What Does Europe Want?

What Does Europe Want?

THE WHO AND HOW OF RESOLVING THE EURO CRISIS

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What Does Europe Want?

THE WHO AND HOW OF RESOLVING THE EURO CRISIS

INTRODUCTION INTRODUCTION

The decisions facing Europe’s leaders and institutions in 2012 are nothing less than colossal. Attempts at the end of last year to cobble together a “comprehensive solution” culminated in the December 8-9, 2011 European Council summit started a process that will consume the continent for most of 2012. But questions remain as to the true nature of the crisis, how the EU can prevent a potential slide in the value of the euro and shore up Greece, and if a lumbering treaty-ratification process can get ahead of market’s expectations and fears. French and German leaders have stated repeatedly that a new treaty is a major step towards fiscal union. However, a sober analysis of the proposed measures in the treaty indicates that many of them came into existence by way of crisis-management policy in 2010 and early 2011.

This piece attempts to dissect the anatomy of the eurozone’s diffuse and often vexing decision-making process to determine: What does Europe want?

The paper’s first section provides an analytical snapshot of the four main players in crisis decision-making: Germany, the European Central Bank (ECB), France and the European Commission. These four actors are and will be essential for the passage and implementation of policy instruments intended to pull Europe out of the crisis. This section is not a comprehensive analysis of all actors – governmental or private – that can impact political outcomes in the EU. It is rather an attempt to capture players and policies that stand out in the debate on the eurozone’s short- and long-term future. The first part begins with an examination of Germany, the country at the heart of the eurozone, and the dynamics that drive the reluctant hegemon’s actions. It then looks at the ECB, the EU’s only credibly independent institution, which continues to be the only player with the latent power to bring immediate relief single-handedly. But the bank is plagued by treaty restrictions and internal ideological conflicts that impair its ability to act. The third part of this section delves into France’s role in bridging the gap between Europe’s two ideological factions while managing its own internal debate. A fourth and final part considers the Commission, which entered the crisis as a weakened institution but retains a role as the nucleus of some of the central questions about the future of fiscal and economic union. As such, the Commission has staked out stronger positions in the past two years.

The second section examines policy proposals that have emerged or are under consideration by eurozone leaders. These options range from short-term instruments, such as re-capitalizing banks, to the longer-term re-wiring of the EU’s basic economic governance. Other policies under review include the depth of European integration and the possible introduction of mutualized eurozone debt. Debates on all these issues could involve new agreements or treaty revisions.

This publication was assembled by the Bertelsmann Foundation North America based on interviews and research conducted in Europe and Washington, DC. This text was originally released on the eve of the December 2011 EU summit in Brussels and has since been updated to reflect the outcome of that gathering. Readers should note that events surrounding the eurozone crisis are changing rapidly.

This text is primarily meant as a primer for a US audience looking for better understanding and greater transparency of a highly complex, fast-moving issue that has become the most important challenge on America’s foreign-policy agenda.

Annette Heuser Executive Director

Meghan Kelly Project Manager, Transatlantic Relations

Tyson Barker Director, Transatlantic Relations

Christopher Wiley Program Associate, Transatlantic Relations

January 18, 2012 2

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TABLE OF CONTENTS The Main Players Germany

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The European Central Bank

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France

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The European Commission

TABLE OF CONTENTS

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The Policies

The European Financial Stability Facility

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Bank Recapitalization

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Economic Governance

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The European Semester

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The Euro Plus Pact

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The Six Pack Measures

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Fiscal Union

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Eurobonds: Mutualization of Sovereign Debt

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Conclusion

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Annex I The United Kingdom

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Annex II Timeline of Major Decisions Taken to Resolve the Eurozone Crisis

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Endnotes

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THE MAIN PLAYERS GERMANY “You have become Europe’s indispensable nation.”

– Radosław Sikorski, Polish foreign minister, Berlin, November 29, 2011

Since the beginning of 2012, Berlin has slowly begun complementing this with a new-found emphasis on growth and jobs creation for the entire eurozone. But this coupled emphasis – the so-called “second leg” of the EU’s response – is not to be found in stimulus but in deep, German-style labor-market reforms that should reduce unit labor costs.

Even while confounding American and European markets and economists, German Chancellor Angela Merkel’s response to the crisis seems to place her squarely in the current of German political Zeitgeist. She shares with her finance and defense ministers the highest approval rating (63 percent, a personal high reached previously in November 2009) of any national German politician. Her popularity comes despite a faltering coalition partner and scandals consuming her hand-picked president.

Six primary traits have characterized German decisionmaking in the eurozone crisis:

Stability Culture: In the past decade, Germany has transformed itself from the sick man of Europe, as portrayed

by The Economist in 1999, to the cautious colossus. Reforms implemented under the Schröder and Merkel governments created the conditions for the German economic buoyancy that allowed the country to weather the global financial and economic crisis successfully. The Schröder government introduced a series of politically difficult structural reforms, including labor-market liberalization and adjustments

GERMANY

Germany is seen by many countries, including its European allies, as a sphinx. Its role thus far in the eurozone crisis is seen as a testament to the county’s continued ambivalence to European leadership as no clear vision for restoring eurozone confidence has emerged from Berlin. Germany’s focus has instead been on the desire to position itself as the “guardian of financial stability and budget discipline” in Europe.1 In the midst of the eurozone crisis, the governing coalition’s response has been to champion a mélange of measures, such as austerity cuts, privatization and pension reforms, on the less competitive member states in Europe’s periphery, particularly Greece. Berlin has shown great reluctance to act in any way that could take pressure off such countries to guarantee that they fundamentally overhaul their public finance and economic fundamentals.

to unit labor costs, and a solid culture of tax collection.

Merkel’s policies complemented these reforms by raising, in 2007, the retirement age to 67, introducing long-term fiscal discipline including the introduction of the “debt brake” into the German constitution in 2009 (a quasi-balanced budget amendment that will hold the German deficit at or under .35 percent of GDP beginning in 2015), and being deeply reluctant to engage in demand-led stimulus in the aftermath of the 2008-9 crisis.2 Germany’s response to the eurozone crisis has been to lean heavily on the conservative-minded stability policy that has defined the governing CDU party’s ideology since the early days of the Federal Republic. This sensibility dovetails well with Merkel’s cautious political style. The heart of her strategy over the last six months has been to put in place hard fiscal constraints such as exporting by summer 2012 the debt brake to the constitutions of other eurozone member states and to enshrine in a treaty automatic sanctions for governments that go astray. Whatever the end state of European fiscal and economic integration, Merkel sees this as the issue on which she holds the most leverage.

She wants to exploit that to create an overlapping system of fiscal measures that will guarantee budget stability and foster greater competitiveness throughout the eurozone.

Germany has long benefitted from an undervalued currency at an effective fixed exchange rate that has bolstered its competitiveness vis-à-vis its neighbors.

The Bild Zeitung Effect: The domestic debate in Germany around the eurozone is effectively sound proof, impermeable to external voices. International perspective is largely muted. The Bild Zeitung, the populist broadsheet read by more than 2.9 million Germans daily, is a barometer for one vehemently euroskeptic streak in German public thinking.3 With headlines such as “Why are We Paying for the Greeks’ Luxury Retirement?”, “Sell Your Islands, You Bankrupt Greeks!”, “Swastikas! The Greeks Taunt Europe even as They Receive Billions More”, the Bild Zeitung reflects the frustrations of many Germans and often becomes the narrative around which policy debate coalesces.4 The German government has done little to counter this populism. It has not effectively communicated the gravity of the crisis at home, leaving many in the Bundestag and the general public with the impression that the crisis is not as existential as the Anglophone and Mediterranean press have portrayed it to be.5 Berlin has also failed to acknowledge 4 What Does Europe Want? The Who and How of Resolving the Euro Crisis

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adequately Germany’s interdependence with eurozone markets. And it has not examined its own culpability in the peripheral states’ private- and public-debt explosion as a result of its current-account surpluses. Germany has instead resorted to the sort of punitive measures to which the Bild Zeitung would subscribe.

Let the good times roll: Polls show that Germans do

In fact, the eurozone crisis has in some many led to unintended benefits for the German economy.

Unemployment in December 2011 dipped to 6.7 percent, its lowest recorded level since German reunification in 1990.8 And waves of skilled labor from the employment-starved eurozone south continue to flow into Germany in search of work. Intra-EU migration to Germany was up 19 percent in the first half of 2011 over the same period in 2010.9 Observers have noted that the German government has been able to achieve a number of political and economic objectives since the onset of the crisis in October 2009, sometimes as a direct result of the crisis itself. The German growth miracle that began in early 2010 was ignited by the euro’s rapid depreciation, which boosted German exports on world markets. Germany may again benefit from this if the currency continues to depreciate gradually in 2012.

Within the eurozone, Germany has long benefitted from an undervalued currency at an effective fixed exchange rate that has bolstered its competitiveness vis-à-vis its neighbors. And the Bund has strengthened its position as a euro-denominated safe haven due to credible publicdebt targeting, stable macroeconomic conditions, a strong current account position, and strong competitiveness relative to other eurozone member states. Most recently, Germany’s bonds have confounded logic by yielding negative nominal interest rates for the first time in the country’s history.10

The German party system is structurally proEuropean: A remarkable feature of the German political landscape is the absence of an organized mainstream euroskeptic political party. This is unlike other major EU member states such as France, Italy, the Netherlands and the UK. From left to right, all of Germany’s major mainstream parties favor greater European integration.

Only the far left party, Die Linke, a hybrid successor to the German Communist party along with a group of Social

The absence of euroskepticism was reaffirmed at recent conventions of three of the governing parties in fall 2011: the Christian Democrats, their Bavarian sister party the Christian Socialists, and the free-market Liberals.11 The proEuropean attitudes are a product of Germany’s history as a vanguard of European integration and of the high barriers to entry for new political parties.

GERMANY

not yet sense the magnitude of the crisis as their eurozone counterparts do. Consumer confidence in the country is high and has climbed through January 2012.6 Business confidence also continues to grow with the six-month outlook for German companies higher going into January 2012 than at any point since October 2011.7

Democrat defectors, is steadfastly euroskeptic, but the party is still seen as a marginal force in national politics.

Germany is more pragmatic than doctrinaire: Some attribute an almost Kantian “categorical imperative” to German political decision-making.12 They cite Germans’ prolonged citations of the Treaties as the basis for action and contend that Germany acts out of a sense of doctrinal purity and commitment to a rigid set of values. In fact, the Germans have shown themselves to be open to compromise in the past two years. For example, it was the Germans who adeptly interpreted the Solidarity Clause (Article 222) of the Maastricht Treaty – a provision originally intended for emergency assistance in the face of natural or man-made disasters – as the legal basis for intra-eurozone loans.

A remarkable feature of the German political landscape is the absence of an organized euroskeptic political party.

Many faces of Germany: Observers of Europe, and even European politicians themselves, often subscribe to the fallacy that Germany’s position on the eurozone crisis is inherent to the German political psyche. Germans themselves often cultivate this perception. Sometimes politicians dig deep into the darkest eras of Germany’s past for tropes that justify current policy. In this way, political choices cease to be political and become culturally hardwired. While this line of argument has served the Merkel government well and has some shade of truth, Germany’s position on the crisis is not monolithic. Both the Merkel government’s aversion to a potential eurobond scheme and opposition to a dual mandate of the ECB have been supported by Germany’s leading opposition party, the Social Democrats. In 2001, then-Chancellor Gerhard Schröder stated that the ECB should look at growth and inflation when setting interest rates.13 In August 2011, the leaders of the SPD held a high-profile press conference to express support for eurobonds. Along with the Greens, the entire center-left has already given its backing to mutualized guarantees for state finance in the eurozone.

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Balancing Germany’s Unilateral Demands (German Europe) with Germany’s Common Interests with most EU Member States (European Germany) European Germany

Budget monitoring and sanctioning through Commission

Budget surveillance with reverse qualified majority the voting for the imposition of sanctions

Internal devaluation through wage suppression

European Financial Stability Facility (EFSF)/ European Stability Mechanism (ESM)

Inflation targeting as the ECB’s sole mandate

Stability or eurobonds (as an end goal)

Labor market reforms and end to wage indexation

Eased voting for loans from the EFSF/ESM

Raising the retirement age

Financial-transaction tax

German Constitutional Court limits on EFSF lending

Higher EU-wide investment in infrastructure projects and research

Debt brakes along the lines of those introduced into the German constitution in 2009

Promotion of labor mobility

GERMANY

German Europe

Targeted use of structure and cohesion funds to promote competitiveness Private-sector involvement in debt write-downs in Greece

Thomas Mann’s oft-quoted dictum that he was “not for a German Europe, but a European Germany” became a central mantra for the Kohl government in the harrowing period between German reunification and the Maastricht Treaty.

But both sides of the phrase are embedded in Germany’s political presence in Europe today.

