandum of Understanding with the troika. As unpleasant as a troika-led adjustment programme may be, we ought to recognize, for the sake of honesty and integrity, that it certainly provides a minimum of solace to an otherwise bankrupt state, by guaranteeing that funds will be offered to it after compliance with certain stringent conditions. For that reason, I doubt the government of Mr. Anastasiades would be willing to take the risk of lifting the capital controls prior to the implementation of the memorandum with the troika. Besides, the overall complacency and clumsiness of the Cypriot political class over the last years has now led Cyprus in a balance of power where no real allies are to be found.
Fragmentation as the main feature of the eurocrisis: To carry the argument further, as to why I think this is an overstatement, allow me to elaborate on market fragmentation being an impediment to a common currency. Prior to the introduction of the Outright Market Transactions of the European Central Bank, the single currency was at an advanced stage of financial disintegration, as the so-called "convertibility risks" (euro exit risks) where already priced in to the markets—and by extent to the real economy in terms of usurious interest rates for small and medium sized enterprises or for individuals. At that time the expected value of a euro deposited in, say, a Greek bank, was substantially less than the expected value of a euro in a German bank. This growing chasm was reflected, inter alia, in the unsustainably divergent Target2 claims against the Eurosystem; while also this fragmentation was clearly a driving factor underlying these massive capital outflows from the periphery to the core (also directly related to the controversy over the Target2 payment system). This evident divergence could, with a dose of exaggeration perhaps, allow one to issue the Olympian pronouncement that the GIIPS are de facto outside of the euro, since their banks cannot be regarded in the same light as their counterparts at the euro area's core and hence "their" euro are of a lower expected value. Understandably, in drawing these parallels I am not assuming that the context is identical, but only that both the assumptions of the argument and the underlying mechanics of the economy and finance are essentially the same. Thus, if Greece, Portugal, Spain, Ireland, Italy or any other have not been "outside" the euro because of the perceived discount their domestically deposited euro have, then neither can the argument on Cyprus' de facto exit withstand close scrutiny, especially since it brusquely ignores a series of events that have preceded it.

Nevertheless and without prejudice to the above, one ought to recognize the modicum of truth on which this proposition is predicated. It is undoubtedly sound to postulate that no common currency can exist while there is fragmentation among its constituent parts and that capital controls on one region do constitute an impediment to a single currency area. In this case the euro zone has been temporarily compartmentalized among a de jure free-capital-movement part on the one side and a market-restricted zone on the other, courtesy of the capital controls that have been imposed by the domestic government in south Cyprus. Here one has to stress the importance of the "de jure" aspect of this, since capital flows across the euro area are already constrained by cyclical factors.

If capital controls in Cyprus are to be strictly temporary, then it is pointless to create all this unnecessary pother. However, if they are to persist for a significant amount of time, such that would in fact swipe into the dustbin of the history of European integration the much-touted principle of the free movement of capital, then I am afraid that the exaggerations will become modest notes on the reality of things... Time will tell.

Does the Cyprus deal herald the start of the Euro's demise?

Regarding the apocalyptic theories on the unravelling of the euro because of the painful Eurogroup deal on Cyprus, I shall enumerate the following remarks, with an emphasis on the bail-in scheme that has been the new paradigm in this crisis:

First of all, the modus operandi of the bail-ins in Europe has neither been standardized nor institutionalized, suggesting that the entire discussion pertaining to the exact nature of this scheme, rests on shaky grounds. The intellectual trend in Brussels certainly points towards the direction of bail-ins becoming an integral part of the toolkit of the Single Resolution Mechanism that will soon be incorporated in the range of new responsibilities the ECB will have under the Single Supervisory Mechanism. Yet, we still are at an early stage in the process, where things are quite fluid.
The regime that has been applied in Cyprus has been ad-hoc, ill-designed, unpredictable and opaque, while it has been placed within the context of capital controls (among others), increasing uncertainty and a geopolitical environment that is rather unfriendly. While there is relative calm in Cyprus at the moment, the inference to be drawn from this cobweb of factors is that the case of Cyprus is neither the prolegomenon to a genuine European bail-in scheme, nor the "template" for future policies applying similar techniques, Mr. Dijsselbloem's litanies to the contrary notwithstanding.
Bail-ins are by their very nature quite heterogeneous among themselves contrary to bailouts, for the former take into account the specific conditions that apply to each problematic bank, whereas the latter applies without serious consideration of the specifics. The only reason bail-outs were hitherto the choice of preference for policy-makers, pertains to their simplicity relative to bail-ins; and given that the Economic and Monetary Union's institutional architecture was quite incomplete, it was practically impossible to concoct any bank-support scheme other than these expensive bail-outs.
Concomitant with the point above, is the fact that for a bail-in mechanism to be credible and effective, there need to be legitimate and concrete arrangements in place that will facilitate the mobilization of the resources necessary to proceed with orderly bank resolutions or restructuring. For the time being, we are nowhere near that in the Euro area.
All this may be very impractical (more time-consuming) in the context of extreme and sustained market duress, which implies that bailouts can never be ruled out as an option or possibility, even if bail-ins are instituted as the new orthodoxy of the future banking union.
Lastly and in principle, a bail-in does not engender the perverse incentives a bail-out does, as bankers and those investing in banks do not labor under the assumption that the "generous" taxpayer will provide them the ultimate backstop they need in proceeding to their speculative bonanzas.

With all this noted, I must dare to suggest that the case of Cyprus will not trigger a domino-effect, nor will it bestow on the minds of investors a fear of a renewed "pop-corn" effect (which in my opinion is what is actually happening in Europe, given the systemic features of the eurocrisis).

Concluding remarks

To digress from the aforementioned, I wish to conclude this post with a short comment on the picture right above. The person holding the placard is Mr. Björn Luley, the director of the Goethe Institut in Cyprus. Apart from the fact that I agree profoundly with the message he disseminates, especially the part concerning the need for solidarity with the people rather than the banks; I have selected this image to stress once again, as I have always done, that we must not allow age-old stereotypes and prejudices to cloud our judgement, nor must we facilitate the recrudescence of ethnicist, racist and misanthropic ideologies.

Extremists, or in certain cases the soothsayers of an eschatological perception of the economy and the modern polity, have throughout history promised to enact a convenient remedy to the ills of the present; yet, by making meticulous application of the toxic and monolithic "we-against-them" device, they would single out the target, demonize him, her or it and proceed blithely to justify any argument or measure against it, no matter how despicable, inhumane or odious that might have been.

If there is one reason we should laud the European project, it is that it has contributed to bringing peace to this war-torn part of the earth; and despite the indubitable inadequacies and design flaws of the European Union, I uphold that it is much more prudent to labor towards improving the EU from within, than providing grist to the mill of nationalist isolationism, which if followed to its logical conclusion, will once again pit us all in an inane, self-defeating race to the bottom.

This is in no way an obscurantist apologetic to the evident shortcomings of the present inter-governmentalist and technocratic superstructure that is the EU, but only a call for rational judgement. As such, I must hereby thank Mr. Luley for reminding us in the midst of a climate of doom and gloom, that fission shall be our demise, and that unity and genuine solidarity among people must be the lofty ideals underpinning all efforts henceforth.

May common sense prevail!

Picture source

Cyprus: A Eurogroup deal that is painful but more just than before

2013-03-25T08:08:00.003+01:00

In the early hours of March 25, the eurogroup has reached an agreement on the macroeconomic adjustment programme for Cyprus, which is in my humble opinion more just than the previous deal that placed asymmetric losses on small depositors while not touching senior bondholders when dealing with the downsizing of the banking system. The new agreement focuses at the heart of the problem, namely Cyprus' two mega-banks, Popular (Laiki) and Bank of Cyprus; and the decisions agreed upon will lead to measures that will greatly diminish the size of these two banks that now comprise the largest part of the domestic banking system. The agreement of the Eurogroup includes the following:

Laiki will be resolved immediately - with full contribution of equity shareholders, bond holders and uninsured depositors - based on a decision by the Central Bank of Cyprus, using the newly adopted Bank Resolution Framework.
Laiki will be split into a good bank and a bad bank. The bad bank will be run down over time.
The good bank will be folded into Bank of Cyprus (BoC), using the Bank Resolution Framework, after having heard the Boards of Directors of BoC and Laiki. It will take 9 bn Euros of ELA with it. Only uninsured deposits in BoC will remain frozen until recapitalisation has been effected, and may subsequently be subject to appropriate conditions.
The Governing Council of the ECB will provide liquidity to the BoC in line with applicable rules.
BoC will be recapitalised through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders.
The conversion will be such that a capital ratio of 9 % is secured by the end of the programme.
All insured depositors in all banks will be fully protected in accordance with the relevant EU legislation.
The programme money (up to 10bn Euros) will not be used to recapitalise Laiki and Bank of Cyprus.

It is crystal clear that the government of Mr. Anastasiades had no option of attempting to save foreign deposits and salvage Cypriot-Russian relations at the expense of spreading the costs to small depositors. This plan was already rejected in the domestic parliament and was denounced by everyone as manifestly unjust.

What is now the case, is an aggressive stratagem to address the heart of Cyprus' economic woes, its two mega-banks, in a way that involves the resolution of the zombie-bank, Laiki, together with a mixture of bail-ins of uninsured depositors, shareholders and bondholders for the Bank of Cyprus. The direct cost for the failure of these two banks will be borne by those who had a stake in the matter, notwithstanding the far-reaching indirect losses that the rest of the people will suffer in terms of capital controls and other arbitrary political decisions.

In moral terms, the positive aspect of this agreement is that the Augean stables of the Cypriot banking system are now being decisively cleansed, by virtue of an independent and thoroughgoing audit, in an effort to determine whether anti-money laundering legislation was hitherto enforced or not. The audit will allow for all the graft and corruption to be unearthed, so that we may finally find out the extent of the symbiotic relationship between Cyprus' mega-banks, the local political establishment and foreign plutocrats.

The eurogroup's agreement, if approved, shall inflict a great deal of harm on Russian interests; on Russian depositors at first and, perhaps second, on Russian geo-economic ambitions. Russian money will contribute to the restructuring and downsizing of the Cypriot banks, while Russia's government seems to have been unable to effectively force Cyprus out of the EU, in its attempt to bring it under its own sphere of geo-strategic influence. What remains to be seen henceforth, is the Russian reaction, which on the one hand will involve Russian plutocrats abandoning Cyprus in favor of other havens for their (ill-gotten?) gains/assets, while on the other it will feature a change in orientations for Russia's foreign policy, as Cyprus will now be regarded as a de facto "European" state or protectorate rather than as a potential Russian satellite.

With the economic links between Cyprus and Russia being severed, it is not clear how will the Russian government be able to strengthen its presence in the region, especially after accounting for the numerous financial, technical and diplomatic difficulties inherent in the exploitation of the gas reserves south of Cyprus.

As for the capital controls that were voted in the Cypriot parliament a few days ago, for them not to become counter-productive and cause asymmetric pain on the real economy and the lower and middle parts of the income distribution, it must be made absolutely certain that these measures be temporary, proportionate and strictly non-discriminatory. Ideally, if one could use such a word at these hours where only suboptimal options are available, capital controls must not last more than the time necessary to receive the first tranche of the bailout funds.

Ever since Greece first received a bailout back in 2010, it was well known to everyone, except the self-deluded Cypriot political elite, that Cyprus would have suffered this fate as the speculative and unsustainable bubbles of the pre-crisis era would have to burst, and their end-product, the over-sized banking system, to be decisively downsized. With the eurogroup's new agreement, this readjustment will occur in a manner that is least bad, under the prevailing circumstances. However, contrary to many of my fellow commentators on Cyprus, I will once again repeat that most of the hardships that Cypriots will have to endure, are the fault of the domestic political class, which:

first, insisted for decades on instituting the banking system as the central pillar of the economy, supported by the narrative of Cyprus becoming an omniptent financial centre,
second, welcomed, endorsed and facilitated the capital inflows from abroad, without considering the quality of those deposits/investments and, moreover, by arrogantly dismissing the long-term deleterious effects the bubble economy would cause,
third, attempted to bound up together the financial system with its geo-strategic ambitions, manifested in the exploitation of the natural gas, without considering the rights of a substantial part of the Cypriot population, the Turkish-Cypriots, and without showing any genuine sentiment of consensuality necessary in solving the Cyprus problem, before adding additional controversies over it,
fourth, its unwillingness to take proactive yet radical measures to address the malignancies of the domestic zombie-banks, before these banks could create the black holes that now need to be filled up with good money; one such black hole being the Emergency Liquidity Assistance (ELA) funds that Laiki absorbed from the Central Bank of Cyprus, despite the fact that it was evidently insolvent, and hence the decision to provide it with liquidity must be denounced as totally irresponsible and opportunistic.

Without prejudice to the aforementioned, it ought to be stressed that Cyprus will experience changes in a number of fields whose ramifications cannot yet be fathomed in their totality. Some of the key issue that practically beg to be examined involve the following:

The credibility of the domestic banking system has been shattered and will require several years to recover,
Cypriot-Russian relations have taken a turn for the worse, however this will affect the geo-strategic balance in the broader region; and it seems that Cyprus has now made a tacit but clear choice to align with the EU and be distanced from Russia's sphere of control,
The intentions of the Greek-Cypriots regarding the Cyprus problem have again been revealed, and it has been evident that these are not at all the kind of orientations and sentiments that would foster an honest series of negotiations for finding a solution to the Cyprus dispute. The South showed, with cavalier smugness, that it considers the natural gas as its own property, or more accurately, as the fief of those shaping the Greek-Cypriot political aspirations and of the large corporate interests that are woven together with them (see the second part of my previous article on this).

More shall follow as the Memorandum of Understanding with the troika is brought into being and as other economic or geopolitical actors react to what is taking place in Cyprus and the Euro area. Let us hope that in the meantime no more inane decisions, which could jeopardize everything, will be taken. Brace yourselves...

Picture credit: Wikipedia

Cyprus: Thoughts on capital controls and the "National Solidarity Fund"

2013-03-23T14:27:00.002+01:00

The parliament of the Republic of Cyprus has approved a total of nine new pieces of legislation aiming at restructuring the domestic banking system by, inter alia, granting more powers to the Central Bank and providing a backstop to the disorderly disintegration of the unsustainable economic model that has hitherto been lauded by local politicians as a "grand achievement", a "milestone of strategic importance" and other such obscurantist apologetics to the otherwise crony-capitalist financialization of the economy. Two of these new laws are of significant importance in terms of their ramifications. Those namely are the law imposing capital controls and the law establishing the euphesticaly-branded "National Solidarity Fund".

Capital controls and the loss of credibility

The law envisaging restrictive measures on transactions in case of emergency (see the law in Greek) effectively places stringent capital controls and limitations on daily market operations. Its content can be summarized thus (fellow blogger Euronomist has also published a post on this):

Restrictions on daily and monthly withdrawals
Ban on premature termination of time savings deposits,
Compulsory renewal of all time savings deposits upon maturity,
Conversion of current accounts to time deposits,
Ban or restrictions on non cash transactions,
Restrictions on the use of debit, credit or prepaid debit cards,
Ban or restriction on cashing in checks,
Restrictions on domestic interbank transfers or transfers within the same bank,
Restrictions on the transactions of the public with credit institutions,
Restrictions on movements of capital, payments, transfers,
Imposition of any other measures which the Finance Minister or the Governor of the Central Bank consider necessary on the grounds of promoting public policy and of safeguarding public security.

Understandably, the state is using its monopoly of coercion to impose severe limitations on the broader population, which in conjunction with the direct and indirect losses that will derive from the haircuts that will be imposed in the context of the restructuring of Cyprus' two mega-banks (Popular and Cyprus bank), will confirm what I noted before concerning the Eurogroup's suboptimal decision, namely that: the cost for the downsizing of the Cypriot banking system will be borne by those who had no substantive gain from the speculative bonanza that preceded the economic crisis.

Without prejudice to the efforts of economists to penetrate the hermeneutic patina of the Treaty on the Functioning of the European Union, with regard to capital controls, it has become readily apparent that the credibility of both the domestic banking system and the political establishment have been reduced into insignificance. On the one hand, the banking system will be in no position to bestow upon clients the confidence that is necessary for the mobilization of private capital in investments, while on the other hand the domestic political class will have great difficulty convincing anyone of its capacity to regulate the economy in a manner that is transparent, predictable and just.

The former's chilling effects will be fully realized over the medium-to-long term; and even though one could expound on the theory that only the bubble-proness will be contained, there still is a substantial amount of sustainable and productive transactions and ventures that will be irreparably hampered, whatever that may entail in terms of opportunities forgone.

As for the latter, this has already been made manifest in the unwillingness of the Russian government to proceed with the agreement on a "full package" for the macroeconomic adjustment of the Cypriot economy. If the Russian elite, whose hegemonic ambitions in the broader region cannot be underestimated, is not willing to effectively buy out Cyprus at this stage, then how can we expect other players on the theatre of international relations to act in a decisive fashion? Doesn't this also raise profound questions as to the actual geo-economic value of these much-touted gas reserves to the south of the island, at least for those states whose alternatives can be less demanding in financial, diplomatic and strategic terms? Should that be the case, then we would have to take note of another egregious error from Cyprus' political system in placing a preposterously disproportional amount of political capital in an otherwise risky, perhaps chimerical, enterprise.

The so-called "National Solidarity Fund"

With the afore-mentioned in mind, let us proceed to a critical exegesis of the assumptions and political orientations underpinning the law establishing the legal person known as the "national solidarity fund" (see the law in Greek). The raison d'être of this fund is to infuse capital to Cyprus' failing banks and, in general, to participate in their recapitalization. As for the resources that this fund will command, these can be enumerated thus:

revenues of the Republic of Cyprus deriving from the (future) exploitation of gas reserves,
ownership titles or bonds that it issues, tacitly backed by the gas reserves and, presumably, the capacity of the state to impose further taxes, arbitrary restrictions etc.
acquisition, management and disposal of equity, bonds or ownership titles from any corporation or other legal person,
donations or contributions that are made by any legal or natural person,
any other source or legal activity

I personally am highly skeptical of the sustainability and quality of this pitiful scaffold that has been erected to provide support to the collapsing Cypriot architecture. At first, its capital appears to me as being of a dubious quality, for it is effectively attached to a phantasmagorized elevation of the natural gas; to a promise that cannot be met with certainty or in full for a number of reasons:

Technical difficulties of mining the gas reserves at the great depth that they are in the middle of the sea, accounting also for the earthquake-prone region of the Levant;
Upfront investments that are required to establish the facilities, pipelines, platforms, infrastructure necessary for the exploitation of the reserves and which are estimated to cost up to €30 billion in net present value. Clearly the government of Cyprus will not have anything near that amount for years (decades!) to come, suggesting the need for public-private ventures as well as cooperation with the governments of other countries. Whatever the modalities, it is crystal-clear that the Republic of Cyprus will have to forgo a substantial percentage of the expected profits;
Rising competition in the future energy market both in terms of new suppliers of natural gas or increased supply of and demand for alternative energy sources, coupled with the rise in the use of renewables; all of which will exert downward pressures on the market price of Cyprus' gas reserves, casting to the wind whatever exaggerations the Cypriot political class has consecrated in its desperate effort to cling on to its empty promises towards the public.

The second thing about this fund, which concerns me, is that a major political investment as well as the concoctions for the short-term support of the domestic banking system are placed on a highly-controversial issue which is directly connected to the Cyprus dispute, the Aegean dispute, as well as the Greco-Turkish-Israeli-Cypriot relations with all their facets and permutations (I will write a full analysis of this conundrum in the near future). In as far as the Cyprus dispute is concerned, the present government, in its decision to proceed with the exploitation of the natural gas reserves, is effectively and unfairly pre-empting negotiations with the Cypriot community of the North (known as the "Turkish-Cypriots").

In particular, the appalling injustice underlying the decision of Mr. Anastasiades' government is found in the evident discrimination against the Turkish-Cypriots, for even though they officially are recognized as citizens of the Republic of Cyprus, they are de facto excluded from any benefits that the exploitation of the natural gas will yield. If the Republic of Cyprus, whose effective sovereignty only extends over the South of the island, is allowed to unilaterally exploit this natural endowment, then how can anyone expect its political class to be willing to develop a spirit of honest consensuality when heading to negotiate a share of these revenues with their compatriots in the North?

To cut the longer story short, the politics of the gas reserves, in the way these are now being shaped by Mr. Anastasiades, seem to me as suggesting three possibilities:

The effective exploitation of the reserves only by the Greek-Cypriot community (the South), which clearly introduces a preferential treatment towards a part of the Cypriot citizens as to the detriment of others;
The concomitant reinforcement of the drift towards the de jure partition of the island that will be suboptimal for all sides involved;
The recrudescence of the problématique of acknowledging the right to self-determination the Turkish-Cypriot community has, something that no state in the world, bar Turkey, has been willing to do heretofore.

Concerning the last issue, I am of the iconoclastic opinion that the Turkish-Cypriots are fully entitled to self-determination, given the unjust treatment they have been subjected to for several decades; and I am uttering thus in full knowledge that some timid souls will consider it a sacrilege to the hallucinatory meta-ethics attached to the notions of the "fatherland", the "ancestors", the "nation" etc.

