It’s go-time in Europe.
Markets have cheered the European Central Bank’s (ECB) latest plan to save Europe – a bond-buying plan called OMT that’s intended to lower borrowing costs.
However, ECB watchers like CNBC’s Silvia Wadwha have pointed out that the details of the plan – namely that troubled countries looking for ECB assistance must first request a bailout from the EFSF/ESM rescue funds provided by EU member states – have some scary implications.
The ECB has effectively set political preconditions in order for it to act – and it knows that the eurozone is looking pretty desperate at the moment.
It’s as if, in Wadhwa’s words, “the ECB is saying, we will only do our job if certain political conditions are met.”
What’s more, the EU unveiled plans for the ECB to become the main regulator of euro-area banks yesterday. This would take banking supervision largely out of the hands of national governments and put it under the purview of the ECB, an un-elected, supranational institution.
SocGen economist Annatoli Annenkov penned a big essay today in a note to clients on the “democratic deficit” emerging in the eurozone.
The bottom line: “All of this reflects growing tensions between national and EU legislation which will only increase as more powers are transferred to Brussels or Frankfurt.”
Annenkov thinks European leaders have squeezed most of the juice out of this current round of policymaking, and thinks could get rockier going forward.
Here’s his take:
The Democratic Deficit
As the EU and the euro area take further steps on integration in reaction to the ongoing crisis, we expect more attention to be given to the issue of the democratic deficit in the EU. Already, complaints in the worst hit countries have related to the sidelining of elected politicians in favour of decisions by technocrats (the Commission, the ECB and the IMF). On the other side of this coin, the German debate and actions by the Constitutional Court highlights the frustration over the emergence of possible contingent liabilities on which national parliaments have little or no influence.
Similarly, questions have been raised over the voting structures of the ECB, where each national governor has equal weight in votes, despite coming from economic areas of as small as 452 thousand inhabitants (Malta) to 81.8 million inhabitants (Germany). While all board members are expected to disregard national interests, the fact that the German governor objected to the new bond buying programme does not help the image of a democratic deficit.
All of this reflects growing tensions between national and EU legislation which will only increase as more powers are transferred to Brussels or Frankfurt. So far, it has been clear that the German Constitutional Court has not been prepared to block the path of politicians, but it would appear that we are reaching the limits of what is feasible without a deeper discussion on either re- designing national constitutions or EU Treaties. Not surprisingly, Commission President Barroso delivered a passionate appeal for starting the work on a new Treaty in his State of the Union address yesterday, starting well ahead of the European Parliament elections in 2014.
Unless the current measures to calm financial markets over the viability of the euro are sufficient, and demands for a deeper fiscal union increase, possibly including more permanent public sector transfers, it will be inevitable for politicians to start contemplating new domestic and/or a new EU Treaty, in line with what has already happened in Germany. Until these issues are addressed, it will be difficult to move on with further integration in the EU and euro area.
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