“The Most Urgent Thing Is To Finish The Banking Union To Break The Sovereign Banking Loop”

"The most urgent thing is to finish the banking union to break the sovereign loop"Kalypso Nicolaïdis, professor at the University of Oxford

Diverse European races flow together in Kalypso Nicolaïdis. Born in Paris, she grew up in Greece, her family´s original country. She also has Spanish heritage through her grandparents. Because of all of this she says she has a vision of Europe filtered through the southern countries. Nevertheless she lives and works in Oxford, where she is Professor of International Relations at the University. In her last visit to Madrid she gave a conference in the Fundacion Areces about European economic governance.

Now that the European construction is being hit by populism and after 10 long years of crisis, many European citizens feel that the European Union is imposed from above. Do you share this feeling?

Absolutely, that’s one of the main reasons for the European crisis, the loss of trust by European citizens, that their leaders represent them, represent their interests and that they even don’t know what the leaders are doing. For a long time it was fine in the European Union because it was dealing with issues that were not so controversial. Even trade, well it can hurt but people accepted that trade globalisation is a good thing, it was not so visible. But we know that for the last 25 years since monetary union and the Maastricht Treaty is has been a long story that there has been an underlying democratic crisis in the EU where people have said we are governed more and more by the centre, by Brussels, but we have less and less control of it and knowledge of it. This was true for 25 years. But, of course the financial crisis, and then the refugee crisis and all the different crises that happen in Europe made this point much more sensitive because suddenly this was not an abstract question, it was about issues that people felt in their pockets, in their homes, in their neigbourhoods. So suddenly they were asking who was taking the decisions that will affect our lives.

The euro has turned 20 in 2019. Has the single currency been a succesful experiment?

Many people in Spain , as well as in my own country Greece, and some in France too, but of course in Southern Europe feel that the euro equals two very bad things. In terms of efficiency people associate it with unemployment and austeriy and in terms of legitimacy they assocate it with your first question, something imposed from above that tells the government what to do. Then you could ask, well people perceive that, but it is true, or maybe it is legitimate, maybe it is right for Brussels to tell Greece or Spain what to do. We can discuss that but the first point is that this is what the euro have brought to the European polity, economic policies that have represented the hardship of a lot of people, and moreover, policies where the costs, the sharing of the risk has been very unequal, not only the showing of prosperity and growth and money but the sharing of risk has been very unequal. And it´s always the same people who bear the risk in Europe.So to that extent, this is why we call this euro crisis a crisis of legitimacy of the whole EU, a spillover of the whole project. So in that sense, it has’t been a success. However, on the other hand, in the EU nothing is black and white.

Black and white, like in life… Do you mean then it can be also considered a succesful experiment?

Well, at least no so bad., and even very good sometimes. Interestingly, in these countries of the Eurozone, citizens more or less continue to support the euro and the bigger project of Monetary Union because they feel that it binds them to a polity that is more reliable and credible than that of their own countries like Greece or Spain and they trust Brussels more than Madrid or Athens and they understand that the euro has been a mode of transaction that has brought Europe closer together. They see also that the euro represents more power for Europe in the world. When Trump uses the dollar to counter European policies or say Iran or elsewhere, people can see the advantages political, binding, external.The problem is that you can say analytically that the euro indeed has been resiliant that the shock that the EU went through in 2008 was an external shock and that in spite of that shock coming from Wall Street, the euro system has allowed for a certain flexibility of reform in order to manage this crisis.

But thirdly, we need to see that the euro has flaws, very deep flaws, that the EU has flaws that the euro brought to the surface like the fact that it tends to use the law in a rigid way and that makes it harder to adapt. The politicians who have to take emergency decisions in intergovernamental summits are not always up to the task and it they aren’t what should we do? Fundamentally, the euro structure did not include a stabilistation mechanism if there was an external shock, so the shock has hit in a very asymmetric fashion and there hasn’t been compensation for that except for the bailouts but they often happened too little, too late.