Concluding remarks

Several delays and inane decisions have contributed to a situation that is rather toxic. In social and economic terms the present generation is sacrificed in the name of rectifying the strategic errors of previous governments, especially with respect to the institution of the financial system as the central pillar of the economy. The lower and middle parts of the income distribution, as well as the youth and the entrepreneurial persons, will all be faced with rigid constraints brought upon them by the systemic failure of the politico-institutional order in Cyprus and the Euro area.

On the political front, the Cyprus dispute, already a highly complex problem, has just become even more difficult to solve; which for people like myself, who would happily labor for the reunification of the Cypriots, is a lamentable setback. The community of the North is deprived of its legitimate claims and rights, while the South seems to gain an asymmetric benefit from the exploitation of gas reserves that should in principle belong to all, not just the Greek-Cypriots, or, a fortiriori, the bankers and their cliques, whose interests are inextricably bound up together with the stratagems of the domestic political establishment.

It's a pity for the people of that patch of earth called Cyprus, because all this could and should have been avoided...

Picture credit: Wikipedia

Cyprus bailout: A suboptimal and unjust agreement of the Eurogroup

2013-03-16T11:34:00.004+01:00

The Eurogroup has reached a political agreement over the terms of the macroeconomic adjustment programme for Cyprus. The Memorandum of Understanding that the Cyprus government will have to sign, will now be finalized by the European Commission, the European Central Bank, the International Monetary Fund and the euro area's permanent bailout fund, the European Stability Mechanism, who will operate in tandem to provide the technical features and conditionality clauses to the Eurogroup's decision.

As is always the case with such agreements, the economically most optimal choice is sacrificed to the altars of political expediency, yet while no one would be surprised from an awkward deal coming out of the Eurogroup, given their impressive record in such ill-advised bargains, the agreement on Cyprus differs fundamentally from the previous adjustment programmes that were implemented in other Euro Member States. A key differentiating element is the unprecedented decision to proceed with the imposition of levies on bank deposits. Such a scheme has been propounded with the objective of broadening the tax base in Cyprus and is predicated on the appreciation of the fact that the domestic banking sector is eight times larger than the total output of the economy, as contrasted to a 3.5 times average in the EU. Notwithstanding the far-reaching ramifications such a decision will have on the economic life of the island, the ad hoc manner in which a political decision on tax policy was forwarded is opaque and evidently undemocratic.

The one-off levy on bank deposits, affecting both resident and non-resident depositors, will be brought into force on Tuesday, March 19, 2013, following a bank holiday on Monday. Electronic transactions have already been subjected to limitations and cooperative banks that are open on Saturdays were forced to close their doors to people who rushed en masse to withdraw their life-time savings. The levy will amount to 9.9% on deposits above €100,000 in Cypriot banks and a tax of 6.75% on all deposits below €100,000. While this measure is expected to raise revenues of €5.5 billion, it ought to be noted that this is done to the detriment of all depositors in present time, while engendering an aversion of savings in Cypriot banks for the short-to-medium term.

On the legal and moral front, this decision to effectively deprive everyone of their savings, must be denounced as unjust; for even if it were true that Russian oligarchs have been laundering their ill gotten gains in Cyprus' banks, it still is unacceptable to use that as an excuse for impoverishing the wider public, especially at a time when a series of tax hikes have already been introduced. In effect, the average depositor is punished for the frivolous speculation of Cypriot banks in the bond markets and for the probable non-enforcement of anti-money laundering legislation. The cost for the downsizing of the Cypriot banking system will be borne by those who had no substantive gain from the speculative bonanza that preceded the economic crisis.

Nevertheless and to remain impartial, I am of the opinion that it would be incorrect to attribute all the misdeeds to the Eurogroup while absolving local politicians from their responsibilities. For instance, the government of ex-president Mr. Christofias had ample time to proceed with proactive measures that would have ameliorated the shock of the crisis. Instead it obstinately denied that the eurocrisis would affect Cyprus. As for the current president, Mr. Anastasiades, he campaigned on a platform that ruled out the very possibility of imposing across the board losses on bank depositors—whatever that may suggest for the integrity of the new government. In addition it should be noted, as a reminder to Cypriot citizens and as a piece of information for readers who are not acquainted with the reality of the Cypriot political life, that over the last years all political parties facilitated, in one way or another, the following:

the aggrandizement of the property market bubble, from which the government raised substantial revenues in the short term without even considering the long term costs on the economy and the environment,
the unbridled expansion of the banking sector and its institution as a central pillar of the Cypriot economy, underpinned by the narrative of Cyprus becoming a major financial center,
the concomitant increase of Russian foreign investments, which occur in the penumbra of doubts and suspicions over the enforcement of anti-money laundering rules,

All these now-structural flaws, have greatly influenced the way in which the Eurogroup approached the case of Cyprus. The decision on Cyprus is suboptimal in economic and moral terms, but it would be a pernicious folly to place the brunt of the barbs on European decision-makers while ignoring the systematic embezzlement of the Cypriot public by political parties who only considered their narrow benefit, while cavalierly ignoring any constraints and the long term costs.

There will be more to write about the case of Cyprus as the Memorandum of Understanding gains form. Whatever the case, a complex, interweaving web of factors related to institutional inadequacy and political opportunism, will severely hamper economic activity for years to come and will have a deleterious effect on the social fabric, by placing asymmetric burdens on life-time savings and the lower-to-middle parts of the income distribution. Both European and Cypriot decision-makers in the European Council are accountable for what is to follow.

Picture credit: hellenicleaders.com

Eurobills: On the joint issuance of European debt instruments

2013-02-21T14:00:00.002+01:00

One of the schemes that is being contemplated in the chambers of European politics, is that of the joint issuance of sovereign debt instruments. This is currently related to the negotiations on the so-called "two-pack", where the legislative reports from the European Parliament suggested schemes for the pooling of Member States' debt and the consequent issuance of such financial tools. The original idea is not novel, as it relates directly to the controversy over the introduction of eurobonds. Regarding the ongoing law-making procedure on the two-pack, some media have already reported that in the context of these negotiations, Members of the European Parliament have succeeded in reaching an agreement in the trialogues with the Council and the Commission over the introduction of eurobonds.

If our intention is to labor under the penumbra of doubt and generalizations, then any financial product that has a 'European' patina must be referred to as a 'eurobond', but if our desire is to be precise and specific, then we must delve into the subtleties of these issues, to clarify the lacunas that currently exist over the understanding of this topic and to provide clear delineations between the various types of schemes or means that are or may become negotiable and/or available. The present blog post represents an attempt to address some of the misunderstandings central to this topic, in a quest for clarity and for a more solid understanding of the movements of the tectonic plates of EU-related diplomacy.

Eurobonds vs Eurobills

Starting from the semantics, it must be stressed that euro-bonds are not tantamount to euro-bills, for these two different terms entail, in this context, a variance in maturities (maturity is a finite period during which the financial/debt instrument exists), with euro-bonds probably representing debt products with long-term maturities, in the range of 5 to 30 years (though it is possible to have longer ones); while euro-bills pertain to the shorter term of a maximum of three years.

The substantive aspect of this phraseological distinction is that the former are tools that can be used to raise the necessary capital for the development of investment projects or other strategic policies that are of a longer term character. The long maturity of such bonds, allows the issuer (the public entity in this case—the state) to remain insulated from the vicissitudes of day-to-day speculations and perhaps to be protected from cyclical macroeconomic fluctuations.

In contradistinction, short-term debt attains the function of providing liquidity for the financing of short-term projects, or as will most probably be the case for an entity that already has debt, will be deployed to pay back older debts, at best to rollover its debt stock into the future. As such, debt bills are not necessarily robust to a range of shocks endogenous to money markets, and by extent, they may be destabilized or negatively affected by general economic instability or other downturns.

In effect, this means that bills, eurobills in our case, are not a debt instrument for the realization of any serious, ambitious, coherent and compelling strategical project, but are destined to be contained to providing liquidity to cash-strapped EU Member States or to finance the immediate needs of the European entity that will issue them (most probably the Commission, once it has developed its fiscal capacity, be it sovereign or not).

Such a tool or mechanism is leagues apart from the concept many have in mind when making allusions to common European bonds, since what they really mean to suggest is having tools with which to finance strategic policies over a time horizon that extends into the remoter future. With eurobills as the best choice in the toolkit of policy-makers, it is quite hard to actually bring into being any of the laudable ideas that find currency in various political circles of our day.

About jointly and severally guaranteed European debt instruments

For the time being, all negotiations have remained captive in the logic of joint issuance of debt. The notion of "jointly-issued" implies that these proposed eurobills will not be genuinely federal debt instruments, as is often and erroneously assumed, but will rather resemble the sort of debt products that can be issued by the European Stability Mechanism and which were issued in the past by the European Financial Stability Facility, to finance the troika programmes in the bailed-out Member States (which were Greece, Ireland and Portugal at the time). These are all makeshifts that cater to the needs, prejudices and interests of the intergovernmental order within the EU (nothing to do with federalism).

Simply and succinctly, the joint issuance of debt amounts to a specific agreement among sovereign entities, to place their name on a single financial product.

Understandably, the flip-side of joint-issuance is the guarantees that have to underpin it in the absence of a single sovereign issuer, where the options are basically narrowed down to two: (i) jointly-guaranteed, and (ii) severally-guaranteed. The first means that there is an ad hoc pooling of debt, among the issuing members, while the latter suggest that each member will remain fully responsible for its own tranche of debt. Whatever the case, the guarantees remain anchored to national sovereignty.

In practice, what is now being propounded as a successful pooling of debt, is the joint-guarantee scheme, where all participating Member States will jointly issue a debt instrument and all of them will jointly guarantee its face value, yield to maturity and ultimate credibility. Put bluntly, the participating Member States that enjoy high demand for their debt products will effectively guarantee/cover other states whose debt is less attractive, with all the advantages and disadvantages along these lines.

While for many this might be better than a setting of jointly-issued but severally-guaranteed debt instruments, it nevertheless does not escape the fact that it is a tower of cards, arguably well-designed, that may not be able to withstand sustained market duress. In effect, such arrangements that are found on the multiplicity of debt tranches and guarantees, resemble the internal structure of financial derivatives, i.e. where different classes ("qualities") of debt are bound together in some complex concoction, to produce a new instrument; an instrument that derives from them (hence "derivatives"), exists because of them, but is nothing if the best debt components of it are for whatever reason rendered obsolete, or a fortiriori if the lower tranches prove to be worthless. I shall not elaborate on how toxic such schemes are and have proven to be, for my purpose herein is to elucidate some of the largelly-ignored features of a de facto quasi-confederal debt instrument; of a makeshift that is branded as a major success, which is not, even if it certainly is a step forward.

The sovereign capacity of the Economic and Monetary Union

From the above, the judicious reader will discern that common debt instruments can only exist in a predominantly intergovernmental institutional arrangement; which nevertheless is not equivalent to a genuinely European federal design, for the underlying sovereignty of inter-governmentalism rests on the participating Member States.

To have true European debt, two prerequisites need to be met, both with far-reaching ramifications in the institutional morphology of the European Union:

Fiscal capacity: The European level of governance must be adequately regulated as to develop its own fiscal capacity, which is a process that is already underway, with the recent ratification of the fiscal compact, the establishment of the six-pack and soon the entry into force of the two-pack (more here),
Sovereign capacity: The status of sovereignty will have to be conferred to the European level that will issue these debts, otherwise the whole system will always be threatened with jeopardy, by virtue of instability in one or more sovereign Member States.

Without these two, there can be no genuinely 'common' debt instruments in Europe. As for the complications germane to such political issues, I shall, for the purposes of this post, reserve myself in pointing to the fact that the way these are regulated will in effect determine whether the EU will be a federation or a confederation, or some unidentifiable entity oscillating between these two; and whether the European tier of authority will be democratic or technocratic. I firmly believe that this kind of problématique deserves an analysis of its own, thus doing so here would require a tedious digression, ultimately taking us off to an inappropriate tangent.

The description of the aforementioned particularities reveals the repercussions "mere details" can have in the overall politico-institutional and economic design and order of the EU, or within the EU. To recapitulate, these debt products that are presented as "common" are nothing but replications of tools that have already been used to deal with the eurocrisis. Also the political implications of the distinction between eurobonds and eurobills need to be born in mind, so as to appreciate the insight that we are nowhere near the introduction of debt instruments that could finance strategic European policies. Finally, I may suggest that, given the zeitgeist in European politics, we will not have eurobonds before a European state exists (whether this is good or not is another issue)... So brace yourselves!

Single Supervisory Mechanism: How it relates to the institutional morphology of the European Union

2013-02-07T10:04:00.001+01:00

NOTE: This is a lengthy essay and is meant to be used as a point of reference, a "pillar article" so to speak, rather than a spontaneous blog post. It has been separated in various sections to facilitate reading. I hope this will prove useful for all those who are interested in these issues. You can view and download this article as a pdf—see here.

(If you are reading this on my website www.protesilaos.com you may click on any of the following titles for quick navigation to its corresponding section)

Contents:

I. Introduction

On the two-day European Council meeting of December 12 and 13, 2012, an agreement was reached to proceed with the formation of the Single Supervisory Mechanism (SSM) that will confer supervisory powers to the European Central Bank (ECB), over all European banks within the confines of the European Union Member States whose currency is the euro. The SSM is expected to enter into force on March 1, 2014 or twelve months after the promulgation of the relevant piece of legislation.

The decision under consideration has followed an earlier European Council agreement, namely that of June 28 and 29 of 2012, while additional input and negotiations influencing it, were provided, inter alia, by the president of the European Central Bank, Mr. Mario Draghi in his November 23, 2012 speech, by the vice-president of the ECB Mr. Vítor Constâncio in his speech on November 26, 2012, by the entry into force of the European Stability Mechanism (ESM), by the introduction of the Outright Monetary Transactions (OMT) programme of the ECB, and by the blueprint for the Completion of the Economic and Monetary Union that the Commission published on November 30, 20127.

Within this political, legal, economic and institutional milieu and against the backdrop of existing dynamics on the dichotomy of the EU into euro and non-euro Member States, it is pertinent to bring under closer scrutiny the proposed SSM, to consider its compatibility with the given order and to perhaps forecast or speculate the impetus for change it will provide. Towards that end the present analysis shall encompass the subtleties that exist between the notions of a banking union and a financial union and shall place the rise of the sovereign Euro-state in the context of the relations between the European System of Central Banks (ESCB) and the Eurosystem, with all the concomitant implications and political ramifications these have. Moreover the discussion shall delve into the transformation of the ECB from a quasi-federal to a truly federal institution, that will have, the right to intervene directly in any part of the area under its jurisdiction, in the context of the supervisory powers, conferred by the SSM.

Elucidating or perhaps outlining these themes is perhaps the most reliable way to appreciate the impact this new set of powers will have on the broader institutional order of the EU, both in strict legal terms, and in political ones. The present author is of the opinion that the SSM shall have important ramifications in various parts of the EU architecture. Perhaps this conclusion shall also be discerned by the reader, in appreciating the information and commentary provided herein, or it may at least be inferred from these perhaps inadequate references and explanations. Ultimately the present essay is nothing more than the prolegomenon to knowledge on this subject, maybe not even that, certainly not exhausting or prejudicing any other research on it, in its legal, political and economic aspects or emanations.

II. Outlines of the SSM and the distinction between the banking union and the financial union

[note: I have previously analyzed this here]

The Single Supervisory Mechanism has often been identified with a banking union rather than a major aspect of a financial union and has been branded as an integral part of the efforts to draw a line under the financial, economic and debt crisis that has been affecting the Euro area at least ever since the beginning of the Great Recession in the late 2007. As was clearly postulated by ECB vice-president, Mr. Vítor Constâncio in his recent speech of January 29, 2013:

The current financial crisis showed how rapidly and forcefully problems in one country’s financial system can spread to another and even threaten the stability of the entire euro area banking system. Such developments can best be assessed and addressed by a central supervisory authority with a bird’s eye view of the entire euro area banking sector rather than through cooperation between national ones.

The second objective of the SSM is to help breaking the negative feedback loops between sovereigns and banks, which were key features during the present crisis. This manifested itself in increasing debt levels of sovereigns that had to provide financial support to struggling banks as well as losses for banks from exposures to sovereigns under stress. We also saw increases in the correlation between the cost of funding of euro area banks and that of their respective sovereigns, particularly in some countries under stress.

The objectivity of Mr. Constâncio’s arguments cannot be discerned in full, for while it certainly is plausible that an integrated financial system, within the framework of a single currency, ultimately needs to be underpinned by a coherent system of prudential supervision, the introduction of the SSM seems to be in line with demands for European supervision over domestic banks, in exchange for direct recapitalizations from the European Stability Mechanism. The underlying rationale is that the feedback loop between Member States and the banks under their purview cannot be really disrupted without addressing the profound incentives that exist or may be engendered in a compartmentalized and fragmented financial and monetary system; for if a government, trapped in a precarious fiscal position, finds it more amiable or convenient not to insist on the conformity of its banks with prevailing rules, in the expectation of enjoying more favorable conditions in the domestic demand for sovereign debt, then no genuine solution to the debt crisis can be found. In that light, the introduction of the Single Supervisory Mechanism must be appreciated as the end product of a bargaining process over European funds as against national sovereignty, with the former, represented by the EU or rather the Eurogroup (though an unofficial body), gaining the upper hand in the process.

The kind of financial oversight that has been propounded as a remedy to the present economic and financial crisis can be understood as a tissue of exaggerations or misrepresentations of a broader rationale on the outlook of the Economic and Monetary Union. At first it is rather presumptuous to assume that an integrated system of supervision would in and of itself prevent or even mitigate a crisis; for while European opinion molders and decision-makers may suggest otherwise, other major economies that have had unified and coherent supervisory mechanisms couched in a perhaps more robust and inclusive institutional framework, failed lamentably in standing up to the alleged potential power such a system has in dealing with a major financial and economic crisis. The very existence and persistence of the Great Recession, though perhaps obfuscated or downplayed by the semantic fiat of mainstream economists and the expansionary monetary policies of major central banks, is a point in notice.

Value judgements notwithstanding, a penetration of the hermeneutic patina of the terms “banking union” and “financial union” is deemed necessary, so that the overall technical and political palaver over the necessity of the SSM does not obscure the underlying changes that are taking place. A strict interpretation of the terms must not oscillate between the ideological predispositions of pro- or anti- integrationists, but must instead focus on the specifics of the legal and institutional aspects they touch upon. To carry on with this task, consideration of the two separate reports that currently are discussed in the ECON committee of the European Parliament is deemed necessary, one belonging to Ms. Marianne Thysen and the other to Mr. Sven Giegold.

A banking union is a system featuring a single rulebook for all banks within its boundaries, on those issues pertaining to the micro-prudential sphere of bank regulation. The fields which are affected and regulated by micro-prudential measures are the leverage ratio of banks, the reserves they are supposed to have, the definition of core tier capital, the adequacy of such capital, the overall calculation of notional risk, the liquidity ratio and other aspects of on- and off- balance sheet parameters. As a general rule the aim is to single out the most important factors that determine the sustainability and solvency of a financial institution, and to provide legislation that will aim at setting a number of minimal thresholds on these issues, with the expectation or hope that these can indeed provide a legitimate backstop to a sustained period of market duress. In the case of the EU, the enforcement of such a single rulebook has been trusted to the European Banking Authority (EBA), which was established by Regulation (EC) No. 1093/2010 of the European Parliament and of the Council of November 24, 2010. The EBA exists within the framework of the European System of Central Bank (ESCB), which in simple terms means that it covers the entire territorial compass of the EU and it involves the supervisory authorities of all Member States, including those whose currency is not the Euro, nor is it envisaged to be under present legislation.

“Banking union” is therefore tantamount to a fully integrated network of micro-prudential supervision, where regardless of which authority actually enforces the rules, the legal framework is uniform or fully harmonized. For that very reason, it becomes crystal clear why the rapporteur of the Parliament, Mr. Sven Giegold has proposed the following amendment in his recent draft report (pp. 6-7):

(4) The conferral of supervisory tasks to the ECB in the banking sector for part of the Member States of the Union should not in any way hamper the functioning of the internal market in the field of financial services. It is therefore necessary to ensure the proper functioning of the EBA, as the ultimate guarantor of the harmonised implementation of prudential rules for banks in the Union, following that conferral. Moreover the establishment of a single supervisory mechanism in the banking sector for part of the Member States of the Union should not hamper the implementation of the European single rulebook applicable to all financial institutions in the Union. It is therefore crucial that full harmonisation of prudential definitions and rules is achieved in the banking sector and EBA effectively guards their uniform and consistent application.

