The European Council’s announcement that the EU “will take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole” was widely interpreted as a bail-out promise. But only a few days after the summit, new doubts arose whether the EU or its larger member states would indeed step in for Greece. So, the options that are discussed still range from default and a Eurozone exit to a strong engagement of the EU and the creation of new crisis management and coordination mechanism for the Eurozone. Despite increasing market instabilities and the rapidly approaching moment of truth when Greece will have to refinance its debt in March/April 2010, policy makers still assess options. This is not surprising, as there is no cheap and safe solution. Any political choice in this current situation has downsides. And no matter how the Greek case is handled, it will be a precedence for the future of EMU governance.

On the website Eurointelligence, we have published an assessment of four policy options for Greece and their pros and cons that have been put forward in the discussion. We argue that letting Greece default (option I) is neither a likely nor a reasonable scenario given the current set-up of the EU. We would not entirely exclude the possibility that the EU commits serious political mistakes in handling the problem so that Greece has to call in the IMF for help unilaterally (option III), but the most likely scenario from our perspective is that the EU member states will come up with a rescue package for Greece if needed (option II). The argument then is whether this should be done in a concerted action with the IMF or not. Given the current state of governance mechanisms in the EU, the risk of political tensions within the EU and problems of legitimacy of a bail-out, we rather expect an involvement of the IMF. But we suggest that this should be clearly limited in time while, in parallel, the Eurozone should be equipped with its own European Monetary Fund and a default procedure in order to limit moral-hazard problems in future cases.

Dear Ms. Chairwoman Sharon Bowles, Ladies and Gentlemen,

Let me first thank you for inviting me to testify in front of your committee. I am very honored to be able to provide you with my expertise on the reform of the macro-prudential supervision of the European financial system.

I will base my comments on the EU Commission's proposal for a new supervisory structure. I have been specifically asked to talk about the macro supervision and in particular about the planned European Systemic Risk Board. However, as the question of how to set up an efficient and effective macro supervision touches upon the structure of the micro supervision, I will also testify at least in a few sentences on the overall planned structure of financial sector supervision.

Let me first start by saying that I think that the basic thrust taken both for micro and macro supervision goes clearly into the right direction. Given the increasing cross-border linkages between national financial institutions in the European Union, a strengthening of the European level in financial market supervision is overdue. Similarly, the idea to give an institution a special mandate to look at potential systemic problems in the European financial system is also very sound and clearly to be welcomed.

However, there are a few elements in the Commission proposal which might hinder the creation of a truly well-working supervisory structure in the EU.
Let me start with the overall planned structure and the possible consequences for macro supervision: The planned new European System of Financial Supervisors, consisting of a network of national financial supervisors working in tandem with the three new European Supervisory Authorities (ESAs) seems to be more fragmented than necessary. Given that the dividing lines between different types of financial institutions and the products they are offering are blurring, I cannot see any good reason to separate banking supervision which will be covered by a European Banking Authority from insurance supervision to be covered by the European Insurance and Occupational Pensions Authority (EIOPA) and from market supervision to be covered by the European Securities and Markets Authority (ESMA).

One thing that we have learned during the past crisis is that one should regulate all institutions and instruments the same way if they provide similar services, no matter what the original aim or legal nature of the institutions in question is. A division of supervision between different authorities always creates scope and incentive for regulatory arbitrage, meaning that certain activities might be shifted towards the part of the financial system which is most weakly supervised. While of course good coordination between the sectoral authorities might overcome this problem, the fragmentation clearly creates extra costs and possibilities for blind spots.

Related to this issue is the question why the three authorities are planned to be located in three different cities. Another experience from past crisis has been that geographical proximity matters for good supervision as well as for the exchange of ideas. Having the three agencies in three cities makes informal links and contacts less likely and might hence hinder the informal flow of information. Putting all three authorities into one city, preferably in one building, would enhance the exchange of ideas and information on all levels among the authorities.

