December 1, 2011
Operator: The following is a recording of the Allison Biggs teleconference with The Atlantic Council of the United States on Thursday, December 1, 2011 at 11:00AM Central Time. Excuse me, everyone. We now have Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics, and Andre Sapir, senior fellow at Bruegel and a member of The Atlantic Council Business and Economic Advisory Group, as well as Alexei Monsarrat, director of the Global and Business Economics Program at The Atlantic Council, on the line. Please be aware that each of your lines is in a "listen only" mode. At the conclusion of the presentation, we will open the floor for questions. At that time, instructions will be given as to how to proceed if you’d like to ask a question. I would now like to turn the conference over to Mr. Monsarrat, who will be offering some introductory remarks and introducing Dr. Kirkegaard and Dr. Sapir. Mr. Monsarrat, you may begin.
Alexei Monsarrat: Thanks very much and thanks to everybody for joining us today. We’ve got a very timely discussion on what’s going on in the Euro Zone amidst a whole lot of developments that are coming out, frankly, even as we speak, and so, hopefully, everyone has their web browsers open on "refresh" to see what it is that’s coming out as we’re going. I want to thank Andre and Jacob a lot for agreeing to join us. We’re very lucky to have them today. These are two people who are focused every day on what’s going on in Europe and real experts on the institutions there, the politics there, and really have their finger on the pulse of what’s happening, so we’re really looking forward to what it is they’re going to talk to us about. Without further adieu, I would like to jump straight in. And, Jacob, we could start with you. You’ve done some great writing on, sort of, the emergent situation and I wouldn’t mind hearing from you quickly, just on, sort of, where things are right now and what your assessment of, as we’ve titled the call, what the end game really sort of is here. Are we headed somewhere that’s really going to bring some success or is this still just in a churning phase?
Jacob Kirkegaard: Yeah. Thanks, Alexei. No, I think about it actually in many ways, in my opinion, today in fact probably marks what, at least to me, is probably going to be the most clear turning point in this crisis, quite frankly. But I will say that I think we have been approaching the end game of the crisis for quite some time, but when I say that I think it’s important to understand that the Euro area and Europe as a whole has a sort of a number of overlapping and mutually reinforcing crises. I mean, it obviously has a fiscal crisis in some of the member states; one country, Greece, is clearly insolvent. There’s a couple of other countries that are more doubtful and then there’s a couple of bigger countries, Spain and Italy, of about who there are questions raised, but in my opinion, are clearly not insolvent. Then Europe clearly also has a banking crises. We’ve seen a number of banks already collapse. Stress, we saw it yesterday with a concerted Central Bank intervention. There’s a lot of pressure in the inter-bank market in Europe and elsewhere. And it’s, unfortunately, a banking crisis that has been, in many ways, mishandled by European authorities, which has aggravated the other, the fiscal, crisis in a number of countries. And then, of course, Europe also has a competitiveness crises in a number of countries, particularly in the Southern periphery, which has for many years been running sustained and very large current account deficits and, as a result, they have built up very large external private and public indebtedness. But I think, in my opinion, that the key crises that Europe faces and the key crisis that really, and understanding this confidence crisis in the Euro as a whole that we’re facing right now, where you keep seeing these headlines about what is the world going to look like when the Euro breaks up. That really is a political and institutional crisis for the Euro, which, of course, was initially designed as a monetary union without really a fiscal or economic union to compliment it. And that has clearly, in this crisis, in my opinion, proven to be a faulty design that essentially the Euro area has not had the capacity to ask forcefully in this crisis to restore confidence; instead it has been forced to design the required institutions, sort of, on the fly as the crisis unfolds, and it is that process that, in my opinion, is not approaching its end because when thinking about this as a political crisis, it is, in my opinion, entirely rational what has happened so far and the sort of game that has been played by the key players. And here I would first and foremost highlight the European Central Bank as well as the key political leaders in France and Germany, because if we start thinking about the ECB has acted, well the ECB is consistently being criticized for not doing enough, but I think it’s important to understand the ECB is not a normal Central Bank. The ECB is in fact a purely political player in Europe, because of its independence. So, it has a capacity to actually haggle and negotiate directly with political elected leaders that no other central bank has in the United States or England or anywhere else, for that matter. And it has used that capacity quite strategically, in my opinion, throughout this crisis, because what ECB has very consistently said is that it wanted more authority and structural reforms implemented in the peripheral countries and then the third component was that it wanted a more compact set of fiscal rules for the Euro area as a whole. And for that reason, it has essentially resisted large scale intervention to try to restore confidence in the markets, because it has not wanted it to, sort of, bail out the