In contradistinction, the financial union is a level of integration beyond that of micro-prudential uniformity, for it also encompasses a single macro-prudential framework. Policies along these lines are exercised by a single authority, in this case the European Central Bank, and are conceived in the spirit of (and with the objective of) identifying and preempting or mitigating the concentration or build up of systemic risk, in the parts of the financial system where are most prone to it, whereby the notion of “parts” may be interpreted as a sector or a niche, or occasionally, as a single financial institution. In principle, the macro sphere of prudential supervision relates to the monitoring and adjusting of macroeconomic aggregates relevant to the overall condition of the financial system, such as the liquidity and integrity of money markets, the functioning of the credit channels connecting the various parts of the system with one another and with the real economy, the exposure of the entire system to external or internal financial bubbles, the accumulation of non-performing assets or financial derivatives on a systemically-significant level and in general anything else, both endogenous and exogenous, that can disturb the overall stability and operation of the system.

Fulfilling this function of macro-prudential oversight is what the SSM aims at. Yet while in theory the scope of action is contained in the macro-sphere, the reality is that the ECB shall have the discretionary power to intervene in individual financial institutions and to impose pecuniary penalties or demand conformity with ad hoc micro-prudential rules it may consider necessary. In this regard, attention should be given to the Commission Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, dated September 12, 2012. As the present author has noted in an article published on December 16, 2012, in an effort to elucidate the essential features of this proposal:

As is always the case with such supervisory capacity, the ECB will be granted the privilege of being the sole issuer and thus withdrawer of bank licenses within the context of its mandate and will, within this framework, be tasked to authorize or not the operations of credit institutions. This is an integral part of the bundle of powers that fall under the conceptual umbrella of financial supervision, yet it can at the same time be considered as a robust preventive or corrective tool for intervening in a part of the financial system, or even a single financial institution, to either call for changes in business practices or even impose the cessation of operations of the bank in question, always if the circumstances impel such a far-reaching and drastic course of action.

[...] Adding to the above, the ECB will demand from institutions under its supervision to comply with criteria on capital adequacy, financial leverage, liquidity etc. In this respect the ECB might deem it appropriate to recommend the formation of capital buffers or the consolidation of balance sheets through other means, if it assumes that some of the standards it has set to monitor are not upheld.

It thus should be suggested, as a recapitulation of the profound distinction between a banking union and a financial union that the former lacks a single entity for macro-prudential regulation, whereas the latter has such a feature. Hence as I have also noted in a previous article published on this blog:

The combination of these two distinct areas of policy, of the micro- and macro- prudential spheres, we may call it a “financial union”. For the financial union to work, there is no doubt whatsoever that both elements are essential [...]

The distinction that has been drawn between the banking union and the financial union may appear to some as an exercise in hermeneutic creativity, as an effort to discern some hidden truth in the essential meaning of particular phenomena. While that could be true, the present author holds that such a conceptual separation is necessary, to provide the conduit to the broader understanding of the impact of the SSM, in regard to the specific political, economic and institutional context that it is immersed in. With the aforementioned having been outlined we may proceed to an assessment of the introduction of the Outright Monetary Transactions programme, on how it influenced the agreement on the SSM.

III. Outright Monetary Transactions: The prerequisite of and prolegomenon to the SSM

The Outright Monetary Transactions programme of the European Central Bank can withstand examination from a number of perspectives, ranging from its purely technical economic impact to the political and legal repercussions it has had and is expected to foster. The present essay’s scope demands that a politico-institutional approach is adopted, in line with an eclectic rationale that recognizes the validity inherent in otherwise disparate fields of research and analysis. The OMT programme was anticipated in July 26, 2012 by Mr. Mario Draghi, the president of the ECB, who, speaking before the Global Investment Conference in London, uttered the following:

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

These words reverberated across the financial markets and were met with exuberant enthusiasm by investors, who believed the ECB was finally willing to uphold the role of an ultimate backstop in the Euro area. The high expectations were however brought back to the nadir of pessimism when a few days later, on August 2, 2012, Mr. Draghi, in a press conference at the premises of the ECB, offered nothing substantive, other than vague remarks and otherwise empty promises. The decisive step to indeed put some flesh to the bones of the “whatever it takes to preserve the euro” tagline, was made on September 6, 2012, when again at an ECB press conference, Mr. Draghi introduced the OMT programme, which effectively positions the ECB as the “dealer” of last resort in the Euro area (see also the discussion I had with Craig James Willy, economic historian and fellow blogger).

In a first assessment of the OMT programme on September 11, 2012, I had enumerated the following features:

1. the ECB will buy "unlimited" amounts of sovereign debt in the secondary markets,
2. before any purchase of such debt, a memorandum of understanding of some sort will have to be signed by the country in need of the OMT and the bailout mechanism EFSF/ESM,
3. the maturity of that debt will be up to three years either if that is newly introduced debt or with a residual 3 years,
4. that any purchase of debt will be followed by a sterilization process to minimize the inflationary pressures,
5. all collateral for liquidity will no longer be subject to a minimum credit rating threshold, meaning that any asset may be accepted,
6. the ECB will have no seniority over private creditors on any bonds it purchases,
7. the Securities Markets Programme, which was initiated under Mr. Trichet, the previous ECB President, will now be terminated and all acquired debt will be held to maturity.

This list reflects the remarks made by Mr. Draghi as well as the text that was also published on the day of the press conference now under examination, which referred to the technical features of the Outright Monetary Transactions. Analysis of the modalities and likely medium-term effects of the OMT is not our chief concern in this paper, for such a task would extend to topics that can scarcely be related to our current subject. Instead, we shall isolate one particular aspect of the OMT, namely its accompanying conditionality clause, the way in which this is connected to the region’s bailout fund, the combined body of the then-temporary European Financial Stability Facility (EFSF) and now-permanent European Stability Mechanism (ESM); and how such a conditionality scheme was a necessary step towards the formulation of the Single Supervisory Mechanism, to ultimately operate in tandem with the ESM, in realizing the two-fold objective of removing all convertibility risks in the Euro area and of preparing the grounds for the financial union.

The conditionality of the OMT relates to the signing of a memorandum by the Member State in need of the OMT programme, for its short-term funding, with the region’s bailout fund. Enshrined in such a memorandum shall be provisions on thoroughgoing internal reforms on a host of economic, social and other policies that may influence the fiscal and macroeconomic fronts. On the fiscal side measures shall focus on cost-saving reforms, on deficit and debt reduction plans. On the macroeconomic level, issues of primary interest shall be the balance of payments, unit labor costs and the robustness of the financial sector. The latter sector of the economy is particularly important in light of the SSM since the health of a financial system largely rests on the sustainability of its constituent banks, and therefore capital buffers may need to be increased, most probably by means of direct recapitalizations, that are to be funded by the ESM. It is here where the rationale of European supervision for European funds comes out in full panoply; for the final success of the OMT in regard to its two-fold objective depends on the effectiveness of the conditionality clause and especially of the community supervision over domestic banks, indirectly via the ESM’s recapitalization programme.

Understandably the tectonic plates of European diplomacy had decisively shifted in favor of the formation of a single supervisory authority in the Euro area—the SSM—once the OMT was announced, even though it has not been invoked and implemented yet (and there is a chance it might never actually have to). It was readily apparent that sovereign bond yields were falling all across the Euro area, courtesy of the positive expectations the OMT’s announcement had engendered, and it also was evident that to sustain these benign market conditions policy-makers would have to persist on assembling the institutional jigsaw they set to form over the years, preceding and during the eurocrisis. It is in this very sense that the OMT stands as both the prerequisite and the prolegomenon to the agreement of the Single Supervisory Mechanism and to whatever else might be considered necessary in rationalizing and reinforcing the measures that have been adopted (e.g. the creation of the Single Resolution Mechanism).

Lastly a more subtle aspect of the OMT that must not pass without mentioning is the role the ECB would assert by bringing it into force. The ECB would effectively become, or may already be, a dealer of last resort (to be contrasted with the now-standard “lender” of last resort), since the ECB has actually preempted political decisions, both on fiscal issues and on the broader problématique of European integration. In demanding conditionality for fulfilling its obligations to conduct open market operations in the secondary markets, it clearly delves in the realm of fiscal policy (still a more or less national competence); while by prejudicing the decisions on the Single Supervisory Mechanism it clearly overstepped its institutional role as a central bank. The realization of the dealer of last resort is therefore a milestone in European Union politics without prejudice to the political and democratic concerns one may justly raise in light of these and other closely-related events.

IV. The rise of the Euro-state, equipped with the SSM, within the European System of Central Banks

Having already provided a morphological understanding of the distinction between a banking and a financial union and of the relationship between the SSM and the OMT programme, we now turn to a perhaps more speculative approach, of engaging in the interpretive analysis of the statute of the European System of Central Banks (ESCB), in light of the expected entry into force of the Single Supervisory Mechanism. A close textual exegesis of important paragraphs and provisions of the said statute shall cover this section, in our effort to make sense of the underlying forces that are expected to affect future decisions on political, economic, institutional and other legal issues.

Starting from Article 2 of the ESCB statute on the objectives of this institutional order, we read thus (emphasis added):

In accordance with Article 105(1) of this Treaty, the primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, it shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 of this Treaty. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 4 of this Treaty.

Given that the Single Supervisory Mechanism shall be infused into the corpus of the European Central Bank, and shall, by that account, remain confined within the physical boundaries of the Euro zone, how should we expect the ESCB to support the general objectives of the Community, when it seems that the schism between euro and non-euro states has in fact widened? The SSM with its concomitant financial union heralds the emergence of a sovereign, two-tier state within the EU, comprised of the single currency bloc (the issue of ECB sovereignty is discussed in the next section). The interests of such an integrated core shall be expected to be more or less harmonized or even common, at least in as far as economic governance is concerned; whereas the non-Euro Member States now face the trilemma of either succumbing to or joining the centripetal forces at the heart of the EMU that have now been reinforced; to remain on the fringes of many important decisions at the EU level; or to follow the logic of repatriating powers, thus reverting many of the benign (for others “deleterious”) spillover effects of European integration.

In the case where Member States currently not expected to participate in the SSM, choose to enter into the core of the EMU, then it is safe to suggest that the interests of the Community will become identical to those of the EMU. If however non-euro members prefer to either cling on to their status despite the clearly unfavorable balance of power they will face, or even more, to repatriate powers, how should the interest of the community be interpreted and how should the European System of Central Banks, composed of both euro and non-euro Central Banks reconcile with tendencies that might be contradictory? If the praxis of enhanced cooperation is to be followed, then the notion of “Community interest” will first of all be a matter of sheer strength of numbers and second, it will effectively be equivalent to the interest of the EMU as against the rest of the EU. Perhaps we must remain aporetic and zetetic (for a book on philosophical skepticism read Emmpiricus, Sextus. Outlines of Pyrrhonism) to see how things shall evolve, what interrelations may be formed, which complementaries can emerge, what sort of order or structure might we behold, what additional scaffolds may be appended to this edifice, before holding judgement of this potential antithesis in the institutional order of the ESCB.

Carrying our textual interpretation further, we proceed to Article 7 of the aforementioned statute, on (institutional) Independence, which reads as follows (emphasis added):

In accordance with Article 108 of this Treaty, when exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and this Statute, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks.

Assuming that the introduction of the Single Supervisory Mechanism in conjunction with the gradual rise of the Euro-state shall create an almost omnipotent core within the EU architecture, how must one regard the institutional independence that all Central Banks of the ESCB currently enjoy, when the ECB is clearly placed on a substantially more advantageous position, as being the “economic tzar” of all things monetary, and to an extent also financial, in the majority of Member States of the EU, and in the Euro-core which shall have the power to effectively usurp the EU and tailor all policies in such a way, so as to fit its needs? In addition, can a National Central Bank of any Member State whose currency is the euro, be considered as tangentially independent when the ECB shall uphold the right of intervention, clearly forcing its sovereignty, whenever necessary, as in the case of preventing or mitigating some systemic risk on a particular locus of the Euro area? And a fortiriori how can the National Central Banks of non-euro Member States be perceived of as genuinely independent, when it is fathomable that circumstances might arise that will place their own policy agenda at odds with the interests of the Euro-core, and as such with an otherwise preponderant force they will have a hard time resisting?

As with above, we may only speculate at this stage of the process, but there certainly exists a possibility that these challenges may well confront political leaders who have not yet solved the conundrum of a multi-speed Europe. In the end, conflicts of interest and/or of power may arise in all other areas of the EU that are affected by the dichotomy between Euro and non-euro Member States. Ultimately it remains to be seen whether the Aristotelean golden mean can be a feasible way of doing politics in the European Union, or whether the strength in numbers, manifested in, or euphemistically labelled as, “enhanced cooperation” shall become the norm henceforth. It seems quite possible though that the method of consensus politics has been swept into the dustbin of history, perhaps awaiting to be dredged up when circumstances undergo a drastic change.

How will integration proceed, in what ways will the aforementioned chasm be bridged or forever keep on growing till the day it reaches its political terminus; how shall the increasing complexity of legislation over legislation and particularity over particularity, all woven together in complex ways and in different parts, influence the integration process; and above all, what may be the final impact on the everyday life of citizens, and on those currently aloof from the fray of EU politics? No definite answer can be provided at this point in time, given the existence and operation of many variables in the political equation and the institutional uncertainty they necessarily create.

V. The Single Supervisory Mechanism shall make the ECB the most federalized EU institution

To suggest that the EU is a sui generis polity is not a novelty. The modalities emulating systems of both a federation and confederation, blended with other methods of international cooperation, in different facets of the broader architecture, render it such a peculiar entity. A judicious investigation of these particularities merits an essay of its own, for it is a subject too vast to be addressed in this section. What is of importance in this specific context, is the decisive change, or chain reaction of changes, the introduction of the Single Supervisory Mechanism will bring along, in transfiguring the European Central Bank from a quasi-federal entity, to a genuinely federal one, incomplete perhaps, but still asserting a clearly-delineated sovereign authority over a given territory, in a two-level system of economic governance.

Concerning economic governance, the present author finds it appropriate to re-direct the reader to the previously referenced documents on the completion of the Economic and Monetary Union. In addition, it should be stressed, perhaps as a caveat for readers who may come across this text in the remoter future, that we are laboring in a dynamically shifting political and to some extent institutional environment, where nothing must be taken as an ultimate given and where the decisions of one European Council meeting might transcend, reverse or otherwise alter the ways in which certain policies seem to be morphing into. Towards that end, one must also pay close attention to the forthcoming European Council summit of February 7 and 8, 2013 where negotiations on the Multi-annual Financial Framework are expected to be held; negotiations whose outcome may place the foundations upon which future talks on an integrated EU or EMU-specific budget might be predicated, to complement and reinforce the tools for economic governance that have been established (see here and here) and/or are envisaged in legislative procedures that are still underway. [UPDATE February 10, 2013: The conclusions of the European Council on the MFF can be found here. The result does not affect the SSM.]

Notwithstanding the potential changes that may result from these constantly shifting pieces of the greater puzzle, the powers that will be conferred to the ECB by virtue of the SSM clearly indicate an institutional “promotion”, so to speak, to a genuinely federal plateau, where it will have the final say on all issues under its jurisdiction. Ever since the inception of the euro the ECB was trusted with the monetary function of the EMU, i.e. to carry out its operations on all these issues that relate to the quantity and supply of the legal means of transaction within the single currency, and moreover to conduct all necessary operations for the sustainability and integrity of the money markets and credit channels across the eurozone. Nevertheless, supervisory powers remained confined within national borders, as was the case with the ultimate responsibility over domestic banks, in such cases as deposit guarantee schemes and in the somewhat related interconnection of the Eurosystem’s National Central Banks via the Target2 payment system. In short, the architects of the Euro wished to confront the so-called financial trilemma33by choosing national independence over genuine or relative financial integration (the third option is financial stability, which can be regarded as concomitant to the other two). This presumable error is now being rectified by means of the SSM, which shall substitute the principle of national independence, for that of financial integration.

To appreciate the significance of the introduction of the SSM in the concatenation and combination of laws and events leading to the complete federalization of the ECB, we must consider that the SSM is envisaged to confer powers of micro-prudential intervention, apart from the apparent macro-prudential ones, in any bank within the Euro area, regardless of what national authorities may think of it. This complete prudential power, this concentration of duties, we shall refer to as the right of intervention; “right” in the sense that it will be held as a residual power, not necessarily an active one, in line with the principle of subsidiarity and due to the sheer magnitude of transactions that occur on a daily basis, as well as the size of the European banking system, that make the indiscriminate use of such power virtually impossible. The right of intervention is the manifestation of the ECB’s sovereignty over the authorities of Member States participating in the SSM.

Before one may dismiss this theory as mere speculation from an outsider, we may turn our attention to the January 31, 2013 speech of ECB vice-president, Mr. Vítor Constâncio, on the Establishment of the Single Supervisory Mechanism as the first pillar of the Banking Union. In regard to the “extensive powers” the SSM shall provide the ECB with, he stated the following, confirming the afore-mentioned, as well as what I have written in previous blog posts on this very issue, long before this speech (emphasis added):

[An] important feature of the SSM regards its extensive powers in the conduct of its supervisory function. The SSM, with the ECB at its centre, is entrusted with an extensive set of micro- and macro prudential powers, covering all key tasks relating to the prudential supervision of credit institutions. The inclusion of macro-prudential powers is a key element because as shown by the crisis, macro- and micro- risks can actually be mutually reinforcing.

This is not some bizarre interpretation of an otherwise limited mandate provided by the draft legislation. In fact it is what is actually provided for in the proposed text of the Commission (emphasis added):

4.2.1. Tasks of the ECB
The ECB will be exclusively competent for key supervisory tasks which are indispensable to detect risks for banks' viability and require them to take the necessary action. The ECB will, inter alia, be the competent authority for licensing and authorizing credit institutions, assessing qualifying holdings, ensuring compliance with the minimum capital requirements, ensuring the adequacy of internal capital in relation to the risk profile of a credit institution (Pillar 2 measures), conducting supervision on a consolidated basis and supervisory tasks in relation to financial conglomerates. Furthermore, the ECB will also ensure compliance with provisions on leverage and liquidity, apply capital buffers and carry out, in coordination with resolution authorities, early intervention measures when a bank is in breach of, or is about to breach, regulatory capital requirements. The ECB will also coordinate and express a common position of representatives from competent authorities of the participating Member States in the Board of Supervisors and the Management Board of the EBA, for topics relating to the abovementioned tasks.

Interpreting the emphasized parts of this paragraph shall clarify some of the perhaps inchoate truths that have been outlined in the present essay. At first, the ECB shall have the ultimate say over the operation of any and all banks within the confines of participating Member States; for being the sole issuer of a bank license also entails the power of being the sole withdrawer of such a license. However this, as well as the broader shift in paradigm towards the modus operandi of bail-ins, will require the entry into force of the Single Resolution Mechanism, but this is only a matter of time, not principle. Secondly, the ECB is tasked to deal with issues that clearly fall within the sphere of micro-prudential powers, such as the notions of minimum capital requirements, capital adequacy, capital buffers, leverage and liquidity, risk profile etc. All these relate to individual financial entities and therefore also imply the right of intervention, whenever and wherever that may be or perceived as necessary. Thirdly and in tandem with the previous two, the ECB shall effectively dictate the agenda on all micro- and macro- prudential issues that are to be considered at and probably endorsed by the European Banking Authority (EBA). The latter issue also has implications that relate to the previous section on the mechanics of the Euro-state within the ESCB, but what is important here is to note once again that the ECB is clearly given micro-prudential powers, further consolidating its capacity, in clear legal grounds, for direct intervention.

What should also be incorporated in this textual exegesis is that the concept of “risk profile” of an individual bank is rather problematic and may open a sluice gate for broad interpretations. For reasons that escape the scope of the present paper, “risk” is impossible to determine with precision and the task of identifying all of its potential parameters is most likely destined to end in failure. In simple terms, the interconnections of the system are such, the vicissitudes of the market process so unpredictable, the world so rapidly evolving, that no genuine certainty can ever be realized, at least not in the modern financial system; a rather unstable or constantly evolving habitat. Conditions may be such that what was initially perceived as a major component of risk, ends up being irrelevant, while another minor factor becomes the source of instability and so on. What we must draw out of this is that such language allows a rather generous margin of discretionary power to the ECB, however that may be used, in the frame of the new federal powers of the ECB (right of intervention).

As if the above were not convincing, Mr. Constâncio also noted this in his last speech (emphasis added):

The SSM in conducting the initial assessment of the banks’ situation will benefit from the fact that the ECB is well prepared to conduct these reviews and related assessments on individual banks, in cooperation with other national and EU authorities and possibly third parties.

Here too the extent of the ECB’s powers to deal with micro-prudential tasks, is explicitly confirmed.

Having outlined the reality over the two-dimensional powers of the ECB on both the micro- and macro- spheres of prudential supervision, and in order to carry our analysis further, we may proceed to another statement of Mr. Constâncio from that same speech (emphasis added):

Creating a strong centre in a decentralised system such as the SSM, will be crucial to provide the ECB with the necessary means to ensure it will have the resources to effectively fulfil its functions without endangering its reputation. In this context, the articulation of appropriate decentralisation procedures through close cooperation arrangements with national authorities within the unity of the supervisory system will be essential.
The knowledge and skills of the system’s human capital will contribute to creating a strong centre. Therefore the recruitment of skilled and experienced staff, particularly banking supervisors, will be a priority.

