The financial rescue plan agreed last week by the EU does not go far enough. That is the opinion of Jakob de Haan, professor of political economics at the University of Groningen and Head of Research at the Nederlandsche Bank (DNB).He wants countries that do not have their financial affairs in order to be dealt with more severely, for example by introducing an equivalent to ‘Article 12 status’, a Dutch municipal guardianship order, for these EU partners.
‘It’s a good thing that there is a plan in place’, according to De Haan. ‘That is a step forwards, particularly because it temporarily brings all the uncertainties on the financial markets to an end. However, it is not yet a definitive solution.’ What De Haan misses is long-term vision among the politicians: ‘I would have liked to have seen political leadership and statesmanship being displayed to really resolve the problems. I can see that there are few ideas about what’s going to happen next, there’s hardly any perspective on the future.’
De Haan is critical of the attitude and approach of European politicians, in his view characterized by short-sightedness: ‘The political discussion concentrates too much on short-term self-interest. Politicians should be keeping European interests in mind, because if Greece goes bankrupt it won’t only be that country that is affected, but all of Europe. I think that these risks are being underestimated.’
De Haan feels that the fact that progress has been made with tightening and expanding the Stability and Growth Pact is positive. That pact from 1997 contains agreements between the countries in the Eurozone designed to promote the stability of the currency via budget control. The new agreements among the EU countries include tightening up budget discipline and making it possible to intervene in the event of financial difficulties and major macroeconomic imbalances, as is now the case in Greece, Spain, Portugal and Ireland.
‘But that’s not going to save our bacon’, states De Haan, who thinks that the new agreement does not go far enough. ‘Too few guarantees have been included to prevent and eliminate emergency situations such as those in the Southern European countries.’ Stricter rules are needed, the monetary economist declares: ‘If a country does not comply with the budget rules, somebody should be able to take effective action, and this is not sufficiently guaranteed in either the existing Stability and Growth Pact or in the agreement signed last week.’
As far as De Haan is concerned, countries which end up in a financial emergency situation should be obliged to transfer their budget policy to a supranational EU body that would then make sure that the books balance. The professor draws an analogy with the ‘Article 12 status’ that a Dutch municipality acquires if it is no longer able to make ends meet. Just as that municipality is placed under the guardianship of the state, so should a budget dissident in the EU be placed under the financial supervision of a supranational body.
A complete transfer of the budget policies of all countries would be going too far, and is not necessary, thinks De Haan. In his opinion that would not be politically achievable either because it would limit national policy freedom. ‘The conditions for national budget policy need to be stricter’, he adds. ‘That would provide more stability because it would prevent countries breaking the rules. And if that happened, action could be taken. That would protect European monetary policy from pressure from the budget policies of individual countries.’
The agreement that has now been reached may not be the best possible, but according to De Haan it is not only a step in the right direction but also essential. ‘If we had not offered the Greeks a helping hand, the immediate bill would have been enormous. It is an illusion to think that stopping support for Greece would not have cost us any money. It would probably have resulted in that country’s bankruptcy, and then we would not have seen a cent back of previous financial aid to Greece.’
In addition, there are also indirect costs in the form of uncertainty about what would happen after a Greek bankruptcy, De Haan continues. According to him, other Southern European countries falling like dominos is a very realistic scenario. ‘People who say that it would be better if Greece went bankrupt don’t know what they’re talking about. Just think of the ordinary Greeks. They are going to have a tough time in the coming years but in that scenario they would really suffer.’
Article by Barend Abeln and Jan Jacobs on the website of the ESB (Economic Statistical Reports)
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