All this might not matter as much for the micro supervision of individual banks or insurance corporations, but might matter for the macro supervision which has to focus on the big picture and on the linkages between the different institutions. Let me remind you that a number of the problems in the U.S. subprime crisis exactly originated from both the sectoral and geographical fragmentation of the supervisory structure. In addition, some central elements in the crisis concerned not only banks or insurances, but the linkages between the two sectors. For example, the insurance business of AIG did not cause any trouble and was sound. The derivative business of AIG, in contrast, created the liquidity problems for AIG which caused the near-bankruptcy of the company. At the same time, the fact that AIG was counterparty to a number of important banks in this market led the U.S. Fed and the U.S. treasury to define it as of systemic importance for the banking sector and hence to the bail-out.

In short, in order to get a good macro picture, you need to monitor the different parts of the financial system together and this could be done more easily if the micro supervision is done in a uniform, integrated structure as the information then are collected in a uniform way from the very beginning.

The second issue which I believe is problematic is the currently planned set-up and voting power in the European Systemic Risk Board (ESRB). The ESRB is supposed to monitor and assess potential threats to financial stability that arise from macro-economic developments and from developments within the financial sector. The general board is composed 33 members with voting power, namely the 27 heads of the national central bank, the president and the vice-president of the ECB, a member of the European commission and the chairpersons of the three ESAs. In addition, the general board has 28 members without voting power: a high level representative from each national supervisory authority and the president of the economic and financial committee.

What strikes me is the heavy bias towards central bankers here. The general board thus looks almost identical to the General Council of the ECB, plus the member of the European Commission and the chairpersons of the ESA. I believe it is very unlikely that such a body will come to fundamentally different views on any issue than the General Council of the ECB. The same holds for the other committees of the ESRB such as the Steering Committee or the Advisory Technical committee: They are all heavily dominated by central bankers.

Central bankers are often subject to a strong uniform thinking and intellectual capture. They have been educated in similar theories and models and the stern discipline demanded by them in communication to the outside world makes them strongly inclined to buy into their institutions predominant way of thinking.

This is a very serious problem for macro supervision: As we know from past experiences of financial fragility, financial booms and financial crisis, problems very seldom appear at the same place in the financial system twice in a row. In order to spot new dangers and potential systemic risks, a very important issue is to bring outside ideas and scenarios into the discussion process. My point again can be underlined by the Federal Reserve's failure to spot the dangers of the housing bubble: Most of the Fed governors just followed the chairman Alan Greenspan's notion that a nationwide crash of house prices was very unlikely and that the fall-out could be easily contained. There was very little, if any opposition to this thinking. Outside economists like Raghuram Rajan or Robert Shiller who warned of imminent dangers were actually frowned upon.

A second problem might arise from a conflict of interest between central bankers and the ESRB's task. Imagine a situation in which the very action of the ECB, i.e. an unexpected strong number of interest rates hikes, threaten financial stability. Would the ESRB heavily dominated by central bankers issue a warning on this danger? I assume that at least there would be some delays in spotting the danger.

An efficient macro supervision would thus have to find a possibility to get outsiders' views and fears into the central bankers' discourse. One option would be to appoint one or preferably more academics in the field of financial or monetary economics as board members with voting rights and give them resources to investigate specific risks. These members could be appointed by the European Parliament in a way that guarantees wide variety of views on the board.

A related question to that of central bankers' bias to conformity is why one wants to give the European System of Central Banks such a heavy weight in running the ESRB, given that the ECB's record for spotting systemic risks is not overly impressive. Of course, the ECB is in a very good position to collect data on financial sector exposure. For years, it has been monitoring financial sector risk. Since 2004, it has been publishing bi-annually the Financial Stability Review.

But to be frank: The ECB did not do well in spotting or reacting to the last crisis. Way into 2008, almost a year after the first tensions had appeared in the money market, the ECB was still significantly underestimating systemic risk, the risk of a substantial economic downturn and was overestimating inflationary pressure. In July 2008, when leading indicators clearly pointed to a substantial slowdown of the European economy and the economy in fact was already in recession, the ECB even hiked interest rates again. Even if the interest rate move was only 25 basis points, this move might well have aggravated the problems in the banking sector. Clearly the ECB was at this point not aware of the problems building in the banking sector even though it was supposedly monitoring that sector. I do not see any reason why the ECB should do much better spotting systemic risks in the future than it has been in the past.