European policymakers from taking the required action on these issues. And I think at the point where we are now in the crises, I think it’s fair to say that we’ve accomplished quite a lot of progress, both obviously on austerity in the periphery as well as structural reform in these countries and we’re about to get a new, probably the key, component of that, which will be the new program that is going to be most likely announced by Italian Prime Minister Mario Monti in Italy and maybe as soon as next week. And then we are finally also beginning to see the contours of the new set of fiscal rules and treaty changes that that entails, which is about to be launched at the EU December Summit on the 9th next week. And I think it’s important to understand that these are not things that would have happened if the ECB had acted in a way that the Federal Reserve or other central banks. If the ECB had done what financial markets and the financial times wanted it to do, Sylvia Berlusconi, for instance, would quite clearly still be Prime Minister of Italy, and we certainly, in my opinion, would not be anywhere near the kind of proposed treaty changes that we are likely to see, in my opinion, launched at the December 9 Summit. And where today, in my opinion, really does mark a bit of a turnaround is that Mario Draghi, today in my opinion, made the most explicit comment about what the ECB wants in return from policymakers in order to launch a more comprehensive ECB response to the crisis. When he testified before the European Parliament today, he basically called for a new fiscal compact within the Euro area, which comes back to the old demand for fiscal rules, and then he said, "And if that comes, other things may follow, but the sequencing matters," which, in my opinion, for a central bankers is unusually straightforward and blunt speak in which basically saying to the European leaders in the run up to the Summit that, "Look, if you agree to these things with a strength and set of fiscal rules and you do the structural reform, well, then the ECB will also do what it can do." So, therefore, as I said, just running off, this, in my opinion, we are really at the formative turnaround in the crises where, from this point on, I will predict that both markets and confidence is going to gradually return and so that in some ways I suspect that we have bottomed out at this point. And I think I’ll stop there.
Alexei Monsarrat: Okay. Thanks. That was great. That was a hugely helpful overview of where we are. Andre, if I can turn to you, obviously anything you want to pick up from where Jacob is or if you have a different or more nuanced view, but then also you’ve done some writing looking at what some of these structures could and should be in terms of how the Europeans organize themselves institutionally. And I think for a lot of us, particularly here in the United States, some of that can be a little esoteric and so to hear a little more maybe in plain speak how this might all work, I think would be helpful.
Andre Sapir: Yes. Okay. Let me take from where Jacob ended and let me say that I’m pretty much on the same page, maybe slightly less optimistic then he is. Let me explain why I see the problem and then connect indeed with, I think, I agree the important speech of Mario Draghi today and connect to the kind of work that I’ve bee doing along similar lines. I think the kind of issue that we have had in Europe, I would describe it under the label of "coordination failure." And the coordination is one indeed, I agree that the European Central Bank is a very different Central Bank than the Federal Reserve and I think that’s very important to explain to an American audience, but that goes back to the fact that indeed the Euro is a currency without the state, so the U.S. Federal Reserve has a clear counterpart, the U.S. Treasury, and that is not the case for the European Central Bank. In a sense, there is something worse than being a currency without a state. For the Euro, it’s to be a currency with many states and the issue of coordination, so there is an issue of coordination, both between the Central Bank and the states and among the states, so it’s a two-level game. Now, the results show in this, I think and that’s what we have seen all along and this is indeed what the bargaining is between the ECB and the states, there is an issue of time inconsistency, or if you want, the time at which the ECB can act is a different time than the one at which governments can act. The ECB can act and is the only actor that we have in Europe and that’s also the reason why there is so much pressure and so much demand on the Central Bank to act, because it’s the only one actor that we have that can act at the speed of markets. And since this is a crisis taking place in great part in financial markets, not that all of the problems arise from the financial market, but that’s where it’s being played, that’s the stage, there is this issue of being able to act at the speed of markets and I think only the ECB can do that. Now, governments naturally, that’s true of the U.S. government cannot act at the speed of market, but what the ECB would like indeed is that there is some commitment on the part of governments that is not only backing the ECB itself, which I think is needed, but even more importantly that indeed governments have learned the lesson from the crisis. The lessons was in the fiscal area, but I agree also with Jacob. The crisis is not just a fiscal crisis, it’s also a banking crisis, and so for the fact that we have been lacking the proper financial institutions in Europe; although, we have an integrated banking market in Europe, we do not have integrated supervision of the banking system. It remains at the national level. Now, so everybody has been looking for the kind of deal that can be struck