How should the allusion to a “strong centre” be interpreted in the light of the otherwise awesome new powers mentioned previously? And what does “decentralization” really imply in the presence of such a strong centre? Aren’t the two mutually exclusive, or is the latter merely relating to operational competences, not substantive ones?

Starting from the last rhetorical question, it is easy to fathom the impossibility of conferring all supervisory operations to the ECB, for the simple reason that the organizational capacity of this institution is too limited to gather, properly asses, and if necessary, intervene in the multitude of transactions that take place on a daily basis, across the Eurozone. For practical reasons therefore the participation of national authorities, of more bureaus that is, is essential. Also it is true that the ECB may be understaffed, both in terms of numbers and in regard to the expertise necessary for these specific new tasks. Given that operational duties must necessarily be delegated to national authorities, it is perfectly reasonable to expect the concomitant use, and probably related re-assignment of functions, of the existing human capital, residing in national supervisory authorities.

Practical need and “common sense” rationalization of tasks shall therefore bring into being the kind of decentralization Mr. Constâncio refers to. While that may be the indubitable fact, one should withhold any judgement at least until after considering the powers underlying this structure. In particular this arrangement no longer represents a confederal order, where both (or more) tiers of authority are holding substantial power on certain issues; but rather stands as a robust hierarchy, with the ECB at the top and the national authorities below it, in what shall be an outright federal design, with no confederal elements whatsoever, bar the resolution schemes and the deposit guarantees, both of which are also expected to be incorporated into the ECB’s range of powers in the near-to-medium term.

By making use of the term “federal” and its derivatives we should provide the caveat that we do so, without any tacit proposition on the satisfaction of the need to achieve an amiable degree of legitimacy and accountability, by means of democratizing output (and perhaps input) legitimacy. “Federal” in this respect relates only to a two-or-more level power structure where ultimate control, state sovereignty narrowly understood, is exercised by the highest stratum of authority in the hierarchical order. Normative statements on the democratization of the ECB, as important as these may be, require a separate and rigorous analysis, with the recognition that the task of truly democratizing a central bank, of placing the money supply and the whole monetary function on democratic vote, may contradict the very raison d’être of the central bank, viz. to provide a final and credible backstop to the financial system under its purview (at least in an ideal realm). Perhaps the democratization of the monetary function may only be realized in the Hayekian theme of the de-nationalization of money, but addressing such perplexities will lead us down the slippery slope of economic theory, which is not our chief concern in this case. Democratic or not, the ECB shall represent, at least in relative terms, the most federal institution in the EU edifice; the most elevated entity in the EU’s institutional landscape one could suggest. Besides, democracy is not germane to the distribution of power in a political system; though it would definitely be the only desirable option. What is meant by that is that we may well have a federation that is dictatorial or, in the case of the EMU, that is predominantly technocratic. Democracy is not intrinsic to this or any other particular form of a state, either in its parts or its totality.

VI. Conclusion

The purpose of the present essay was to examine the main aspects of the Single Supervisory Mechanism, which is envisaged to enter into force in about a year or so from now. The analysis herein did not touch upon the narrowly understood technicalities and specificities of the SSM per se, in large part due to the premature stage of the bargaining process, which may well alter substantially, what now is provisioned on these issues. Instead the approach that was adopted, was an institutional one, of political economy one may say, of seeking to identify, concatenate and explain the most important causes and likely effects of the SSM on the broader institutional morphology of the European Union. Towards that end, the present author has found it necessary to discuss the subtleties over the distinction between a banking union and a financial union; the relationship of the Outright Monetary Transactions programme with the SSM; the dynamics of the rising Euro-state with regard to the operations of the European System of Central Banks; and lastly, the explicit sovereign power the ECB will assert by virtue of the SSM.

Concerning the issue of a banking union as contrasted to a financial union, we provided for the main distinction in the scope of powers each system features. The banking union, in a strict interpretation of the terms, concerns a single rulebook on all issues pertaining to the micro-prudential regulation of the banking sector; whereas the financial union is a level of integration beyond that, for it also encompasses a single system of macro-prudential regulation. In this specific case the area under the jurisdiction of the ECB shall become a financial union, while the rest of the EU shall move towards a banking union.

On the existence and impact of the Outright Monetary Transactions programme, we provided for an interpretation that depicted it as both the prerequisite of and the prolegomenon to the Single Supervisory Mechanism. The reason for postulating thus, has been that the OMT programme is accompanied by a conditionality clause, related to direct funding by the European Stability Mechanism, in cases such as the direct recapitalization of banks; and for such a process to be effective or even possible, European funds had to be accompanied by European supervision or control. The introduction of the OMT has therefore prepared the grounds for the SSM, perhaps prejudicing a decision in its favor.

In respect to the relationship between the Euro-core and the European System of Central Banks, the analysis focused on the potential impossibility of preserving the statute of the latter, in particular the allusion to the support of the Community’s interests. The potential antinomy in the ESCB stems from the fact that the Euro-core, equipped with the SSM, shall have a uniform position, suggesting that we might bear witness to a clash of interests between euro and non-euro Member States, whatever that may imply on the interests of the Community as such. The perhaps speculative assertion of the present author has been that the praxis of enhanced cooperation will effectively render the notion of “Community interest” either obsolete or tantamount to “EMU interest”.

Lastly, the current paper featured an analysis of the institutional promotion of the ECB from a semi-federal entity, to a genuinely federal one, by virtue of the SSM. It was suggested that the SSM entails the right of intervention wherever and whenever that may be necessary, not only in the sphere of macro-prudential supervision and regulation, but also in the realm of micro-prudential authority. By asserting a micro-prudential role, the ECB shall intervene in any part of the financial system, regardless of what national authorities may perceive as appropriate; and by that account, it shall exercise its federal supremacy, its sovereignty, over the other authorities in the SSM structure.

With this introduction to all of the above, the present author may now offer his opinion that the Single Supervisory Mechanism is indeed a catalyst in the European integration process, though not necessarily in realizing the gradual reconciliation or convergence of the multiple speeds comprising the European Union; but rather as a powerful impulse that may substantially contribute to the rise of a federal state in Europe, not necessarily from the EU, but most likely, within the EU, whatever that may imply for future European politics.

On European meta-nationalism: A critique of the exogenous impetus to integration

2013-02-04T09:17:00.000+01:00

The Berlaymont building, housing the European Commission, on a snowy day.
Picture credit: Protesilaos Stavrou CC BY-NC-SA

One of the essential features of the European federalist movement that escapes the attention of many—federalists included—is the heterogeneity of ideas existing and growing under the conceptual canopy of 'federalism', with this very word—'federalism'—being as I conceive of it, open to diverging interpretations ranging from statist ideologies to libertarian ones, with varying permutations and combinations between them.

What theories the federalist movement has propounded in the course of its history will not be my chief concern in the present article, not because I labor under the delusion that we cannot derive any knowledge from historical experience, but due to my conviction that regardless of the actions and postulations of previous federalist generations, one can only converse with or challenge modern federalists by addressing the very premises of their existing ideology, their most cherished aspirations and their profoundest misunderstandings, if there are any after all; not by making judicious reference, in splendid sectarian fashion, to an hagiographic version of the life and works of some allegedly indisputable persona or other much-touted authority of the past; rather by scrutinizing their current propositions, unmasking and identifying the weaknesses underlying the hermeneutic patina of their rhetoric; not for the sake of annihilating that which has been concocted or meticulously forged, rather for engaging in a constructive and thoroughgoing critique of it, with a hope of stimulating a discussion that will improve it from within, or, at the very least, that will raise awareness and bring into focus the inherent diversity of this ideo-political movement.

Being oblivious to the aforementioned heterogeneity, one may only assume that federalists share the common objective of establishing a European two-tier state which will override some, most or all of the existing nation-states in Europe; a state that will only differ from its constituents in degree, not structure or fundamental principles. This impression can be well justified, given that the majority of today's self-defined federalists, politicians, citizens and technocrats alike, have valorized "integration" as the ultimate telos of their efforts. This is so since integration and this magnificent phantomality of more Europe have undergone a quasi-mystical transfiguration from rather empty notions into pseudo-sacrosanct objectives, to be pursued in their own accord.

The recrudescence of nationalist and statist tenets

Many federalists of our day are, in my humble and perhaps uninformed opinion, merely reproducing some of the oneiric concepts of the past, as all they really wish to accomplish, once the veneer of progressivism is removed or penetrated, is the construction of a state that will refurnish in a brand new package the tenets of statespersonship that dominate political thought at least ever since the Treaty of Westphalia (1648) and the French Revolution (1789), those being encapsulated in the following four presumptions:

state sovereignty: the supremacy of the state's interest and edicts as against its subjects and the tacit statist rights of coercion and control, which underpin the very promulgation and implementation of all secondary rules in a polity,
nationalism: the formation of a collective identity based on a web of fictions about the 'self' and the 'other' and the entailing prejudice that the 'self', this phantasmagorized perception of the collective self, is mystically tasked to uphold that which is perceived as germane to it,
collective essentialism: at bottom this is an Aristotelean meta-ethical conviction in the existence and precedence of the collective ontology, the nation, the society, the people, the tradition etc. over the individual human being, and
methodological territorialism: the device, or rather the chimera, of identifying a state and a collective identity to a clearly delineated territory, which is a necessary presupposition for the realization of state sovereignty and for its moral justification.

These four shibboleths have formed the basis of all state-building processes in the centuries hitherto and, thanks to the intellectual bodyguards of the state per se, have bestowed a powerful impression on the people that any and all emanations of eudaimonia, however defined, cannot be even remotely realized or truly experienced in the absence of a robust hierarchy, where a selective elite imposes conditions and moulds society, in accordance with or in the name of, a tutelary idol, a spectralized elevation of a political process or conception, an exalted myth that is alleged as self-evident and universally true. In our case this has been the task of the federalists' establishment, which oscillates between the principles of liberty and the ethics of sovereignism, in what now emerges in Europe as a timid yet determined European meta-nationalism, manifested in the politics of the Eurocore, of blithely proceeding towards "integration" and "more Europe", towards the completion of the Economic and Monetary Union, by circumventing fundamental values and by casting aside anyone who disagrees with this bundle of propositions, this secular dogma (for more on the completion of the EMU see here, here and here).

Underpinning all of the aforementioned is a tacit fear of the "other", an anxiety that rapacious forces are willing to challenge or devour "us". There exists a narrative that "we" must band ourselves together to rise up to these potent threats and that "we" must do whatever it takes to stick together, so that "we" are not extinguished in misery, and implicitly, that "we" should regain or attain a hegemonic role over the "other" by virtue of the Eurocentric presumption that "we" have discovered the one and only truth, the conduit to all knowledge and to prosperity and by that account "we" are entitled to demand from the "other", the eternal "other", to conform with "our" social imaginary, our "truth". When we are exposed to indignant statements that unless we form our little European neo-mercantilist gang, we will no longer be in the centres of international power; when every technocratic stratagem is justified as a necessary reaction to some external disturbance, perceived or real; when exogenous stimuli are invoked to justify and to accelerate integration as such, even if fundamental principles have to be undermined; then we are in effect bearing witness to the embryo of the age-old 'we-they' syndrome, which can only pit us in a race to the bottom with the "other" and which will coercively cast upon us an identity that we must conform with, in the name of whatever fantasy the demagogue, politician, or mild-tempered technocrat has put forth.

The importance of the narrative in a self-instituting polity

Politics is about the allocation of power among the members of society. Ideology is about the modalities of such distribution. An ideology is made manifest in a narrative. The prevailing narrative of a people, the volksgeist, and/or the prevailing spirit of the times, the zeitgeist, are of great importance in the political ebb and flow, though not in their essentialist, Hegelian sense, in determining the ways in which power will be structured, ordered and consolidated.

Any self-conscious meta-political impulse emanates from a compelling narrative. It is all about the "why" permeating and empowering change, and by that account, it is what influences and determines the end and the means of this reformulation. To overlook the importance of the "why" is to remain ignorant to the broader impact of the reformative dynamic and thus constitutes an irresponsible decision that may result in perverse or unwanted results. Practical people will find little value in such discussions, dismissing them cavalierly as armchair theorizations. Such a denial is fallacious for it first asserts that practical people are insulated from any ideological predisposition whatsoever and second that praxis can be separated from theorisis, which is an impossibility for one must think before one may act. Reformative action is purposeful—it necessarily is the externalization of some theory, otherwise it is not "action" but mere "re-action", and reactionary measures can be, or tend to be, unsound.

What is this "why" of mainstream federalists? I would certainly like to hear the views of others on the subject, but from discussions I have had in private and by monitoring the debates of certain prominent figures in the federalist movement, I am of the belief that there either is great confusion in the movement, or there exists a great sense of reaction to exogenous stimuli. Perhaps these are the two sides of the same coin.

Some wish to have integration so that Europe may remain part of the G20, G8 or whatever other economic conglomerate of world domination, as if membership per se in such organizations renders the lives of regular folks more amiable. Others raise the alarm for Europe returning back to certain abandoned methods of production in a hasty attempt to be protected from the vicissitudes of rising competition in world trade; where the very idea of trading and being interdependent with the rest of the world is seen as more or less evil or as a sign of weakness. And yet others want Europe to integrate so as to be truly sovereign and independent from whatever villain they may present. The standard bugaboos were the USA and China, while during the eurocrisis this cultivation of ghosts found fertile soil in the depiction of "the markets" as purely malevolent forces, conniving to jeopardize the ameliorative scaffolds caring leaders had raised for their own people. In a nutshell, whenever the impetus to integration is provided by an external source, actual or imaginary, and whenever it is presented and exploited as such, the new nationalism of Europe, the European meta-nationalism, comes out in full panoply.

Fewer are those who see integration as endogenous, as a means to an end, rather than an end in itself; it is those who need no ghosts to justify their position. The "why" for integration is in this case an extension of fundamental principles, of the maximization and greater distribution of liberty, welfare and peace. Integration in Europe is or can be the means to achieving or to extending such lofty ideals; it is a means not an end, for if it is an end in itself, then it shall suffer the fate of abuse by those willing to meet it, regardless of implicit or explicit costs and effects.

Ultimately, the way one speaks determines the way one thinks and if the oratory for the integration of Europe reflects the nationalism of the past, elevated to the European level, then it is a sovereign European nation-state that we shall have, with the concomitant ills this engenders and impregnates. Towards that direction, I am of the view that many fellow federalists may need to ruminate more intensively and perhaps reconsider their approach, in parts or in its totality.

My comment on UK's Soft Secession from the EU

2013-01-25T17:31:00.002+01:00

Picture credit: Horatiu Ferchiu

Fellow blogger Horatiu Ferchiu has posted an interesting article on the case of the UK in the EU, titled "Soft secession in the EU?". Here is the 'short' comment I left on his blog:

This is a very interesting approach indeed. I shall leave the parallels with the American state-building process and its related struggles to others who are more knowledgeable on the topic. Allow me to add a few more words on the theme of the euro-bloc which is of particular interest to me and which is among the main themes of my blog (by the way, thanks for the link).

The ideas on federalism notwithstanding, European integration was initiated as a project of international (intergovernmental) cooperation, effectively falling within the spheres of 'foreign affairs' and 'international trade'.

Though one may identify a number of ideas behind the initiation of the European integration process, it is my humble opinion that a thoroughgoing inquiry into the matter will leave us with two fundamental principles underpinning all things 'European':

National sovereignty: The governments of member states were eager to enjoy the 'increasing returns to scale' deriving from accession to a broader economico-political community. Nevertheless, none was prepared to overcome the powerful social imaginaries that dominate European statesmanship at least since the Treaty of Westphalia (1648) and the French Revolution (1789), viz. state sovereignty and nationalism (the latter term is not used to describe 'far-right' parties–this is a misunderstanding and a misuse of the original term, since in its actual meaning it refers to the precedence one offers to the perceived collective ontology of the 'nation' over individuals domestically or of nations/individuals abroad). This was mainly made manifest in the praxis of consensus politics, or more lyrically if you wish, with the respect of–and search for–the Aristotelian golden mean,
Economic liberalism: The Member States would harmonize their policies to dismantle trade barriers among them, so as to realize the potential of a free (free-er) market in Europe (Western Europe at the time). However, contrary to the liberal doctrines, the ends of free trade would be achieved by the meticulous application of mercantilist means. States agreeing to 'mutually' remove barriers to trade are not challenging the principle of such restrictions, but only reconsider its scope and extent. This is important as it does not remove the possibility of such barriers being reintroduced, should conditions, perceived or real, necessitate such action. The case of migration controls that you mention is but the tip of the iceberg and the issue certainly transcends the UK problématique since other Member States have also resorted to similar modes of conduct. The point is that the idea of mercantilism was never challenged as such, but was merely reconfigured to suffice the political ambitions of the time.

For reasons which I need not enumerate in the present comment, this system was rather sclerotic and could only result in maladministration or, even worse, end up in what we may call 'planned chaos'. Whatever progress was achieved in the years between the Treaty of Rome and the Treaty of Maastricht was in large part thanks to the rulings of the European Court of Justice. For instance, it is the ECJ's jurisprudence that consolidated the four freedoms of the single market.

The limitations of the original modus operandi were readily apparent, so with the Treaty of Maastricht European leaders took the timid, yet radical, decision to shift from the principle of consensus to the praxis of enhanced cooperation. The creation of the Economic and Monetary Union (the Euro) was the epitome of this change in approach and, most importantly, it heralded the start of what may I may term "Eurocore politics", i.e. the idea of a European two-level state emerging within the EU architecture, eventually usurping the latter.

I will not delve on the Eurocore politics here, since this is something I effectively do on a regular basis through my blog posts. What I may say is that the direction Mr. Cameron has pointed to is but the counter-force to the momentum of integration that has been developing ever since 1992.

The important particularities and detail complementarities aside, what we are witnessing here is a mutually reinforcing dynamic of divergence, while the Euro-state emerges as a sovereign entity on the continent, smaller in terms of membership than the EU, but far more significant in all other respects.

Thanks,
Protesilaos

The above was just the prolegomenon to a more elaborate analysis I intend to write in the coming days, so stay tuned if you happen to be interested.

On the European identity and the nation-less democracy

2013-01-20T11:57:00.001+01:00

The mythical origins of Europe
Picture credit: Wikipedia

As I have already noted in several of my last articles, a sovereign two-tier state is emerging within the European Union; a state that will be relatively limited in scope, as it shall be confined, for the time being, to fiscal, monetary, financial, budgetary and economic policies. This state shall be none other than the Economic and Monetary Union (effectively the Euro area) elevated to the last level of political integration in its ascertion of sovereign authority, manifested in the federal right of intervention; a process that will require some time and will be completed over the medium term, but which has already been decisively set in motion (for a tangible example of such sovereignty see my analysis on the distinction between the banking union and the Single Supervisory Mechanism).

Concomitant with the rise of a state is the problématique of political legitimacy, of how the state relates to its subjects and how its operations and preponderance are accepted by them. No state can last without any kind of support. In fact, all states throughout time—tyrannical ones included—have been in need of a minimum of consent from their subjects, though not necessarily in the form of active support, but merely as passive resignation to some inevitable exogenous impulse.

Nationalism as the identification of the state with the people and the land

In ages past, the patina of authority to the rulers was provided by the clergy, in perhaps the oldest alliance of the state with the intellectuals: the symbiosis of state and organized religion (the Church). The ruling class was either considered to be appointed by (the) God(s), or they themselves were self-centered as gods or semi-gods, with the clergy's eulogies facilitating such presumptions. Historical exceptions are those cases were people acted as autonomous, as having recognized, perhaps unconsciously, that human qua individual and collective is the sole institutor of all social life and, by that account, the community of individuals forming a polis would, by itself, determine what the law, the order, the terminus would be. The Athens of Pericles, the Italian city-states of the Renaissance, despite whatever flaws and limitations we contemporary people may identify in them, were among such autonomous societies, whose midpoint were the endogeneity and potential variability of the social imaginary.

In contradistinction to the autonomous polities, all other societies were characterized by heteronomy, by the alienation of the institutor—human—from the institutions, in the formalization and hypostatization of the latter as objective truths, as absolutes, as products of exterior forces bestowing upon society a given order, assumed of determining their conduct by virtue of some 'natural', 'divine', 'historical' or other greater magnitude that operated in the absence of human action and creation or in spite of such action and creation. The feudal status quo of the Middle Ages clearly conforms with this categorization.

With the rise of representative democracy an historical compromise between the forces of statism and populism (in the sense of 'the people') was achieved, in the formation of nation-states, viz. states that not only depended on a more or less popular support, but were above all identified with a given territory and people, not only in present time, but for eternity. Nationalism was the guiding social imaginary, the nation was the tutelary figure so to speak, or rather the intelligentsia's narrative, in reconciling the doctrines of state sovereignty and conscience, as fleshed out in the Peace Treaty of Westphalia (1648), with the exuberant forces of democracy, socialism and federalism, all of which were found in opposition to the ancien régime of state rule and supremacy. The nationalist tenets can be discerned in four principal propositions:

the nation is a timeless, natural ontology, anterior to individuals, with certain intrinsic features that determine its character or form,
the people existing in present time, comprise only one dimension of the national whole, with the other two being the ancestors and the posterity,
the state is the incarnation of the nation and by that account it shares insoluble ties with the people (the nation in present time),
the nation-state-people has a natural habitat, which is rightfully its own and which is therefore the territory where the national will may be established.