In the crisis, Germany has mitigated its role between championing a German Europe and accepting a European Germany (see chart). But the focus has slowly shifted toward the latter. The Greek bailout in March 2010, the establishment of the European Financial Stability Facility (EFSF) in May 2010, emergency safety valves on sanctions in the economic governance packages outlined in March 2011, and a surgical treaty revision to make the European Stability Mechanism (ESM) a permanent successor to the EFSF in July 2012 are all indicators of a shift towards a European Germany.

The CDU party platform now allows for bond purchases by the ECB as a last resort. The platform also allowed the possibility of mutualized debt following eurozone integration, direct election of the European Commission president, and combining the roles of Commission and Council presidents.14 All of these would set the EU on better footing to restore confidence in its governing system. The challenge, many commentators have noted, is timing. In the course of the crisis, German decision-making has been glacial yet decisive. Either way, it has shown that where Germany goes, so goes Europe’s future.

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THE EUROPEAN CENTRAL BANK “We have delivered price stability over the first 12 years of the euro – impeccably! Impeccably!”

The European Central Bank (ECB) is the only EU institution to weather the eurozone crisis with a high degree of credibility among international economists and markets.

Other institutions – the European Commission, the European Council, the European Financial Stability Facility (EFSF) and the cluster of new micro-prudential supervisory bodies, in particular the European Security and Markets Authority (ESMA) and the European Banking Authority

European Central Bank Stability/Inflation Targeting

Germany/Bundesbank Netherlands

ECB European Commission Finland

Ireland France Spain Italy

Growth/Employment

Until the onset of the financial crisis in 2007, the ECB demonstrated a strong degree of loyalty to its Bundesbank pedigree. The ECB guaranteed price stability, particularly through medium-term inflation targeting at or below two percent. The bank also maintained its fierce political independence from governments.15 The ECB’s strict adherence to the Maastricht Treaty constrained its ability to act but at the same time reinforced its credibility. Its willingness to raise interest rates to firm up the currency and assuage fears of imported inflation bolstered the fledgling institution’s reputation as the Europeanized successor to the Bundesbank.

THE EUROPEAN CENTRAL BANK

– Jean-Claude Trichet, ECB president, on the bank’s record in the face of German criticism, Frankfurt, September 8, 2011

(EBA) – are too new, too beholden to entrenched interests in member states, or too under-resourced to restore confidence in the eurozone.

In the 2007-8 crisis, the ECB began to demonstrate greater flexibility, particularly in its willingness to intervene in markets via its discount window (standing facilities) to help Europe’s troubled banking sector. Then-ECB President JeanClaude Trichet recognized early on that global imbalances in capital and risky lending could imperil the financial system.

The bank quickly and decisively activated the eurozone’s reserve network to increase liquidity to keep European banks lending.16 As the global financial downturn became an acute eurozone crisis, the ECB began to purchase sovereign bonds from troubled states on the eurozone periphery, some of which have since resorted to the IMF and the EFSF for lending relief.

Since assuming the ECB presidency on November 1, 2011, Italian central banker Mario Draghi has addressed speculation about the ECB’s willingness to continue Trichetera policies. Speaking about a possible Greek exit from the eurozone at his first press conference as ECB president, Draghi stated simply that “it is not in the treaty.”17 The response hinted at three tenets that could define Draghi’s governing philosophy during the crisis: 1) a desire to bolster the indivisibility of the eurozone; 2) a demonstration of strict adherence to the Treaty as the governing document; and 3) an assertion of the bank’s independence.18 Draghi has indicated a willingness to consider greater intervention now that a fiscal union and tighter budgetary controls among national governments is on the table.

Speaking before the European Parliament on December 1, 2011, he said that “a new fiscal compact would be the most important signal from euro area governments embarking on a path of comprehensive deepening of economic integration.

It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations.”19 At the same time, he insists that any ECB intervention stay

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The ECB’s independence offers a legal window for expedient action: Prior to the crisis, some countries – particularly France and Italy – began to question the bank’s staunch independence and inflationary targeting.

In the early part of the financial crisis, French President Nicolas Sarkozy did not shy away from using the ECB as a political foil. He stated that the euro is overvalued by 30 percent to 40 percent, assailed the bank’s “counterproductive” interest rate hikes in summer 2008, and rued its independence as a “historical error”.21 Today the French government has come around to respect the ECB’s independence, primarily because Paris sees it as the avenue to market easing over German objections. The bank has demonstrated during the crisis that it is willing to assert that independence, even if that means snapping at its most protective benefactor, Germany. Garnering the public ire of adherents to Bundesbank orthodoxy, the ECB opposed private-sector involvement in the Greek bailout in July and intervened in Italian and Spanish bond markets.

At their summit in Strasbourg in November 2011, the leaders of France, Germany and Italy spoke explicitly about the sanctity of the ECB’s independence. But this vague accordance masks real differences among the three. France and Italy want active intervention in bond markets to hold down interest-rate spreads and offer respite to countries with higher interest rates; Germany prefers markets to see ECB independence as non-interference with the natural course of market pressures holding forth.

If the ECB’s legitimacy in Germany begins to decline as a result of future bank action, the EU could face another crisis of confidence on the monetary side.

German public discourse on the ECB’s role in the crisis has shown that the bank’s intervention could undermine German confidence in the euro even as such actions help save European monetary union. In May 2010, Axel Weber, Bundesbank president and heir apparent to the ECB presidency, publicly criticized the ECB, and in February 2011 he decided to leave the institutions of the European monetary system. Jürgen Stark, the German ECB chief economist, subsequently and abruptly left that bank’s governing board, a move that many have interpreted as a response to its bond purchases following the July European summit. Stark and Weber had voted in the governing board against the purchase of troubled sovereign bonds. The opposition to the ECB’s moves also extended to the highest political levels in Berlin. In August 2011, German President Christian Wulff openly criticized the ECB for overstepping its mandate, saying “I regard the huge buy-up of government bonds of individual states by the European Central Bank as legally questionable.”24

THE EUROPEAN CENTRAL BANK

within the framework of the Maastricht Treaty, meaning the bank’s intervention is ultimately limited in duration and scope.20 Since the European summit in December 2011, euphoria around potential ECB intervention in sovereignbond markets has subsided. The ECB has instead stepped up low-interest credit availability to the banking sector.

These funds could be used to acquire sovereign bonds, but the impact would not be as potent as direct ECB purchases.

The ECB’s success in 2012 will be contingent upon a delicate balancing act between its independence and its legitimacy, particularly in Germany.

Finally, recent personnel decisions under Draghi’s leadership heightened questions about the ECB’s fealty to its heritage in Frankfurt. The position of ECB chief economist, one held by a German at the ECB since its inception, was offered to Belgian Peter Praet although Stark’s German replacement on the ECB’s executive board, Jörg Asmussen, was widely seen as the presumptive successor to the chief economist position. The decision sparked an unusual amount of German media attention and questions about the German monetary establishment’s being sidelined.25 If the ECB’s legitimacy in Germany begins to decline as a result of future bank action, the EU could face another crisis of confidence on the monetary side.

The red lines of Bundesbank orthodoxy: Some circles in Frankfurt and Berlin feel betrayed by ECB actions and purported plans to intervene more actively in bond markets.22 Doctrinaire German economists see the ECB’s credibility rooted in its adherence to the Maastricht Treaty.23 For them, calls for primary-market debt purchases or even interest rate-spread targets violate the Treaty. Even secondary-market purchases cause discomfort; some see that as a slippery slope to debt monetization.

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FRANCE “If we want more solidarity, we need more fiscal discipline.”

- Nicolas Sarkozy, French president, on the grand bargain for the future of the eurozone, Toulon, December 1, 2011

In the eurozone crisis, France is the key proponent of a give-and-take approach, a combination of strict budgetary monitoring and eased access to capital that German Chancellor Angela Merkel dismissed so forcefully at the Tripartite Summit in Strasbourg on November 24, 2011.26 The French political leadership has staked out a position balancing initiatives aimed at fiscal rectitude with those of eased assistance to weaker states.

So far, Paris has skillfully achieved its tactical goals in the emerging EU framework to resolve the crisis. The treaty arrangements under consideration are – at least for now – intergovernmental rather than based on communitybased. In addition, the punitive measures for correcting future budgetary overreach still contain an emergency “out” in the form of reversed qualified majority voting. Finally, Sarkozy was able to nudge Berlin towards balancing its calls for austerity with greater emphasis on growth and jobs creation.

Still, given the Sarkozy government’s low popularity at home, its EU negotiating success in late 2011 could prove a pyrrhic victory. Four salient factors will determine French negotiating behavior in the coming months:

Maintaining parity with Germany: Since German reunification, France has been eager to tether German strength to the European integration process in a way that allowed Paris to draw down its interest rates and to maintain the European balance of power with the FrancoGerman tandem at its heart. The European monetary union was the result of that.

FRANCE

The eurozone crisis has placed France in the difficult position, fighting to maintain the status quo power constellation in Europe. Paris’ dilemma arises from an ideological pull between two diametrically opposed economic alternatives: 1) remain consistent with long-held, growth-driven fiscal practices and ever increasing demand-side policies, and risk a credit-rating downgrade; or 2) ally itself with the fiscally spartan, structurally reform-minded Germany to maintain (at least the perception of) its place in the elite core of strong economies. France stands Janus-like with one face toward Germany and one toward Mediterranean countries such as Italy and Spain. This position has defined France’s European economic policy since the early 1980s.

The past ten years, however, have brought vastly different fortunes to France and its neighbor to the east. Both had similarly high structural unemployment in 2004, 9.2 percent in France and 9.8 percent in Germany.27 Both enjoyed current account surpluses in 2002, with France’s at 1.8 percent and Germany’s at two percent.28 Both embarked on ambitious structural reform processes between 2002 and 2006 to improve the competitiveness of their economies and reduce unemployment.

Their success in implementing structural reform, however, diverged. Unlike Germany’s successful rewiring of its labor market, France failed in its efforts to pass a compromise reform package in the New Employment Contract (CPE) in 2005.29 French domestic demand outstripped exports and unit labor costs outpaced productivity. France also has the second-highest employment-protection level in the OECD.30 Today, French unemployment is stuck at 9.3 percent. It has a current account deficit of 2.1 percent of GDP, a budget deficit of 5.7 percent of GDP and carries debt of 85.4 percent of GDP.31 The veneer of French parity with Germany has been based largely on its AAA sovereign-debt rating.

France perceives its AAA rating as the Rubicon: For France, the rating has become the symbol of the country’s decades-long economic transformation started during the Mitterrand presidency. It is the economic variant of its permanent UN Security Council seat, a source of prestige.

The French government is determined to ring-fence its creditworthiness through a series of reform measures including: 1) supporting a so-called regle d’or, the balanced budget amendment; 2) addressing structural reform issues affecting the labor market and working hours; and 3) advocating protective measures to limit the bankingsectors exposure (seen in Paris’ reluctance to support in July 2011 deep haircuts for Greek debt that would expose French banks to insolvency).

Greater mutualization of public and private debt has traditionally been France’s position, particularly in the case of bank recapitalization. French banks are among the most exposed to the tenuous debt of Europe’s periphery. Many European banks brought significant amounts of sovereign debt onto their balance sheets to meet capital requirements set by the Basel II agreement. Such debt was seen at the time as risk-free buffer capital. As such, France was the lead proponent for transforming the EFSF into a bank. This would give the EFSF access to the ECB’s unlimited lending capacities to facilitate bank recapitalizations. France also advocates easing EFSF loan approval by making it contingent on qualified majority voting of member states rather than unanimity.

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Low structural reform tolerance: The French street is a

The establishment of a debt brake in national constitutions is the one area where the German and French governments have most stridently agreed. But the measure’s immense unpopularity in France and the country’s upcoming elections mean the debt brake may not come to pass in Paris, even as other member states, such as Spain, are moving towards approval. Even if Sarkozy wins re-election in April or May and his center-right UMP party does well in June’s parliamentary vote, French adoption of a debt brake will be challenging.

FRANCE

powerful political tool in the country’s political life. France’s abortive attempts to pass structural reforms to its labor market in 2005 and 2006 demonstrate the informal veto that high-profile protests and strikes can have. A pensionreform bill was passed in 2010 with minor revisions, but it, too, demonstrated the French electorate’s traditionally low tolerance of reform. The power of street protest in French political life is acute. In his speech in Toulon on December 1, 2011, President Sarkozy stated that the country must “mobilize the mind” to push through structural reforms again.32 In early 2012, he already began to outline these reforms and declare his support for deeper austerity. In doing so, he will again test his country’s willingness to accept reform.

April 2012 elections: Some observers speculate that President Sarkozy’s re-election hinges on his strategy to embrace Germany’s position on a balanced-budget law and other austerity measures. The fault lines around this position have become the electoral cleavages between the incumbent and his main rivals on the right and the left.