between the ECB and the governments, knowing again that the ECB would act, could act, very quickly and that it’s a commitment that governments would take, but there’s always the problem as to whether governments will deliver. So, in the sense, and we have seen the letter that was sent this past summer by the ECB, by Jacque Trichet, to the Italian Prime Minister, essentially trying to strike the saying, "We are intervening, but there are a lot of things you need to do in Italy," and in a sense, the Italian Prime Minister did not really respond in kind. And I’m also optimistic obviously of the fact that we have now, not only a new Prime Minister, but also a new political situation that has been quite a bit in Italy that is allowing this new Prime Minister to have the confidence and the support of the Italian Parliament to deliver some measures. So, yes, I think Italy is a very, very crucial element. It’s a very crucial tangible sign that the ECB is looking at, simply because the size of Italy is so much bigger than that of any other country. The Italian debt is the biggest debt of all the Euro area countries. I mean, just to give, again, to Americans a sense of what is different between the American situation and the European situation; think of the U.S. state which has the largest public debt. That debt would amount to roughly 1 percent of U.S. GDP. If you look at the Euro area states, that is the largest public debt, that’s Italy, that debt is more than 20 percent of Euro area GDP. So, we are talking totally of a different kind of scales here and Italy is a very crucial country and I agree that, and I’m also optimistic on that, Italy moving and delivering and providing some room for action by the Central Bank and for optimism everywhere. Now, as far as the, sort of, more long-term reforms, of deeper reforms, the kind of discussion we have fiscal union, what Mario Draghi, the term he used today was not fiscal year, it was a "fiscal compacting need," when he spoke at the European Parliament, but I think we are more or less talking of the same kind of thing. There the Central Bank, and I think Germany as well, has been looking for [Inaudible 00:18:38] measures, the kind of idea that Trichet had already floated a couple of months ago where they would be a body, a person, a body in Europe, a fiscal authority that would have some kind of veto power over national budgets. Now, that is a huge, huge step. I mean, imagine the fact that national parliament, the Parliament of France, would have decided on its budget or at least already discussed the contours of the budget and then at the European level, one would decide that this budget is potentially creating problems, not only for fiscal accessibility of France, but for the Euro area as a whole, and that a decision would be taken that this budget need to be rewritten, that what the government and Parliament in France would have done is simply not acceptable for the rest of the Euro area and one would have been a fiscal authority, maybe a Finance Minister, a Euro area Finance Minister, would have with the support of the Council, with the support of probably the European Parliament, would have the authority to say that this national budget needs to be rewritten, so it would have this veto power. That would have a huge, huge step and that’s obviously we are talking then of a totally different kind of union than what we have at the moment in terms of the loss of sovereignty. Now, together with that loss of sovereignty, obviously there must be a counterpart and the counterpart has got to be the solidarity, so we are talking, what one discusses in any kind of federation of consideration, two sides of the balance. One side, which is solidarity, but the other one, which is responsibility of power of the center to intervene in the affairs of the lower level of authority, of the states, in exchange for the solidarity on the part of the federation, of the consideration. So, I think this is the kind of thing that people are talking about and it’s clear that to put this kind of new system in place would require quite a discussion in Europe. It’s not something that is going to be done on Sunday evening at 4:00 in the morning in agreement. I mean, the people of Europe need to be involved in that, because indeed one’s talking about seeding fiscal sovereignty, so one needs to indeed to complete the economic monetary union, countries gave up, at least Germany, did give up monetary sovereignty and know it’s in a sense up to the others to seed fiscal sovereignty and the crucial country will be France, I think. But we have to see whether countries are willing to go down this road. And I myself, and that’s what I wrote with my colleagues, I mean, we would like sort of a commitment already taken now to open this kind of process. Probably one needs to have measures taken very quickly; again, because there is this idea of providing the space for the Central Bank and, again, I agree that what Italy can do on its own and I think will do on its own, will be very important, but one needs also to have this kind of design and start this conversation about fiscal union, fiscal compact, however you want to call it that will take time, but on which it will be important to have a political commitment say soon in the direction into which countries are willing to go. And essentially it means that they are accepting that what was done previously was insufficient. So, I again agree with Jacob that this is the lesson that we have to draw from the crisis that we have a monetary union, we are not going to create a European state, but we need to have elements, like elements, of fiscal union that can, in a sense, both back up the Central Bank and provide the elements of the states, both in terms of punishment when it’s needed but also solidarity when it’s needed.