The European political order of modernity, from the French Revolution thenceforth, was essentially predicated in variances of the above four, in the dissolution of empires or of fiefs-states and their consequent substitution with nation-states, whose squabbles were no longer to be perceived as antagonisms between the ruling elites and their mercenaries or serfs, as was the case in pre-nationalist times, but as conflicts between entire nations, in perceived primordial struggles and hatreds. The rise of total war, exemplified in the two World Wars can be attributed to this very shibboleth— the product of what may be called a 'we-they' syndrome.

With the end of WWII many understood the limitations of nationalism, as a compound of beliefs that could only bring fission and engender self-destructive competition between people. Those enlightened or audacious enough to sever all links with the nationalist tenets had recognized the original principles of democracy, socialism (in the sense of 'for society', not in the sense of sovietism/communism) and federalism, as antithetical to state rule and all its related facets, such as e.g. the identification of the state with the people. The European integration process, with all its undeniable flaws, was initiated in this spirit, to develop a federal and democratic polity that would differ fundamentally from the statist-nationalist paradigm of political organization; a polity that would not compartmentalize human beings along border lines, but which would overcome these rigidities in creating an effectively nation-less democracy; a polity of cosmopolites contrary to ethno-polites, if I may say so.

Do we need a 'European' people?

Ideas never die, they may be swept into the dustbin of history only to be dredged up again at a future date when conditions allow so, but they never disappear entirely from the world, as they represent certain deep-seated beliefs or perceptions of humans in relation to phenomena. Nationalism could be no exception. To avoid any misunderstandings, I may stress that by 'nationalism' I am not making use of a smear term to denigrate anyone, nor am I utilizing it in the sense of "far-right", "extremist parties" etc. Nationalism is, in my understanding, a broader world-view underpinning many (most?) modern political ideologies, including a number of those that are or purport to be leftist (for instance, myself as a cosmopolite, I do not agree with such notions as 'inter-nationalism').

Against this backdrop of conflicting ideas being at the forefront of intellectual debates and of European integration reaching a point where key constitutional questions require satisfactory answers, it is pertinent to delve in the theme of a European identity, of a European populous. Do we 'need' a European people as an essential element or a prerequisite of European democracy? Or may we proceed to a new form of political organization, one that has yet to gain prominence in history?

Anyone following my rationale and the implicit ideas I am propounding has anticipated my suspicion of such notions as 'European identity', 'European people' etc. on the grounds that these are essentially couched in nationalistic terms. In particular, they rest upon the belief that a state has to be identified with a given people and hence 'a people' has to be created and be clearly delineated. The argument is plausible once the notion of 'unity' is brought into focus, however this account leaves much to be desired, for it interprets such unity only in its internal dimension, not its external one, as a sense of belongingness between individuals as against other individuals abroad.

The moment we recognize a need to develop a fixed identity of ourselves, a stereotype of us, we will have to do it, wittingly or not, in accordance with the nationalist method, by defining a territory that is 'ours' and a set of values that are 'germane' to 'us', of which we are the best and perhaps sole representatives in contrast to what 'others' have as inherent to them.

In my humble opinion, this position of what I call European meta-nationalism, is specious even though it is driven by sincere and, in many ways, progressive sentiments and ideas. For while it introduces a reformative element, it remains trapped in an antinomy, in the web of assumptions and prejudices of older doctrines of statism and of political organization. Ultimately this will bring about an era of gigantism, of 'big nations' competing on the global setting with one another, in the recrudescence of the mercantilist order, via currency wars, trade restrictions and other devices of 'we-they' classifications.

What I consider as optimal, in juxtaposition to the European meta-nationalist line of thought, is a federal, decentralized and bottom-up political order in Europe that will recognize and respect two fundamental principles:

cosmopolitanism: all humans, regardless of origin, no matter whether they were born or grew up in Europe or any other part of the world, can participate and contribute to a European democracy, by virtue of them being human, nothing more, nothing less; because as Socrates rightly claimed virtue can be taught, meaning that 'our' values are not ours in the possessive sense of the term and hence everyone has something to learn and to teach,
individuality: a system that will respect the individual person, as a free being and as a contributor to political organization, eventually bringing forth systems of democratic decision-making that are deliberative and participatory.

On the one hand cosmopolitanism places a check on segregative tendencies, while on the other individuality objects the figment of state being equivalent to society, therefore demanding a genuinely decentralized and inclusive political system and a distribution of power that preempts and prevents the control of human by human.

Concluding remarks

It would be preposterous to claim that my view is anyhow superior to anyone else's or that this article exhausts the topic I elaborated upon. What has been forwarded here is but the prolegomena to an understanding of the world, to my understanding at least, along subjectivist and libertarian federalist lines.

The themes of sovereignty, democracy, authority, identity, European integration and all that is directly or indirectly related to them, can definitely be interpreted from a variety of angles, where perhaps an eclectic approach may be the conduit to knowledge, or to the discovery of the Aristotelean golden mean, in proceeding towards our future.

Since I wrote this article, I may also direct the reader to the blog posts of fellow bloggers Horatiu Ferchiu and Euronomist who have also recently written on the theme of a European people. What I have postulated herein is not in response to them or anyone else in particular, but is, I believe, part of the broader debate; a debate which will hopefully broaden and deepen.

Whatever the case, anyone willing to concatenate the series of events that have been taking place over the last years, will realize that we live defining moments in the history of European integration and, therefore, what we do or abstain from doing now, will have an impact, cardinal or ancillary, on the decisions and realities that are to follow. For democracy to be brought into being, if we really are democratically-minded people after all, action is necessary and so are vigilance and alertness to the workings of power. Some might, on these grounds object to 'armchair theories' such as the above, arguing that theorizing is not practical and cannot yield any substantial results nor bring forth the reformulation of the broader social imaginary that is the narrative of the age in the polity. In my humble opinion this accusation is erroneous as it neglects the fact that the mother of all action is thinking, writing and deliberating.

One must first know what to look for, before venturing to seize it. Do we know what Europe we want?

Tougher rules on Credit Rating Agencies are not enough

2013-01-18T12:39:00.001+01:00

Financial ratings of European States by Standard & Poor's
Picture credit: Wikipedia

This week the European Parliament adopted a resolution which decisively restricts many of the operations of Credit Rating Agencies (see provisional edition of the final text). Ever since the beginning of the Great Recession, roughly five years ago, Credit Rating Agencies have been regarded, correctly or erroneously, as the culprits of the financial and economic crisis that befell humanity. The overall narrative underpinning this decision was that these private agencies held substantial market power, since their ratings were the single most important determinant in shaping the portfolios of investors. Collateralized debt obligations and other toxic financial derivatives were branded as "risk-free", courtesy of the excellent ratings from the triad of Standard & Poors, Moody's and Fitch. Price signals and other underlying factors were thus obfuscated or severely distorted, effectively engendering egregious malinvestments and resulting in heavy distortions in the capital structure. A great deal of truth can certainly be found in all these views and, in that respect, the European Parliament's resolution is a step in the right direction. Nevertheless, much of the broader picture has been brusquely ignored, wittingly or not, in what has become a post-modern witch hunt against financiers and market actors.

In particular, politicians and opinion molders were spot on in their accusations of the graft and ethical frailty inherent in the modern financial system; and they were also correct in stressing the oligopolistic status and excessive market power of the three major rating agencies. Where they failed lamentably, was in not pointing out the set of fiscal, monetary and regulatory policies that fostered this situation of corporatism, cronyism and corruption. Their pontifications omitted the fact that these agencies were impregnated by the chimerical policies of the "Great Moderation", viz. those economico-political views that stem from the neoclassical synthesis of mainstream economic thought and which in effect advocate the 'management' of the economy through the combined efforts of government and established corporations. What the uninformed refer to as "free market" is nothing but a neo-mercantilist system ruled by the invisible iron fists of big government and big corporations; this system has nothing or very little to do with the principles of genuine competition, free exchange and voluntary cooperation.

Credit Rating Agencies enjoyed an official oligopolistic status and their ratings were treated by official entities—with the European Central Bank being one of them—as cardinally important indicators in the assessment of risk and evaluation of assets. In other words, policy-makers used such credit ratings to conduct their 'public' policy.

Largely thanks to the misguided Basel Accords on capital adequacy, which have managed to produce this magnificent phantom of 'zero-risk' assets, these rating agencies could determine which assets were to be considered safe or not; and could, by that account, channel resources in any way they wished to, merely by providing their patina of authority, found in their top ratings (I recommend reading the excellent analysis of fellow blogger and economist, Vuk Vukovic: Political economy of the US financial crisis 2007-2009).

In a nutshell the awesome power these "big three" had, was offered to them with alacrity by public institutions and authorities. Thus a fair assessment of the subject now under discussion must point to the fallacious assumptions that are omnipresent in modern politics. These are most often made manifest in laws that insulate certain corporations from genuine competition, by increasing barriers to entry, or by directly providing privileges and sweetheart handouts shrouded in public-private joint ventures; or occasionally, when things allow or call for it, in pseudo-patriotic and quasi-socialistic palaver which presents such cozy relationships as benign for "the homeland", "the people", "the nation" and whatever other collective imaginary the government in charge may make judicious reference to, in its effort to justify its policies.

However, one should recognize the drastic change brought about by the vicissitudes of the Great Recession. As I noted in a previous analysis:

Ever since the Great Recession commenced, the three established credit rating agencies (Standard & Poors, Moody's, Fitch) have lost the "credibility" they once enjoyed. Their excellent ratings for financial derivatives and other assets that proved to be toxic, effectively forced investors to reconsider their methods in calculating risk and in pricing assets. These agencies proved to be utterly oblivious in predicting the crisis, as their ratings suggested that the market was rather robust, when in truth the bubble was becoming increasingly unsustainable.

In addition, the effective transformation of the European Central Bank to what may be called a dealer-of-last-resort, courtesy of its Outright Market Transactions programme, has effectively rendered all such ratings irrelevant or ancillary. What prudent investors are now chiefly concerned with in purchasing sovereign debt or other assets, is political and institutional factors; hence speculation will be contained to the effectiveness of the conditionality clauses that are entailed in the OMT, or by extent to the success of the recent decisions for the completion of the Economic and Monetary Union (I recommend reading some of my latest posts on the role of monetary policy, see here, here and here, among others).

Given the aforementioned, I am of the view that tougher rules address, adequately or not, the symptoms and the concomitant effects of the problem, not the root causes. The stench of corporate capitalism (neo-mercantilism) still lingers in the corridors of power. As such, we must bear in mind that efforts which are only contained in the regulation of these agencies, rest on a misdiagnosis of the underlying presumptions of the politico-economic system that engendered the Great Recession, the Eurocrisis and all that is related to them.

On another level, the issue cuts far deeper, down to the epistemological issues of modern economics, where thinkers have not yet escaped from the fictions and byproducts of formalism and scientism. It seems to me that politicians have been willing to rectify their previous approach to the matter, whereas academics have been ever-more determined to obstinately cling on to their shibboleths.

With the insights of heterodox schools and in particular of radical subjectivists still cavalierly disregarded by the economics' establishment, one cannot expect any kind of thoroughgoing reform of the discipline. Economics is being falsely branded along the lines of physics, and thus it may only misinterpret reality by throwing a camouflage of ostensible objectivity and of alleged truism over things and conditions that are profoundly relative and subjective. Without a change in economic reasoning, policies will be confined to sub-optimal levels, of tinkering with the superficialities of existing challenges.

The distinction between the Banking Union and the Single Supervisory Mechanism

2013-01-16T08:22:00.001+01:00

With the plethora of information available, it can be assumed that even the uninitiated to the mechanics of the Euro and the Economic and Monetary Union have recognized the importance of a financial union to underpin the single currency and to ensure its integrity, at least financial-wise. What has yet to be made clear is the subtle conceptual and practical dichotomy between the notions of a banking union on the one hand and the Single Supervisory Mechanism (SSM) on the other; with the latter being expected to be infused in the corpus of the European Central Bank's competencies within the next months (a year or so from now).

Banking Union and the Single Supervisory Mechanism are not the same

Strictly speaking, the concept of a banking union is profoundly distinct from that of the SSM, in that it encompasses areas of policy pertaining to what may be referred to as 'micro-prudential'. These are regulations on the specific workings of the components of the financial system—of individual financial institutions—and relate to factors and metrics determining the various aspects of risk. A banking union is a system featuring an integrated rulebook on microprudential policy with provisions on issues such as core tier capital, liquidity, leverage etc.

In simple terms, a banking union in the EU will exist when all Members States adopt uniform rules on the regulation of their banks, perhaps with ancillary discrepancies on non-substantive aspects of the laws. Responsible for such competencies, at least for the time being, is the European Banking Authority (EBA) which was established on January 1, 2011 and which carries out its operations by conducting, inter alia, those 'stress tests' and exercises on capital adequacy some might have recently heard of. In addition, the distinction is important for legal purposes as the EBA is competent over the whole single market, whereas the SSM shall be confined to the euro area (remember that the Euro area does not encompass all EU Member States). With that said, it should also be noted that in light of decisions towards further integration, there currently is a draft report at the European Parliament, on this very subject, by Mr. Sven Giegold.

In contradistinction, the Single Supervisory Mechanism, which shall become part of the European Central Bank, and which shall, by that account, concern the Member States whose currency is the euro, is devoted to the 'macro-prudential' supervision of the financial system, in overseeing developments on those factors which are perceived to contribute to systemic risk, i.e. to a bank, network of banks, transaction or web of transactions, placing a perceived or actual risk of contagion—of an externalization of a shock—on other economic magnitudes locally or, most importantly, across the area. The perhaps debatable rationale supporting this decision is that the ECB, being the institution that performs the monetary function of the EMU, may balance or complement monetary policy with macro-prudential measures, in whatever modalities these may be woven together, to produce a coherent and systematic approach vis-à-vis the euro area.

The monitoring of aggregate imbalances is the first priority in this context. However, as I explained in my previous analysis on the SSM, ECB supervision shall be substantiated with effective preventive/intervention powers, eventually delving in the micro sphere of prudential supervision, to address and prevent an undesirable accumulation of risk from resulting in generalized instability. In practice, the ECB shall be expected to investigate specific cases and to enforce pecuniary or other penalties on financial institutions that fail to comply with whatever standards; and, most importantly, the ECB shall become the single issuer and withdrawer of bank licenses in the euro area—a power it may resort to if conditions for the mitigation of contagion call for 'extraordinary measures', however interpreted. Moreover, the ECB shall hold the power to decide on the restructuring of a bank by imposing debt-equity swaps to senior and junior bondholders as well as unsecured depositors; a scheme known as bail-in in contrast to the bail-out where funds not directly related to the failing entity are mobilized in its support, without any definite qualifications. For such thoroughgoing powers to be made real the Single Resolution Mechanism (SRM) must also be brought into force, which is to be expected soon after the introduction of the SSM (since I made reference to the Giegold report at the European Parliament, I may also direct the reader to the report of Ms. Marianne Thysen, which deals with the legal aspects of the SSM).

As such it could be suggested that the banking union is essential for the full realization of one of the four freedoms of the single market, namely the free movement of capital; whereas the SSM is an integral part of an integrated currency union whose monetary policy is not compartmentalized along national borders, but which instead represents the federated system it actually is.

The combination of these two distinct areas of policy, of the micro- and macro- prudential spheres, we may call it a 'financial union'. For the financial union to work, there is no doubt whatsoever that both elements are essential; nevertheless, it should be stressed that their conceptual separation is the prolegomenon to the propounding of a systematic politico-economic interpretation of the topic, one that stands up to the requirements of academic precision and rigorous analysis. Besides, we may already discern that once these compounds are set in place the Euro area shall feature a financial union, it shall be more fully integrated that is; whereas the EU shall be sufficed with a banking union, which will nonetheless remain segregated, in financial terms, between Euro and non-euro member states, whatever the political implications of that may be.

Federal sovereignty of the European Central Bank

With the above-mentioned categorization in mind we may also appreciate some more profound political elements of the integration process, pertaining to the emergence of a sovereign, federal state within the EU, comprising the Euro bloc. Notwithstanding the developments occurring on the fiscal and budgetary fronts, regarding the economic governance of the Economic and Monetary Union, the Single Supervisory Mechanism shall bring into being the 'federal sovereignty' of the ECB over the Eurosystem, as it shall confer to it the most important of all powers in a two-tier political edifice, viz. the right of intervention as a preponderant/superior entity.

In formal terms, or rather as a starting point, the ECB shall place under its purview only a limited number of European banks, perhaps around 200 out of the total of 6000, while the rest shall fall under the oversight of national supervisory authorities. It is assumed that the ECB need only stick to the task of checking on those banks that are systemically important, probably due to their intense cross-border operations. Nevertheless, a number of factors, practical, legal and economic shall make the ECB responsible for all euro area banks, probably in a system of delegated powers, in accordance with the so-called principle of subsidiarity, where national authorities are merely carrying out operational tasks, as assignees of the ECB and not as 'independent' (aka sovereign) bodies.

One such element, often escaping the attention of policy-makers, relates to the very nature of modern finance, where systemic risk, direct or indirect, is inherent in all banks. The complex, interweaving web of transactions that concatenate and bind together a number of financial institutions, in multiple ways and varying degrees, effectively suggests that no bank can be insulated from the vicissitudes of systemic instabilities or distortions. The federal right of intervention shall be brought into force, sooner or later, once it becomes readily apparent, even to those oblivious of the anatomy of the financial system, that any effort to draw an artificial division between 'small' and 'large' banks, to keep the ones hermetically shut from the others, shall eventually be rendered futile and self-defeating. Once a financial instability, or a local stress perceived of affecting the European level, surfaces and reverberates within the confines of the euro area, 'federal action' shall be brought to the foreground, as the most evident realization of the ECB's sovereignty.

Concluding remarks

Understandably the issue can withstand scrutiny from at least three angles, namely the political, the economic and the legal. What has been written herein certainly does not exhaust the subject. The EU is on its own account a very complex system in all these respects and (unfortunately) it so happens that details or distinctions such as the above, which superficially appear to be nothing more than exercises in hermeneutics—perhaps tantamount to the efforts of medieval monks to discern the number of angels fitting on the head of a pin—can be of paramount importance in influencing or decisively shaping the conduct of individual citizens.

As I already noted in my previous article, the ECB, equipped with its prudential powers, shall represent, in relative terms, the most complete version of a federal institution in the EU. With the euro-state asserting shape within the institutional milieu of the EU, we shall wait to see how other state functions, namely legislative, executive and judicial, will be developed. Will the European Parliament metamorphose into a genuine federal parliament, with the Council of Ministers becoming one of its two chambers? Will the Commission transform into a directly elected government? Will the lacunae over the supremacy of EU law be covered in a European constitution, clearly delineating the institutional order of Europe? Or shall the technical aspects of the system be reinforced in the rise of a confederal order, where the European Council in tandem with a technocratic Commission shall reign supreme?

These and many others are the questions for the months ahead; questions that can be inferred from the appreciation of those seemingly minor features of the broader picture, which historiographers of the future may pass without notice.

Eurocrisis far from over: Some of the challenges ahead

2013-01-12T12:45:00.002+01:00

I am of the opinion that to understand the politics and orientations of the eurozone, one must start from assiduously studying the remarks of the European Central Bank's president, Mr. Mario Draghi, its vice-president, Mr. Vítor Constâncio and the other members of the institution's executive board. The reason I postulate thus, is that the ECB reflects and/or shapes the broader ideocentric perception of the eurozone in at least two ways:

It is the incarnation of the timid, gradual yet radical shift in approach to European integration, from the principle of consensus between member states, to that of 'enhanced cooperation', even though during the eurocrisis this evolved or devolved into the dominance of duos and cliques such as that of 'Merkozy'. The ECB represents a 'federated' monetary system, within a broader politico-institutional milieu that is not genuinely federal, but which rather represents a hermaphroditic political entity, in that it contains properties of federalism and confederalism. Heretofore the ECB has lacked an essential feature of central banking, namely macro-prudential responsibilities and powers. With the Single Supervisory Mechanism soon to be infused in its corpus, and with the Single Resolution Mechanism to follow soon after, the ECB will represent, in relative terms, the most complete version of a federal institution in the EU.