Socialist presidential candidate François Hollande and farright Front National Marine Le Pen have warned against any transfer of fiscal sovereignty to unelected institutions such as the European Commission or the European Court of Justice. President Sarkozy is attempting to outflank his electoral opponents by finessing his position to include German austerity, national parliamentary fiscal control and member state sanctioning authority.

Sarkozy tends toward Gaullist suspicion of the supranational, especially for budgetary and fiscal expenditure issues. In his Toulon speech, he said: “The rebuilding of Europe cannot be the march toward more supranational” decision-making.33 This is consistent with debates in spring 2011 in which France successfully injected a member state veto (see page 19) into the penalty process for the package for economic governance.

Sarkozy’s comments hint at substantial differences between French and German positions, with the ECB on Germany’s side. The French may have scored a victory when the UK veto led to an intergovernmental (not supranational) approach to the new fiscal arrangements. Still, the difference between an intergovernmental approach to fiscal union and a community approach will continue to be a point of contention between France and Germany. Berlin and the Commission still favor the eventual incorporation of any new agreement into the structure of the EU within five years.

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THE EUROPEAN COMMISSION

- José Manuel Barroso, State of the Union speech, Strasbourg, September 28, 2011 After a decade of political atrophy, the European Commission – the EU’s executive – entered the eurozone crisis in a weakened state and remains the least influential of the currency area’s key actors. Member states interested in guaranteeing a dominant state-based approach to EU governance used the European Council summits from spring 2010 onward to splice community power, the areas of pooled sovereignty administered by the Commission.

The Council, the legislative body of the 27 EU member states, under the leadership of President Herman Van Rompuy, has been placed at the center of a draft for European Economic Governance (EEG) and more recently elevated to presiding over regularized eurozone summits. These expanded roles will give him significant influence over the relationship between the eurozone and the wider group of all 27 EU member states. The establishment of the European Financial Stability Facility (EFSF) as an intergovernmental body beholden solely to member state consent has further eroded the Commission’s role in economic and financial governance. It does, however, have a role on the back end of EFSF actions as part of a troika (with the IMF and ECB) that is limited to monitoring the implementation of reforms in Greece, Ireland and Portugal.

THE EUROPEAN COMMISSION

“For the euro area to be credible – and this is not only the message of the federalists, this is the message of the markets – we need a true Community approach...Within the Community competencies, the Commission is the economic government of the Union.

We certainly do not need more institutions for this.”

As the “guardian of the treaties”, the Commission pivots between its function as a technical body, one tasked with implementing regulatory enforcement, and a political body, one responsible for introducing new legislation. It closely guards its prized competency, the ability to initiate EU legislation under the auspices of Article 17(1) of the Maastricht Treaty.34 It has a clear stake in a more robust pooling of competencies in fiscal, financial and economic questions, and tends to represent this. The Commission wants to position itself as the responsible party for a tighter economic and fiscal union. But with the December 2011 decision to move forward with an intergovernmental fiscal agreement in the wake of the UK veto, it is unclear whether the Commission can fully buck the trend of its diminishing political role. Member states will debate in the coming months the Commission’s role in the future power constellation while also examining ways to make it more democratically accountable.

In the 1980s and early 1990s, the endemic pulse of Europe’s integration process had the Commission at its center. It could regain that position for the following reasons:

Laboratory of ideas: Despite its circumscribed role, the Commission remains the source of many legislative proposals that have defined the EU policy debate in the crisis. The Commission launched the vehicle for fiscal monitoring, the Six Pack (see page 19), that will serve as the precursor to fiscal union. It has laid out a series of proposals that have become the basis of discussion for future economic governance. These ideas address competitiveness targets that adhere to the Europe 2020 strategy for jobs and growth, the need for consistent fiscal monitoring, support for a financial-transaction tax, and mutualized bonds.35 The Commission couches its call for eurobonds in terms of stability, a clear acknowledgement of a need for German buy-in.

In a desire for greater political autonomy, the executive body seeks to establish a source of revenue separate from the member states. These proposals for so-called “own

The Commission pivots between its function as a technical body, one tasked with implementing regulatory enforcement, and a political body, one responsible for introducing new legislation.

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resources” have included a 2010 suggestion for bonds to fund infrastructure projects in member states and the introduction of its support for a financial-transaction tax, which some have said could be an independent source of revenue for the EU.

THE EUROPEAN COMMISSION

Because the Commission’s influence vis-à-vis the member states, particularly large countries such as Germany, France and the UK, has never been fully clarified, personal relationships between national and Commission leaders are key to determining the Commission’s role in crisis decision-making.

Growing role in the eurozone South: The Commission is becoming the steward of Europe’s technocratization and has taken a much more active role in managing the eurozone’s troubled economies. Whether through tighter monitoring of fiscal adjustments, prescriptions of structural reforms, budgetary reviews or through staffing decisions in new technocratic governments such as Italy’s and Greece’s, the Commission is effectively colonizing the beleaguered euro South. Its role in the troika places it at the center of austerity measures, privatization, and pension, tax and employment reforms in Ireland, Greece and Portugal. And since September, the Commission’s Task Force for Greece provides assistance for creating a reliable business climate and reports quarterly on its progress.36

On

the precipice of greater power?: The Commission’s most important political mandate in the eurozone crisis could come from its more muscular surveillance role, particularly concerning national budgets.

Its responsibilities in this area under existing provisions, such as the Six Pack, include overseeing the submission of national policies to the Commission for scoring before they are drafted in national parliaments, and implementing a Super Commissioner for budgetary oversight.

Despite the UK’s high-profile veto of the EU Treaty option, the Commission could also assume the responsibilities of the Eurogroup presidency and acquire sanctioning authority for profligate states that violate a new treaty.37 This would be an awkward role, however, requiring the Commission to submit a report at the request of a member state that could subsequently be used as the basis for a case in the European Court of Justice. As such, it will be singularly focused on accelerating the pace of the agreement’s eventual absorption into the EU Treaty. France and Germany have indicated that the Commission should take the lead in generating proposals to promote job creation and greater labor mobility within the EU.

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THE POLICIES THE EUROPEAN FINANCIAL STABILITY FACILITY (EFSF)

- Wolfgang Schäuble, German finance minister, November 30, 2011 The European Financial Stability Facility (EFSF), agreed by the heads of the 27 EU member states in May 2010, is a bailout fund for eurozone countries locked out of credit markets and in need of financial stability. It is financed by eurozone member states through pledged commitments.

The countries in need of assistance do not contribute to the fund.

Current EFSF Lending Capacity Including Commitments for Country Programs (Billions) €26

€287

€17.7 €109

Portugal

Greece (potential)

Ireland

Effective Lending Capacity Data Source: EFSF

THE EUROPEAN FINANCIAL STABILITY FACILITY

“Financial markets are skeptical because the EFSF can [make decisions] only unanimously. What we need is instrumentation capable of decisionmaking that can also be convincing to market participants.”

Countries can request support from the EFSF only if they are unable to borrow on markets at acceptable rates. The EFSF can issue bonds at an interest rate of funding costs plus operational costs.38 The lending rates were intended to be about 3.5 percent at the time of the agreement but have soared as high as nine percent.39 This causes hardship for countries that borrow; but unfortunately the market does not offer a better alternative. Approval for a country to receive EFSF aid requires unanimous consent from euroarea finance ministers.40 This was a source of controversy because of the no bail out clause in the Maastricht Treaty, but leaders were able to work around that.41 It continues to be a burden on economically strong countries that assume capital guarantees and the accompanying interest. The EFSF is slated to expire in June 2012, at which time a permanent mechanism, the European Stability Mechanism (ESM), will replace it.42 But since Standard & Poor’s (S&P’s) downgraded the EFSF’s rating on January 16, 2012, EU officials have intensified a push to bring the €500 billion ESM into place

by June 2012. The ESM requires the 17 eurozone members to ratify a framework agreement and the EU-27 to ratify an amendment to the Lisbon Treaty. Leaders are currently debating the framework’s terms. Language stating that countries deemed insolvent “shall be required” to negotiate bondholder losses will be removed, much to the chagrin of Chancellor Merkel, who has pushed for tougher language to avoid further German taxpayer burden.43 The current lending capacity of the EFSF, amounting to €440 billion, already contains commitments to Ireland, Portugal and Greece. Ireland and Portugal are currently receiving loans from the EFSF. Greece has been receiving aid through loans dispersed by the IMF and bilateral loans pooled by the European Commission, so the EFSF has thus far not provided financial assistance to Athens.44 However, the sources of funding of the second Greek bailout (€109 billion), announced on July 21, 2011, have not yet been clarified.45 It could be that funds, at least partially, come from the EFSF and the ESM. Since its inception, the EFSF has lacked adequate funds to guarantee financing of debts in countries such as Italy, Spain or Belgium, should they lose access to credit markets.

The S&P downgrade of the EFSF and two of its significant contributors, France and Austria, now forces the EFSF to operate with even less funding. Proposals to leverage the Facility have been discussed, the most recent being the ability to lower funding costs through an EFSF issuance of fixed credit protection (20 percent-30 percent), and through public and private investment in bonds.46 But the EFSF has yet to achieve the sufficient firepower of €1 trillion, largely because investors are not interested in purchasing Europe’s troubled bonds.

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Eurozone leaders cannot rely on private investors to enlarge the EFSF’s lending capacity to a credible size.

THE EUROPEAN FINANCIAL STABILITY FACILITY

Eurozone leaders cannot rely on private investors to enlarge the EFSF’s lending capacity to a credible size. An alternative option under consideration is IMF leveraging. On November 25, 2011 the Dutch and Finnish finance ministers called on the IMF to play a bigger part in boosting the EFSF’s lending capacity. Bilateral loans from countries outside Europe were touted as a way to “increase the effective size of the IMF” with aspirations that the “IMF could play a bigger role in the crisis,” according to Dutch Finance Minister Jan Kees de Kager.47 But the IMF itself lacks sufficient lending capacity.

In a document released to the IMF Steering Committee in September, Managing Director Christine Lagarde wrote, “our lending capacity of almost $400 billion looks comfortable today, but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders.”48 Once again, all roads return to possible ECB leveraging of the EFSF.49

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BANK RECAPITALIZATION

– Charles Dallara, managing director, Institute of International Finance, in a letter to the Group of 20 summit leaders, November 1, 2011 Since the July 15, 2011 stress tests of European banks conducted by the European Banking Authority (EBA), it has become apparent that several financial institutions have serious exposure to risky sovereign assets.

Shockingly, Dexia, the Franco-Belgian bank, announced a break-up on October 10, 2011 in spite of having passed the July stress test. The main culprit was the bank’s large exposure to bonds in the eurozone’s troubled periphery.

Many of Europe’s banks face similar contagion risks.

IMF Managing Director Christine Lagarde has urged a “mandatory” recapitalization of Europe’s banks to address the problem.50 In the days leading up to the October 26, 2011 EU summit, politicians and bankers negotiated ways to reduce exposure to Greek debt. Reports came from the “troika”(the EU, the IMF and the ECB), which was charged with investigating Greece’s balance books, projecting that Greece’s debt would peak at 186 percent of GDP in 2013, even with a previously agreed 21-percent debt write-down by private creditors.51 Banks, reluctant to face higher losses, won EU leaders over with a compromise: A “voluntary” bond exchange that would require a write-down of as much as 50 percent to 60 percent.

Details of the bond exchange will be negotiated with banks in early 2012, but there is already fear that payouts will be triggered on credit default swaps (CDS), whereby the bank provides an insurance policy to the buyer against default on governments bonds. Warren Buffet called CDS “financial weapons of mass destruction.”52 They were a major cause of the default of big financial institutions in the US, such as Lehman Brothers and AIG. European leaders would be wise to avoid this scenario.

In another move to prevent contagion, EU leaders agreed on October 26, 2011 to force banks to recapitalize to reach a core tier one capital ratio of nine percent by June 30, 2012.

The implications of this are:

BANK RECAPITALIZATION

“There is a clear need to restore the confidence in Europe’s banking sector, and the recapitalization plans for European banks are seen as a key part of the approach. But the scope and approach chosen will cause a number of serious problems.”

1) The capital requirement will be favorable to German, British and even French banks and less favorable to Italian and Spanish banks because they will have to raise more funds against their inevitable bond losses. It comes as no surprise that one of Italy’s largest banks, UniCredit, quickly announced recapitalization plans amounting to €7.5 billion to reach the nine percent requirement.53 The fact that guarantees are being made at the national level feeds the current fragmentation in the European banking system.

2) The relatively short timetable to achieve the capital requirement will make it difficult for banks to raise private funds. The European Banking Authority (EBA) has assumed responsibility for clarifying the precise capital shortfall, which, it announced on December 9, 2011, is €114.7 billion.54 Banks must submit their plans for recapitalization to their national authorities by January 20, 2012, and these plans require subsequent EBA approval.

