Veritas – EU officials battle doubts and pressures

Brussels correspondent Luisa Porritt finds dispirited policymakers battling for the heart, and future, of Europe

EU officials want to repair policy errors through bank recapitalisation and tighter scrutiny of sovereign public finances but they face struggles between regional institutions and with electorates, while the prospect of future economic growth is weak.

“Once we get out the current difficulties of sovereign debt problems in the Eurozone, we will never again get back into the same position,” Ecofin Council President Jan-Vincent Rostowski said following a meeting last week of finance ministers, which produced an agreement to reduce their deficits to below 3%.

But plans to tackle the sovereign debt crisis are already under threat. Fragmented EU institutions and lack of consensus among individuals within them hamper policymakers’ ability to respond quickly and effectively.

UK Liberal Democrat MEP Sharon Bowles says the Commission’s messages are often contradictory and overstated. “Ecofin has not performed well throughout this crisis. There are even mixed messages from the European Central Bank (ECB), with different members of the board saying different things,” she says. “If you didn’t want to cry about it, you’d want to laugh.”

Tensions exist publicly and privately at the highest level of European political institutions. This affects work on policy details. According to Bowles, “everybody’s a bit unhappy” about the “Merkozy” response – proposals emanating from German Chancellor Angela Merkel and French President Nicolas Sarkozy. “The level and quantity of eurozone meetings is not liked by members of the eurozone.”

Markus Ferber, member of the German Christian Democrat party and of the European Parliament’s Economic and Monetary Affairs Committee, knows how politically fragile the situation is. “Electorates are not happy, but we are convinced we are doing the right thing.”

“If the euro dies, more will happen,” he says, referring to the controversial decision to support Greece despite its apparent insolvency. “That will destroy all the achievements we have made in Europe.”

But even he is pointing fingers. “I’m not blaming the markets, I’m blaming those who have misused the markets by delivering more and more debt and not using the benefits of the euro.

“Germany is not the winner, nor is France, Belgium, or Luxembourg. It was Greece, Portugal, and Spain. They got the interest rates. In Germany we learnt our lesson, now they have to do that.”

Inside the Commission there are regrets that it failed to impose sanctions on countries like Greece when it had the power to do so.

“Either the focus on budgetary surveillance didn’t work, or [it was] the wrong focus,” says one EU official. More recently the body took a tougher line when Commissioner Olli Rehn said Greece’s new leadership must give a written statement of its intent; essentially, a pledge to implement austerity measures.

In future, countries under surveillance face a public warning to repair their finances. If that fails, sanctions of 0.2% of GDP will be imposed, paid into an account that accrues interest. If the EC’s demands are still not met, that country’s government will lose both the original payment and the interest. Continually refusing to comply results in a further fine.

But even that policy is contradictory and unclear. After the Ecofin conference it emerged that if a country is in serious financial trouble, the fine will not be imposed.

The hope is it will not get to that stage, but reactions to the debt crisis have been unorthodox. Recently ousted president George Papandreou’s suggestion Greece should hold a referendum on austerity measures took the Commission by surprise.

“We felt [that] announcement by Greece was a breach of confidence [given] by its European partners. Now confidence needs to be mended,” said Rehn.

Restoring political confidence between states may be easier than restoring market confidence. Ecofin’s outlook for European growth is “gloomy”: 0.6% growth for the EU as a whole in 2012, and 0.5% in the euro area because of austerity measures.

In 2013, that is expected to rise to 1.5% for the EU and 1.3% in the euro area. Global growth for next year was revised downward from 4.1% to 3.5%, though it is expected to accelerate in 2013.

“We’re in for a hard decade, in which it will be extremely difficult to find growth. We built on debt in the past. We cannot do that in future,” says MEP Bowles. She agrees with the Commission’s initiative to make the financial sector safer by bolstering banks’ capital reserves, but is worried about its lack of thought on how to finance the real economy, in particular ensuring banks lend to small companies.

“Euro area growth plans are not terribly effective or efficient. There is room for improvement in this area,” admits one EU official. “The crisis made a dent in growth potential. There is a labour supply problem due to demographics.”

Hans Martens, head of the European Policy Centre, agrees. There is a huge demographic threat, given Europe’s ageing population and low birth rate. The solution? Partnerships with Northern Africa, he says, a suggestion he has received hate mail for in the past.

Another is to include Turkey in the EU, he says. “We should not have started the negotiations if we didn’t want to finish them. Turkey did not have a financial crisis; it did not have to bail out its banks. The average age there is 21. It is 36 elsewhere in Europe.”

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