Thank you very much for your attention.

We are convinced that the strangely coordinated good-cop-bad-cop game played between member governments, Eurogroup President, European Commission and other interested actors of blaming Greece and saying it has to get out of its mess alone on one day, and politically guaranteeing a bail-out the next, has proven rather useless. The rising spreads on Greece government bonds seem to prove that markets are indeed not calmed by this two-faced-strategy.

In our view, one of the underlying problems is the following: On the one hand, a bail-out is most likely to happen (how could it not in the Eurozone?). But on the other, no one really wants to say so because no one wants to give a Carte Blanche to Greece. In particular as the Greek Prime Minister yesterday put forward a consolidation programme which does not deserve this name. The measures he announced yesterday will most likely not prevent insolvency of Greece because the problems of the country cannot be solved by some minor budget cuts alone and markets will have little reason not to further increase risk premiums.

Not knowing yet how weak the Greek fiscal proposals would actually be (but expecting them to be so), we put forward a proposal for crisis management in Greece in Tuesday’s edition of Handelsblatt.

We argue that there is a danger that market reactions drive Greece into sovereign default, if politics does not succeed to construct a clear link between a bail-out promise and very clear conditionality (in terms of reforms expected from Greece).

Soverign default is not only a danger for Greece but also for other member states with high deficits such as Ireland or Spain or high debt such as Italy or Belgium. In all cases, self-fulling prophecies (i.e. risk premiums) could drive countries into fiscal disaster.

In order to calm market reactions and especially prevent contagion, we argue that the EU should immediately set-out conditionality under which countries would get rescue packages. One condition could be that the national budget would have to be approved of the European Commission and the member states, for instance in the Eurogroup. This would imply a temporary limitation of fiscal sovereignty. Such a new treaty would then be offered to any country which wants to accept it. As soon as a country signs this treaty, it would be sheltered against speculative attacks as financial markets then know that default is impossible as there is the guarantee by partners. Countries which are afraid of contagion from the Greece disease would thus find an immediate protection.

At the same time, the idea would give a bigger leverage over Greece: First, the fall-out from a Greek default would be limitied as contagion is prevented. So, if Greece decides not to agree and to continue to run an irresponsible fiscal policy, the rest of the EU could more credibly threaten to let Greece fall. If Greece agrees, however, the EU would have a much stronger tool to solve the Greece mass than the current Stability and Growth Pact. The strategy chosen so far, namely to try to oblige Greece to make promises more or less about when it will comply with the Stability and Growth Pact, is obviously no adequate means of crisis management.

From the start, the De-Larosière-Process was driven by a lack of political ambition. A few months ago, when de Larosière gave the press conference on his group’s report on Financial Market Supervision, he was asked why the report was rather unambitious (by the way, it was almost entirely adopted in the European Commission’s proposal to the Ecofin). He is reported to have answered something like he wanted to be realistic (which can be interpreted that he did not put the most reasonable suggestions in the report, but a version that may at least be debated by the EU member governments some of which do not wish to see too much interference into their own regulatory framework and their financial sector). Even de Larosière’s realism may have been disappointed by the Ecofin yesterday.

But now the next round is open. Legislation on the European Financial Market supervision will be decided in a co-decision procedure between the Ecofin and the European Parliament.

Four MEPs set the tone
Yesterday, in an immediate response to the Ecofin decision, four MEPs, all members of the European Parliaments ECON-Committee and its respective coordinators for the political groups of the EPP (Jean-Paul Gauzès), S&D (Udo Bullmann), ALDE (Sylvie Goulard) and Greens (Sven Giegold) have set the tone. In a joint statement, they immediately criticised the ECOFIN's decision on the financial supervision.

They announce that the “European Parliament will not agree to water down the new European authorities” and ask the Council to stick to the Commission proposal of a European Systemic Risk Board in charge of macroeconomic supervision close to the auspices of the European Central Bank, as well as independent authorities, which should be equipped with binding and proportionate powers concerning micro supervision.

This quick reaction is symbolically strong. Such a cross-party move is rare. It may well be the start of months of conflict between the Ecofin and the European Parliament in the legislative co-decision procedure. So one hope uttered Mats Odell, Swedish Minister for Financial Markets and Local Government, may not come true: “I hope and trust that it will be possible to reach an agreement with Parliament in the first reading of this legislative proposal."