3) Banks unable to raise private funds can turn to their national governments for state aid. If such aid is unavailable, national governments can seek loans from the EFSF. Because most EU countries already pay into the EFSF, the process is oblique.

Europe’s banking system still lacks consistency and coordination, but attempts to rectify that are underway.

Financial advisers to the EBA have written EU finance ministers to “urgently adopt a European approach” by forming a resolution fund, jointly backed by national governments that would provide guarantees to debt issued

by EU banks.55 This approach has received support from the ECB and the European Commission. Germany, however, has expressed concerns on behalf of the core European countries. Berlin fears that taxpayers would be liable for the exorbitant debt in the peripheral eurozone countries.

On December 9, 2011, the ECB announced exceptional support for eurozone banks by making unlimited loans with three-year maturities available. The previous maturity limit was 13 months. The ECB also began accepting a wider pool of collateral for loans and lowered its reserve requirement for commercial banks from two percent to one percent. But some analysts argue that this step does not address the lack of uniform solutions to mitigating debt.56

Banks unable to raise private funds can turn to their national governments for state aid.

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ECONOMIC GOVERNANCE

- Athanasios Orphanides, ECB council member, November 24, 2011 The idea of a fiscal union is as old as the debate about the single European currency. In the late 1990s the French unsuccessfully insisted on aligning the euro with the socalled gouvernement économique”58 Such a union is now back in the headlines after receiving renewed support from German Chancellor Angela Merkel, French President Nicolas Sarkozy and Italian Prime Minister Mario Monti.

Such a union requires closer coordination on and stricter centralized enforcement of budgetary rules. EU monetary policy is currently decided on the European level, while fiscal policy is determined nationally. The absence of proper fiscal coordination is often cited as a major cause of the euro crisis.

In March 2010, the EU began introducing legislation that builds upon the Stability and Growth Pact (SGP) and encourages greater fiscal discipline among member states.59 This push towards greater fiscal union actually began when the SGP was adopted in 1997, but the current crisis has forced a fairly drastic acceleration of that original momentum, and raised the stakes associated with forging a path to successful macroeconomic harmonization.

The SGP was originally intended to coordinate national fiscal and economic policy at the European level and to “ensure that Member states maintain budget discipline in order to avoid excessive deficits.”60 Its mechanisms for doing so were simple and comprised two arms: one preventative, one dissuasive.61 The SGP thus provided both oversight and the potential for corrective measures in the event that any member state (or states) fell out of economic harmony with the others or with the EU as a whole. In practice, however, the SGP never functioned as well as intended – particularly when it came to dissuasive measures. Several member states, notably France and Germany, found themselves in breach of the SGP requirements as early as 2002.62 Given

their influence and position on the Council, larger member states such as these were seemingly able to violate the three percent/60 percent threshold requirements without fear of reprisal. And despite the mechanisms in place to force systematic corrections of any subsequent fiscal imbalances, no offending member state ever faced disciplinary action.

Simply put, the European Council never followed through on its power to bring sanctions.

ECONOMIC GOVERNANCE

“The crisis has reaffirmed with great force that strong economic governance is a prerequisite for stability in a monetary union. Sadly, despite having experienced tremendous costs stemming from the sovereign crisis in the euro area, lack of sufficient progress in strengthening economic governance going forward, including clarity on crisis management, has become a grave source of instability in the euro area.”57

In practice, however, the Stability and Growth Pact never functioned as well as intended.

Other notable deficiencies of the SGP include broad non-compliance with medium-term objectives such as balanced budgets or creating surpluses, even during times when such goals were easy to achieve (i.e., mid 2000s).63 Perhaps most significantly, the SGP did not adequately consider the different circumstances that defined each member state’s economies when the Commission reviewed budgetary policies. Instead, the pact promoted a one-sizefits-all approach that disregarded differences between the economy of a founding member state and that of a new member state.64 On the whole, the SGP never worked as well as intended.

A primary criticism of the SGP’s functioning under the duress of the recent global financial crisis, besides its general ineffectiveness, was its lack of “bite” to ensure the compliance of all member states. Indeed, even the SGP threat of “further proceedings” against member states violating the three percent/60 percent threshold was somewhat undefined. Such “proceedings” mostly involved further review of a member state’s economic imbalances, the creation of community incentives for a member state to self-correct the imbalances (incentives which, if not capitalized upon, merely resulted in further incentives), and then, ultimately, possible sanctions.65 It is this lack of “bite” that the current package of economic governance measures seeks to address. In principle, all three are similar to the SGP. But they come with added punch, a decidedly more specific corrective framework for enforcement, and pointed tools for managing a fiscal union.

The following section analyzes the three primary pieces of legislation – The European Semester, The Euro Plus Pact and the so-called “Six Pack” – that attempt to give the SGP teeth and, in some cases, double up on competencies and creating redundancies in the process.

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European Semester Timeline Policy Guidance to EU and Euro Area

JANUARY

European Commission

FEBRUARY

MARCH

Country-specific surveillance APRIL

JUNE

JULY

Policy Guidance Including Possible Recommendations

Annual Growth Survey

Council of Ministers

Debate & Orientations

European Parliament

Debate & Orientations

European Council

MAY

Finalisation & Adoption of Guidance

Spring EU Summit

Adoption of National Reform Programmes (NRPs) & Stability and Convergence Programmes (SCPs)

THE EUROPEAN SEMESTER

Member States

Endorsement of Guidance

Autumn: Decisions at national level.

THE EUROPEAN SEMESTER “The European Semester that begins today is at the heart of the reformed economic strategy. It is the first time [that] we are going to put in place these new instruments of joint governance at the European level…

We are effectively introducing a genuine European dimension into national budgetary and economic policymaking for the first time.”66 - José Manuel Barroso, European Commission president, in a press conference to introduce the first European Semester process, January 12, 2011 The European Semester, introduced as a key element of the Europe 2020 initiative in March 2010, is a framework for integrated surveillance and multilateral policy coordination.67 It is an annual assessment of national budgets by the Commission that is meant to coordinate member states’ economic policies vis-à-vis national budgets, to reduce debts, and to incentivize growth through harmonization. By improving coordination through multilateral monitoring of member states’ economic policies, this measure is designed to strengthen budgetary discipline, macroeconomic stability and growth, and to improve competitiveness. These goals are in keeping with the broader Europe 2020 initiative. The process should also engender a sense of common purpose and fate among eurozone states.68 The European Semester is a far more structured vehicle for the goals of the SGP, although it shares many surveillance elements of the SGP’s “preventative” arm.69 The European Semester is more of a code of conduct than a set of hard and fast commandments. It distinguishes itself from the SGP by shifting the timing of the budgetary process, and of fiscal and structural reform plans.70 The former is significant because member states were previously not obligated to make their economic policies contingent on EU-level influence or approval. Under the Semester’s

rules, national parliaments must wait for the Commission’s assessment of national policy before they can begin negotiating their budgetary policy.71 The overall aim is to strengthen economic policy coordination among countries by providing what the EU refers to as ex-ante guidance to states preparing their fiscal houses for the coming year.

A second institutional change introduced by the Semester is “the alignment of the timing of fiscal and structural reform plans.” Until now, member states submitted their plans to align and harmonize with the rest of the EU (Stability or Convergence Plans) at the same time as their plans for achieving national budgetary targets (National Reform Programs).72 The Semester separates the two and requires more direct involvement, and approval, of the European Commission and Council. Whether sovereignty is impinged upon under this scheme is debatable: While the final stage of national policy formation is free of direct EUlevel control, member states are so encumbered up to that point that extricating EU influence from the last round of budget negotiations is impossible.

The results of the European Semester have been mixed.

According to a recent Bruegel-Hertie report, member states have thus far adapted differently to the European Semester.73 Ownership of and adherence to the new economic policy coordination cycle appears strongest in the new member states. Old member states show strong (but freely interpreted) adherence. Smaller member states, those without significant economic relations with other EMU/EU states, or those in significant economic difficulty show little or weak adherence. Another problem is that the European Semester does not differentiate and prioritize policy actions across countries, and thus the Commission tends to employ a “one-size-fits-all” approach to policy recommendations.74

The European Semester is more of a code of conduct than a set of hard and fast commandments.

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THE EURO PLUS PACT “It will provide a new quality of economic coordination. And we call it the Euro Plus Pact for two reasons: first, because it is about what eurozone countries want to do more.

They share one currency, and wish to undertake efforts on top of the existing EU commitments and arrangements. Secondly, because it is also open to the others… from non-euro countries.”75

The Euro Plus Pact (EPP) was drafted by the Council, largely at the insistence of German Chancellor Merkel and French President Sarkozy. It is yet another measure designed to expand the scope and power of the SGP. It is an intergovernmental mechanism designed to “strengthen the economic pillar of the monetary union, achieve a new quality of economic policy coordination, improve competitiveness, thereby leading to a higher degree of convergence.”76 By obliging countries to incorporate the SGP’s fiscal rules into national legislation to maintain competitiveness and avoid fiscal imbalances, the EPP is the next logical step in realizing the SGP’s original goals. The EPP makes political and economic decisions previously and exclusively concluded at the national level subject to convergence with other member states at the EU level.77 Like the European Semester, however, the development of policies to achieve convergence remains the prerogative of member states.

There are “broad areas of coordination – e.g., keeping wages in line with productivity,” but “the policy mix remains the responsibility of each country.”78 The EPP was endorsed during the European summit in March 2011 by eurozone leaders (particularly Sarkozy and Merkel). Non-eurozone states Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania also voiced support.79 The EPP focuses primarily on national competencies that are key to increasing competitiveness and avoiding harmful imbalances. While the euro-area members agreed on the pact, other EU member states have been invited to participate in it – but this is only on a voluntary basis, as participation in the EPP is not required of non-eurozone states (non-participants of note include the UK, Hungary and the Czech Republic).80 The EPP includes structural features that are absent in the SGP, such as recognition of the differences among member states’ economies, an awareness of spillover effects from one member state’s policies on another’s, and an understanding among member states that upholding the integrity of the

However, the pact has yet to deliver greater integration among its adoptees. This is perhaps due to the open coordination method used to adopt the measures, which combines the legislation with others to stave off a worse eurozone crisis, and to provide another mechanism by which eurozone members can more fully integrate their economies and collectively monitor fiscal behavior.81

THE EURO PLUS PACT

- Herman Van Rompuy, European Council president, in a press conference to introduce the Euro Plus Pact, March 25, 2011

single market must be the guiding principle behind political and economic convergence strategies.

The EPP is not without its critics. Primary criticisms surround its seeming country bias, and its lack of real “teeth”. The first complaint relates to the emphasis on competitiveness indicators and their utility. The EPP has reinforced the idea that competition – because peripheral countries have lost competitiveness in the last year – is the only problem that needs to be resolved. This approach is taken because “creditor countries control the official agenda and are free to put emphasis on those issues that do not require much adjustment on their side.”82 No focus exists on issues that are not problematic for Germany (national debt brake, increasing retirement age, etc.). Other issues that would require German reform, such as service-sector liberalization and dealing with doubtful assets on the balance sheets of “government sponsored” banks, have simply been omitted.

The Euro Plus Pact is the next logical step in realizing the Stability and Growth Pact’s original goals.

Regarding the lack of enforcement mechanisms (the “teeth”), the EPP is big on meaning but short on delivery.

Belgian MEP Guy Verhofstadt has already noted the absence of EPP credibility on this issue. “It sets out a series of finesounding intentions and ambitious objectives without indicating how the member states are to be compelled to take the measures and implement the reforms which are needed in order to attain the objectives,” he has said.83 Others, such as Daniel Gros of the Centre for European Policy Studies (CEPS), have argued that the fundamental problem of member states’ divergence on basic competition issues, such as unit labor costs, cannot be made subject to correction by government pressure. Rather, market forces and the demands of creditors drive such things, and they are outside the regulatory purview of convergence/ competitiveness correction mechanisms such as the EPP. Additionally, this mechanism that single-mindedly focuses on competition in Europe excludes some of Europe’s most competitive nations (the UK, Denmark, Sweden, Poland, Czech Republic).

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THE SIX PACK MEASURES

- José Manuel Barroso, European Commission president, State of the Union speech, September 28, 2011 These measures contain six legislative proposals to strengthen the EU’s and, in particular, the eurozone’s economic governance. Four of them focus on reforming the SGP, two on addressing macroeconomic imbalances.85 The Six Pack features mechanisms for early detection of imbalances and subsequent enforcement of punitive actions against non-compliant member states (e.g., a codification of the European Semester procedures into law). Together, these measures are designed to enhance budgetary discipline as intended under the SGP, to ensure a satisfactory reduction in member states’ public debt, and to decrease high deficits by achieving ambitious, countryspecific, medium-term budgetary objectives.

