Helmut Schmidt and Giscard d’Estaing: What Needs to be Done After the Brussels EU Summit
By Michael Liebig
The 50% “haircut” of Greece’s debt was inevitable. Most private creditors had already written off their Greek state bonds by that percentage – or more. The € 440 billion “European Financial Stability Facilty” (EFSF) has gotten the authorization for a “partial coverage insurance” of future bond sales by Greece, Portugal, Ireland, Spain or Italy. The purpose is to assure public and private investors to encourage them to buy state bonds of these countries. The head of the EFSF, Klaus Rehling, flew right away to Beijing for negotiations on Chinese bond purchases. Whether these actions will stop the speculation against Southern European state bonds by mostly Anglo-American banks, hedge funds and rating agencies remains to be seen.
In essence, the Sept. 27, 2011 decisions of 17 the Eurozone governments in Brussels represent technical and organizational “crisis management”. There are two interconnected issues which have remained unresolved, but are of fundamental importance for re-creating stability in Europe.
The first issue is the permanent institutionalization of a “fiscal stability culture“ in the European Union as whole. Governments, not only in Southern Europe, have become addicted to deficit spending. Instead of raising revenues or cutting expenses, they went in debt. The accumulated sovereign debt has become simply unsustainable.
The lasting implementation of fiscal discipline, however, depends on a political “deal” among European states and within each European state. Such a shared commitment for “self-discipline” is impossible as long as a large chunk of the finance sector remains utterly “undisciplined”. That’s the second issue. Absurdly enough, financial speculation is unregulated and free of taxation, while financial services tied to the real economy are regulated and taxed. Speculation reaps enormous profits for private actors, but when speculation misfires, the losses get “socialized” – as we have seen in 2008.
Hang Together or Be Hung Separately
On Oct. 19, 2011, at Frankfurt’s Old Opera, a farewell ceremony was held for the outgoing head of the European Central Bank, Jean Claude Trichet. Among the speakers at the event, were two old men: Helmut Schmidt (92), the former socialdemocratic German Chancellor, and Valerie Giscard d’Estaing (85), the former liberal-conservative French President. Both did address the interconnected issues of institutionalizing fiscal stability and tackling the problem of financial speculation. Before Schmidt and Giscard took up these issues, they first mentally stepped out of the semi-hysterical and convoluted debate over Europe’s current condition.
In the middle of the hectic crisis meetings on Greece, Italy and the future of the European currency system, Schmidt acidly remarked: “All the talk of a so-called ‘euro crisis’ is just the idle chatter of politicians and journalists.” And Giscard added: “The media, in particular the Anglo-Saxon press, [have] loudly proclaimed the euro crisis, giving speculators a field day.”
Have the two old men lost touch with reality? Or do they possess a sense for what is of strategic importance and what are merely transient phenomena which will be forgotten after a few months.
The two men literally embody European history: Giscard was born in the German Rhineland as the son of French occupation officer and fought in French Resistance, while Schmidt served as a Wehrmacht officer on the Eastern Front in World War II. Both are trained economists and the two together created in 1979 the European Monetary System (EMS), which preceded the Euro single currency system. As polls show year after year, Schmidt is Germany’s most popular and respected politician. Giscard may not be as popular in France, but his sharp analytical mind is still highly respected
In Frankfurt, Schmidt raised the question: Why is European integration an imperative? Usually, the answer turns to the past: Europe’s unity is the response to its fratricidal and self-destructive wars during the 20th century. Indeed, peace, liberty and (relative) prosperity in Europe should not be taken for granted. But Schmidt turned to the future: “While for 200 years we Europeans made up over 20% of the world’s population, we now account for no more than 9% and in 40 years we will account for just 7%. Each individual EU member state will then represent only a fraction of 1%.”
How should individual European nation states accounting for 0.3%, 0.1% or 0.05% of the world population exert their national interests vis-a-vis big powers like the USA, China, India, Brazil or Russia? They can’t. Therefore, argued Schmidt, it’s in the fundamental national interest of each European nation state to promote European cooperation and integration. The alternative would mean marginalization in the global arena – for each individual European nation state and for Europe as whole. One is reminded of Benjamin Franklin’s dictum: Either hang together, or get hung separately.
That’s evident in monetary sphere: The euro – the common currency of 17 European states – is one of the three currencies that do matter in the world – along with the US dollar and the Chinese renmimbi. Notwithstanding the “euro crisis”, Schmidt and Giscard noted, both the internal and the external value of the euro have been more stable than that of the US dollar. In the near future, also the currencies of India and Brazil will be leading factors in a multipolar world monetary system. Moreover, we will likely see, alongside the euro, the emergence of other regional currency unions – among ASEAN, Latin American, Arab countries and of Russia with some of its neighbors.
Political Action for Institutionalizing Fiscal Discipline
On the background of this “long-range” view, Schmidt’s argument appears plausible: If European nation states want to preserve their national interests, they must stick together – and act together. Here Schmidt locates Europe’s real problem: “A crisis of the ability of the European Union’s political bodies to act. This glaring weakness of action is a much grater threat to the future of Europe than than the excessive debt levels of individual euro area countries.” The lack of political resolve and action has manifested itself in the “failure to set down the economic and legal rules of game for the currency union.”