Alexei Monsarrat: Thanks very much, Andre, and to both of you. I’ll have the Operator now again remind everyone how to ask questions. While we wait for the queue to build up, I will kick off with the first one, but if our Operator could explain again now, that would be great.
Operator: At this time, we will be opening the lines for questions. If you would like to ask a question, please press the "star" key followed by the "one" key; that’s "star one" on your Touchtone phone now.
Alexei Monsarrat: Thanks very much. I’ll kick off, and we’ve actually got a number of calls coming in right away, so I want to turn quickly to the line, but I wanted to get a sense, Andre, of picking up really where you left off, and this is a question for both of you; although, Andre, you might want to come in first. It’s on the political front and this does seem to be sort of the key question as far as the end game is concerned. And do you think that Europe is ready for this right now, this sort of solidarity moment? And that has to go along with relinquishing some sovereignty. If they’re not, how do they get there? And by that, I’m most interested in: Who do you see, sort of, who is the adult in the room that has to stand up and lead this process? And who is the best place to do that right now? And particularly against the backdrop of it still seems like there’s some space between France and Germany on this right now.
Andre Sapir: I think you put the finger on the key question. I would say that if you look at France and Germany as the two key players into this, not that the other players are irrelevant at all, but let’s say, those two at least are representing the two sides of the discussion. I would say that maybe contrary to what observers allege, I find that the discussion and the depth of the discussion, the political issues, is very advanced in Germany, but not very much advanced in France. And I think that’s a bit disquieting. In a sense, we are back to where we were 15, 20 years ago; that is before the launch of the Euro where they had been in Germany for a variety of reasons. They had been a very profound discussion on the relationship between monetary and political union and, as you will remember, there was a view, there was a strong view in Germany that monetary union was fine, but that it should only come after political union. And in the event this is not what happened, monetary union did come before political union of fiscal union as an element of political union. And it’s not be accident, therefore, that where you hear today much of the discussion again on the political union, because when you talk of Euro bonds or you talk of other elements, it always boils indeed to the political union kind of issues. I think it’s in Germany. So, they are reconnecting to the old debate, the debate that had been there before, and maybe also the way Germany’s organized, sort of, a federal republic with power, both at the federal level and at the lender level, maybe it’s easier in Germany to have this kind of debate. As I said in my initial remarks, my view is that when monetary union was created, the only country that’s really seeded sovereignty is Germany, because Germany had real monetary sovereignty; other countries did not have really monetary sovereignty at the time of entering into the Euro. They’d already given that up. So, Germany had a huge monetary sovereignty and gave it up. So, I think now the effort to rebalance this economic monetary union on the side of the fiscal union, I think this effort has to come from the partners of Germany and, first and foremost, France because as the largest of the other countries, it is the country that is the most sovereignty, the most sovereignty on the fiscal side. All countries are fiscal sovereignty, but again, larger countries have more of it. Now, I’m a bit worried that I do not see in France the kind of discussion yet that is needed to go into this kind of direction. Probably the fact there is going to be an election in a few months doesn’t help; although, at the same time you could say, "Well, this is the perfect timing to have this kind of debate." But I think the debate in France is difficult. I think people I speak to in France, they realize it very, very, very well, but there is clearly in France an important segment of the population that feels this is not an acceptable move to go towards loss of sovereignty in the fiscal area. I think we will get there and I think the sooner this debate is started, I think the better we are, but in a sense I think Germany is in a sense ahead of France.