The Six Pack constitutes the most comprehensive set of economic regulations pursued since the creation of the eurozone. The Commission first presented these legislative measures in September 2010. The European Parliament approved them on September 28, 2011, and the Council adopted them on November 8, 2011. Collectively, and in coordination with other elements of the new economicgovernance rules, the six are intended to provide a method for much stricter implementation of the SGP by increasing transparency and accountability, enhancing surveillance of fiscal and macroeconomic policy across the EU, and giving the Commission more power to sanction and punish offending member states. The Six Pack is the teeth missing from the SGP.86 This set of new rules did not, of course, come about easily.

France and Germany, despite sharing largely congruent aims, differed on execution. But Germany long pushed for the adoption of common fiscal standards and norms (unsurprisingly those that resemble its own fiscally responsible practices).87 Not all eurozone members are

One primary issue of contention hinged on the nature of sanctions for states that flout the new rules. Should sanctions be imposed automatically (as favored by Germany) or implemented via some form of qualified vote in the Council (as favored by France). Paris also wanted Council-approved warnings to precede sanctions. The legislation’s final version includes a compromise that allows for “reverse qualified majority” voting on warnings.

It stipulates that “in case of a persistent and/or particularly serious failure to respect the rules, the Commission will draft a recommendation to the member state to take corrective action. The recommendation will be adopted by the Council unless a qualified majority of member states vote against it.”88 If no such majority blocks the recommendation, then it is automatically issued. The French won a minor victory, even if it came at the expense of a more rigorous and effective corrective mechanism.

THE SIX PACK MEASURES

“This ‘Six Pack’ reforms the Stability and Growth Pact and widens surveillance to macroeconomic imbalances. We are now back very close to what the Commission originally put on the table… This legislation will give us much stronger enforcement mechanisms. We can now discuss Member States’ budgetary plans before national decisions are taken. This mix of discipline and integration holds the key to the future of the euro area.”84

pleased with this approach. In the context of the euro crisis, Berlin argues that its own growth and employment figures demonstrate that it has the correct approach, and therefore is right to push other EU countries down its path.

It’s difficult to speculate on how the Six Pack will play out, which makes the dual-pronged hopes of these measures more likely to have dual-pronged results. On the one hand, the integrationist trajectory written into the rules brings hope that Europe’s fiscal houses will better coordinate and create a better firewall to defend against future economic crises. If implemented stringently and rigorously, the governance package could work well at binding the individual and collective economic health of all member states. This would prevent future catastrophic imbalances and steer a course towards a more perfect fiscal union. However, the severity of the envisioned methods of correction (i.e., fines and sanctions in cases of member state fiscal impropriety) could also turn potential crises into much more serious economic difficulties for both offending states and their neighbors.

More recently, a few weeks before the December 9, 2011 summit, the European Commission proposed two new pieces of legislation designed to complement the Six Pack measures by increasing the Commission’s power to provide budgetary surveillance of eurozone countries.89 The proposals allow for enhanced monitoring procedures and mechanisms, and are targeted primarily at eurozone member states in the greatest financial danger (i.e., those facing severe stability problems, those accepting financial assistance, or those just moving off such assistance). An expanded set of monitoring tools includes “a common budgetary timeline [and] common budgetary rules”. The tools can vary in their “intrusiveness” depending on the

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severity of a member state’s financial situation.90 The primary value-added feature of the proposals is that governments would be required to “publish and present their draft budgetary plans in advance of their adoption by national parliaments”.91 This still does not, however, grant the Commission the right to veto member state national budgets.

THE SIX PACK MEASURES

The ECB sees measures such as those comprising the Six Pack (and the two new complementary measures) as the only way to limit the eurozone’s broader troubles while building sustainable economic stability. The Commission, which helped introduce and further many of the new governance proposals, has a strong interest in using them to advance economic integration and to protect Europe from future economic crises. Being vested with significant new powers under the new economic governance scheme, the Commission is in a new position of strength. And despite criticism from some member states that the totality of the new measures is tantamount to a sovereignty-sapping “United States of Europe”, controlling or preventing future crises would prove impossible for European institutions without the new corrective tools and powers.

The Six Pack constitutes the most comprehensive set of economic regulations pursued since the creation of the eurozone.

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FISCAL UNION “The lessons are very simple: rules must be adhered to, adherence must be monitored, non-adherence must have consequences.”

– Chancellor Angela Merkel, Bundestag address, December 2, 2011

Economic Governance: Fiscal Union Member State Centered UK France Spain

FISCAL UNION

The proposal for fiscal union is the most ambitious of the proposals to solve the eurozone crisis because its credibility requires buy-in from many EU member states. Although it remains unclear how fiscal union differs from the aforementioned EU legislation on economic governance, some EU leaders believe a new agreement with a legally binding mechanism would make, at a minimum, the rules appear more enforceable to doubtful investors.

German Chancellor Angela Merkel has been a strong advocate of achieving fiscal union through treaty change, which requires ratification by all 27 EU member states. She was disappointed by UK Prime Minister David Cameron’s announcement at the December 8-9, 2010 EU summit that London would not participate in a new agreement. Cameron attempted to obtain special treaty concessions for financial services in exchange for his approvals, but EU leaders did not budge. The conventional thinking is that weak regulation of financial services helped create the eurozone crisis.

French President Nicolas Sarkozy has favored an intergovernmental agreement starting with the eurozone 17 and offering other EU member states an option to sign on later. He has only reluctantly supported Merkel’s proposal for treaty change92, a position mirrored in the French public.

A recent poll by Harris Interactive shows that 64 percent of French respondents value national sovereignty and think that states should act independently without permission from European partners.93 The compromise proposal that Merkel and Sarkozy negotiated includes automatic sanctions for countries that breach the EU’s deficit limit of three percent stipulated in the Stability and Growth Pact (SGP). The “automaticity” of the sanctions demonstrates the need to apply the rules more forcefully, as they have been repeatedly broken in the past. Should a country wish to reject a sanction, it would need a qualified majority agreement among all the eurozone states.94 Additionally, the proposal calls for balanced-budget amendments to be enshrined in national constitutions.

All member states but the UK agreed to a new fiscal compact at the December EU summit. At the next EU summit on January 30, 2012 leaders should consider an initial draft of the compact before adopting it at a March 1, 2012 European Council meeting. A working group comprised of member state advisors is working on the draft.

Italy

ECB European Commission

Plans are also progressing for an intergovernmental treaty, which will exist outside the EU Treaty, among 26 EU member states. Such pacts normally provide EU institutions with limited enforcement power, but a

Finland Germany

Netherlands

Community Centered

Confidence in the finality of the eurozone crisis is still low.

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FISCAL UNION

recent draft was controversial for a provision allowing the Commission to bring a profligate member state to the European Court of Justice (ECJ). This was criticized by the UK, which insisted that an agreement outside the EU Treaty should not give new powers to EU institutions. When that provision was subsequently removed, a prominent group of MEPs complained that the draft language did not respect the integrity of the EU institutions.95 On January 18, 2012, the European Parliament adopted a resolution expressing doubts about the necessity for an intergovernmental agreement (P7_TA-PROV(2012)0002).

Meanwhile, the ECB has criticized the draft as substantially watered-down. Jörg Asmussen, an ECB executive board member, wrote in a letter to the Financial Times that “[t]hese revisions… clearly run against the spirit of the initial general agreement on an ambitious fiscal compact.”96 ECB backing has been important for eurozone leaders to obtain because they initially believed an ambitious fiscal compact could encourage the bank to step up its intervention in flailing bond markets, thereby assuaging investor fears. But by the start of the December 2011 EU summit, the ECB signaled it would not act that way. The latest criticism of the draft further dampens its impact.

It is also unclear if the agreement would require a national referendum in Ireland, where passage would be anything but assured.97 Given this potential hurdle, Chancellor Merkel appears to want to make ratification a requirement for further bailouts.

Eventually, the intergovernmental agreement could be inscribed into the existing EU Treaty. This could realistically happen within five years.98 Such an approach would help satisfy the European Commission, which has repeatedly denounced any method that establishes a fiscal union that divides the EU into a “two-speed Europe”.99 Given the agreement’s diminished impact in the short term, however, confidence in the finality of the eurozone crisis remains low.

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EUROBONDS: MUTUALIZATION OF SOVEREIGN DEBT “Eurobonds are not a short-term fix, but they could fill the gap left by the loss of confidence in government bonds generally.”

The European Commission and certain political leaders support creating mutualized, or shared, debt among eurozone nations. They join many leading economists and policymakers who see this as a solution to Europe’s fragmented fiscal system.

Mutualization Pro-Eurobonds

Spain European Commission

Italy

European Commission President José Manuel Barroso proposed such “stability bonds” in his State of the Union speech on September 28, 2011.102 These instruments, Barroso said, would be “bonds that are designed in a way that rewards those who play by the rules, and deters those who don’t.”103 They would be designed for the daily financing of eurozone governments through common issuance.

The Commission has devised three possible approaches for mutualization:104

ECB

1) Full mutualization: This plan would convert all national government bonds to eurobonds backed by the 17 eurozone countries. It would require treaty changes and would face major political hurdles. Full mutualization would also be unlikely to incentivize indebted member states to continue with difficult reforms since it would shield them from the market pressures that have spurred austerity measures and structural reform over the past year and a half.

2) The Blue Bond Package: Eurozone countries

France Netherlands Austria

EUROBONDS: MUTUALIZATION OF SOVEREIGN DEBT

- John Bruton, former Irish prime minister and former EU ambassador to the US, October 18, 2011

Under a so-called eurobond scheme, eurozone countries would issue joint bonds and collectively guarantee them.

By pooling eurozone lending, the nominal interest rate on sovereign debt regardless of the issuing country would coalesce around the weighted average rate of current national bond issuances. This would imply, if using the first seven months of 2011 as a basis, interest rates of 3.17 percent for two-year bonds and 4.41 percent for 10year bonds.100 This scenario would raise interest rates on German bonds by between 1.34 percent and 1.73 percent, representing an annual cost of between €33 billion and €47 billion for Germany.101 But such a structure would relieve the pressure on countries such as Italy and Spain, which are struggling to maintain affordable access to bond markets. They would use a eurozone-wide debt guarantee to exploit the creditworthiness of their more financially robust northern neighbors, especially Germany. A mutualized bond would also be a highly liquid asset to rival Treasury bonds as a reserve asset. This, in turn, would add to the bond’s long-term attractiveness.

Finland

Germany

Does Not Support Eurobonds

would issue common eurobonds to a certain limit (e.g., 60 percent of their annual GDP). National governments would be responsible for backing any additional debt that they issue. This plan would also require treaty changes and face political hurdles. It has nevertheless been championed by many, particularly those in the think-tank community who see it as an effective incentive to member states to keep their debt below 60 percent of GDP. Any excess debt issuance, dubbed “red bonds”, would be less creditworthy and require a higher yield to balance investor risk.105 In the long term, this could exert corrective pressure on member states that would otherwise be tempted to allow debt to exceed 60 percent.

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23

3) Limited guarantees: This third option would provide some guarantees on newly issued bonds. Its structure would be similar to that of the European Financial Stability Facility (EFSF), although bond guarantees would be readily available to states in non-emergency situations as well. Limited guarantees would still likely lead to a decline in creditworthiness since they would reflect the creditworthiness of the nations that offer them.

EUROBONDS: MUTUALIZATION OF SOVEREIGN DEBT

The political hurdles to mutualizing debt lie first and foremost in Germany. Chancellor Angela Merkel has adamantly opposed the creation of eurobonds, not least because Germany would risk its AAA rating if its creditworthiness were pooled with the rest of the eurozone.

Speaking ahead of her December 2, 2011 Bundestag address, she said that “I and the rest of the government find eurobonds the wrong method in this stage of European development, even damaging.”106 Germany sees the introduction of a mutualized bond scheme as an undue course to relieve pressure from governments currently implementing politically difficult reform packages as a result of rising borrowing costs. In addition, the German Constitutional Court ruled in September 2011 against eurobond issuance.107 Eventual mutualization has nevertheless not been ruled out. EU Internal Market Commissioner Michel Barnier’s prediction that “Germany will move [on eurobonds] as soon as it has confidence in our capacity to manage together” may yet come true.108 France has taken a public position similar to that of Germany. French Budget Minister Valerie Pecresse has said that eurobonds “would be the final stage of a process of convergence. Right now there’s a consensus that the step to take is repairing public finances.”109 Given the French economy’s vulnerability, however, this position could change if negative economic developments continue.

The IMF has consistently stated that now is not the right time to consider eurobond issuance. Chief Economist Olivier Blanchard has said, “Our position is that it would be premature to implement [eurobonds] before a good system of surveillance is in place.”110 Blanchard favors other corrective measures not yet fully exhausted. ECB Executive Board Member José Manuel Gonzalez-Paramo bluntly told an audience at Oxford University, “I think eurobonds will exist at some point.”111 The potential implementation of eurobonds as a means of is seen my key participants as the capstone of the fiscal union process.