What the MEPs statement definitely shows is that there is action in new ECON-Committee. This is good news as the Committee has a lot of potential, the Parliament being involved in key legislative projects in the co-decision procedure.

Strong majority in the EP for the four parties
The four political groups (EPP, S&D, ALDE and Greens) have a vast majority in the EP. What will be interesting to see is whether the four co-ordinators, who are all either German or French, will be able to mobilize the British and Central and Eastern European MEPs in their groups. Yet it seems more likely that they will be able to construct a majority, than that they won’t. Especially as many MEPs are currently up in arms against the Council’s move to push through the SWIFT regulation on 30 November 2009 – the day before the Lisbon Treaty entered into force and would have transferred this legislative act into the Co-Decision procedure, hence giving the Parliament full participation in the legislative procedure.

But will the regulation on the European Supervisory Authorities then be one of the first legislative acts that end up in the conciliation committee in this legislature?

It is too early to speculate, given the fact that the first reading is only just about to start. What the Parliament can do in the next months is to play the matter back to the Ecofin for a new position which would go into a second reading.

The problem that might emerge for the European Parliament is time pressure. If it is true what the four MEPs write, notably that “European citizens are awaiting effective measures to prevent new crises” these same citizens may have little understanding for a confrontation between the Ecofin and the Parliament that, up to the second reading, may at least last into autumn 2010 leaving them without improved Financial Market supervision structures. So the EP might turn out to be slightly more cooperative than yesterday’s statement sounds, if the price is to go for months’ long procedures in the conciliation Committee.

For the Ecofin, it will be politically difficult to move, given the strong position taken by the UK against a strong EU supervision both within the Ecofin and publicly after the meeting. This will be all the more true should a Tory government be elected into office in May 2010 as is widely expected.

The Commission, in constrast, may mount pressure though and re-emphasize its initial proposals which the Ecofin watered down yesterday. What will in any case be interesting in January will be the European Commissioners’ positions on this matter. The statement issued by the four parliamentary groups gives an idea of the tone in the upcoming hearings of the likely Single Market Commissioner, the French Michel Barnier, and the proposed Finnish EcoFin-Commissioner, Olli Rehn. Both are likely to be questioned over the issue in the Parliamentary hearing. So is the Commission’s President Barroso who may feel he needs to position himself strongly given the fact that his last Commission was strongly criticised of being to lax on regulation issues.

If the Parliamentarians do not move away from the position they took yesterday and if they construct a majority against the Ecofin-proposal, the Finance Ministers may be surprised by the EP’s action. The Parliament’s opposition may even reach the level and attention it gained when stopping the first version of the Service Directive a few years ago.

Sounds too good to be true? Right. It is not that Merkel and Westerwelle have found a new way to make debts simply go away, but they are rather resorting to an accounting trick. The idea behind all this is to install a special purpose entity which now borrows something like €40bn from the capital market and uses the money in future years to pay for deficits in the social security system. Thus, the recorded deficit for this year would skyrocket, but it would be lower in the years to come, making it possible to meet German constitutional requirements for deficit reduction even if taxes are cut.

In fact, it is well possible that such an accounting vehicle might well put he future budgets at least within the words of the German constitution. The German laws for public finances often only look at the legal nature of a transaction, not at the economic relevance behind it.

Unfortunately for the new coalition, however, it is very unlikely that this Enron-like accounting trick will actually get Germany off the hook when it comes to the Stability and Growth Pact. This pact prescribes that the combined deficit of the public sector must not be bigger than 3 percent of GDP. In addition, the rules of Eurostat differ from national rules. The basic principle of the Eurostat rules is to look beyond legal form and at the economics behind a government transaction. Thus, proceeds from privatization do not lower the government debt as a privatization is just a change of assets. Moreover, if the government is repayed a loan it had given to the private sector before, this transaction does not lower the public deficit according to the Eurostat measurement even if it lowers current borrowing by the government in question.