The other reason why the ECB is of cardinal importance to appreciating the politico-economic reality and prospects of the EU/Eurozone pertains to the fact that it is the embodiment of a very precise and specific brand of monetarism, namely the Germanic one. As I noted in my last article on the monetary policy prescriptions of Mr. Jens Weidmann the the European Central Bank was modeled according to the German Central Bank, the Deutsche Bundesbank, both in its unassailable institutional independence and its relatively limited mandate of not delving into the fiscal front, by focusing exclusively on inflation targeting. It could be claimed that the ECB's extraordinary measures to hold together the single currency area have been in 'violation' of its formalistic monetarist mandate, for it is clear that all three programmes on this account, namely the SMP, LTRO and OMT, had all been concocted to indirectly finance budget deficits; in other words to provide a convenient substitute to fiscal measures. Personally I contest such a position on the grounds that the tenets of monetarism do not really exclude such expansive and aggressive praxis, for in truth this economic ideology is but the keynesian worldview shifted from the fiscal to the monetary front (yes Milton Friedman was a keynesian, a 'right-wing' keynesian if you like). In very short, the monetarists are of the view that 'someone should do something' on the macroeconomic level, and for them this is the central bank rather than the central government.

For these reasons alone, I always find it pertinent to review any significant ECB activity or publication. The January 10, 2013 press conference of Mr. Mario Draghi is a case in notice. Mr. Draghi appeared quite optimistic about the prospects of the eurozone and while recognizing some of the persisting weaknesses on the financial front, he seems to be of the view that the worst is over. In that respect three are the remarks of his that are particularly useful (all emphasis in the quotes is mine):

The economic weakness in the euro area is expected to extend into 2013. In particular, necessary balance sheet adjustments in financial and non-financial sectors and persistent uncertainty will continue to weigh on economic activity. Later in 2013 economic activity should gradually recover. In particular, our accommodative monetary policy stance, together with significantly improved financial market confidence and reduced fragmentation, should work its way through to the economy, and global demand should strengthen. In order to sustain confidence, it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring.

...which is then followed by:

In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to continue strengthening the resilience of banks where needed. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels. Decisive steps for establishing an integrated financial framework will help to accomplish this objective. The future single supervisory mechanism (SSM) is one of the main building blocks. It is a crucial move towards re-integrating the banking system.

...and concluded thus:

Other economic policy areas will need to make further contributions to ensure a firm stabilisation of financial markets and an improvement in the outlook for growth. Further structural reforms should be rapidly implemented to make the euro area a more flexible, dynamic and competitive economy. In particular, product market reforms to increase competition and competitiveness are essential, accompanied by measures to improve the functioning of labour markets. Such reforms will boost the euro area’s growth potential and employment and improve the adjustment capacities of the euro area countries. They will also add further momentum to the progress being made with regard to unit labour costs and current account imbalances. As regards fiscal policies, the recent significant decline in sovereign bond yields should be bolstered by further progress in fiscal consolidation in line with the commitments under the Stability and Growth Pact.

Mr. Draghi's prescriptions can be rephrased as "more austerity and more support to bankers". To make a critical examination of these remarks, it is must be stressed that the serene atmosphere that Mr. Draghi is trying to depict is in great part imaginary, as it stems from the ECB's actual or perceived activism in propping up the Euro's financial system. The ECB's balance sheet which has greatly expanded in this eurocrisis (now at €2.96 trillion) together with the ongoing asymetries in the Eurosystem, as reflected in the Target2 imbalances, and strengthened by the expensive bailouts to sovereigns and banks, are but indications of a crippled financial system (among others), not a robust one which is on its way to full recovery. Litanies to the contrary aside, the ECB will have to cling on to its expansive monetary policy for several months to come, which will probably engender controversies across the Eurozone, with particularly scornful reactions from Germany which is heading to a pre-election period where politicians will of course need to suffice the domestic anti-inflationary sentiments. In that respect I will not be surprised to witness Germany's neo-mercantilist economic 'conclave' becoming loud and vociferous once again.

Secondly, the underlying weaknesses or even malignancies in several parts of the Euro area have not been addressed at all. As fellow bloggers, Emmanuel Schizas and Martin T. have noted in their analyses, contagion has not been contained and there is sufficient evidence to fuel expectations that it might reach France. While I certainly do not agree with the doom and gloom manifested in The Economist's articles on France, I do believe that the country will be brought under significant market duress. What I expect from the French case, in conjunction with the reverberations of the ECB's Outright Monetary Transactions, is a gradual but irreversible convergence of euro-wide interest rates at the new risk-free premium that the market will perceive as existing (perhaps with the exclusion of Greece that will require more time to catch up). Towards that end, France will have to deal with permanently higher borrowing costs, which will however not reach exorbitant levels.

The real ridicule that Mr. François Hollande's administration will face is a political one, as his government's pompous palaver against 'austerity' and the like will be proven to be but a tissue of unrealistic promises. Mr. Hollande will implement vicious austerity, but he will of course do so in impressive style, by embellishing all intrusive policies with patriotic oratory and other attention-getting devices. For us Europeans, the real concern is to see how such specularistic and euphemistic politics will affect the broader picture and how will they influence the European integration process. Predictions along these lines cannot be substantiated on any facts, at least not for the time being, but I do have a feeling that trouble is brewing, especially if the statolatric rhetoric becomes ever-more exuberant.

Returning to the aforementioned remarks of Mr. Mario Draghi, it is crystal clear that the ECB is expecting from all member states to fully comply with the technocratic dynamics on the economic governance of the Economic and Monetary Union and to proceed with fiscal reforms swiftly and decisively. Implicit in such statements is the proposition that the troika's policy orientations have been correct and sound and that it is the cautiousness, unwillingness and/or complacency of governments which has produced whatever invidious effects on society and the real economy. While a camouflage of scientific objectivity has been thrown over the reality of the troika's ideological underpinnings, one cannot ignore the fact that egregious errors were committed and are going to be committed because of a misreading of the situation and of misplaced strategical decisions for the years ahead.

Apart from the economics of the subject, the democratically-sensitive people of Europe should challenge the above on the normative and principled level; whether unelected and essentially unaccountable technocrats, such as the ECB's planning board have the right to compel elected governments to conformity with certain modes of action. Personally I cannot envisage a 'democratic' central bank which will also conduct sound policy, but we could at least expect some checks and balances to constrain the ECB's omnipotence; checks and balances which are now absent, pitiful or derisory.

The Eurocrisis is far from over, but judging from the fact that this has always been a profoundly political crisis, the challenges ahead are on the institutional, constitutional and democratic fronts. I believe that the year 2013, apart from being a year of persistent unemployment, economic stagnation, and in cases, silent desperation, will be of paramount importance in determining the overall balance of power between the forces of technocracy and democracy in Europe. The tectonic plates of the euro area are still shifting and it remains unclear what kind of institutional morphology they will produce. What is evident though, is that if Mr. Draghi's recommendations are blithely implemented, then it is technocracy that shall arise as the new order in Europe.

On the monetary policy prescriptions of Bundesbank president, Jens Weidmann

2013-01-03T13:46:00.002+01:00

Jens Weidmann, president of the German Bundesbank
Picture credit: Wikipedia

To those familiar with the politics underpinning the creation of the Economic and Monetary Union, it is well known that the European Central Bank was modeled according to the German Central Bank, the Deutsche Bundesbank, both in its unassailable institutional independence and its relatively limited mandate of not delving into the fiscal front, by focusing exclusively on inflation targeting (for the ECB the target is 'below but close to 2%'). The Bundesbank is an incredibly powerful and esteemed institution in Germany, one that most probably, if not definitely, influences the German government in ways which may not be visible to an inattentive eye, and thus it has an indirect impact on the lives of millions of citizens across the euro area. In addition, given the present architecture of the Eurosystem and the ECB's internal decision-making bodies where the Bundesbank has a rather influential role, it is of my opinion that its statements on what monetary policy is or ought to be, should not be disregarded, but should instead be subjected to analysis, at least for the sake of raising awareness. As such I find the last interview of the Bundesbank's president, Mr. Jens Weidmann, for the Frankfurter Allgemeine Sonntagszeitung (30-12-2012) to be of great interest, especially for assessing the quality of the debates and controversies on monetary affairs and, by extent, on the broader political economy of the Eurozone.

To proceed I shall quote and then discuss three important remarks of Mr. Weidmann, in light of events that have already taken place during the eurocrisis as well as the latest decisions of the European Council for the completion of the EMU and for the establishment of the Single Supervisory Mechanism. In highlighting certain aspects of his interview I am not implying that the rest of his remarks are insignificant nor that I necessarily disagree with his position. Instead I do recommend that in addition to my present commentary you spare some more of your valuable time reading his full interview.

On to the first point (all quotes are from this interview which can be found on the Bundesbank's website and which has been translated into English by their own personnel):

Question: The concept of "monetary financing of governments" is controversial.

Answer: I believe that we, as a central bank, should not enter an area which could possibly be regarded as monetary financing of governments. Once people begin to fear that we are printing money to fund budget deficits, our credibility as a guardian of monetary stability will quickly go out the window.

Financing governments via the inflationary power of the printing press is an unwise policy; one that engenders perverse incentives and rent-seeking mentalities for politicians and, consequently, for the state's cronies. Nevertheless I believe that we already have enough experience from the eurocrisis to realize that this kind of discussion is mostly academic. The plain fact is that the ECB's operations in the secondary markets in conjunction with the reinforcement of the capital adequacy criteria for European banks (soon to be followed up by the mighty macro-prudential powers of the ECB), have in effect succeeded in indirectly financing governments. The Securities Markets Programme (SMP), the Long Term Refinancing Operations (LTRO) and lastly the Outright Monetary Transactions (OMT) were all concocted for the sole purpose of financing budget deficits, litanies to the contrary notwithstanding. Whether this has been and will be achieved indirectly via financial intermediaries so that people are kept with the illusion that their cherished central bankers are the guardians of 'sound money', does not alter the fact that monetary policy has at times been used as a substitute for fiscal measures.

Moreover while I repeat that I am against debt monetization, as in terms of principle I am closer to the Hayekean theme on the denationalization of money, I nonetheless find that this shrewd method that European policymakers have adopted, of indirectly financing governments, is actually, though perhaps unwittingly, a means of providing sweetheart handouts to entrenched mega-banks. Euro policymakers are getting private banks to do their job, so as to avoid the opprobrium that would, logically or supposedly, arise if they were to violate some rigid rule or mandate on these issues. This however, scrupulous as it undoubtedly is, is in effect a kind of corporatism, since these private corporations will not just deliver the money for free, but will seize the opportunity to make some easy profit on the side out of the money bonanza and the unwillingness of politicians and technocrats to acknowledge their egregious errors and revise their ways accordingly.

Second point on Mr. Weidmann's interview:

Would the euro have suffered any damage if the ECB had done nothing?

I don’t think so: policymakers would have then had to take action. I am well aware that these are difficult decisions for policymakers. But it is, after all, the job of policymakers, and not the central bank, to decide on redistributing solvency risks in Europe. By taking action, the central bank takes pressure off policymakers – a risky move.

My impression is that Mr. Weidmann is making a very brave assumption on this one. His argument is that in the absence of ECB action governments would have no other alternative but to proceed with austerity. Even if for argument's sake we were to agree that the otherwise manifestly ineffective and unjust combination of tax hikes, welfare state deconstruction and bailouts to failed banks or governments, aka austerity, was the right way forward, it would still not justify the degree of confidence projected by Mr. Weidmann. For even if there were no disagreements between member states on what measures to be adopted, it would still be wishful thinking to assert that under the ostensible magic of extreme market duress politicians would have acted in the most rational ('rational') and optimal of ways. In fact it would be safer to assume that in the vacuum of the ECB's inaction, the anti-euro, anti-austerity parties would have appeared much more persuasive in their rhetoric of the disintegration of the euro and of reconstituting national currencies, on the grounds that they would then have a central bank 'caring' for their country, instead of some 'indifferent' ECB.

The fact that the ECB acted does not mean that it did the right thing or that its policies improved the situation, even if they did. The point is that economic actors and citizens in general, operate in accordance with their "expectations", their "psychology", among others; and because in the present case these are anchored on the presumption of central bank activism, of it being the ultimate backstop, the lack of such action would on its own account be a sign of incompetence, fostering uncertainty and a profound uneasiness over the future of the euro tantamount to that of passengers on a plane without a pilot. I repeat this is an issue of perception, not of economic fundamentals.

If the ECB had not acted on the cases where it was expected to, then it would have exacerbated the crisis rather than provide those idyllic conditions for the implementation of the kind of fiscal policy Mr. Weidmann would endorse. The fact that the OMT programme, which in my opinion is not as omnipotent as some ECB cheerleaders suggest, has succeeded in temporarily removing all convertibility risks, i.e. concerns for euro exits, even though it has not been used yet, is a clear sign of how important expectations or the common sense of security are. The particulars aside, I am of the opinion that to ignore the significance of emotional factors in daily economics, is to reduce human beings to mindless automatons and a fortiriori to fallaciously postulate the actual existence of that magnificent phantom of the omniscient homo economicus, which has been plaguing economic reasoning at least ever since the Enlightenment Age.

On to the third and final point:

Interest rates on safe investments are already less than the rate of inflation. That is a creeping destruction of wealth, known as financial repression.

I would not refer to the current negative real interest rates as financial repression just yet. Only when the state begins to influence savers’ investment decisions and engages in coercion would I see such a situation as existing. However, negative real interest rates are a consequence of expansionary monetary policy in the crisis which is felt immediately by savers.

Whether Mr. Weidmann would like to call it financial repression or not is mostly a matter of perspective or of willingness to test the limits of euphemistic palaver. In my opinion we do have financial repression on a monumental scale and I would say that apart from what is now happening on the regulatory framework, it is in great part related to the Basel Accords (I recommend Emmanuel Schizas' analysis on this). As mentioned above the various programmes of the ECB in conjunction with the new rules on capital adequacy effectively channeled funds into state coffers. Besides when all major central banks across the globe are engaging in aggressive monetary easing in an effort to siphon ever-more credit to the otherwise bankrupt sovereigns as well as to preserve the corporate-capitalist status quo, it is rather Orwellian to say that no repression whatsoever occurs. With the iron fists of central bankers manipulating the major economies of the globe it is quite obvious that the market is not "free" in any sense of the term, but that it is heavily distorted in each and every of its parts; and to a great extent this is done to reinforce the symbiotic relationship between states and banks.

As a conclusion I would like to point out that most political controversies in Europe have been dominated by arguments stemming from unexamined shibboleths and deep misunderstandings, while missing the broader picture as well as the specifics of each and every case. It is unfortunate that we came into this crisis with a profound unwillingness to adapt to the rising challenges, but instead we obstinately clung on to dogmas that guided our lives in ages past. We assumed that the change brought upon by this crisis was merely superficial and as such we were not willing to admit that many of our cherished principles were in desperate need of reconsideration. The policy failures resulting from this lack of alertness, from this staunch refusal to be versatile, are already well known to all of us and yet instead of witnessing some effort, even a timid one, to think in alternative ways, we see that integration and European politics in general are still predicated on most of the presumptuous notions that stood as inviolable 'truths' in the pre-crisis era.

Towards that end I am of the opinion that Mr. Weidmann, while certainly a very adept central banker, has not been willing to question, even for a moment, the tenets of his institution. He has therefore made his own contribution, though perhaps a minor one, to the preservation of the ideocentric elements that mobilized European integration in recent years, which have been proven to be inadequate in improving the lives of people residing in Europe and which shall bestow upon us a technocratic order that we will have a hard time reforming or rather abolishing.

May 2013 lead us from the Year of Citizens to the Union of Citizens

2012-12-30T12:53:00.002+01:00

This is my last post for the year 2012; a year that has been the most important in my life thus far, for a number of reasons. Concerning my blog it was recently recommended as one of the three "must-reads" for 2012 by the editor of Bloggingportal.eu: for his constant and high quality coverage of the Eurocrisis and European Politics. From my side, I wish to hereby express my gratitude to all my blog readers and to all my fellow euro-bloggers for making participation in this public sphere interesting, engaging, meaningful and didactic. I wish or rather I am almost convinced that 2013 will see the European blogosphere playing an ever-more important role, both informative and constructive, in the events which are expected to unfold in 2013—the year that has been designated as the European Year of the Citizens (see official page). The latter shall be the topic of the present article, since the democratization of the European Union edifice should, in the humble opinion of the present author, be the top priority of any reformative agenda.

According to the Commission's official page for the Year 2013:

The European Year of Citizens 2013 is dedicated to the rights that come with EU citizenship. Over this year, we will encourage dialogue between all levels of government, civil society and business at events and conferences around Europe to discuss those EU rights and build a vision of how the EU should be in 2020.

This language certainly engenders a host of ambitions from people across Europe and it seems to succeed in bestowing optimism in the hearts of those who long for a genuine European democracy. Nevertheless judging from the fact that on the economic, fiscal and financial fronts we are already witnessing the rapid formation of a technocratic state encompassing all Euro area member states, I believe it will be a Herculean task to expand democracy in the near future; democracy not in its perverted meaning of "democratic accountability and legitimacy", not even in this fig leaf of "encouraging dialogue" with authorities, but in the broader and proper sense of actual and effective participation in the levels of power where decisions that influence our lives are being taken.

What the Commission is aiming at with this campaign is certainly a laudable end, given that informed and vigilant citizens are a prerequisite to any demands for further liberty. That which merits criticism nonetheless is the overall ambition of EU policy-makers to establish a so-called Citizens Pillar for the EU architecture. Such a pitiful scaffold is nothing but a suboptimal compromise, considering that the EU, for it to be genuinely democratic and thus sound in its policies, ought to be predicated exclusively on citizens, rather than having them as the de facto cheerleaders and infamous apologists of a technocratic apparatus of power and control.

If the intergovernmental praxis remains the only method of revealing conduits to further and deeper integration, then the pro-citizens campaign is but a healthy exercise in euphemistic palaver, embellished with lofty ideals, but devoid of any substance, as the locus of power will remain in powerful national governments that will always unscrupulously exploit any favorable balance of power they are found in, to propound or effectively enforce their own understanding of what is good and desirable.

To allude Adam Smith's metaphor, with the inter-governmental method in place it is as if European integration is moved by an invisible iron fist; one that does not hesitate to transcend fundamental democratic norms and practices, and which in the name of mitigating a Eurocrisis that has been exacerbated by inane European policies, will sacrifice to the altars of efficiency and effectiveness any modicum of liberty citizens had gained over the years.

Reformative change requires grassroots action, yet it should not be neglected that the mother of all actions is the painstaking process of thinking and of producing ideas, ambitious ideas, crazy ideas, of how to make the life of each individual better; the collective life, the private life. Activism for its own sake is but a waste of energy, and so are ideas that are not materialized in action but which remain whimsical theories of armchair thinkers who, aloof from the fray, lose sight of the particular task at hand.

The year 2013 can indeed be a first step in expanding European democracy and in progressing towards a bottom-up system of decentralized decision-making. It will however face the headwinds of technocracy on the policy fronts that are among the most cardinal to any modern state, namely the economic, fiscal and financial ones. Judging from the dismal record of the EU, a mere year for citizens is more than welcome, however any praise to European institutions should not escape the pressing need of developing a Union of Citizens out of the present order—and for that we, as citizens, must remain adamant and decisive.

Happy new year!

Single Supervisory Mechanism: The basis for a Financial Union (analysis)

2012-12-16T22:41:00.001+01:00

Frankfurt.Headquarters of the ECB.
Picture credit: Wikipedia

As I noted in my extensive analysis of the conclusions of the European Council meeting of December 13-14, the agreement on the Single Supervisory Mechanism (SSM) would merit an article devoted solely to it. My intention in this post is not to follow up on the praxis of my previous analysis, i.e. engage in a paragraph-by-paragraph examination of the actual text of the proposed regulation, but instead to provide an overview of the proposal, accompanied by various comments, considerations and concerns of mine on the various facets of the mechanism as well as on issues that are concomitant with or, which might arise from, its installation. The document I shall predicate my textual exegesis on can be found here and is dated September 12, 2012 (all quotes in this article are excerpted from that link).

General Information

To provide a summary of the 33-page-long Council regulation, it is important to know that the SSM will be established as an independent board within the European Central Bank and will constitute a substantial part of its “macro-prudential” powers. Supervision will be limited to the physical boundaries of the euro area, as the new responsibilities and powers that will be conferred to the ECB by virtue of the SSM, will become applicable only to the Member States whose currency is the Euro.

The ECB will initially place under its purview only the largest banks of the region, meaning that it will supervise about 200 out of the roughly 6000 European banks. Nevertheless after a transitional period of a bit more than a year, the ECB shall be expected to be fully prepared to uphold the task of supervising all banks within the Euro area.

Lastly a technicality worth mentioning is that the ECB will also be the host supervisor of non-Euro banks who have established branches in the Eurozone. Such was not the standard method with the previous system where a cross-border branch of a bank would still fall under the control of its respective national bank.

Tasks and powers of the ECB

As is always the case with such supervisory capacity, the ECB will be granted the privilege of being the sole issuer and thus withdrawer of bank licenses within the context of its merit and will, within this framework, be tasked to authorize or not the operations of credit institutions. This is an integral part of the bundle of powers that fall under the conceptual umbrella of financial supervision, yet it can at the same time be considered as a robust preventive or corrective tool for intervening in a part of the financial system, or even a single financial institution, to either call for changes in business practices or even impose the cessation of operations of the bank in question, always if the circumstances impel such a far-reaching and drastic course of action. What is clear though, is that Damocles' Sword now lies in the hands of the ECB and it can be used as a force for benign reforms or to inflict a great deal of harm.