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CONCLUSION With its implications for fiscal sustainability, competitiveness and financial markets in Europe and around the world, the eurozone crisis is a global economic crisis. But more fundamentally, it is a political crisis. The ostensible power centers in the EU have not upheld hallowed concepts, such as the community method or open coordination, that are enshrined in the Treaties and high-minded communiqués. In reality, power is tucked away in national capitals that pursue their own interests.

That is a challenge for a system that is subject to vetoes from numerous states and institutions, many of which can derail decision-making, and that is difficult for many Europeans to access and influence. Indeed, these are some of the EU political system’s most endemic flaws.

CONCLUSION

The EU’s long-term legitimacy will require policymakers, central bankers, Commission officials and economists to bring decision-making out of the shadows and subject it to the edifying check of democratic accountability. The question of what Europe wants must ultimately be decided by the people of Europe themselves.

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ANNEX I THE UNITED KINGDOM “The European Community belongs to all its members. It must reflect the traditions and aspirations of all its members.”

– Margaret Thatcher, The Bruges Speech on Britain and Europe, September 20, 1988

At home in London, the veto was lionized by the euroskeptic boulevard press and the Tory party rank and file as a demonstration of decisive leadership. But it was gleefully derided in France and lamented in Germany whose government sees the UK as a natural ally for the continuation of market liberalization and fiscal rectitude. Either way, the move has “plunged Britain’s position in Europe into the greatest uncertainty in a generation.”112

In recent years and much to the dismay of some of its most ardent advocates in Brussels – including its own nationals – the Tory party under Cameron’s leadership has broken many of the informal ties that linked his party to the continental center-right. The most glaring example of this was the Conservative party’s 2009 decision to pull the Tories from the pan-continental European People’s Party (EPP), a federation of center-right parties, and to join instead an ideologically haphazard grouping of euroskeptics, the European Conservatives and Reformists (ECR). This decision has marginalized Tory members in the European Parliament as evidenced by roles in leadership and key committees. It also effectively barred Cameron from attending EPP summits. The Marseilles EPP gathering on the eve of the EU summit was seen as the moment in which leaders such as German Chancellor Angela Merkel, French President Nicolas Sarkozy, European Council President Herman Van Rompuy and European Commission President José Manuel Barosso – all of the center-right EPP – could coordinate positions on treaty change. Some keen observers have speculated that had Cameron not abandoned the EPP in 2009, he would have had a clearer sense of the FrancoGerman sentiment and been able to plan accordingly.

The UK government has demonstrated since the veto that its staunch opposition to a new treaty was not an apparition. It has sustained its campaign against the new treaty, vowing to block the eventual signatories of the agreement from using EU institutions in its enforcement. This decision is having a clear impact on the development of fiscal governance, particularly regarding the role of the European Commission and the European Court of Justice (ECJ) in enforcement.

Splendid isolation: France, now pursuing a strategy that

The erosion of informal ties with pan-European conservatives: Always an outsider in the European club,

A diminished actor in the world: One of the most

the UK has accelerated the process of disentangling itself from EU governance. Adroit policymaking in the highly stylized negotiations of Brussels and Strasbourg requires access to as many formal and informal halls of power as possible. Having long recognized this, the UK, Poland and other non-eurozone members – often derided as “outs” by the political leadership of France and other eurozone members – have sought to preserve their influence through their role as informal observers to negotiating processes.

This takes place inside the Council, the formal negotiating area, and outside in political caucuses, where party

ANNEX I

A somewhat dramatic coda to the December 2011 European summit came with UK Prime Minister David Cameron’s veto of an EU-based treaty change on fiscal coordination.

After an entire night of intense deliberation in which other member states refused to accept British insistence on single market opt-outs for the UK financial-services sector, Cameron emerged in the morning to say that he had vetoed the proposed changes to protect British national interests.

groupings hammer out joint positions on issues before European summits. The UK will be party to the negotiations on the intergovernmental fiscal treaty.

maintains the dynamic that leaves the UK marginalized, is pushing hard for passage of an EU-wide financial-transition tax (FTT). Other leaders, including Merkel, have supported such an initiative but only if implemented throughout the eurozone or, optimally, the EU. The UK is strongly opposed to an EU-wide FTT on multiple grounds and could again be placed in a position to veto, perhaps alone.

consequential examples of collateral damage from the eurozone crisis has been its impact on the EU’s ability – formally and informally – to project power in the world.113 Despite its Franco-British leadership and powers derogated to it by the Lisbon Treaty, the much maligned European External Action Service (EEAS) has suffered a still birth since 2009.

The timing of the financial crisis could not be more inauspicious for the EEAS, placing enormous pressure on it to focus on financial and institutional wrangling in Brussels and leaving it noticeably absent from such major

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geopolitical events as the Arab Spring and the Fukushima Daiichi power plant disaster in Japan. The UK has the largest defense budget in the EU and the region’s greatest expeditionary capabilities. London is also one of the most consistent advocates of the European presence in the world. But the Cameron government has been clear in its intent to rein in the EEAS’s power, going so far as to block a meager €27 million increase in its budget.

ANNEX I

The crisis has shown that role of the EU as a global actor will remain relegated to its power as a “force multiplier” in unconventional levers of power – humanitarian and development aid, sanctions, regulation, and trade relations.

The pretense to a greater Europe-puissance has begun to give way as this goal looking less realistic.114

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ANNEX II TIMELINE FOR MAJOR DECISIONS TAKEN TO RESOLVE THE EUROZONE CRISIS MAY 2, 2010 The European Central Bank, European

MAY 9, 2010 The 27 heads of EU member states agree to create the European Financial Stability Facility (EFSF), a legal instrument that provides funding assistance by solvent eurozone countries for insolvent eurozone countries.

announce plans to reduce Greece’s debt whereby private investors take a greater loss (about 50 per cent) through a voluntary agreement in exchange for safer debt. Leaders also announce plans to recapitalize Europe’s banks at the cost of €106 billion and create a €1 trillion firewall to prevent the spread of contagion to larger, more solvent eurozone countries.

NOVEMBER 8, 2011 The European Council adopts

ANNEX II

Commission, and the International Monetary Fund agree to a €110 billion bailout package for Greece. Greece promises austerity to cut its budget deficit to three percent of GDP by 2014.

OCTOBER 26, 2011 At an EU summit, heads of state

the Six Pack measures, six proposals comprising the EU’s economic governance package. The Six Pack amends and strengthens the Stability and Growth Pact (SGP), introduces a new Excessive Imbalances Procedure, and includes new requirements for national budgetary frameworks.

NOVEMBER 9, 2011 Greek Prime Minister George NOVEMBER 28, 2010 EU finance ministers approve a €85 billion bailout package for Ireland that includes funding from the EFSF (and its permanent mechanism, the European Stability Mechanism (ESM)), the IMF, and bilateral loans from the UK, Denmark, and Sweden. Ireland promised austerity in return.

JANUARY 12, 2011 The European Commission adopts the first Annual Growth Survey (AGS) and begins the new annual cycle of economic harmonization and policy coordination known as the European Semester.

Papandreou resigns after a tumultuous week in the markets spurred by his threat to put the country’s bailout conditions to a referendum due to violent protests in the streets of Athens over harsh austerity measures.

NOVEMBER 16, 2011 Italian Prime Minister Silvio Berlusconi resigns after the Italian Parliament passed austerity measures in light of soaring interest rates on Italian debt. Technocrat Mario Monti succeeds him to lead Italy towards more fiscal responsibility.

NOVEMBER 23, 2011 The European Commission MARCH 24-25, 2011 The European Council agrees on the Euro Plus Pact, a strategy for competition and employment growth that is obligatory for eurozone countries and optional for the remaining EU members.

publishes a “Green Paper” on the feasibility of stability bonds, a proposal for mutualizing debt among the eurozone countries.

NOVEMBER 24, 2011 Italian Prime Minister Mario MAY 16, 2011 EU finance ministers approve a €78 billion bailout package for Portugal that includes funding from the EFSF, the ESM and the IMF.

JULY 21, 2011 At an EU summit, heads of state announce the second bailout for Greece of €109 billion from the EFSF, ESM and private investor losses. They also announce the enlargement of EFSF from €440 billion to €780 billion, which will require ratification by national parliaments.

Monti, French President Nicolas Sarkozy and German Chancellor Angela Merkel meet in Strasbourg to discuss Monti’s plan to balance Italy’s budget by 2013. They agree to create plans for a fiscal union and to stay quiet on the role of the ECB.

NOVEMBER 30, 2011 Eurozone finance ministers agree on ways to boost the EFSF’s firepower through bond guarantees and private investment. They also discuss IMF involvement in boosting the fund.

OCTOBER 13, 2011 The enlargement of the EFSF is finally ratified with approval by the Slovak parliament.

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DECEMBER 5, 2011 French President Nicolas Sarkozy and German Chancellor Angela Merkel meet in Paris to discuss plans for treaty change and automatic sanctions for fiscal irresponsibility. They also request other EU leaders to announce their positions on treaty change by the December 8-9 summit, so that measures can be in place by March 2012.

DECEMBER 8-9, 2011 The EU summit focuses on plans

ANNEX II

for a fiscal compact, to which 26 EU member states agree.

UK Prime Minister David Cameron refuses to support it, thereby blocking potential treaty change. ECB President Mario Draghi resists notions that the bank would intervene in sovereign-debt markets. Eurozone and EU leaders agree to contribute €150 billion in bilateral loans to the IMF to support global financial stability.

JANUARY 9, 2012 French President Nicolas Sarkozy and German Chancellor Angela Merkel meet in Berlin to prepare for the January 30, 2012 EU summit. They praise the progress of the fiscal compact-drafting process and launch a strategy to revive economic growth and job creation in a further effort to combat the eurozone’s debt problem. They also urge the expedition of Greek debt restructuring.

JANUARY 30, 2012 Another EU summit in Brussels is scheduled to discuss solutions to the crisis. Under consideration is a draft of the guidelines for a fiscal compact.

MARCH 1, 2012 The 26 EU member states are expected to sign on to a new fiscal compact. Eurozone leaders reassess the adequacy of the ESM/EFSF €500 billion ceiling.

JULY 2012 The European Stability Mechanism (ESM) enters into force and the EFSF ceases to negotiate new programs.

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ENDNOTES 1

Beschluss des 24. Parteitages der CDU Deutschlands: Starkes Europa – Gute Zukunft für Deutschland. Pg. 8.

Die Schuldenbremse – für die Zukunft unserer Kinder. Federal Republic of Germany. 2010, retrieved online : http://www.bundesregierung.de/Content/DE/__Anlagen/2010/schuldenbremse-infografik-textversion,property=publicationFile.pdf 3 Informationsgemeinschaft zur Feststellung der Verbeitung von Webeträgern e. V., retrieved online : http://www.ivw.de/ 4 Bild-Zeitung, Oct. 27, 2010; Bild-Zeitung, June 6, 2011.

5 “Is this really the end?” in: The Economist, London. November 26th, 2011, retrieved online : http://www.economist.com/node/21540255 6 The GfK Group, retrieved online : http://www.gfk.com/ 7 Ifo Business Survey December 2011. Retrieved online at: http://www.cesifo-group.de/portal/page/portal/ifoHome/a-winfo/d1index/10indexgsk 8 “Germany’s unemployment rate at record low in December.” In BBC Online. Retrieved online at: http://www.bbc.co.uk/news/business-16390429 9 Schultz, Stefan. „Europas Krise, Deutschlands Segen“ in Spiegel Online. January 9, 2012. Retreived online at: http://www.spiegel.de/wirtschaft/soziales/0,1518,808010,00.html 10 Auction Result: treasury discount paper of the Federal Republic of Germany. January 9, 2012. Retrieved online at: http://www.bundesbank.de/download/presse/pressenotizen/2012/20120109.tenderergebnis.en.pdf 11 In May 2010, the CDU attempted to use a hard line on Greece to push up its poll numbers in North-Rhine Westphalia. In August 2011, the FDP attempted to profile itself as a Euro-skeptic force. Both strategies backfired with the CDU losing 10.3% of its support and control of the government and the FDP garnering a paltry 1.8%.

12 Wohlgemuth, Michael. “Kant was No Stickler for Principles” in: What does Germany Think About Europe? Ulrike Guerot and Jacqueline Henard (eds). June 2011. Pg.13.

13 Schmid, John. “German Slump Prompts Push for Lower Rates: Schroeder Urges the ECB to Focus on Growth, Too.” The New York Times, June 30, 2001, retrieved online : http://www.nytimes.com/2001/06/30/business/worldbusiness/30iht-ecb_ed3__1.html 14 Beschluss des 24. Parteitages der CDU Deutschlands: Starkes Europa – Gute Zukunft für Deutschland 15 The US Federal Reserve has a dual mandate of inflation targets and employment. Lowering interest rates can create inflationary pressure, which helps to create jobs because businesses are more likely to spend and grow. Additionally, it could depreciate the currency which would boost exports.

