The Euro Is Worth Defending

The euro has been of enormous benefit to both the Eurozone and to Finland, and it is worth defending in its first major crisis.

A shared currency and fiscal politics has made conducting business stable and predictable. It has eased trade and transport, strengthened internal markets and maintained low interest rates. The cost of borrowing money in Finland is now lower than during any other time of Finnish independence.

To defend the euro means to be ready to take the necessary corrective steps. While doing so, we want to ensure that these changes have the acceptance and trust of citizens.

 The Crisis Is an Opportunity for Structural Renewal

Difficult decisions to balance debt and return spending to a sustainable levels lay ahead for the Member States. Many countries will be forced to introduce spending cuts and increase taxes, but they should simultaneously also remain capable of structural reform.

These structural changes may, depending on country, mean such things as the renewal of local administration, dismantling of professional immunities, the harmonisation of work and social support structures or pension reform. Increasing the productivity of the public sector is also necessary to prepare for an ageing population and the growing need of care for the elderly. This also applies to Finland.

Any crisis is an opportunity for renewal. If the EU were to achieve structures that support labour and an efficient utilisation of tax revenue, structures that would meet the needs of the future rather than the past, then there would have been some positive and necessary outcomes of this crisis.

At their best, balancing programs can also serve to weed out corruption and restrict the ‘black economy’. They can be a good method of reducing any undue benefits accumulated by political elites.

It is necessary to implement the balancing programs in a just way, so that people can accept a tighter fiscal policy. This is why the wealthy must carry their part of the burden and the most exposed parts of the population must be spared cuts.

Let’s Draw up Fiscal Rules to Stick To

Every EU Member State independently decides their state income and expenditure. Limits to their state finances have been set in the Stability and Growth Pact, but not been followed.

The EU has not taken active measures against excessive debts or deficits before this crisis. Only this autumn the EU has approved a legislative package that tightens the coordination of fiscal policy.

This package attempts to reach tighter budgetary discipline by increased transparency and tracking. Simultaneously, sanctions have been proposed for those who repeatedly refuse corrective action.

Limiting Internal Tax-Cooperation

Also the major decisions on tax policy have been left to the Member States, with the exception of the value added tax. Each country has been able to decide on its own, for instance, how high the taxation on corporate gains should be.

Internal tax-competition has intensified an already harsh global competition of who offers corporations the lowest tax rate and cheapest environment.

A large number of Member States will, in the near future, have to balance their budgets. This is much easier to achieve if states can gather a reasonable part of their taxes from corporations.

That some countries offer low taxation is one part of the problem. Another is that some countries or regions offer a veil of secrecy, behind which one can avoid taxation.

This veil can cover up ownership relations, bookkeeping or bank transfers. By increasing transparency, the OECD and EU can strengthen their tax gathering and create a fairer financial environment. Action taken against tax havens until now is far from sufficient.

The EU has for years tried to strengthen the tax levy on deposits. The Savings Directive currently in force still contains gaps that enable tax evasion.

Improve the Solidity and Insight of Financial Institutions

Out-of-control credit expansion is one of the central reasons of the current financial crisis. There is an attempt to regulate lending by tightening the capital requirements in the EU. These requirements regulate the lending capacity of financial institutions in relation to their own capital.

Tightened capital requirements have met strong opposition in the US, causing concern that they may not be passed by the EU. New demands for increased capital requirements may increase the price of lending, but then, financial crises like the one we are experiencing are even more expensive. Thus, restricted lending and reduced risk-taking are justified even if they increase the price of loans.

The supervision of financial institutions in the EU has already been improved by strengthening financial oversight. This is necessary, for supervision of individual financial institutions on the national level does not expose risks connected to the functions of the whole system.

In November, the Commission also presented new proposals to improve the functioning of rating agencies. In order for information offered by rating agencies to be trustworthy and reliable, actions are necessary to ensure their independence and freedom from conflicts of interest.

Restrain Speculative Finance Through a Transaction Tax

The Commission has proposed a tax on financial transactions within the EU. The tax would apply to a large number of financial institutions and cover a wide array of transactions.

The financial sector has been abundantly supported with public funds, and it is justified to include the sector in covering the costs of the crisis.

A second reason for the tax would be to restrain speculative trading, which would stabilise markets. The Commission estimates that the tax would limit especially automated trading on short-term speculative investments.

The speculative economy has increased costs for all, so it is justified to also distribute the gains to all. The tax gains foreseen in the directive proposal are around €60 billion. For comparison, the Finnish state budget for 2012 is around €52 billion.

Reasonable Interest Rates While Maintaining Incentives

For a long time the common currency kept the interest rates of the Member States at very similar levels. Only as a consequence of the crisis did the so called “risky state obligations” diverge and rise remarkably.

One could think that the markets act correctly when national risk is included in the interest paid by nations. On the other hand, high interest rates make their debt burden hard to manage.

One proposed way of lowering the interest rates of risk countries is the Eurobond; common and shared EU bonds. While a collective guarantee of debt would lower interest, the fear is that common liability would remove incentives for risk countries to carry out the necessary but painful reforms.

The Commission has presented their thoughts on possible Eurobonds and on how they could improve the credibility of Member States. If this route is taken we face a long process of treaty changes.

Expanded Tasks for the European Central Bank

The main task of the European Central Bank has been to maintain price stability. The prevention of inflation is important, but the tight restriction has hampered the ECB’s actions in exceptional conditions.

As the crisis has advanced, the bank has had to combat a credit crunch by buying bonds of troubled countries. By doing so it has been forced to exceed its original mandate.

The ECB has a large role to play in mastering this crisis. Therefore its mandate must be expanded.

Member States need the support of the ECB in order to avoid bankruptcy. The balance to this support is that no state should run a long-term, intentional deficit. If you live on borrowed money, you should lose a part of your independence.

Growth from a Green Economy

Estimates of future economic growth in the EU are modest. The current crisis is one factor, but a combination of ageing population and necessary future adaptation measures, familiar to Finns, is the underlying cause. Many countries are not competitive, and growth can no longer be fuelled through unsustainable loans.

The EU competes for the global distribution of labour with China and other rising economic powers. We can’t compete through cheap labour or lax environmental regulation, so the EU must rely on competence and innovation and find a suitable slice of the global task division.

One such fast-growing slice is offered in the demand for tools that solve environmental problems. Global energy production, mobility and consumption must, in a few years, be placed on a sustainable base. This needs a massive amount of competence and workers. For the sake of the climate and for itself, the EU should speed up green growth, based on factors like improved energy efficiency, speeding up renewable energies, sustainable transport and efficient resource use.

The financial crisis has diverted attention from our largest crisis, climate change. Unfortunately we do not have time to wait for a better economic trend before seizing climate politics. Now is the time to look for measures that help solve both crises. As a new recession looms, countries that can do so should stimulate or at least avoid front-loaded cuts.