Following these rules, the accounting approach envisioned by the new German coalition government would not help to keep the German deficit within the SGP limit for the years after 2010 and it would not increase the deficit this year. While the details are not yet known and Eurostat has not issued a decision, borrowing for a special purpose entity in 2009 would most likely only count as a financial transaction not to be included in deficit calculations. The government has borrowed, but it keeps the cash at hand. As for a normal company, the net worth has not changed. So the deficit remains unchanged.

Only when the social security systems (which – remember – are part of the government sector according to the Eurostat rules) spend the money and actually run the deficits in 2011 or 2012, this will be recorded as a deficit for the German public sector according to the Eurostat rules no matter when the money was borrowed. If now the new government adds tax cuts to these deficits, it is very likely to breach the SGP's 3-percent limit and will hence come into conflict with the SGP.

Why this needs to be the case in order to make the SGP workable shows this little thought experiment: If the plan of the great coalition really would be accepted, what would keep i.e. Mr. Sarkozy from borrowing €300bn this year, putting it in a special purpose entity, having this entity investing the money in short-term French government bonds and spending the money in the years to come? Clearly, this year, overall borrowings would be enormous, but if the entity at the same time buys government bonds with a shorter maturity, France might be able to borrow that much. And Mr. Sarkozy could continue to run deficits of the magnitude of 5 percent of GDP or so for years to come without coming into conflict with the SGP.

While the drafters of the SGP can be criticised for a lot, they took some care in drafting the technical part of these rules. Germany has always frowned at other countries which used Enron-like accounting for the public balances to conform with the SGP. Now Germany is starting to lead the pact when it comes to accounting alchemy.

Foreign or European affairs were strikingly absent from this summer’s electoral campaign, which had started shortly after the European Parliamentary elections of June 2009. With the exception of the Linkspartei which advocates a swift withdrawal from Afghanistan, none of the parties sought profile through foreign or European policy issues. Unsurprisingly, the FDP does not diverge decisively from the European policy conducted by the outgoing grand coalition.

The grand questions of integration
As far as the EU’s deepening is concerned, the German Liberals fully converge with the CDU and the SPD in their support for the Lisbon Treaty. But like the other two parties, they have not put forward any further reaching proposals, neither for the EU as such, nor with regards to specific policy challenges. Chances are hence low that Germany assumes the much requested leadership role that would match its economic and political power of the EU.
Interesting, though, is a sentence in Westerwelle’s statement on the German Constitutional Court’s ruling on the Lisbon Treaty and the role of the national Parliaments in controlling competence transfers: “The necessary democratic legitimation needs to come from the citizens, not governments”  (quoted from IP Global Edition 09/10 2009, p. 8). If taken by the word, this idea could serve as the starting point for a debate tackling the fundamental problems of legitimacy of European integration, revived but unresolved ever since the Constitutional Treaty failed its ratification in referenda in France and the Netherlands in May and June 2005. However, given the low profile the FDP has recently taken on EU issues, from today’s point of view, it seems more likely that the FDP will join the CDU in its executive-based approach to generate legitimacy of European decision-making by the output it produces, while not taking a pro-active stance on questions of input legitimacy (e.g. the role of the EP and European parties, direct forms of participation, etc.).

Enlargement
Regarding the future widening of the EU, policies will not change in substance either. While remaining open to an integration of the Balkan states, Germany will not do more than officially respect the fact that negotiations are underway with Turkey – and emphasize that these do not automatically lead to Turkish EU membership. Leading FDP figures have recently repeated that they do not see Turkey to be ready for EU membership in a mid-term perspective, while not repeating its hostility towards Turkish EU membership that emerged in the party around the year 2002. As long as France keeps is skeptical stance on Turkey and continues to delay negotiations, the new German government will see no need to express itself in a clearer way. If Turkey’s EU membership becomes less and less likely, the challenge for the German government (as the EU’s largest member with a less strained relationship with Ankara than for instance Paris) is yet to engage for as close and constructive a relationship with Turkey as possible, given its strategic importance as a major neighboring power and a key partner in Nato.

