Happy 61st Birthday, Europe!
A year ago, the European Union turned 60. Six decades had passed since May 9, 1950, the date when the French Foreign Minister made the historic speech, at the instigation of Jean Monnet, which inaugurated institutional cooperation between France and Germany. It established the European Coal and Steel Community, core of what would become, in 1957, the European Community, and the later the EU.
Getting back to May 9, 2010, it was a memorable birthday, but not for the usual reasons: after months of institutional uncertainty, Greece was at risk of default on its sovereign debt, and market tensions had engulfed European interbanking lending. On May 7, the ghost of Lehman Brothers seemed to hover over Europe once again.
Rumors about the risk of a rupture of the Economic and Monetary Union suddenly seemed to have some foundation. Put with their backs against the wall, European leaders managed to set up a last-minute rescue package on Sunday night: a €110 billion bilateral bailout fund for Greece; a supplementary stability fund (the European Financial Stability Facility, EFSF) capable of mobilizing up to €440 billion in loans to other eurozone countries against the risk of default (guaranteed by €700 billion worth of assets); ECB intervention on treasury bond markets to prop up ailing economies, in order to stabilize the price of government debt.
On that day, according to many, the single currency was salvaged, planting the seed the of European fiscal federalism. However, this was but a temporary solution (until 2012), with many points left uncovered or in doubt.
What can we make of that European accord today? What's the health of the Union on its 61st birthday? On March 24-25, the European Council finally approved the guidelines for new macroeconomic governance. From a structural point of view, the agreement calls for the implementation of six legislative proposals. Four are about reforming the Growth and Stability Pact in order to improve fiscal discipline, by imposing quantitative targets in public debt reduction, in addition to existing constraints on maximum deficits allowed. The accord also calls for mechanisms to control macroeconomic imbalances, by implanting monitoring and early-warning systems with respect to crisis-sensitive indicators such as real estate prices or trade deficits.
In order to manage the current debt crisis, the European Council has decided to make an exception to the general principle that prevents financial aid between EU governments, to introduce the European Stability Mechanism (ESM) which will take the place of EFSF from 2013 onward. ESM will be endowed with €700 billion worth of capital and will be able to make €500 billion worth of loans to countries experiencing financial difficulties, in exchange of strict conditionality about reforming their public finances. Funds will be lent with a mark-up on interest rates with respect to the current cost of servicing the debt, i.e. at a risk premium. Private investors will also be called in to share the risk, in order to avoid moral hazard in financial markets. These elements constitute a profound overhaul of all EU non-monetary governance, which has been now aligned, 20 years after Maastricht, to the changed characteristics of global finance. In the next few months we will be able to understand the legislative details of the reform and assess the reaction of the markets. But we can already say that in year 61 the Union is having a better birthday.