16 Marsh, David. The Euro: The Battle for a New Global Currency. New Haven. 2009. pg. 217.

17 Speech by Mario Draghi, November 3, 2011. Retrieved online : http://www.ecb.int/press/key/date/2011/html/sp111201.en.html 18 Angela Merkel was the one who publically broached the possibility of departure of Greece from the eurozone.

19 Speech by Mario Draghi, Hearing before the European Parliament on the Occasion of the ECB’s 2010 Annual Report, December 1, 2011. Retrieved online at: http://www.ecb.int/press/key/date/2011/html/sp111201.en.html 20 Atkins, Ralph and Hugh Carnegy. “Draghi hints at eurozone aid plan,” Financial Times, December 1, 2011.

21 Marsh, 227.

22 Draghi, December 1, 2011 23 Article 123, Treaty of the European Union, retrieved online : http://eur-lex.europa.eu/en/treaties/dat/11992M/htm/11992M.html 24 Speech by Christian Wulff. Lindau Nobel Laureate Meeting. August 24, 2011. Retrieved online : http://www.lindau-nobel.org/upload/2011_08_24_Opening_Speech_Wulff_English_6252.pdf 25 Mahler, Armin. „Maßgeschneidertes Trostpfaster,“ Spiegel Online. January 3, 2012. Retrieved online at: http://www.spiegel.de/wirtschaft/unternehmen/0,1518,807005,00.html 26 Taylor, Paul. “Euro Zone Leaders May Have to Accept Tighter Union.” New York Times, November 28, 2011. Retrieved online : http://www.nytimes.com/2011/11/29/business/global/euro-zone-leaders-may-have-to-accept-tighter-union.html 27 Eurostat. Retrieved online : http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Unemployment_statistics 28 Trading Economics. Retrieved online : http://www.tradingeconomics.com/germany/gdp-growth 29 Barker, Tyson. “Flexicurity in Europe’s Labor Market” in: Policy Matters, Volume 4, No. 2, 2007. Berkeley. Retrieved online : http://policymatters.net/issue/PolicyMatters_Spring_2007.pdf 30 France’s Loi Aubry limits weekly working hours to 35.

31 IMF Stability Report on France, November 2011. Retrieved online : http://www.imf.org/external/np/country/2011/mapfrance.pdf 32 Speech by Nicolas Sarkozy. Toulon, France. December 1, 2011. Retrieved online : http://www.elysee.fr/president/les-actualites/discours/2011/discours-du-president-de-la-republique-a-toulon.12553.html 33 Ibid.

34 Treaty of the European Union, retrieved online : http://eur-lex.europa.eu/en/treaties/dat/11992M/htm/11992M.html 35 The Europe 2020 strategy’s predecessor, the Lisbon Agenda, set forth a series of targets to create a European knowledge-based economy that was meant to be the world’s most competitive. Green Paper on the feasibility of introducing Stability Bonds, European Commission. November 23, 2011. Retrieved online : http://ec.europa.eu/commission_2010-2014/president/news/documents/pdf/green_en.pdf 36 The Commission has a two-pronged mission in Greece: It wants to establish investment projects aimed at maintaining demand and employment, and it aims to expedite the injection of €15 billion of structural funds. Its informal influence has also increased by staffing the ministries across the region have been seconded from the Commission to help distressed countries meet targets set by the troika. Questions and Answers on the Task Force for Greece. European Commission website. September 13, 2011. Retrieved online : http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/599&format=HTML&aged=0&language=EN&guiLanguage=en 37 As President Barroso stated: “It was an illusion to think that we could have a common currency and a single market with national approaches to economic and budgetary policy. Let’s avoid another illusion that we can have a common currency and a single market with an intergovernmental approach.”

38 These bonds are not referred to as “eurobonds” because they are guaranteed by individual member states rather than the collective euro zone. Some argue, however, that this is a façade and they are essentially Eurobonds. See: De le Dehesa, Guillermo. “Eurobonds: Concepts and Implications,” European Parliament, March 2011, retrieved online: http://www.europarl.europa.eu/document/activities/cont/201103/20110317ATT15734/20110317ATT15734EN.pdf).

39 EFSF Framework Agreement, retrieved online: http://www.efsf.europa.eu/attachments/20111019_efsf_framework_agreement_en.pdf. In November, the interest rate on EFSF loans reached 9 per cent in Ireland. Reddan, Fiona. “Ireland’s funding costs start rising again,” Irish Times November 26, 2011, retrieved online: http://www.irishtimes.com/newspaper/finance/2011/1126/1224308179040.html).

40 See EFSF Framework Agreement.

41 The Solidarity Clause of the Maastricht Treaty provided the legal basis for the financial stability amendment. The provision was originally intended to allow for intra-governmental assistance in the midst of natural or man-made disasters. See De Witte, Bruno. “The European Treaty Amendment for the Creation of a Financial Stability Mechanism,” Swedish Institute for European Policy Studies Bepa: June 2011, retrieved online: http://www.eui.eu/Projects/EUDO-Institutions/Documents/SIEPS20116epa.pdf.

42 The ESM will be established as an intergovernmental organization under public international law. See the European Council’s website at: http://www.european-council.europa.eu/eurozone-governance/features/feature151211-moving-towards-fiscal-union.

43 Peel, Quentin and Peter Spiegel. “Devil’s in detail of Sarkozy-Merkel deal.” Financial Times December 6, 2011, retrieved online: http://www.ft.com/intl/cms/s/0/30aba180-2040-11e1-9878-00144feabdc0.html#axzz1frbFkoZd. 44 The European Council’s fact sheet on the adjustment program for Greece, retrieved online: http://www.european-council.europa.eu/media/443140/27.10.11-greece-factsheet.pdf.

45 Valée, Shahin. “There is no such thing as EFSF leverage without the ECB,” Bruegel October 19, 2011, retrieved online: http://www.bruegel.org/publications/publication-detail/publication/621-there-is-no-such-thing-as-efsf-leverage-without-the-ecb/.

46 The EFSF website, found at: http://www.efsf.europa.eu/mediacentre/news/2011/2011-015-maximising-efsfs-capacity-approved.htm.

47 “Netherlands, Finland favor strengthening IMF role as they improve euro defenses,” Washington Post November 25, 2011, retrieved online: http://www.washingtonpost.com/business/markets/poll-germans-strongly-against-eurobonds-approval-of-merkels-crisis-management-rising/2011/11/25/ gIQANZaNvN_story.html 48 Armitstead, Louise and Jonathan Russell. “Christine Lagarde: IMF may need billions in extra funding,” The Telegraph September 25, 2011, retrieved online: http://www.telegraph.co.uk/finance/financialcrisis/8788223/Christine-Lagarde-IMF-may-need-billions-in-extra-funding.html 2

ENDNOTES 30

30

49

In August 2011, Daniel Gros, director of the Centre for European Policy Studies (CEPS), the Brussels-based think tank, and Thomas Mayer, Deutsch Bank chief economist released a paper that proposes to register the EFSF as a bank (called the European Monetary Fund (EMF)), which would give it access to potentially unlimited amounts of ECB re-financing in case of an emergency. The EMF would have access to the ECB like other banks have; the ECB acts as a lender of last resort for eurozone central banks.

The authors tout this idea for three reasons: It works around the EU Treaty’s prohibition of ECB monetary financing, it could effectively increase muchneeded EFSF liquidity, and it does not require additional taxpayer money. See: Gros, Daniel and Thomas Mayer. “Refinancing the EFSF via the ECB,” CEPS. August 18, 2011.

50 Speech by Christine Lagarde. “Global Risks are Rising, but there is a Path to Recovery”: Remarks at Jackson Hole. August 27, 2011, retrieved online: http://www.imf.org/external/np/speeches/2011/082711.htm.

51 “No big bazooka,” The Economist October 29-November 4, 2011.

52 “A nuclear winter? The fallout from the Bankruptcy of the Lehman Brothers,” The Economist September 18, 2010, retrieved online: http://www.economist.com/node/12274112.

53 Unicredit Strategic Plan, retrieved online: http://www.unicreditgroup.eu/en/pressreleases/PressRelease1753.htm.

54 Press Release, European Banking Authority, December 8, 2011, retrieved online at: http://stress-test.eba.europa.eu/capitalexercise/Press%20release%20FINALv2.pdf.

55 See letter text on the blog of the co-author, Sony Kapoor: http://www.re-define.org/blog/2011/11/28/need-pan-eu-funding-support-banks.

56 Please see: Véron, Nicolas. “Europe Must Change Course on Banks,” Peterson Institute for International Economics December 19, 2011, retrieved online at: http://www.piie.com/realtime/?p=2581.

57 Orphanides, Athanasios. “New Paradigms in Central Banking?” Working Paper 2011-6, Central Bank of Cyprus Working Paper Series. Nicosia: Central Bank of Cyprus, November 2011. Retrieved online. www.centralbank.gov.cy/media/pdf/NPWPE_No6_112011.pdf 58 “EU governance by self-coordination? Towards a gouvernement économique.” European Commission Report, August 2004. Retrieved online. http://cordis.europa.eu/documents/documentlibrary/100124131EN6.pdf.

59 Communication from the European Commission. “Europe 2020: A strategy for smart, sustainable and inclusive growth.” Brussels, 3.3.2010. Retrieved online. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:2020:FIN:EN:PDF 60 “Stability and Growth Pact and Economic Policy Coordination.” Summary of EU Legislation, Economic and Monetary Affairs, Retrieved online at: http://europa.eu/legislation_summaries/economic_and_monetary_affairs/stability_and_growth_pact/index_en.htm 61 The first arm of the SGP, the preventative arm, required member states to submit annual plans to the Commission that laid out how they would maintain their “sound fiscal positions” vis-à-vis their national economic policies. These plans were in turn assessed by the Commission, and then ultimately judged by the Council. If the judgment of the Council was that any member state appeared to be in jeopardy of losing its sound fiscal position, the Council could issue a warning (in conjunction with the Commission providing pointed policy advice) to the offending member state, in the hopes that doing so would prevent that state from getting into excessive deficits. The second arm of the SGP, the dissuasive arm, established a mechanism whereby any member state whose deficits ran over 3% of GDP/Debt:GDP ran over 60% (and thus was in Treaty violation) would be called out for excessive deficits, given a set of policy recommendations by the Council on how to course-correct its fiscal trajectory, and provided with a specific time frame in which to bring itself back to the firmer footing of deficits below the 3% threshold. Any state failing to act on the Council’s recommendations would be subject to “further proceedings”, which for eurozone states also included the possibility of sanctions.

62 Blanchard, Olivier and Francesco Giavazzi. “Improving the Stability and Growth Pact Through Proper Accounting of Public Investment,” in Fiscal Policy, Stabilization and Growth Pact: Prudence or Abstinence?, edited by Guillermo Perry, Luis Servén, and Rodrigo Suescún. Washington DC: The World Bank, 2008. 259.

63 Savage, J.D. and Verdun, A. “Reforming Europe’s Stability and Growth pact: Lessons from the American Experience in Macrobudgeting”, Review of International Political Economy 14(5). 2007. 842– 867.

64 Alves, Rui Henrique and Óscar Afonso, “The “New” Stability and Growth Pact: More Flexible, Less Stupid?” FEP Working Paper Series, June 2006. 6.

65 Dutzler, Barbara and Angelika Hable, “The European Court of Justice and the Stability and Growth Pact – Just the Beginning?” European Integration online Papers (EIoP) Vol. 9 (2005):5. Retrieved online. http://eiop.or.at/eiop/pdf/2005-005.pdf 66 José Manuel Barroso, press conference unveiling the first Annual Growth Survey (AGS). Brussels, January 12 2011. Speech retrieved online. http://www.youtube.com/watch?v=UvRBC8jxkh4 67 “Monitoring progress through the European Semester.”Europe 2020 website. Retrieved online. http://ec.europa.eu/europe2020/reaching-the-goals/monitoring-progress/index_en.htm 68 “In order to ensure the proper functioning of EMU, euro area Member states are under a particular obligation to regard their economic policies as a matter of common concern due to the potential for spillover effects among countries sharing a common currency. Therefore, a more comprehensive and permanent overhaul of economic policy coordination at the EU and euro area level has proved necessary in light of the crisis and the current challenges.” Council Recommendation of 12 July 2011 on the implementation of the broad guidelines for the economic policies of the Member States whose currency is the euro.

Official Journal C 217, 23/07/2011 P. 0015 – 0017.

