Of ants and crickets: a fable for our times?

Franco-German plans for economic governance have led to institutional and intellectual conflicts that may be difficult to overcome.

Marius Holtrop, who was president of the Dutch central bank from 1946 to 1967, used to borrow from Aesop’s fables to characterise Germany as the prudent ant and France as the profligate cricket in their contrasting approaches to European integration.

The question that he posed, as recalled by André Szász, a former colleague at the bank, in his lucid history of the euro, was: “Whether the ant could be expected to put its stored resources at the disposal of the cricket?”

That fable has played out ever since in the European Union. Tomorrow (11 March), the latest episode of the long-running saga will resume in Brussels. Leaders of the eurozone will meet to discuss how, through strengthening economic governance, the single currency can be stabilised and the European economy energised.

The omens are not good. France and Germany, to the annoyance of both the European Commission and some member states outside the eurozone, notably Poland, have joined forces to put forward proposals for an intergovernmental economic governance focused on the eurozone.

Indeed, this week’s discussion pre-empts a debate among all EU member states on 24-25 March. Then the question of whether, behind the scenes, France and Germany now share a common vision of how all this should work may become clearer.

Writing in the Financial Times last week (3 March), Jacques Delors, a former president of the European Commission, and Romano Prodi, his successor-but-one at the Commission and prime minister of Italy on either side of that, teamed up with Guy Verhofstadt, an ex-prime minister of Belgium who is now in the European Parliament, to underscore the philosophical and practical differences in approaching EU economic policy issues that still lie beneath the appearance of Franco-German entente on economic governance.

The Delors-Prodi-Verhofstadt argument is that instead of a German-inspired competitiveness pact, which emphasises the need for eurozone members to adopt tougher economic disciplines, the European Council should adopt a “Community Act” for economic convergence.

This would, they argue, “push forward in the most vital economic fields where closer alignment and co-ordination is needed…pensions reform, wage levels, corporate taxation rates, research and development, and investment in transport, telecommunications and energy infrastructure”.

Under threat

Philip Whyte of the Centre for European Reform, a London-based think-tank, says the governance debate is characterised now by “big institutional conflicts”. It is not just some smaller, non-eurozone member states and the Commission that fear what Delors attacks as the ‘Franco-German intergovernmental model’ for reformed economic governance. The European Parliament also feels threatened.

So what are we to make of these institutional and intellectual conflicts?

Fundamentally, what is at stake today is not whether Europe’s sovereign-debt crisis can be overcome and the euro underpinned in the short and medium term. Rather, the issue is whether Europe can emerge from its sovereign- debt crisis strengthened politically, socially and economically, able to cope with the next cyclical recession, whenever that may strike, and able to compete with China and the other newly industrialising developing countries.

Germany, in spite of the need for further reforms, is the only large EU country that has a functioning economic model that can hold its own against China and other emerging powers. The Nordic countries and the Dutch, which are ants not crickets, are doing quite well too and their model is not based on centralised economic pump-priming by a government.

Fast reform

A second point: time is running short. Five years ago, I thought that the EU had a decade, even two, in which to reform and meet the challenging brave new world of globalised competition. Since the financial crisis began in 2007, while China, India and Brazil have continued to march forward, the transatlantic economies have stagnated; focused, necessarily, on clearing up the mess the crisis left behind.

The EU could still face a ‘lost decade’, as Latin America did after its sovereign-debt crisis in the 1980s. All EU states have to reform fast, just as the Greeks are being forced to, if they are to avoid that fate. Germany is not exempt. Its Landesbanken must be sanitised swiftly.

However, thirdly, the new economic governance superstructure risks becoming incoherent. Even leaving out the national governments, the non-exhaustive list of actors would include the European Banking Authority, the European Central Bank, the International Monetary Fund, the Eurogroup, the European Court of Justice, the European Systemic Risk Board, the European Stability Mechanism, the Council of Ministers, the European Parliament, the European Commission (both its department for economic and financial affairs and its department for the internal market and services).

This is an alphabet soup of institutions, agencies and authorities, each with fingers in the governance pie. Some are new, some old, some already part of the EU’s infrastructure, some, including the IMF (back in western Europe after a 40-year absence), essentially more “intergovernmental”.

With institutional conflicts already sharpening, this complexity does not augur well for the effectiveness of whatever new economic governance structures might emerge.

Unsurprisingly, Delors argues that the Commission should be at the epicentre of any new governance regime. But the Commission under José Manuel Barroso, its current president, has not distinguished itself as a crisis leader or manager since 2007. Nor has it been a particularly effective economic policy co-ordinator since the launch of the single currency.

The Commission, says one of the eurozone’s most eminent economic policy advisers, is “too political” to be an effective economic policy co-ordinator and disciplinarian. With its already wide-ranging brief for economic policy co-ordination and its right of legislative initiative, especially in the field of financial-market regulation, it has its hands full. Delors’ call for its position to be further strengthened looks nostalgic bordering on unrealistic.

What we have learnt since 2007 is that the EU is not good at crisis management.

“There will be overlaps, but to the greatest extent possible crisis management activities can and should remain primarily intergovernmental,” says Barbara Boetcher, a Deutsche Bank economist.

Given the centrality of the single currency to the EU’s future, it is the (intergovernmental) Eurogroup, the finance ministers of the eurozone plus the ECB president and a European commissioner, rather than the Commission, that should, under better leadership, play a more decisive role in pushing through reforms.

This is where peer pressure and sanctions have to work, not least because the days when all the eurozone’s members enjoyed, by default, Germany’s triple-A bond rating are now consigned to history. Financial markets are exerting their own inexorable, sometimes irrational, speculative pressure on economic policy formulation, member state by member state.

Stewart Fleming is a freelance journalist based in London.

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