Adding to the above, the ECB will demand from institutions under its supervision to comply with criteria on capital adequacy, financial leverage, liquidity etc. In this respect the ECB might deem it appropriate to recommend the formation of capital buffers or the consolidation of balance sheets through other means, if it assumes that some of the standards it has set to monitor are not upheld. What is tacitly proposed from this perhaps non-exhaustive list of assessment tests, is that the ECB will have to actively collect masses of information on a quite systematic basis, process them and deliver timely as well as accurate policy responses, based on their judicious interpretation. This implies quite a Herculean task for the ECB or national authorities in the Eurosystem (ECB + the central banks of all Euro Member States), and might eventually raise doubts over the effectiveness of such a gargantuan system, especially once all the eurozone's banks, with the multitude and plethora of their activities, are brought under the Single Supervisory Mechanism.

Related to all this busy data-grubbing is the responsibility to assess and single out internal underlying risks or other brewing malignancies in individual banks and, wherever necessary, initiate the envisaged processes for the introduction of 'necessary actions' that will aim at mitigating the notional or real peril. If we are to combine this with the licensing powers of the ECB, we can infer that under conditions of extreme duress, actual or perceived, the ECB can ultimately resort to the withdrawal of the license of any bank, provided a persuasive justification can be presented, even though strictly and legally speaking this is not a prerequisite. A final act of this sort that cannot occur regularly and unexpectedly. It is nonetheless an potentiality that will need to be counter-balanced by strong and effective safeguards, which are still absent from the official texts on the matter.

That said, it ought to be stressed that a Single Resolution Mechanism (SRM) is not yet finalized, suggesting that the ECB will not be able to proceed with the dismantling of any financial institution in the near future by forcing the new paradigm of targeted bail-ins. Given that the broader legal framework on the financial union is still in a rather embryonic form, we can expect a substantial number of additions to such schemes, including (hopefully) among others, the necessary checks and balances at each and every aspect of these new "federalized" powers.

Notwithstanding the discussion on resolving individual banks, the ECB can opt for less radical measures such as impose pecuniary sanctions or other similar penalties that will aim at bringing the non-conforming financial institution in line with established rules. For these more standardized corrective operations to be fair and well-grounded, we must expect the ECB to assume investigatory powers, so as to be in a position to sufficiently carry out on-site inspections wherever necessary, in an effort to substantiate its information of the case it examines.

All of the above constitute a massive amount of necessary daily work that the ECB will simply not be able to keep up with. As such national supervisory bodies will retain some of their existing powers and will most probably be tasked to uphold the day-to-day operations of the SSM. We can fathom some sort of a subsidiarity principle applied in this edifice, or if we want to avoid euphemisms, we can expect the ECB to hold the final say on all decisions, but delegate to national authorities all the "manual labor" of the SSM.

Independence and accountability

On this issue I find it necessary to quote the exact text, emphasize where necessary and provide my interpretation and commentary below:

[page 7] The ECB shall therefore be accountable for its tasks to the European Parliament and to the Council/the Eurogroup. The ECB will be subject to regular reporting requirements and will respond to questions. The chair of the supervisory board will present an annual report on the ECB's supervisory activities to the EP and the Eurogroup and may be heard by the competent committees of the EP on any other occasions. The ECB will also be obliged to respond to any questions asked by the EP and its members on its supervisory activities. Moreover, under the Treaty, the President and the Vice-President of the Governing Council as the body with final responsibility for the ECB's action, as well as the other members of the Executive Board, are appointed by the European Council after consultation of the European Parliament.

At first, it must be made clear and above board that this reference—which in effect is nothing more than the replication of the necessary though inadequate administrative principle of transparency—pertains only to the supervisory powers of the ECB, not to the ECB's monetary policy in general.

Secondly, I believe that the above quote signifies, once again, what the much-touted concept of "democratic accountability" amounts to. For any reader who might not be acquainted with the use of this phrase, I who have had the patience to read through stacks of such documents over the last months and have listened to speeches of all sorts of EU officials, especially the President and Vice-President of the ECB, must assure you that it is one of their favorite and most convenient fig leaves; one that perfectly covers the otherwise technocratic modus operandi and the humbuggery it involves. As I also noted in my previous analysis on the Council's conclusions for the completion of the EMU, "democratic accountability and legitimacy" are not tantamount to genuine democracy. My proposition can be better understood once we consider the "accountability" part in line with the above-quoted text. In particular the provisions that are envisaged to merely answer questions before the European Parliament's committee's or to publish regular reports, are already an established custom, which in my humble opinion leaves much to be desired, at least for all those who hold certain high standards for democracy.

To provide ambiguous answers to deputies, often embellishing them with ample technical jargon that only financial specialists may really comprehend, is not really the kind of accountability a citizen would expect from policy-makers, especially when such policy-moulders hold the most awesome of all economic, state powers—monetary policy—to effectively manipulate the entire economy, if they wish to. "Transparency" is already the kind of healthy activity all EU bodies, agencies and quangos perform.

For the principle of accountability to be meaningful, the European Parliament, the only democratic EU institution at the moment, must hold the right to impose conditions on any body, agency or bureau whose activity it considers unsatisfactory. For the time being the European Parliament remains a rather restrained institution, in many cases it resembles a hearing court, which by the way cannot even legally decide on its seat but must instead cling on to this preposterous and wasteful practice of holding 12 plenary sessions per year in Strasbourg, while all of its political operations are centered in Brussels.

Entry into force

Again I shall quote the original text, this time with no further comment, other than the realization that when politicians really wish to, decisions can be taken swiftly:

[page 8] Due to the urgency of setting up an effective SSM, the regulation will enter into force on 1 January 2013. In order to ensure a smooth start of the mechanism a phasing-in approach is envisaged, which provides for the possibility for the ECB as of 1 January 2013 to apply its supervisory tasks to any banks, in particular banks which have received or requested public financial assistance, while the most significant credit institutions of European systemic importance shall be subject to ECB supervision as of 1 July 2013. The ECB will assume in full its tasks in relation to all other banks as from 1 January 2014 at the latest.

However note that since there are still many issues that remain unclear, further negotiations are expected throughout the first semester of 2013, while the SSM will become fully operational in March 2014.

Assessment and food for further thought

In my opinion and to be fair though critical on how perverse European politics are or can be, the Single Supervisory Mechanism is a structure that should have existed ever since the euro was brought into being. An integrated monetary policy, a single currency, cannot possibly afford to have its credit institutions being supervised by national authorities nor can the entire financial system remain compartmentalized along national lines while capital flows, daily market transactions are quite liquid and cross-border. A "federalized" fiat monetary and financial system must include a single supervisory body/authority/mechanism. It is crystal-clear that the SSM now sets the basis for a genuine financial union that should have accompanied the single currency all along.

Objections can definitely be raised over its modalities, but the principal idea remains unaffected. The only real concern, which effectively enters into the broader institutional and democratic problématique of the emerging sovereign and technocratic Euro-state, is whether such powers should be conferred to an already omnipotent ECB or be trusted on an independent authority. In my opinion the latter would have been a slightly better choice, always in line with the constitutional axiom of the separation of powers. Nevertheless the truth is that even in such a case, the checks and balances would be rather pitiful, as the ECB would still remain in its position of superior strength.

Notwithstanding the concerns I have repeatedly voiced over the rising technocracy within Europe, and the degradation of democratic principles this entails, I would wish to point out that the ECB is among all others a very 'political' or 'politicized' institution, despite all the litanies to the contrary and the paeans on the importance of its independence. Time and again, decisions pertaining to the conduct of monetary policy have provided the impetus for endless and most-often unnecessary pother and they have set the field for occasionally public disagreements as well as covert bargaining between governments or powerful central banks, especially the German Bundesbank (e.g. on the Target2 payment system or the latest OMT programme and on the bailouts to various member states).

Against this backdrop it is not difficult to fathom a scenario where the balance of power favors certain politico-economic interests within the ECB, who may abuse the over-concentration of powers at the ECB, to forward with greater effectiveness the broader economic or ideological agenda the Commission in tandem with the Council have been meticulously implementing or even enforcing, over the last months and years.

Politics aside, concentration of such authority also engenders two, usually overlapping and interrelated, frailties: (1) corruption, (2) cronyism. As Lord Acton trenchantly put it: power tends to corrupt and absolute power corrupts absolutely. We know well that European banks are not immune to corruption, nor are their owners and agents the knights in shining armor who struggle for the toiling peoples and for those who have been crippled down by rapacious market insiders and inane politicians that have been religiously adhering to manifestly deleterious policies. Recent scandals are but the tip of the iceberg of the fraudulence and mendacity inherent in Europe's (and the globe's) financial system. When such financial institutions are considered in conjunction with all the cases of money laundering or related crimes they may facilitate, then we can already expect one day to unearth the sort of graft and corruption that will proudly rival that of Wall Street's...

Finally, this is an ongoing process and as is always the case, the devil lurks in the details, meaning that future analyses will be necessary to elucidate each and every aspect of the financial union that is rapidly asserting shape, in parallel, or thanks to the emerging technocratic Euro-state.

The rise of technocracy: Full analysis of the Council roadmap for the completion of the EMU

2012-12-15T12:55:00.001+01:00

Emblem of the European Council. Picture credit: Wikipedia

One of the most important European Council meetings is concluded and we already find ourselves in the midst of a rapid and forceful emergence of a technocratic sovereign state within the EU; what I am already referring to as the Euro-state which encompasses all Euro area member states and which has the potential to incorporate all other member states that have committed to adopt the euro as their currency but have done so, i.e. all EU member states except the UK and Denmark. The Council has effectively reproduced most of the Commission's proposals that were enshrined in its November 30, 2012 Blueprint for a deep and genuine Economic and Monetary Union. It has avoided any reference to euro-bills, i.e. debt instruments of the eurozone with a short-term maturity of up to two years, and it has also omitted any reference to the Euro area parliamentary chamber, as a special and more important committee within the European Parliament, equipped with more powers than all other existing parliamentary committees. My interpretation is not that they will seek to avoid these perhaps thorny issues altogether, but in line with their incrementalist modus operandi they will bring them forth at their future meetings, perhaps by the summer of 2013.

With the above in mind I shall now proceed to a paragraph-by-paragraph commentary on the conclusions of the December 13-14 Council meeting, in particular on their Roadmap for the completion of the EMU. In this effort I shall abstain from commenting on all the facets of the financial/banking union, in particular on the Single Superisory Mechanism and its concomitant schemes for single resolution of banks and a common deposit guarantee mechanism. The reason I omit this subject is because the Council has published a more thorough document, a Council regulation to be precise, which I shall analyze separately in a future post. As such I shall not comment upon the few references on the ECB- and Eurosystem- related issues that are included in the Council's roadmap. UPDATE December 16, 2012, 22:55 CET: I have just published my full analysis of the Single Supervisory Mechanism.

Proceeding thus, we read from the very first paragraph the following (all emphasis is mine and all quotes are taken from the Council's Roadmap for the completion of the EMU, unless otherwise noted):

The European Council agreed on a roadmap for the completion of the Economic and Monetary Union, based on deeper integration and reinforced solidarity. This process will begin with the completion, strengthening and implementation of the new enhanced economic governance, as well as the adoption of the Single Supervisory Mechanism and of the new rules on recovery and resolution and on deposit guarantees. This will be completed by the establishment of a single resolution mechanism. A number of other important issues will be further examined by the June 2013 European Council, concerning the coordination of national reforms, the social dimension of EMU, the feasibility and modalities of mutually agreed contracts for competitiveness and growth, and solidarity mechanisms and measures to promote the deepening of the Single Market and to protect its integrity. Throughout this process, democratic legitimacy and accountability will be ensured.

Brussels. Outside the European Parliament.
By Protesilaos Stavrou CC BY-SA-NC

From a political science perspective the most important element of the negotiations that are now culminating in such a roadmap for the completion of the EMU, is that we have witnessed, in fact ever since the creation of the Euro as an effective clique of states within the EU, a timid though radical shift in the diplomatic approach to European integration. In the founding decades integration was forwarded on the basis of the Aristotelean golden mean, through measures and decisions that would promote the common good in a context of mutual understanding. In stark contrast ever since the installation of the euro-cartel we are bearing witness to the fruits of the method of enhanced cooperation of states willing to impose their dictates on other governments that would never offer their consent for certain policies.

The very existence of the euro is a clear-cut case, however in recent times we are seeing how integration proceeds without the approval of all parties involved, through an undemocratic and manifestly unjust process of intergovernmental cooperation, effectively between Paris and Berlin. The emergence of duos such as the "Merkozy" or of trios and other cliques that spearhead integration in line with the ideological mindset they uphold, is evidence of the deprecation of the old European Community and a fortiriori of the usurpation of the EU by the Euro-clique which gradually asserts the most fundamental of all statist fictions: state sovereignty, in the proper sense of the term which includes the power to compel and to be superior to any other authority within a given geographic area. This must concern at least those who wish to see a genuinely democratic European community, resting on real solidarity and mutual respect between all of its peoples and which is stranger to any pattern of thought that forwards 'we-they' syndromes and which initiates various antagonisms and races to the bottom.

Let us now proceed to the closer examination of the text:

1. In the light of the fundamental challenges facing it, the Economic and Monetary Union needs to be strengthened to ensure economic and social welfare as well as stability and sustained prosperity. Economic policies must be fully geared towards promoting strong, sustainable and inclusive economic growth, ensuring fiscal discipline, enhancing competitiveness and boosting employment, and in particular youth employment, in order for Europe to remain a highly competitive social market economy and to preserve the European social model.

I have always felt profound uneasiness with this deterministic tenet of reasoning which claims that integration must proceed at all costs for the sake of effectiveness and efficiency as a mere reaction to an exogenous stimulus, to the financial and economic crisis that has revealed all of the structural malignancies of the eurozone. I am of the impression that such an approach may only foster the false dilemma of "integration or chaos", which inevitably leads a person to two suboptimal conclusions of either rejecting the EU altogether or of sacrificing all democratic and other principles to the altars of bureaucratic convention and technocratic expediency, in an inane effort to reinforce only the economic, fiscal, budgetary and financial facets of the Euro architecture, while casting democracy—genuine democracy that is—to the dustbin of history.

In my opinion this cheap excuse must not be accepted, but must instead be treated for what it really is: a grotesque panoply of falsehoods and outright lies. Integration can and must be forwarded only for the sake of establishing a European democracy to enhance our liberties, rights and other lofty ideals we may have. In that respect integration is the means to a better life, and not an end to be pursued as such, often to our detriment. To present integration as a reaction to an external shock is to downgrade all laudable principles civilized people must uphold; it is in effect an indication of the technocratic "rationalization" of the whole process that knows no ethical constraints in its quest for power and control.

Next point:

2. The consolidation of EMU rests not only on completing its architecture but also on pursuing differentiated, growth-friendly and sound fiscal policies. While fully respecting the Stability and Growth Pact, the possibilities offered by the EU's existing fiscal framework to balance productive public investment needs with fiscal discipline objectives can be exploited in the preventive arm of the SGP.

This statement offers priority to the logic of fiscal discipline we have seen in Europe over the last years. While I have never been in favor of frivolous deficit spending and of the inflationary policies it necessarily requires, I must say that to effectively prohibit states from exercising fiscal policy in a counter-cyclical manner, is to elevate idiocy to the level of constitutional law. Yes states must adapt sound policies, but only as a means to the improvement of their citizens lives and not as a preordained, pseudo-moralistic objective. The logic of such fiscal rules rests on a tissue of unexamined and ill-grounded shibboleths. The rates of debt and deficit they are seeking to introduce as "golden rules" are nothing but arbitrary, for in the real world there is a much more complex, interweaving web of factors that influences the fiscal position of a state and the overall conditions in the economy. To isolate two or a few more parameters as the most important ones is to obstinately refuse to recognize the complexity of the economy and to labor in a mechanistic, and therefore fallacious, frame of mind.

Proceeding to our analysis:

3. Further to the interim report submitted in October 2012, the President of the European Council, in close collaboration with the Presidents of the Commission, the European Central Bank and the Eurogroup, has drawn up a specific and time-bound road map for the achievement of genuine Economic and Monetary Union. The European Council notes the "Blueprint" issued by the Commission which provides a comprehensive analysis of the relevant issues combined with an assessment of their legal aspects. It also notes the contributions made by the European Parliament. The European Council sets out the next steps in the process of completing EMU, based on deeper integration and reinforced solidarity for the euro area Member States.

I have two short comments to make on this paragraph:

The Eurogroup is an unofficial forum that enjoys no institutional legitimacy. To provide it with such a crucial function is to circumvent democratic rules, especially when we take into account the fact that the European Parliament is merely "contributing" to the whole debate through opinions that in truth face the fate of the recycle bin. In addition the planning board of the European Central Bank participates in all these negotiations with eager alertness and they—these unelected technocrats—will decide on what we the citizens will have as an authority over our heads, to regulate our conduct, to force us to do this and prevent us from doing that.
My concern is that "reinforced solidarity" might imply a greater dose of the kind of coercive "support" we have had over the last years, usually epitomized in the troika's methods of adopting decisions under overwhelming duress and of implementing measures against the popular will, often by deploying police corps, tear gas and other methods of compulsion; decisions that have in many cases harmed the social and democratic fabric. Isn't there a limit to all this chivalry, altruism and sainthood? Personally I have had enough of this poisonous solidarity.

Next paragraph of the Council's Roadmap for the completion of the EMU:

4. The process of completing EMU will build on the EU's institutional and legal framework. It will be open and transparent towards Member States not using the single currency. Throughout the process the integrity of the Single Market will be fully respected, including in the different legislative proposals which will be made. It is also important to ensure a level playing field between Member States which take part in the SSM and those which do not.

This remark is quite important from a legal point of view, as it states quite clearly that no treaty changes are needed to effectively reshape Europe root-and-branch and center it around a technocratic Euro-state. However please take note of the fact that in case we citizens call for genuine democracy in Europe, for say, an elected European executive to replace the hypertrophic technocracy that is the European Commission, we must go through excruciating treaty changes, where certain member states who now feel quite comfortable with the status quo and with the direction integration is heading to, will place all sorts of obstacles and will demand all sorts of concessions, effectively rendering obsolete any effort for the democratization of the EU/Eurozone.

As for the rest of the paragraph I believe it contains certain antinomies. For instance how can we have a euro-state that will operate as a unified entity and as a permanent majority in all fora of decision-making, and at the same time have a level playing field with non-euro member states? There is no such thing as equality in this new reality, since some states will have the power and the means to impose their whims and caprices on those who do not wish to follow, and this will be done via the praxis of enhanced cooperation.

Further issues:

5. The immediate priority is to complete and implement the framework for stronger economic governance, including the "six-pack", the Treaty on Stability, Coordination and Governance (TSCG) and the "two-pack". Following the decisive progress achieved on the key elements of the "two-pack", the European Council calls for its rapid adoption by the co-legislators.

Immediate priority is given to the implementation of the rigid fiscal rules that are enshrined in the above-mentioned legislations, especially in the fiscal compact (aka TSCG). If we examine this in line with the time-horizon that the Commission had established in its Blueprint, we must not be surprised, since the Commission had already stated that first we will concentrate all important powers at the level of the Euro area and then "after 5 years" we will open discussions on issues of democracy (at the end of this article in Annex 1 I quote the Commission's time-frame).

I am now carrying the commentary to the next paragraph. However please note that §6-11 refer to the financial union and to topics such as the Single Supervisory Mechanism, which as I already mentioned, I intend to scrutinize thoroughly and systematically in a future article. As such analysis now moves on to the last paragraphs from 12-14:

12. In order for the EMU to ensure economic growth, competitiveness in the global context and employment in the EU and in particular in the euro area, a number of other important issues related to the coordination of economic policies and economic policy guidelines of the euro area will need to be further examined, including measures to promote the deepening of the Single Market and to protect its integrity. To this end, the President of the European Council, in close cooperation with the President of the Commission, after a process of consultations with the Member States, will present to the June 2013 European Council possible measures and a time-bound roadmap on the following issues:

a) coordination of national reforms: the participating Member States will be invited to ensure, in line with Article 11 of the TSCG, that all major economic policy reforms that they plan to undertake will be discussed ex ante and, where appropriate, coordinated among themselves. Such coordination shall involve the institutions of the EU as required by EU law to this end. The Commission has announced its intention to make a proposal for a framework for ex ante coordination of major economic policy reforms in the context of the European Semester;

b) the social dimension of the EMU, including social dialogue;

c) the feasibility and modalities of mutually agreed contracts for competitiveness and growth: individual arrangements of a contractual nature with EU institutions could enhance ownership and effectiveness. Such arrangements should be differentiated depending on Member States' specific situations. This would engage all euro area Member States, but non euro Member States may also choose to enter into similar arrangements;

d) solidarity mechanisms that can enhance the efforts made by the Member States that enter into such contractual arrangements for competitiveness and growth.