Alexei Monsarrat: Thanks. Jacob, I don’t know if you want to come in on that.
Jacob Kirkegaard: No, I mean, I largely agree with Andre, so I have nothing further to say.
Alexei Monsarrat: So, go to our first question and it’s appropriate, I would remind everyone, which I forgot to do at the beginning so I apologize, but we are on the record today. So, this is all quotable and usable for press. With that, I will turn to Howard Schneider from the Washington Post.
Howard Schneider: Folks, and thanks for your time in doing this. I had really two questions along the same lines, which is I wondered if you could give us a sense of your insight into the short-term, sort of, tactics we might see deployed over the next week or two here. In other words, what do we think the ECB might, in fact, be willing to do? Is it going to be more bond buying? Is it going to specifying yields, sort of, fixing yields? Is it going to be solely from the banking sector, longer loans, broader collateral; that sort of thing? And given Raine and Yonkers comments the other day about a quick appeal to the IMF, what do we expect from the front in terms of resources to be funneled through or into Europe?
Jacob Kirkegaard: I guess I can start with that. I would certainly not expect the ECB to at any point commit to a fixed yield for Euro area countries. I certainly think that remains out of the question. But on the other hand, I certainly think that a more muscular scaled response could include an unannounced, but de facto considerable expansion of the security market’s program to restore; it is very easy to justify based on the existing excuse, if you like, of restoring the monetary transmission mechanism. I would also expect things like longer term, unlimited liquidity beyond one year. We already saw yesterday a tweak of the addition to the 50 percent basis point caught in the raid, but also a tweak in the eligible collateral requirements for the salary post and Mario Draghi today in his speech to the European Parliament, specifically touched upon that issue of eligible collateral, so I would also expect more there. I would clearly expect then to cut rates by at least 25 basis points next week. And you could also see a further potentially significant expansion on the covered bond program, which is essentially something that is specifically mostly of interest to the Euro area banks. And I think you could also, I would not at this point rule out an ECB; although, this is probably not my central scenario, but I think you could see an ECB provision of capital to some sort of IMF facility, which is, of course, a way of sort of rerouting ECB capital back to European countries in the form of an IMF facility for perhaps first and foremost Italy. But I think there is a number of things that the ECB could potentially do without getting into any particular issues with respect to the treaty, because I also think that once next week the process of kick-starting the treaty changes; that is essentially my opinion going to nullify, there is at this point a particular risk of a massive public uproar in Germany from the German government for an expansion of ECB, actually I think that was made clear a couple of weeks ago at the CDU Congress. And if this happens after the Euro area members have signed up for more binding fiscal rules, I think that the political road, so to speak, is largely cleared for these more forceful actions that the ECB, that Mario Draghi announced, that the ECB will contemplate were the fiscal rules commitments to be made next week.
Howard Schneider: Thanks.
Alexei Monsarrat: Thanks very much. We’re going to go to Peter Rashish at the U.S. Chamber of Commerce.
Peter Rashish: Thanks very much and congratulations to you both for those insights and very comprehensive overviews. I just wanted to ask either of you, and this is built on what Howard Schneider asked, whether you’re confident that once we have this package, the Center Nine, and once, for example, we have the more specific Italian package next week that the kind of scenario that you just pointed to, Jacob, where in sort of a stealthy way the European Central Bank will become a lot more engaged, whether that is enough fire power. In other words, whether the market is really convinced that now the Europeans have at their disposal all of the instruments they need to deter any bond yields from skyrocketing and now it’s done? Or will the Europeans still need to find more cash somehow? And along the lines of what you just suggested, the ECB, for example funneling something to the fund, which would then come back. Will we have enough or will there still be out there this notion that there’s still a contagion risk because the Europeans don’t have what it takes.