69 Using the AGS as the foundation for the semester more broadly, and taking its policy advice into account as the basis for developing policy goals moving forward more specifically, member states then draft their National Reform Programs (NRP) along with their Stability or Convergence Programs, to reflect the advice offered in the AGS. The two documents each member state produce based on the AGS will be presented to the Commission for assessment.

Thereafter, the Council (based on the Commission’s assessment) will return to each member state a tailored set of specific guidelines, which in turn are to be used in the shaping of national budgets in the second half of the year. Actually implementing the specific guidelines as they appear in the Council’s recommendation and incorporating them into their national policies is, however, optional. States still maintain their rights to policy and budget formulation without EU influence. There is also no direct punitive consequence built into the European Semester itself that results from a member state deciding not to base its national policy around the Council’s suggestions – although punitive measures are built into other legislative arms of the overall economic governance package that now seeks to redefine the SGP. European Commission. Retrieved online. http://ec.europa.eu/economy_finance/een/019/article_88106_en.htm; The European Semester comprises an annual, six-month cycle in economic policy coordination among all 27 member states that starts in January and finishes in June/July. It begins with the Annual Growth Survey (AGS), a report in which the Commission analyzes the Union based on the progress made towards Europe 2020 targets, a macro-economic report, and the joint employment report. The AGS applies to the EU as a whole, but is also individualized; it is meant to change the way national governments shape their economic and fiscal policies. Member states are encouraged to draft their budgetary and structural reform plans according to AGS recommendations and conclusions, taking an interest in their neighbors’ economic well-being as well as their own. The Commission is to monitor progress towards commonly agreed goals throughout an initial period. The first six months of each year are thus meant to act as a back-and-forth between member states and European institutions (Commission and Council), during which time policy interdependencies are to be identified, and general and country-specific recommendations are made. This is done before national parliaments meet to make policy decisions in the second half of the year.

70 Hallerberg, Marzinotto and Wolff, 8-9.

71 Europe 2020 website. Retrieved online. http://ec.europa.eu/europe2020/reaching-the-goals/monitoring-progress/index_en.htm 72 A National Reform Program is a set of objectives and measures identified by EU member states that need to be taken in order to achieve budgetary targets and the correction of excessive budget deficits. National Reform Programs enable member states to identify the setting of national targets under the “Europe 2020 Strategy”, as well as undertake growth strategy measures for development, employment and social stability. They are not, in and of themselves, budgets, as much as they are a plan for establishing a framework upon which budgetary goals should be based, and which informs the creation of a national budget. As may be implicit in the titles, Stability Programs are submitted by eurozone states, whereas Convergence Programs are submitted by non eurozone states. Both are comprised of measures respective member states pledge to undertake in order to stabilize their public finances.

73 Hallerberg, Mark, Benedicta Marzinotto, Guntram B. Wolff. “How Effective and Legitimate is the European Semester? Increasing the Role of the European Parliament.” Briefing Paper for the European Parliament. Brussels: European Parliament, August 2011.

74 Ibid.

75 Herman van Rampuy, press conference unveiling the Euro Plus Pact. Brussels, March 25, 2011. Speech retrieved online. http://www.youtube.com/watch?v=Vfy8B0rckp0&feature=relmfu 76 Press release of the European Union, “Conclusions of the European Council (24/25 March 2011). Retrieved online. http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf 77 Policy areas subject to convergence include: reducing the cost of labor and increasing productivity by reducing centralized bargaining and decreasing public wages; increasing long term, and especially youth, employment; reforming public finances by limiting government liabilities; controlling levels of private debt; coordinate corporate tax policy; all of these must now be coordinated and aligned between member states across the EU.

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Rennie, David, “The Divisiveness Pact. Charlemagne Column, The Economist, March 10, 2011. Retrieved online. http://www.economist.com/node/18330371 http://www.novinite.com/view_news.php?id=126626 80 Press release of the European Union, “Conclusions of the European Council (24/25 March 2011).

Retrieved online. http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf; “’Euro-plus pact’ divides non-eurozone members.”

Euractiv, March 25, 2011. Retrieved online. http://www.euractiv.com/euro-finance/euro-plus-pact-divides-non-eurozone-members-news-503526 81 The Open Method of Coordination is a relatively new method of coordination within the EU designed to help Member States progress jointly in the reforms they needed to undertake in order to reach the Lisbon goals. It consists of fixing guidelines/timetables, indicators & benchmarkes, translating guidelines into national and regional policies, and periodically monitoring progress in order to help engender mutual learning processes among/between member states.

82 Gros, Daniel. “Sense and Nonsense of the Euro Pact Plus,” in The Contribution of 16 European Think Tanks to the Polish, Danish and Cypriot Trio Presidency of the European Union. Brussels: Notre Europe, June 2011.

83 Verhofstadt, Guy. “Can the euro survive Merkel, Sarkozy and Barroso?” MEPs Corner. Retrieved online. http://www.alde.eu/alde-group/meps-corner-news/meps-corner-details/article/can-the-euro-survive-merkel-sarkozy-and-barroso-37453/ 84 José Manuel Barroso, State of the Union Address, Strasbourg, September 28, 2011. Retrieved online. http://ec.europa.eu/commission_2010-2014/president/pdf/speech_original.pdf 85 1) Regulation amending regulation 1466/97 (from July 1997, regarding the strengthening of surveillance of budgetary positions and the surveillance and coordination of economic policies): from now on, budget plans will be sent to the Commission as part of the European semester; countries are not allowed to increase spending by more than their average GDP growth; failure to reach medium term budget objectives (MTOs) result in initial warning, penalties of 0.2% of GDP after 7 months (requires only simple majority vote). This is the “preventative arm” of the economic governance package; 2) Regulation amending regulation 1467/97 (from July 1997, regarding speeding up and clarifying the implementation of the excessive deficit procedure): countries in violation of 60% of GDP debt limit will have to reduce debt by at least 0.5% on average over 3 years or face penalties of 0.2% of GDP (only overturned by qualified majority vote).

This is the “corrective arm” of the economic governance package; 3) Regulation on fines for deficit countries: regulation setting out a range of fines for eurozone countries under the excessive debt procedure. Countries flouting MTO requirements/EU debt limits are subject to fines ranging from 0.2-0.5% of GDP; difference over SGP is that now fines will actually be enforced. Similar penalties for countries that falsify debt information; 4) Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area: when a country fails to abide by Commission recommendations or make reforms to eliminate excessive imbalances, it will be fined up to 0.1% of GDP annually. Overturned only by qualified majority vote; 5) Regulation on the prevention and correction of macroeconomic imbalances: sets up a monitoring system for imbalances – public and private indebtedness, house prices, unemployment, current account balance, real effective exchange rates, etc. Those crossing the threshold are subject to a review by the Commission. If imbalances are found, the country must submit a corrective plan. If after six months and two warnings no progress is made, the country can be fined up to 0.1% of GDP. Overturned by reverse qualified majority vote; 6) Directive on the requirements for the member states’ budgetary frameworks: this establishes statistical and budgetary standards – such as that state accounts should be published monthly, debt and deficit limits should be written into law, budget planning should be done over three years, independent auditors should check all government accounts.

86 Very similar in its approach and structure to the SGP, these measures have two primary arms: preventative (action through warnings) and corrective (action through sanctions and fines levied as a % of GDP). Member states must enact policies that are as fiscally prudent as possible, regardless of how rosy their economic situation is compared to their European neighbors. Failure to meet the agreed upon standards will result in sanctions. In addition to this, and as outlined in the European Semester and the EPP, budget developments are followed more closely than in the past, subject to oversight by the Commission and ultimate judgment by the Council.

87 Kundnani, Hans. “Germany as a geoeconomic power.” European Council on Foreign Relations website. Retrieved online. http://ecfr.eu/content/entry/commentary_germany_as_a_geoeconomic_power 88 EU Press Release, “EU Economic Governance: A Big Major Forward”. Retrieved online. http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/364&format=HTML&aged=1&language=EN&guiLanguage=en 89 COM(2011) 821 final 2011/0386 (COD) – “Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area.”; COM(2011) 819 final - 2011/0385 (COD) – “Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area.”

90 European Commission, Press Release (MEMO/11/822), 11/23/2011. “Economic governance: Commission proposes two new Regulations to further strengthen budgetary surveillance in the euro area.”

91 Ibid.

92 In a December 1, 2011 speech in Toulon, Sarkozy stated, “It is not by going down the path of more supranationality that Europe will be relaunched.” Carnegy, Hugh. “Sarkozy reluctant to cede key powers,” Financial Times, December 1, 2011, retrieved online: http://www.ft.com/cms/s/0/b23b95ec-1c2c-11e1-9631-00144feabdc0.html#axzz1fCcoTR1L).

93 Harris Interactive website: http://www.harrisinteractive.fr/ 94 Carnegy, Hugh. “France and Germany agree new rules,” Financial Times, December 5, 2011, retrieved online: http://www.ft.com/intl/cms/s/0/d0d39098-1f53-11e1-90aa-00144feabdc0.html?ftcamp=rss#axzz1ffkvqh5F 95 “Draft treaty changes soothe Parliament,” Euractiv, January 13, 2012, retrieved online at: http://www.euractiv.com/future-eu/draft-treaty-changes-soothe-parliament-news-510120 96 Spiegel, Peter, Gerrit Weismann and Robin Wigglesworth, “S&P Downgrades France and Austria,” Financial Times, January 14, 2012, retrieved online at: http://www.ft.com/intl/cms/s/0/78bf6fb4-3df6-11e1-91f3-00144feabdc0.html#axzz1jjalSmhN. 97 The Irish Constitution requires a referendum in case of EU treaty change. For background, see: Kelly, Meghan. “The Latent Power of the Irish Referendum,” B|Brief Bertelsmann Foundation: December 15, 2011, retrieved online at: http://www.bfna.org/publication/the-latent-power-of-the-irish-referendum.

98 Pop, Valentina. “More power for EU commission in new draft of fiscal treaty,” EU Observer, January 6, 2012. retrieved online at: http://euobserver.com/19/114777.

99 “EU Rehn: Treaty Changes Should be Based on Current Framework“ Wall Street Journal, November 30, 2011, retrieved online: http://online.wsj.com/article/BT-CO-20111130-709777.html 100 What will Eurobonds cost? Position of the Institut für Wirtschaftsforschung (Ifo). August 17m 2011. Pg. 4.

101 What will Eurobonds cost? Position of the Institut für Wirtschaftsforschung (Ifo). August 17m 2011. Pg. 4.

102 Transcript retrieved online at: http://ec.europa.eu/commission_2010-2014/president/pdf/speech_original.pdf 103 ibid.

104 European Commission website: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/820&format=HTML&aged=0&language=EN&guiLanguage=en 105 Delpla, Jacques and Jakob von Weizsäcker. “Eurobonds: The Blue Bond Concept and its implications,“ Bruegel Policy Contribution. March 2011.

106 Scally, Derek. “Merkel says she will not barter on eurobonds,” Irish Times, December 2, 2011, retrieved online at: http://www.irishtimes.com/newspaper/world/2011/1202/1224308475202.html.

107 Under Art. 110 of the German constitution, the Bundestag enjoys full fiscal sovereignty, and this right was reaffirmed by the Constitutional Court as an essential parliamentary control of the executive. While the court accepts a partial transfer of decisions to the level of the EU, the parliament must retain a minimum set of rights to ensure democratic decision making. Eurobonds constitute a fundamental breach of this principle.

108 “Germany will move on eurobonds, says Barnier,” EUobserver, November 23, 2011, retrieved online at: http://euobserver.com/1016/114332.

109 “Sentiments Higher on New Options of Eurobonds,” International Business Times, September 15, 2011, retrieved online at: http://www.ibtimes.com/articles/214148/20110915/sentiment-higher-on-new-options-of-eurobonds.htm 110 Rastello, Sandrine. “IMF’s Blanchard Says It’s ‘Premature’ to Issue Euro Bonds,” Bloomberg, September 20, 2011, retrieved online at: http://www.bloomberg.com/news/2011-09-20/imf-s-blanchard-says-it-s-premature-to-issue-euro-bonds.html.

111 “ECB’s Gonzalez-Palermo: Eurobonds to exist at some point,” Reuters, November 24, 2011, retrieved online at: http://www.reuters.com/article/2011/11/24/us-ecb-eurobonds-idUSTRE7AN1YU20111124 112 Traynor, Ian, et al. “David Cameron blocks EU treaty with veto, casting Britain adrift in Europe,” The Guardian, December 9, 2011. Retrieved online at: http://www.guardian.co.uk/world/2011/dec/09/david-cameron-blocks-eu-treaty 113 “EU Foreign Policy must not become a casualty of the Euro Crisis” Open letter. December 16, 2011. Retrieved online at: http://euobserver.com/7/114664 114 Corn, Tony. “Toward a Gentler, Kinder German Reich? The Realpolitik behind the European Financial Crisis. In: Small Wars Journal, November 29, 2011.

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