Finance and Economics as Political Issues
Europe’s economic crisis will not be quickly overcome. The challenge will test politicians while affirming their vocation.
The five years of the current economic crisis have focused attention on two pairs of two questions which underlie the complex, endless, often urgent debates on specific policies. Although the questions seem simple, the answers cannot be simple.
How does the finance and banking sector relate to the ‘real economy’? How ought it to relate?
How does that real economy in turn relate to the common good? How ought it to relate?
These questions of the right relationship between the finance sector, the economy itself, and political responsibility will resonate for years to come. Commentators speak of the ‘doom loop’, as governments assume ever greater debt to save the banking system, sometimes then facing sky-high borrowing costs. ‘Orthodox’ growth policies rely on public finance, and new debt cannot cure over-indebtedness: which means there is no easy short cut to crisis resolution.
According to the Bank for International Settlements (BIS) central banks have taken extraordinary actions to prevent financial collapse. Rightly, it goes on to argue that central banks cannot by monetary policy alone assure sustainable economic growth. Others might say what the BIS does not. Central banks are even less capable of targeting growth to where it is most needed. Politicians cannot delegate to bankers their own responsibility.
Recently, though, politicians have been energetic in constructing two foundational responses to the crisis.
In June, the Council of the EU agreed to turn into EU law the set of international standards known as Basel III. The EU would thereby enact the measures endorsed by the G20 leaders in 2010. While the Basel agreements themselves target only about 120 ‘internationally active banks’, the EU legislation would apply to 8300 European banks. This ambition to control the disastrous irresponsibilities of the finance sector, and to correct previous regulatory failings, is remarkable: but one must wonder whether the capacity of the European Central Bank (ECB) can be sufficiently enhanced in time (before late 2014), and whether this regulatory burden can be sustained. Who will control the ECB?
The following week, immediately before the EU Summit, the 27 finance ministers agreed a radically revised set of procedures for the rescue of banks. The sums involved are astonishing. Between 2008 and 2011 the EU spent the equivalent of a third of its entire economic output on saving its banks. The new rules on bail-outs, still be to be debated by the European Parliament, come into effect only by 2018, so years of deep uncertainty lie ahead.
Despite the criticism, sometimes justified, about the fragility of deals concluded overnight by exhausted politicians with divergent national interests, it is impossible to imagine two such foundational agreements, which extend beyond the Eurozone to all member states, without the structure of the EU political institutions.
Frank Turner SJ