Jacob Kirkegaard: I think that that is a risk for sure, but I have to say that I don’t think that that risk is particularly big, quite frankly. And to that I will also point to something that’s worth listening to, which was the comment by the Polish Finance Minister Rostowski, after the ECHO Finance meeting in which he eluded exactly to that point and he said quite explicitly that there was an agreement among all ministers, which presumably would include Wolfgang Schaeuble, that you needed to precisely avoid this situation where ministers make, as Andre said, or leaders make, as Andre said, unprecedented commitments to hand over sovereignty, yet there is no market response and the market keeps sitting on the sidelines, that it needs to be complimented with a more forceful short-term response from the official sector. So, no, I think that it’s not going to be enough just to sit back and wait for markets to come back. You are going to need a bit of shock and awe here, if you like, and that could take the form of the IMF involvement, it could take other forms as well, that I don’t have a strong opinion either way, except that I think the reasons are very clear and announced really staged in the official sector in the Euro area about is this really necessary. And I think in some ways, again, that’s how I read Mario Draghi’s speech today as well, but that is something that the ECB, too, is aware of.
Alexei Monsarrat: And, Andre, I don’t know if you wanted to also respond to that.
Andre Sapir: Maybe I say something, address to both Howard and Peter’s points together. I mean, first again, I’m very much in agreement with the points made by Jacob. A couple of things; I mean, there’s no doubt that the situation is aggravated in recent weeks and the ECB, which has given very positive signals about its willingness to act, is obviously responding to those signals, to the aggravation of the situation, and aggravation in terms of liquidity. So, there is concern about the functioning of the financial markets, about the banks, in terms of liquidity and the indicators in the state where they were back in 2008, so there was no question, I think, that the ECB would, in fact, I mean, that’s a normal sort of land of last resort, backs up, land of last resort, towards the banks. I think the question remains as to how far the ECB is willing to go in supporting the sovereigns. And obviously it’s very hard to disentangle again for the reasons that Jacob explained before, what we are with the crisis now is one that is both one of the sovereigns and one of the banks and one cannot supersede one or the other. They are both, and we are in this bad spiral. So, the situation and the action of the ECB in terms of providing liquidity is both giving relief to the banks and it’s giving some relief also to the sovereign, but I mean, it doesn’t mean at all that the ECB is shifting its position in not wanting or not being able, as a matter of fact, to be a land of last resort in the sense of acting on the sovereign debt market in a radical manner. Now, about six years, a ceiling on that, I would not expect that either at the moment, but I think there may be, again, sort of an action by the ECB that may, as a matter of fact, provide something similar to that, so I mean, there’s been a discussion for several weeks in Europe with people, sort of, favoring the view that one should announce a ceiling on needs for the individual Euro area countries. Now, again, one is always back to the question of not only of the treaty itself and the ability of the ECB to do that, but I think one is always back to the quid pro quo. I mean, it’s clear that the ECB is warranted to do and to use its fodder and not get any return from its action on the part of the members, so it’s one thing to act to provide some space, it’s another to see that it doesn’t get a response. So, I think more we will see government and, again, Italy, I think, is crucial there; the more we will see governments taking difficult measures, things that they were not able to do before, I think the more we will see that the ECB; although, not pre-announcing its strategy and I think it’s perfectly correct that the ECB should not, given the tightness of its mandate, I think it’s correct that the ECB doesn’t want to pre-announce. But I think the more governments will act, the more it will provide the space for the ECB to be imaginative.
Alexei Monsarrat: Thanks very much. We now have Chris Wiley of the Bertelsman Foundation.
Chris Wiley: Hey, Alexei, this is Tyson Barker actually; we have a whole group in here listening. This has been a fantastic conversation and I’m glad we could all hear it. I have a pretty basic question about kind of policy anatomy with regard to the fiscal union. In the past year or so, we’ve seen a number of initiatives come out of Brussels and the Euro Zone in general from the European semester to the Euro Zone Plus Pact to the Six-Pack to what is now being referred to obviously as kind of "the treaty change," all of which seem to have the same goal. I was wondering if you could give us a sense of how all of these pieces work together in some ways and how much they are duplicative or how much the decision was made because, for example, the Six-Pack has this reversed qualified majority voting mechanism that they wanted to make it more automatic, that they’re going after a treaty change; maybe just flush out that debate a little bit.
Jacob Kirkegaard; I think maybe Andre is better qualified to answer that than me.