Starting from paragraph 12, there are two issues that need to be highlighted, the first relating to the coordination of economic policies, which effectively will encompass everything from employment policy, to social welfare, education, the pension system etc. for all may be interpreted as "economic" policy since such issues are interdependent with fiscal and budgetary affairs. If we assume that the kind of economic policy we will get is what the troika has already been forwarding in the countries under bailout programmes, then we must expect a radical shift in sociopolitical life in Europe and a harmonization along a specific, ideological economic model. Whether this is good or not, I shall leave it to the judgement of the reader. The second issue I would wish to highlight is that consultations and negotiations along these lines do not involve the European Parliament at all, when we should expect the only democratic institution of the EU to be the protagonist in such issues that will affect the daily life of all European citizens. The fact that technocrats are once again deciding for us, without us, is a lamentable failure to ensure at least a minimum of democracy and of principled norms of political conduct.

Now on to the subsections. First point (a): What I have been saying for quite some time now, is that all these negotiations are leading to the installation of a troika in permanence with sovereign jurisdiction over the whole area. In this respect I find point (a) as the supervisory facet of the permanent troika, since by coordinating economic policies on an ex ante basis it is meant that (i) elected governments have absolutely no autonomy over initiating any kind of fiscal or economic policy, (ii) a permanent mechanism for realizing this ex ante coordination must be set in place. In effect this is a political and institutional straitjacket for elected governments and I am much concerned about the prospects for true democracy once this system has been given flesh and bones, for its "efficiency" might seem quite appealing to the powers that be. Furthermore "coordination" amounts to inter-governmental decisions using the Commission as the spearhead. This method contravenes democratic decision-making since citizens have no direct say in any of these affairs, and also some member-states now possess disproportional power that they will use and abuse to impose their own understanding of policy-making on all the rest. This is the confederal method which all Europeans who stand for democracy should actively oppose (for more see my articles here, here, here, here and here).

On to point (b): I am not sure what kind of social dimension is meant here, given that this is a single sentence, that the precedent is not very promising, that such documents are the apotheosis of Orwellian palaver and that "social dialogue" with top-down faits accomplits amounts to nothing.

Points (c) and (d) must be seen in tandem as they contain euphemistic language which clearly delineates what was noted quite explicitly in the Commission's blueprint (especially in ANNEX 1 of their document), as troika-style reform mechanisms, compelling member states into certain modes of conduct or placing them in whatever fiscal, economic or other straightjacket.

And finally the last and most egregiously technocratic point I wish to touch upon on the Council's roadmap for the completion of the EMU:

14. Throughout the process, the general objective remains to ensure democratic legitimacy and accountability at the level at which decisions are taken and implemented. Any new steps towards strengthening economic governance will need to be accompanied by further steps towards stronger legitimacy and accountability. At national level, moves towards further integration of the fiscal and economic policy frameworks would require that Member States ensure the appropriate involvement of their parliaments. Further integration of policy making and greater pooling of competences must be accompanied by a commensurate involvement of the European Parliament. New mechanisms increasing the level of cooperation between national parliaments and the European Parliament, in line with Article 13 of the TSCG and Protocol No 1 to the Treaties, can contribute to this process. The European Parliament and national parliaments will determine together the organisation and promotion of a conference of their representatives to discuss EMU related issues.

Beware of the loopholes in the semantics I ought to say at this point. In my understanding the phrase "democratic legitimacy and accountability" is not equivalent to genuine democracy. Strictly speaking, democratic legitimacy means that all decisions must be in line with the rule of law and that the rulings of the judiciary are fully respected. This is mainly a theme of administrative and constitutional law and while it is an integral part of democracy, it does not cover the most important aspect of an inclusive political system: the direct or at least indirect participation of citizens in the decisions that determine their lives. Furthermore democratic accountability, also in a strict interpretation of the concept, suggests that the executive must explain its decisions before the legislative, which again leaves much to be desired since we already have such a process of "informing" the parliament(s) of all the predetermined decisions that are been made, and we know it is insufficient. Put together, the notions of legitimacy and accountability must be fully applicable to non-elected bureaus such as police, surveillance, judicial authorities and the central bank—in general to all unelected offices and centers of power. Consequently the Council advocates the creation of a sovereign Euro-state and in exchange they will offer basic principles of legality as substitutes to genuine democracy. To me this is a downgrade from whatever pitiful democracy and liberty we already have.

Furthermore the kind of political arrangement they envisage for the national level is in effect the identical praxis of the troika programmes in all countries that have been receiving bailouts. As we know, all of the troika's dictates were approved by parliaments laboring under duress. In that perverted sense there was an "appropriate involvement" of national parliaments. As such this reference amounts or can amount to nothing principled. Directly related to this is the mere "involvement" of the European Parliament. As we know quite well the EP is currently involved in all sorts of policies but its role remains secondary to say the least. Moreover what is the effectiveness of such parliamentary involvement if the broader institutional arrangement that engenders faits accomplis through the inter-governmental route, remains in place and is actually reinforced with state powers of coercion and control?

Having said so it is fair to recognize that the cooperation between the EP and national parliaments is indeed something that can and must be done more effectively, but such a practice alone, or in combination with the above, does little to diminish the profound democratic deficit of the EU. The real and greatest problem, namely the lack of an elected executive and of genuinely democratic decision-making, has been completely omitted and is now being obfuscated by the diminution of democracy into an affair of communication between different parliaments, whose powers are substantially reduced before the omnipotence of existing inter-governmental decision-making.

As a conclusion I wish to remind my readers that I personally am in favor of a democratic, decentralized, federation in Europe as a means to expand on our liberty, prosperity and welfare, and to overcome the rigidities of the old nationalistic order in Europe. However what I now see emerging out of the current negotiations is antithetical to my principles, for it is a technocracy that no force will be able to restrain and which will hold powers that will intrude in every aspect of our daily life. To such a detestable technocracy, I shall always be opposed, regardless of what other federalists may think is happening in all this "integration" they so much laud. One must want democracy and liberty, not economic tzars to compel them to do this and to prevent them from doing that.

Annex 1

The Berlaymont building in Brussels housing the European Commission
Picture credit: Protesilaos Stavrou CC BY-NC-SA

The Commission's time-horizon as stated in their Blueprint for a deep and genuine Economic and Monetary Union (pages 12-13):

In the short term (within the next 6-18 months), while immediate priority should be given to the full deployment of the new economic governance tools brought by the six-pack as well as rapid adoption of current Commission proposals such as the two-pack and the Single Supervisory Mechanism, more can still be done through secondary law, in particular in the area of economic policy coordination and support to structural reforms necessary to overcome imbalances and to improve competitiveness. Once a decision on the next Multiannual Financial Framework for the EU has been taken, the establishment of a financial instrument within the EU budget to support re-balancing, adjustment and thereby growth of the economies of the EMU would serve as the initial phase towards the establishment of a stronger fiscal capacity alongside more deeply integrated policy coordination mechanisms. Together, the next step in fiscal and economic policy coordination and the corresponding initial phase of the build-up of a fiscal capacity could take the form of a "convergence and competitiveness instrument". Following the adoption of the Single Supervisory Mechanism, a Single Resolution Mechanism for banks will be proposed.

In the medium term (18 months to 5 years), further budgetary coordination (including a possibility to require a revision of a national budget in line with European commitments), the extension of deeper policy coordination in the field of taxation and employment, and the creation of a proper fiscal capacity for the EMU to support the implementation of the policy choices resulting from the deeper coordination should be established. Some of these elements will require amending the Treaties. The reduction of public debt significantly exceeding the Treaty criterion could be addressed through the setting-up of a redemption fund. A possible driver for fostering the integration of euro area financial markets and in particular to stabilise volatile government debt markets is common issuance by euro area Member States of short-term government debt with a maturity of up to 1 to 2 years. Both of these possibilities would require amending the Treaties.

Finally, in the long term (beyond 5 years), based on the progressive pooling of sovereignty and thus responsibility as well as solidarity competencies to the European level, the establishment of an autonomous euro area budget providing for a fiscal capacity for the EMU to support Member States in the absorption of shocks should become possible. Also, a deeply integrated economic and fiscal governance framework could allow a common issuance of public debt, which would enhance the functioning of the markets and the conduct of monetary policy. As set out in the Commission's Green Paper of 23 November 2011 on the feasibility of introducing Stability Bonds, the common issuance of bonds could create new means through which governments finance their debt and offer safe and liquid investment opportunities for savers and financial institutions, as well as a euro area-wide integrated bond market that matches its US dollar counterpart in terms of size and liquidity.

This progressive further integration of the euro area towards a full banking, fiscal and economic union will require parallel steps towards a political union with a reinforced democratic legitimacy and accountability.

The progress in terms of integration will also have to be reflected externally, notably through steps towards united external economic representation of the euro area.

Also from the Commission's Blueprint we get the following concerning the Euro-state:

(page 11) A comprehensive vision for a deep and genuine EMU conducive to a strong and stable architecture in the financial, fiscal, economic and political domains, underpinning stability and prosperity is necessary. In such a deep and genuine EMU all major economic and fiscal policy choices of its Member States should be subject to deeper coordination, endorsement and surveillance at the European level. These policies should cover also taxation and employment, as well as other policy areas crucial for the functioning of EMU. Such an EMU should also be underpinned by an autonomous and sufficient fiscal capacity that allows the policy choices resulting from the coordination process to be effectively supported. A commensurate share of decisions with regard to revenue, expenditure and debt issuance should be subject to joint decision-making and implementation at the level of EMU.

The above paragraph, as well as the afore-mentioned time-horizon envisage the savage destruction of national democracy via the gradual but systematic concentration of all important state powers at the Euro-area level; all this without a genuine European democracy in place. Integration must be predicated on direct representation and participation, on genuine democracy and democratic customs such as elections; themes that are meticulously excluded from all EU-related documents.

As for democracy behold the height of hypocritical speech and the perversion of reality, in the way they think of the existing framework and of any possible objections that might be posed to the rising technocracy:

(page 35) The Lisbon Treaty has perfected the EU's unique model of supranational democracy, and in principle set an appropriate level of democratic legitimacy in regard of today's EU competences. Hence, as long as EMU can be further developed on this Treaty basis, it would be inaccurate to suggest that insurmountable accountability problems exist.

Bon courage to all of us people...

A failure of ideology not of Germany

2012-12-12T11:11:00.000+01:00

The Reichstag building in Berlin. Picture credit: Wikipedia

The narrative that unites most anti-austerity people is the one which asserts that the source of their hardships, of the impoverishment and immiseration they are facing, of the inane pro-cyclical policies they are enduring, of the dearth of liquidity a perverse financial system has brought upon them, lies either in Europe generally speaking or more specifically in Germany and its present chancellor Mrs. Merkel. German flags have been burned at the streets of Athens, the German government has been depicted in nazi uniforms, politicians all around Europe put the brunt of their barbs on Mrs. Merkel for what they perceive as a German failure. Likewise in Germany certain established media have been working laboriously, ever since the beginning of this crisis, to dehumanize certain peoples, to attribute to them all sorts of defects in their "cultural character" and in general to provide the ideocentric underpinnings to a deterministic oratory that assumes the resulting misery as "inevitable", as some sort of divine judgement bestowed upon the sinful and the profligate.

We live in an epoch where common sense and the rightly-understood common good are hard to find; the socioeconomic setting of our days, the overall politico-cultural milieu, engenders an exuberant quasi-racism, that feeds from age-old stereotypes and xenophobic fictions. Fission has been the main characteristic of the European continent over the centuries; only in recent times have we managed to overcome the 'we-they' syndromes that used to put us in a moronic, self-defeating race to the bottom with one another. This achievement is now being threatened by the resurgent nationalism and inwardness of our days that are usually made manifest as populist anti-Germanic palaver or as outright neo-fascist and neo-nazi tendencies (as is the case in Greece: see my full analysis on Golden Dawn).

It is the belief of the present author that the challenges of our times trace their roots in ideological failures rather than the idiosyncrasy of state leaders or the volksgeist of certain countries.

The most evident failure of ideology in this global crisis has been the unfolding of the unexamined postulate that considers GDP growth as an end in and of itself. Predicated on this presumption we saw sweatshop working conditions being imposed on millions of people across the planet, we witnessed an unbridled domination over the earth coupled with disrespect for all its species, we discerned the rise of neo-colonialism this time with multinational corporations taking the role western empires performed in ages past, and we saw the hyper-inflationary financialization of the world economy that sustained and aggrandized all these bubbles that have now left us with mountains of debt and bottomless indignation. Such an ideological failure cannot be contained to a country, a personality or group of personalities, but must rather be addressed at its root as the defining, guiding myth of our age, the tutelary figure so to speak; and it must be systematically questioned and scrutinized as a profoundly fallacious, if not pernicious, tissue of shibboleths and unexamined socio-economic and political prejudices.

Then we have more Europe-specific ideological flaws. The grandest of them all is the very story behind European integration. For the last years integration has been treated as an end in itself, rather than the means to a life of liberty, peace and prosperity. In the false dilemma between integration or chaos, we have seen a forceful transformation of societies under the auspices of the troika, we have witnessed the radical shift in European politics from the principle of the Aristotelean golden mean to the praxis of "enhanced cooperation" whereby a clique of governments or duos similar to the 'Merkozy' impose on all the rest what they consider as the one-and-only modus of integration. The very creation of the euro as effectively a cartel of states within the EU rather than of the EU is evidence of this shifting in the tectonic plates of EU-related diplomacy.

In more recent days and with the December 13-14 European Council meeting fast approaching, we see another ideological monstrosity taking shape: the creation of a technocratic Euro-area state that will elevate Colbertism and euphemistic palaver to new heights. The European Commission's blueprint for a deep and genuine economic and monetary union, contains all the elements of a root-and-branch transformation of Europe that will feature the effective installation of a troika in permanence and for all, non-Euro countries included. Along these lines we find the Council's paper on the same subject, dated December 5, which effectively reproduces the proposals, recommendations, arguments and justifications that were enshrined in the Commission's blueprint and which are all reflected in earlier speeches of the European Central Bank's President, Mr. Mario Draghi, and vice-president, Mr. Vítor Constâncio (for Mr. Draghi's speech see here, and for Mr. Constâncio's here).

Analysing the specifics of these crucial documents, one who is not deluded by the hypocrisy of bureaucratic pontifications, will realize that a sovereign state with an independent budget and with powers to tax and to force elected governments and entire peoples into specific forms of action, or to place them in various straitjackets, is already being contemplated. In this new ideological type of "integration", genuine democracy is secondary in importance, if it can be considered important at all, for the technocratic elite of Europe already agrees that such democratic 'complications' will be discussed over the longer-term, long after all important fiscal, banking and economic powers have been forever withdrawn from elected governments and centralized at the Euro-area level. As a matter of fact the Commission's blueprint envisages "discussions" for some fig leaf of democracy after 5 years from now and once all the technocratic aspects of the Euro-state have been set in place and become fully functional. We will first get Commissioners who will veto and compel elected governments and then we will discuss some kind of inclusive decision-making. In my opinion this too is a failure of ideology, a failure writ large; a failure that will take us down the garden path of serfdom.

With the above in mind, I find the arid nationalistic or pseudo-patriotic antagonisms as distractions from the real challenges that we already face. To change our fate, to ensure our liberty and expand on it we need to work together. Civilization requires painstaking efforts, it is not coincidental. It is the jungle method, the 'we-against-them' fanaticism that is the easy way forward, but which ends in tears.

We better think clearly, for we are at the crossroads of history.

Last Eurogroup for Greece resulted in a non-agreement

2012-11-27T07:26:00.001+01:00

Emblem of the European Council. Picture credit: Wikipedia

As is often the case with the eurocrisis, after yet another high-level meeting European politicians will parade before the public some 'decisive' agreement they have reached. The last episode in this series is the November 27 Eurogroup statement on Greece. For an inattentive reader the text appears to present a political agreement that sets the basis for a gradual but definite solution to the diplomatic dimension of the Greek crisis. In other words, one not paying attention to the actual wording of the text will discern that Euro-area leaders have managed to make a first step in overcoming the shortcomings of decision-making at the European level combined with the architectural flaws of the monetary union. While today and perhaps the days ahead, we will once again witness an orgy of pompous remarks on how critical this latest decision is; we must remain indifferent to the plethora of misleading commentary which will aim at obfuscating the plain fact that no tangible agreement was ever reached. A judicious interpretation of the actual text reveals that there 'might' be a change in certain parameters, 'provided' that some strict and rigid conditions have been met. The only aspect of the bailout programme to Greece which is clearly reinforced is the monitoring of the implementation of the Memorandum of Understanding, but this too was effectively agreed in prior.

As a matter of fact let us read through the text, starting from the issue of supervision. The Eurogroup statement notes that (emphasis mine):

The Eurogroup noted with satisfaction that the updated programme conditionality includes the adoption by Greece of new instruments to enhance the implementation of the programme, notably by means of correction mechanisms to safeguard the achievement of both fiscal and privatisation targets, and by stronger budgeting and monitoring rules. Greece has also significantly strengthened the segregated account for debt servicing. Greece will transfer all privatizations revenues, the targeted primary surpluses as well as 30% of the excess primary surplus to this account, to meet debt service payment on a quarterly forward-looking basis. Greece will also increase transparency and provide full ex ante and ex post information to the EFSF/ESM on transactions on the segregated account.

Ignoring the fig leaf of 'transparency' that was added to the above paragraph, this part of the text suggests two things:

The conditionality of the programme has been strengthened which means that non-elected technocrats will have a stronger say on Greek internal affairs. Also it is tacitly understood that if for whatever reason, be it external shocks, internal economic weaknesses, or even failure of the Greek government to implement the measures it agreed to, the now-common horse trading at the Eurogroup or European Council will start anew, reinvigorating the sentiment of uncertainty over the case of Greece. Payments may be delayed once again, new measures may be required to meet whatever chimerical targets and in general we will all bear witness to the kind of European politics that has thus far exacerbated the crisis, rather than contribute to its effective and benign solution.
All the looting of Greek public property, under the corporate-capitalist doctrine of ad hoc privatizations (which have absolutely nothing to do with genuine free markets), will be conducted for the sake of servicing the debt; a debt whose legitimacy remains in question as there has never been a thoroughgoing audit to see what part of it was the product of corruption, while also a great portion of it derives from the funds the Greek state has provided to the domestic banking system (putting the entire bill on the citizen/taxpayer). The serious political and moral objections to such an outright injustice notwithstanding, it is crystal clear that this is an economically unproductive or even counter-productive approach, for it channels valuable funds into areas that can yield no returns whatsoever and which may only succeed in restraining the real economy and in preserving the zombified status of Greek banks.

Proceeding into the nub of the issue, the actual non-agreement, we read the following in the Eurogroup's statement (emphasis mine):

Against this background and after having been reassured of the authorities' resolve to carry the fiscal and structural reform momentum forward and with a positive outcome of the possible debt buy-back operation, the euro area Member States would be prepared to consider the following initiatives:

A lowering by 100 bps of the interest rate charged to Greece on the loans provided in the context of the Greek Loan Facility. Member States under a full financial assistance programme are not required to participate in the lowering of the GLF interest rates for the period in which they receive themselves financial assistance.
A lowering by 10 bps of the guarantee fee costs paid by Greece on the EFSF loans.
An extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years. These measures will not affect the creditworthiness of EFSF, which is fully backed by the guarantees from Member States.
A commitment by Member States to pass on to Greece's segregated account, an amount equivalent to the income on the SMP portfolio accruing to their national central bank as from budget year 2013. Member States under a full financial assistance programme are not required to participate in this scheme for the period in which they receive themselves financial assistance.

The Eurogroup stresses, however, that the above-mentioned benefits of initiatives by euro area Member States would accrue to Greece in a phased manner and conditional upon a strong implementation by the country of the agreed reform measures in the programme period as well as in the post-programme surveillance period.

The adequacy of the list of proposed measures is of no interest to us within the context of this article, for it is evident that these are mere points for consideration and further bargaining. From the wording of this part of the Eurogroup statement it is readily apparent that ambiguity and vagueness have been intentionally introduced to allow a great deal of flexibility to all parties involved in the Greek bailout, in an effort to keep the pressure on the Greek government without making any actual commitments. Towards that end, the last paragraph of the above quote is quite explicit in the caveats it introduces. To recognize them requires no legal shrewdness nor hermeneutic creativity, but a mere sense of suspicion that stems from the realization of the inconclusiveness of European politics in general and Eurocrisis (mis-)management in particular.

More periodic reviews will follow, additional divergences in opinion will appear, new obstacles will arise along the way. Greece as well as the rest of the Eurozone are in fact suffering from a systemic incompetence of the political order of Europe, found in the overall complexity of institutional and structural flaws in the EU in general and the Euro area in particular.

From my side, I am convinced that we are nowhere near a political solution. In the meantime we see the entropy of the Greek society, while the eurocrisis deepens in many other countries until it eventually reaches the European core. Without a radical shift in approach, European politics will remain part of the problem rather than the solution to it.