Giscard d’Estaing laid down four basic “rules of the game” for the euro currency:
- “the ‘compulsory coordination’ of fiscal deficits and debt, with the imposition of automatic sanctions if reference values are exceeded
- decisions to be taken by qualified majority voting (by double majority, i.e. the majority of member states and, representing the majority of the population of the Union), for decision making that avoids gridlocks and delaying tactics
- A procedure for withdrawal from the euro area for countries that deem these rules too restrictive or that do not comply with them
- the establishment of an Economic and Monetary Secretariat for the euro area.”(In this respect, Schmidt spoke of “a powerful authority with responsibility for fiscal and economic policy” in the euro area)
In view of what has happened in Greece, Italy and elsewhere in Europe, the validity of these four rules for fiscal discipline seems evident. However, the political implementation of these rules means freezing or cutting budgets, reducing public debt and refraining from client politics. That’s all quite unpleasant, particularly for politicians who have become addicted to client politics – in Italy, for example. But, beyond client politics, fiscal discipline is a great challenge for all, even the most virtuous politicians – they want to be re-elected.
Speculation & Structural Financial Reform
Here, both Schmidt and Giscard made a crucial point: The peoples of Europe will not accept fiscal discipline and ensuing “belt tightening”, while financial speculation continues to rampage. “In the space of a few years, financial speculation became ensconced at the heart of the banking sector,” and a “shift in the banking system to the detriment of the real economy in favour of speculation” has occurred, said Giscard.
Speculation is not an ideological term. Following the economist Joseph Schumpeter, speculation are transactions for financial gains without corresponding activities in the real economy. The volume of derivatives trading – the most wide-spread form of speculation – is estimated at above $900 trillion, compared to the world’s GDP of $62 trillion.
The perception of financial speculation as a threat to society and the real economy has become a matter of “common sense” among perfectly “normal” people. It’s no longer a “special issue” of leftist organizations. Big industry and the associations of small and medium-sized firms are positioning themselves against the speculative elements in financial sector. Moreover, there is a visible division within the banking system itself. For example, the German public banks have launched an advertisement campaign with the following message: Sparkassen, Volksbanken and Raiffeisenkassen are public-cooperative institutions serving the “small savers” and small/medium-sized businesses – they do not engage in derivatives speculation. Thus, speculation is seen as a clear and present threat equally to “real world” businesses, workers, the prekariat and parsimonious housewives – and to states.
Without a comprehensive and systematic regulation and taxation of the financial sector, it will be politically impossible to establish a firm and lasting framework of fiscal discipline in Europe. “The announcement of a bold reform of the European banking system, even if it is difficult to implement, would do more to restore the confidence of the public than all other rescue measures,” said Giscard. And he emphasized that the most immediate regulative task is the legal separation of banks – or departments within banks – and hedge funds engaging in financial speculation from those financial institutions tied to the real economy. That’s the principle underlying the New Deal’s “Glass-Steagall Act” which was abolished in 1999 by the Clinton administration. The financial transaction tax has two purposes: To generate badly needed tax revenues and to function as a disincentive for financial speculation.
The political class in Europe is not that autistic to have missed what is brewing in society. Not surprisingly, over the recent weeks, a growing number of political leaders in every European country and across all party lines have demanded the separation of banking tied to real economy from speculative financial institutions and the introduction of a financial transaction tax. However, demanding financial reform, is not the same as enacting it.
The “Occupy” Movement
And here we come to the “Occupy”movement which, in many ways, echos positions which Schmidt and Giscard are articulating. This movement didn’t start in the United States with the “Occupy Wall Street” rallies. It started in Madrid, last April, and its next big manifestation was in Tel Aviv during the summer. Of course, the “Occupy” movement includes activists from leftist, trade union-linked, church-linked and environmental groups. But these “usual suspects” by themselves have not been able to reach out to the broader public. Moreover, internet-based modes of communicating have outflanked traditional forms of political organizing. The amorphous “Occupy” movement attracts perfectly “normal” people. It doesn’t address “special issues”, has no “special” constituencies, except that young people are most active. And, the “Occupy” movement is not weakened by its blatant lack of any coherent “political program”.
The best available explanation for the emergence of the “Occupy” movement is that it is resonating a general mental disposition in society. “Common sense” – not political or ideological positions – collides with the fact that speculators reap enormous profits and then, on top of this, have the chutzpah to cash up the tax payers. When economic conditions obviously violate common sense and no corrective action is taken by the political class, the economic and financial “system” looses its legitimacy. And a sense of the illegitimacy of the “system” becomes “common sense” in society.
Schmidt said in a prime time TV appearance that he “understands well” the “Occupy” protests. As Schmidt is a man of realpolitik, it seems this statement was primarily meant as a warning to the political class in Germany and in Europe not to loose any more precious time – and finally implement the structural reform of the financial system. Or, as Giscard put it in respect to an overdue “bold” financial reform: “When a watch no longer tells you the right time, you don’t simply move the hand, you repair the mechanism.”
Schmidt is promoting a man of whom he thinks that he will get things done: Peer Steinbrück (64), the former Finance Minister who in 2008 successfully “managed” the financial crisis in Germany – together with Chancellor Merkel. Schmidt and Steinbrück together have just published a best-selling book featuring the reform of the financial system and the need for a institutional framework for fiscal and economic policy in Europe. They appeared together on Germany’s most-watched TV program on Sunday evening; again the message was: get the financial reform done now. And, Schmidt has publicly said that Steinbrück would be the right man to succeed Merkel as Chancellor.
But Merkel can be fast on the “learning curve”. Merkel too seems to have realized that the two overriding issues facing her now are the institutionalization of fiscal discipline in Europe and a structural financial reform. By November 2-3, when the next G20 Summit will be held in Cannes, we will see whether or not the European leaders follow the course of action prescribed by Schmidt and Giscard.