Andre Sapir: Okay. So, I mean, it’s clear that if there were to be a treaty change, which I think there needs to be, then those different pieces, they would become more coherent than they appear at the moment. I mean, it’s inevitable. They are laying down the ground; one can see the direction that you’re very clear. Tyson, but they all proceed in the same direction, but it doesn’t mean that they are fully consistent with one another because of the way the process has been going. But I think the direction is indeed very, very clear. But one could add other elements, I see in the complication, another piece, which is the ESS or on the ESM treaty, the European Stability Mechanism, which is, as you know, a treaty that would be a treaty only among the Euro area countries. It’s not under the EU treaty; it’s a separate treaty among the Euro area countries and it’s not in the tradition of the community approach. It’s the pure inter-governmental treaty, and you could ask also, "How the two fit together," so this one piece, the ESS, will turn into the EMS which is still to be negotiated because it was concluded in principle in July and now the negotiation has been reopened with all kinds of issues, so it’s not over. But there we will have a treaty, which is inter-governmental, and at the same time, what you discussed, the Six-Pack and the other measures, they fall under the community approach and there is an issue there how the two would work with one another and I think that’s not fully clear, and I think that’s also one reason why many people are putting forward this idea of a treaty change. And the treaty change would have the advantage of bringing back, in a sense, the ESM treaty under the community approach. It would be maybe not the same as today, maybe the community approach for those matters would have to evolve a bit, but I think one would have a community approach. So, because at the moment you have not only, as I said, a variety of pieces of legislation, but they have been put forward, but would broadly be consistent with one another. Maybe not fully consistent, but they are broadly consistent; they are going the same direction as some type of sanctions and monitoring and then there is the solidarity side, which is inter-governmental. And although there are bridges between the two, since it has not bee tested, it’s not fully clear how it would work and, again, I insist that I think that’s one of the advantages and one of the necessities, I think, of having a treaty change and a serious discussion is to have all of those elements, both the solidarity and the monitoring and sanction under the same roof and with the same logic.
Jacob Kirkegaard: I mean, I completely agree with what Andre said. I could just say one thing about the treaty change. I actually think that the ESM model, so to speak, or the Shang-In treaty model, or whatever you want to call it, where a treaty change starts as an inter-governmental process outside the regular treaty and then is then subsequently incorporated at some future point into the existing European treaties is probably at this point, in my opinion, the preferable method, because if we go to having, say, an inter-governmental conference, that opens a Pandora’s Box where everybody want something, wants the general process of rewriting, or if the general process of rewriting the existing treaty is opened, it’s easy to see how the European Parliament, for instance, demand much more power than it already has. And this would be a process that would essentially end in years of stalemate, which is something that the Euro area and Europe as a whole cannot at this point afford, in my opinion. So, I would much prefer that the ESM sort of separate treaty first and then a subsequent incorporation into the regular treaty.
Andre Sapir: Can I add something on this?
Alexei Monsarrat: Yes.
Andre Sapir: I have no problem with this pragmatic approach. I think that pragmatism at its virtues and in times of crisis where we are now, I think we have to be pragmatic and I’m perfectly willing to be pragmatic. However, I think that one will not be able to at some stage in this evolution, one will not be able, it seems to me, to forego the discussion about Parliament, including the European Parliament, because at the time when they would be elements of seeding sovereignty, fiscal sovereignty, which is a huge, huge step. I mean, it seems to be even a much bigger step politically than seeding monetary sovereignty for governments and for Parliament to give away monetary sovereignty was, I think, much easier than to give sovereignty over something which is much closer to that core business of politicians; the fiscal side. So, I think that if we were to go, as I think we agree, we need to go into this element, some elements of giving, of sharing, of pulling together fiscal sovereignty, they would need to be a different role for the Parliament, at least in those matters. So, that discussion will have to come one day as well, because there will always be this question of legitimacy; how can you do this without regaining sovereignty that you’re losing at national level? You have to regain it some place at the European level and that the natural place would be the European Parliament.
Alexei Monsarrat: Thanks. And we’ve got time for one more question and we’ve got Peter Chase at the U.S. Chamber of Commerce.