Coping with the crisis
As far as the further handling of the Economic and Financial crisis is concerned, a centre-right coalition would probably pursue most of what the grand coalition has so far done. While the FDP would probably be less obsessed with bankers’ bonuses than the outgoing government was ahead of the Pittsburgh G 20 meeting, there are no signs so far that the Liberals intend to tackle some of the real pressing issues such as global imbalances, creating truly impactful supranational financial market supervision or tackling divergence in the Eurozone.

Fiscal policy-wise, a German centre-right government will struggle with the promises of both parties to lower income taxes, while attempting to reduce deficits and public debt. Much depends on which common stance both parties find in the coalition negotiations. Especially if Germany should manage to reduce deficits below the current forecasts (there is increasing evidence that it will underscore the forecasts (4,7% of GDP in 2009 and 6% in 2010), a German centre-right government would probably attempt to push the fellow Eurozone members towards budget consolidation while simultaneously attempting to strengthen the coordination of structural reforms as part of the overall economic policy coordination in the EU. It would thereby run into conflict for instance with France which has a distinctly different position on the right exit strategy, given its strong reliance on domestic consumption. The German answer to the question of how to tackle diverging competitiveness within the Eurozone will hence not change: it’s by “doing one’s homework” in terms of structural reforms, wage moderation and controlling if not reducing unit labour costs. Meanwhile, some of Germany’s partners increasingly feel (and voice) that Germany’s export-led growth strategy combined with budgetary consolidation has elements of free-riding.

Identifying who is in charge
Pinpointing the name of the next foreign minister and reviewing his key statements on European affairs yet does not tell us much about who will actually be steering European Union matters in the next federal government. Two questions are usually raised after general elections: The first one is who acts as the key coordinator of European affairs, the Foreign Ministry or the Chancellor’s office. Under the outgoing grand coalition, tasks were formally shared between Chancellor’s office and Foreign Ministry which acted as coordinator, but it showed that the former took the political lead especially under Germany’s EU Council Presidency in 2007. The second question is who will have the lead on European economic affairs. Will tasks continue to be split between the Finance Ministry (concentrating on issues related to the Stability and Growth Pact) and the Ministry of Economics (which was responsible for most other matters of economic policy coordination in the EU such as the Lisbon Agenda etc. under the grand coalition)? Or will the Finance Ministry re-become the key actor it used to be under the Red-Green coalition lead by Schröder up to 2005?  In this case, the Unit that moved from the Finance Ministry to the Economics Ministry with the start of the Grand Coalition could move back. Theoretically, but this is against German tradition and would make it more complicated to satisfy both the CDU’s and the FDP’s appetite for key economic portfolios, both ministries could also be merged to a single Ministry of Finance and Economics as is the case in some fellow EU member states. These are also points to be kept on the watch list during the coalition negotiations in order to assess who is in the driving seat of Germany’s future European policy.

Read the full column at the Project Syndicate Website here.

There is also a longer policy paper on the issue which has just been published at the Stiftung Wissenschaft and Politik and can be accessed here.

Prior to this change, the German constitution had a simple rule: Outside times of "economic disequilibrium", the government was not allowed to borrow more than it was spending on investment.

From now on, the rules are much strikter. According to the new rule in the constitution, the German federal level will only be allowed to have a structural deficit of 0.35 percent of GDP from 2016 onwards. The German Länder will not be allowed any structural deficit from 2020 onwards. Only in cases of "desasters outside the control of the government", a deviation from this rule is allowed. (See for a previous critique http://www.euro-area.org/blog/?p=190)

This means that the German constitution now forces a very harsh austerity stance one Germany for the coming years. Most recent forecasts include a structural budget deficit for 2010 of 4 to 5 percent of GDP. If the government wants to bring this down into the range of constitutionality before the end of the transition period, it would have to start rebalancing its budget very soon. As most of this structural deficit is now at the federal level and has thus to be all but eliminated by 2016, one can expect an extremely tight fiscal policy over the coming years. In order to reach this target, a consolidation effort of almost 0.8 percent of GDP is needed each year from 2011 onwards. Should there be more need for stimulus in 2009 and 2010 than forecast so far, the necessary consolidation effort will grow accordingly.

While the constitutional rule might well prove to cause a lot of problems at the technical level of operating it (as it uses a HP-filter like procedure to estimate structural deficits which tend to be revised very strongly several years into the past), it is very likely that German politicians will try to stick to it before they change it again.

