Monday 23 April 2018

Uneasy perch for Varadkar among the Baltic hawks

Netherlands Prime Minister Mark Rutte has spoken out against a federalised Europe, Ireland may find itself drawn towards a similar stance
Netherlands Prime Minister Mark Rutte has spoken out against a federalised Europe, Ireland may find itself drawn towards a similar stance
Brendan Keenan

Brendan Keenan

VACANCY. Due to the imminent retirement of the present incumbent, applications are invited for the position of leader of the Awkward Squad in the European Union Project.

It looks as though the Netherlands has already staked its claim. Prime minister Mark Rutte chose Berlin to make a speech in typically blunt Dutch terms, dismissing the idea of a new Franco-German push towards further integration, and much else besides.

Some commentators even used that cliché of the hour, 'red lines', to describe the contents of Mr Rutte's speech, but that is the language of the departing member. As one of the original Six, Holland's European credentials are impeccable - but what kind of Europe?

It is still mainly about the euro. Everyone agrees that its incomplete design makes the single currency vulnerable to another crisis. But there agreement ends. With debt still breaking new records in the advanced economies, including the eurozone's, another crisis cannot be ruled out. There has been only limited changes in how to deal with one.

Going further inevitably raises the question of the EU's political structures. New alliances and fault lines are emerging and Ireland is caught in the middle. As well as being the most vulnerable to the economic consequences of Brexit, its own model is the most vulnerable to eurozone structural change.

There is more involved than corporation tax, although the consequences of the kind of change proposed by the Commission, following hard on Brexit, is the stuff of nightmares. Ireland needs to find a new place in Europe, and a new story about itself. Its participation in last week's statement by several EU governments can be seen as part of that process.

It was an interesting group. As well as the Netherlands, there was Denmark, Estonia, Finland, Latvia, Lithuania and Sweden. From the point of view of Paris at least, there you have the awkward squad.

They have already been dubbed the new 'Hanseatic League', after the 13th-century combination of merchants across in what is now Belgium, Holland, bits of Denmark and Germany, and up to the Baltics.

Ireland was a long way from the real Hanseatic League, but was at the finance ministers' lunch last November which is seen as the beginning of the new one. The Dutch and German ministers were invited in for the coffee.

Irish participation is significant but the country is still a bit of an outlier in such a gathering - and not just in geography either. The press release from the Department of Finance last week put it all in the context of the EU-wide effort to create a stronger economic and monetary union.

Further deepening of EMU should stress real value-added, not far-reaching transfers of competence to the European level, and discussions about the future of the EMU should take place in an inclusive format.

This may be read as a not-so coded version of Mr Rutte's plain speaking, when he said the EU was not a "Franco-German Europe" and, more startlingly, that neither was it "an unstoppable train speeding towards federalism", adding for good measure that the Commission should work more for EU governments and "not the other way round".

The role of the Commission is central, but it is a complicated story. The EU executive was both sidelined and damaged by the euro crisis and has been trying to enhance its political standing since. But it has run into more criticism over its perceived failure to apply the budgetary rules, especially to France.

The curious appointment of the feared Martin Selmayr as secretary-general of the Commission does not help, but the apparent threat of trade war with the USA by trade Commissioner Cecilia Malmstroem points to a deeper problem. Trade is the responsibility of the Commission but, as far as the public could tell, her hit list for retaliation was drawn up without any political input from elected governments.

Mr Rutte thinks the Commission has become too political and would strip it of one of its most important functions. A new European Monetary Fund (EMF) would take over the enforcement of budget rules and do economic analysis of the kind which the Commission produced on Ireland last week.

There lies the rub. Ireland has joined a group which believes that strict obedience to the fiscal rules is the key to avoiding further crises, and is determined to see them enforced. Meanwhile the Commission joins local critics in saying that Irish fiscal policy is still too reliant on boom-time tax revenues.

The new group may be opposed to Franco-German hegemony but it mostly agrees with German policy that tighter controls of budgets, and not debt-sharing or aid from Brussels, are the way to avoid future crises. Ireland has always talked that talk but, as the Commission said, there is still not much sign that it is keen to walk the walk.

More fundamentally, Ireland has always seen the Commission as the guarantor of the legal rights of small member states against the political power of the big ones. It should be a matter of concern to the Brussels bureaucracy that this is less and less the perception among small eastern states, as well as Ireland. The EU institutions now exercise powers that stretch their political legitimacy to the limit, but we might not like the consequences of strengthening that legitimacy.

The new league is determined to have 'bail-ins', where bondholders take losses, imposed by the proposed EMF. Not just bank bondholders either, but also those who lend to governments. There would be provisions for the restructuring of unsustainable government debt but they would be applied, not by the Commission, but by the existing system of voting by member states.

One can almost hear the cheers from Irish rooftops but let's hope we never find out whether such cheers were justified. With Denmark and Finland among the signatories, it would certainly not mean an absence of austerity. As a heavily-indebted country, even qualified majority voting on such matters could be alarming for Ireland.

The difficulties are recognised by the group's call to start with the tasks on which there is some measure of agreement. Disagreements are largely political, based on what voters will tolerate. As our description of media coverage the other week showed, national attitudes and stereotypes determine how things are seen.

That may be why there is more agreement among economists and technocrats than among governments. An eminent group of these, brought together by the German business think tank Ifo, set out their priorities in a statement last week.

They too want bail-ins and a banking union to end the 'doom loop' between states and their banks. They also advocate that an EMF administer fiscal rules, backed by independent national fiscal councils - but say the rules should be much simpler.

As simple as can be, in fact. They would concentrate on spending, rather than abstract definitions of deficits, and in general limit spending to sustainable economic growth. One would think it should be easy to get agreement on something as straightforward as that. The main objection may be that it is too simple - which is why it just might work.

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