Peter Chase: Thanks. I actually wanted to go directly to what you were just raising. That was Andre, yeah?
Alexei Monsarrat: Yeah.
Peter Chase: The problem that strikes me is when you bring more and more power into Europe, specifically a power to veto, as I think you put it, the budget, then what you’re doing is directing a huge amount of public popular ire at those unelected bureaucrats in Brussels. I think it is politically a very, very bad idea. When, in fact, market discipline acts and could act as the appropriate brake on the member states who are borrowing too much. And I think one of the things that’s always struck me is that many member states though that the benefits of monetary union where they all felt that they were giving up monetary policy, they would have German interest rates. That was the myth that led to the problem. And so I think that, I guess, the question is: There’s a difference between the ESB stepping in, prices trying to attend to markets overreacting, and a longer term thing of pulling the political veto decision into Brussels as opposed to letting the markets in more normal circumstances just tell politicians that if they want to run a deficit of X, then they’ll have to pay an interest of one. Are you not concerned about the longer term political implications of such a veto power in Brussels?
Andre Sapir: Okay, a couple of responses, if I may. I think, I mean, I personally see this veto power to be applied rarely. I mean, really for exceptional cases. So, I think it would be, I mean, in my frame of mind, you would not have actions of that sort several a year. I think this is one of the difficulties that we had also with the stability pact. I think the stability pact was not strong, but became used sort of very regularly, and became a process that lost, not feet, but it also became somewhat of a bureaucratic process. It was a process that did not reach really sort of the political level. I think that was a mistake. So, I think for this to have any sense, you have to choose your cases. They need to be rare and they need to be very important cases. So, they need to be, I’m going to use a word which I think has become popular, they need to be systemic cases. So, you need really to demonstrate the fact that any country is doing something and that is really risking, creating difficulties for the Euro area. So, I’m all in favor of increased market discipline and putting in place mechanisms for increased market discipline. And I’ve written about those kind of things, but I think that nonetheless you will not be able to do only with market discipline. I think that would be foolish to rely 100 percent on market discipline. You do need also the kind of discipline that we are talking about here with this kind of veto power that needs to be applied rarely. No, that does not answer your other question. Even if it’s rare, even there a problem of political legitimacy and I repeat, yes, I think there is a problem of political legitimacy. It cannot be done in a bureaucratic manner. It cannot be those people would wield this kind of veto power, would not have full political legitimacy. So, what kind of legitimacy? They need to have legitimacy, both from the Council and from the European Parliament, so it has to be from the state and from the people, if you want; from the Upper House and from the Lower House in our system. But if you look at the Council, the equivalent of the Senate, and the Parliament the equivalent of the House, you need some of both Houses. In addition, it seems to me, and that’s what we wrote in a recent paper, that this Minister of Finance, let us say, would have, would carry, this veto power, would need to carry it into the national Parliament, so they wouldn’t need to be a debate into the national Parliament. It would not just be a registered letter sent from Brussels to the national capital saying, "You know, guys, you took a decision in your national Parliament. Sorry. Brussels has decided that it doesn’t go and you need to change a thing." I think one would need to go and there’s a serious debate in the national Parliament and explain, because in a sense you are vetoing what the national Parliament has done and you need to confront that. You need to have a discussion with them and a debate.
Jacob Kirkegaard: If I could say just one thing, I mean, I completely with Andre; it’s a very good point. But I would just say that the notion that market pressure is going to do this in a diversified manner, taking into account the individual budget decisions of individual countries in the monetary union, has I think been fundamentally proven wrong in this crisis when we see this repeated instance of contagion inside the Euro area. So, I think it would be a terrible mistake if policymakers in the future demanded or began to rely on a policing effort that basically assumed away the existence, the clear existence, of contagion inside the Euro area.
Alexei Monsarrat: Okay. That wraps it up for us. I want to make sure we bring these in under an hour and we’re right there. So, I want to thank again Andre and Jacob as well as everybody else on the call and we will speak to you all again soon. Thanks.
Andre Sapir: Thank you.
Jacob Kirkegaard: Thank you.
Operator: Thank you, everyone, for joining us today. We hope you will join us again for another call in the near future. This concludes today’s conference. You may disconnect your lines.