Moreover, changing this rule again will prove very hard: Even the grand coalition only got about 10 more votes in the Bundestag than it needed to change the constitution (such a change needs a two-third-majority both in the Bundestag and Bundesrat). In times of normal-sized coalitions, it will prove much harder to mobilize such a majority. Moreover, if the grand coalition continues after September 27 and the Social Democrats will lose as much as the polls predict, even the grand coalition will not be able to change the rules back again.

For the rest of EMU this means that after the crisis, Germany will consolidate its budget much earlier and much quicker than the rest of Europe. Consequently, domestic demand will remain weak in Germany. Thus, in the (hopefully) coming recovery, not much of a growth impulse can be expected from EMU's largest economy.

The manifesto recognises that "the euro has played a very effective role in protecting European economies in the context of the global financial crisis. More must be now done simultaneously to  reform the financial markets, counteract the recession and re-launch the economy to create new growth and jobs.” It hence wants to turn the Lisbon Agenda into a “European strategy for smart green growth and jobs [...]  which will create 10 million new jobs by 2020 – with two million in the renewable energies sector alone – and help make Europe a world leader in innovation, new green technologies and products. and in the implementation of which the social partners should play a dominant role.

The SPE's new strategy is formulated against the background of climate change and seeks to transform "transport in Europe into the most efficient, affordable and ‘clean’ for people and businesses”, expand “energy and broadband infrastructure for the purposes of economic modernisation”, enhance “cooperation between the EU, governments, regional and local authorities to improve energy efficiency and reduce consumption” and to “raise investment in research, development and innovation to levels higher than those in the US”.

Logically, the EU budget needs to play a larger role in this, by serving to “improve living standards and foster social cohesion and growth throughout Europe as well as supporting convergence of the least-developed EU regions, not least in the new Member States. “ The SPE also wants to increase EU public spending on education.

The SPE does not say much on the question how this stronger role of the State both on the national and on the EU level should be financed. The only obejctives regarding the income side of the budgets are to put “an end to tax havens, tax avoidance scams and tax evasion, and step up the fight against money laundering in the European Union and globally so that all market actors pay their fair share of tax to the countries in which they operate.”

This agenda should be supported by a “European Central Bank [that] must encourage growth and employment while maintaining price stability”. Apart from this, the manifesto remains strikingly silent on macro-economic cosiderations.

The SPE has a rather strong agenda on re-regulation of financial markets – very much in contrast to the PPE (see previous post): “regulation should cover all financial players and implement a new standard for transparency and disclosure.” It asks for “rigorous capital requirements for all financial players, and limits on excessive borrowing and bad loans to prevent excessive risk taking and debt.” It wants to improve the European system of supervision and intends to force financial institutions to state all risks on their balance sheets. It also criticises detrimental short-selling which “should be curbed by regulatory authorities.” It wants to monitor and regulate hedge funds and private equity funds more effectively. Many of these points are actually currently under debate in policy makers' circles. There is little controversial to this.

The SPE's program plays on economic populism when it asks for limits on top executive pay and bonuses. It also demands to improve workers’ rights to information and consultation during all takeovers and that employees paying into pension funds know where and how their money is being invested.

Opinion surveys on specific questions of financial market regulation, or the regulation on executive pay suggest that the SPE should have received a larger share of the votes than it actually did. One of the main reasons which this was not so is probably the strategic error of the SPE not to put forward a Socialist candidate for the post of the President of the European Commission.

Another explanation is that at least some of the SPE’s demands are not very credible or do not seem to be overly consistent. In a lot of EU countries, social democrats and socialists actually controlled the finance ministry at least over a significant time period before the crisis, but yet failed to act decisively to regulate financial markets. A good example is Gordon Brown who for a long time was supportive of deregulation for financial markets and financial institutions, but also the German finance ministry which has been controlled by social democrats for more than a decade during most of this time was pushing for deregulation of hedge funds and private equity funds.

Having been in favour of a small state and deregulation consistently might be more attractive to voters than advancing deregulation and a small government in times of a boom and rediscovering big government and regulation in a crisis.