“Economic governance in the Eurozone” – Intervention of Charis Polycarpou, member of the Economic and Social Research Department of the C.C. of AKEL

 

 

“The framework of economic growth for the countries of the European periphery”

 

1st December 2013

 

 

Dear friends,

 

Permit to stress two key aspects mentioned by the previous speaker.

 

First, the forces that have developed in the Cyprus banking system before and after Cyprus’ accession to the Eurozone and,

Second, Cyprus’ perspective today, as reflected by the public debt due to these forces.

On my part, I shall attempt to outline the political and economic characteristics of the framework in which Cyprus is called upon today to tackle these given conditions.

That is to say, how has the economic governance of the Eurozone evolved after the recent developments and how has this influenced and affected the decisions of the countries in tackling the inequalities within the Eurozone economies.

If you like, what room is there to tackle the problems that have been created by the EU member states themselves, but also what are the immediate consequences expected to be on Cyprus in particular.

So far economic policy on an EU level has been exercised by many agencies/bodies, whether they be member-states, or by the EU institutional bodies. However, it has been stressed constantly recently that the strategic goal, particularly in the Eurozone, is now the implementation of a uniform single policy, identified with an extremely neo-liberal economic philosophy.

The principal of the coordination of economic policies, which to an extent had respected the independence of the economic policy pursued by each Member-State and incorporated as a fundamental principle in the Treaty of the EU, I would say, is now being undermined and challenged, both by the EU institutional bodies themselves and by powerful EU countries such as Germany. They are setting as their goal the transition to a system determining on a central level the economic policies which every EU member-state must follow and which go beyond the control exercised so far of the monetary circulation to issues relating to the control of the state budgets and banking system of the countries in the Eurozone.

Consequently, the first point that must be pointed out is the fact that the possibility of a country today, but also its possibility to pursue a sovereign-independent economic policy in the future aiming at the implementation of specific economic goals, which it itself determines according to its own peculiarities and conditions, has been severely restricted. Let alone with regards a country that is also under a Memorandum, as in the case of Cyprus.

What changes have taken place so that there is this loss of sovereignty? There are a number of economic and political factors that have enhanced and affected such a process. For example, the wage freeze in Germany during the recent past and subsequent competitive advantage it has gained over the rest of the countries, giving it the dominant role in the determination of EU economic policy. This is an issue Costas, together with Heiner Flassbeck, have repeatedly analysed, also pointing out the impact on the countries of the South. Another example is the prevalence of the Christian Democrats on a European level and the role played by the German Christian Democratic party.

However today, I shall restrict my comments to the institutional developments on the level of economic governance and how these contribute to the institutionalisation now of specific economic policies. Consequently, I’ll look at how their implementation takes away from Cyprus tools and mechanisms for growth and therefore affecting Cyprus’ course in the Memorandum.

The first case is the signing of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (known as the “Fiscal Compact”) and concerns the Eurozone members and all that they wish to incorporate. According to this Fiscal Compact, states will now aim indefinitely at surplus budgets. A Budget will be considered as surplus if it records a primary deficit up to 0.5% of the GDP. To understand the difference of the current provision, we need to compare it with the previous situation that existed. The Stability Pact provided for a deficit of up to 3% without the concrete specification of sanctions and penalties. Therefore, we can observe a strengthening of the fiscal adjustment which first and above all will harm and attack developmental expenditures and social benefits.

The second case concerns the “6-pack” of regulations as they are called in a codified manner since it includes 5 Regulations and 1 Directive that enhance the monitoring of the economic performances of states on an annual basis by the European Commission. It is being implemented for the whole of the EU with special terms for the Eurozone members. According to these rules, the possibility and scope of a country’s divergence from the goal on the deficit is determined on a European level which must be fulfilled, but also the measures that must be taken in order to fulfil this goal. At the same time, an economic penalty is being institutionalised for the countries which, according to the assessments conducted by the European Commission, have failed to comply with the “recommendations” that have been made at an earlier stage. Consequently, the non-compliance with the economic policies that are imposed will result in economic penalties.

The third legislative regulation is what has been termed the “2-pack” of regulations and the “European Semester” and represents the monitoring and control system of the Eurozone. These common rules institutionalise independent third party organisations-companies to monitor national budgets. States will undertake directions concerning their budgets annually in May, whilst in October the member-state will submit them for approval to the European Commission and the Eurogroup accompanied by the recommendation of the independent company. If the member-state adopts the budget recommendations of May and the observations of the independent organisation, then the budget in question will be tabled at the national Parliament. Otherwise, the European Commission will demand a revised budget, addressing an Opinion and then the Eurogroup will decide.

Even though the list of legislations is long, I will refer only to one other example. The new procedure of forming the banking union between the banks of the Eurozone countries, although it began as a procedure to provide direct support to the banks from the European Central Bank (ECB), today its orientation has unquestionably been exposed. The subordination of the banking system to the supervision, control and authorisation of the ECB is accompanied by new regulations and demands which of course reduce the possibility of the banking sector to provide loans to the real economy, but at the same time it will also lead to the gradual absorption of the weaker banks by the powerful banking giants. Furthermore, it also leads to the implementation of new single rules on the dissolution – restructuring of the banks, within the framework of the parameters that had been applied in Cyprus in March. In the case of Cyprus this will mean that for the banking system of Cyprus to survive in its current form and avoid new restructurings, big capital reserves will be needed so that it can meet increased demands.

Consequently, this framework affects Eurozone member states in a concrete way:

First, we have seen economic decision-making policy for the EU member states being restricted.

– The states must now strictly comply with the minimal fiscal goals.

Second, the implementation of a strict fiscal policy excludes the possibility of the prospect for growth and enhancement of a welfare state.

Namely:

– The balanced budgets will be reflected as restrictions on wage levels and pensions depending on the revenues of the state, even when these will be reduced further as a result of recession or due to the loss of resources from structural changes such as privatisations or even as a result of the increase in tax evasion.

– In addition, within this framework the control of budgets is also expanded to the possibility of the European Commission to determine what is actually funded and to what degree. The attempt for a comprehensive management of the strategic natural reserves could also be viewed in the same context, whereas in the case of Cyprus it would also involve its natural gas.

Third, the effect extends to the full and absolute control of the banking system.

If we focus on the case of Cyprus we draw the conclusion that according to the Memorandum it is called upon to implement a number of targets and challenges, whilst at the same time Cyprus is deprived of important tools to fulfil them.

At the same time, if we assess the granting of powers to the European Commission, we will conclude that this is not accompanied by the implementation of a policy that will cover the needs and strengthen each country’s productive possibilities. On the contrary, countries remain unbalanced and unequal in their development, given that there are also bigger deficits in the technological differences between countries, resulting in pressure being focused on wages. However, as long as continuous reductions and cuts are being imposed, so will the vicious circle of “austerity-recession-expansion of the competitive deficit” be enhanced.

We can for sure conclude that such a transfer of the economic independence of member states to the EU deepens and intensifies the dependence of states on the decisions of the leaders of the powerful Eurozone member countries. However, on this issue, I can only say that today we must assess whether these decisions are now taken according to the overall interests of the Eurozone or are taken purely to serve national objectives/interests.

In conclusion, I reiterate that all I have said outline the framework and if you like, the framework Cyprus is called upon to overcome, or at least attempt to overcome its current problems.