We have seen that the European central bank has bought time for the politicians but instead of taking advantage of this time as much as they could, we have seen that the Comission and the Brussels institutions have resorted to coercive ways of addressing the euro crisis and this has been the core reason of the crisis because now suddenly in the eyes of the our citizens the EU represents these coercive mechanisms that’s not what it was supposed to be.

What about the ECB’s work managing the euro crisis? Mario Draghi will leave the institution at the end of the year. The task has not been easy for him, has’t it?

Absolutely, for the implications of the decisions he has made, he was like almost a God, his uttering words created facts on the ground. His words were credible. So when he said in September of 2012 “we will do whatever it takes”, the same sentence uttered by some else would have not worked. So the tone had implications for billions, if the capital would flow outside bail-out countries and the eurozone. So his words mattered. He has been excellent at managing and signalling. But secondly, he had to take material decision not just rhetorical., and these material decisions have involved shepherding in his board representatives of completely different countries on one hand. He had to bring together two very disparate groups. On the one hand, his board and the technical people and those much more conservative want to interpret OMT as no bailout, indeed the Germans, versus those much more liberal countries who wanted to use money as a proxy for some sort of transfer and he of course managing between them, leaned towards using Quantitative Easing to buy back national bonds and that was kind of a proxy for national bail outs. He was able to push the boundaries, the limits of the aceptable for the more conservative but he didn’t go so far to lose their trust, almost always. At the same time, he was part of the Troika, intervening in specific countries and having to work with external bodies such as the IMF, the Comission, the Council, the politicians and shepherded them, also help to bring those to certain policies for their core countries finding again an equilibrium or balance between intervention for structural reform and their own credibility and legitimacy and he caný go too far.

There are two different goals, connected but different. So if here was someone who wore different hats, juggled different balls in this crisis. For me he has been one of the saving grace of the euro crisis, it is the role that Draghi has been able to make the ECB play in this whole story. We will be missing him, but we don’t know who will replace him.

Which would be the guidelines for the next team in the ECB?

To really have finished the Banking Union. That’s clearly the most urgent thing to break the sovereign banking loop. Even in this country, it is still an issue, but in Italy it is the biggest threat. We need to finish the banking Union and how you deal with non-performing loans, potencial bankrupcy and deposit insurance and so on. And of course that will take someone who can coral especially the Germans which is why some people would prefer the President of the ECB to be a German, an enlightened German, and that’s not an oxymoron. And of course we have the capital Union which is linked to the Banking Union. The EU doesn’t have fiscal capacity to really place a stabilisation function, a shock absorber function, at least it needs to recover a capital union. But then the core question becomes how is this done while ensuring that the social fabric of the different EU countries doesn’t further disintegrate. So, you can´t make fast changes, we have to create safety nets, we have to make sure that small banks, small depositors do not lose their money. And special attention to the social implications of monetary reform.

The next European elections in May will also replace the current Parliament. Almost all political analysts see the vote as a threat to EU unity because of the possible rise of populism…

Yes and no. We can agree with the diagnosis, as it stands now. Things change very rapidly in the EU, but there is likely to be quite a populist push. But on the other hand, how much of a threat is this? If the populist push is a political reflection of something that is happening in European societies, then in some ways it’s a good thing because it´s a wake up call, and finally perhaps, if there are quite a lot of Eurosceptics in the European parliament, it will finally help create a space, a political space, where there is more conversation between the integrationsts of the more mainstream traditional parties, the Christian democrats and social democrats which have dominated decision making in the EU since its creation and these anti-systemic parties. I think one of the big flaws of the EU in the last ten years in managing the euro crisis has been indeed that all of the push back against some of the approaches of the EU has been ghettoised, pushed to the margin, including in the European Parliament, instead of engaging. And the reason why I think engaging can be fruitful is several fold. One is because I don’t think it serves European conversations to be wedded to the tyranny of dichotomies, this is the Manichean dualism, us versus them, those who want more Europe, those who want less Europe. I think that frame of the European debate is wrong. It does not do service to Europe, because those who want less Europe are pushed away as if they were anti-Europe, which is not the same thing. So the frame needs to change. And the perceived process needs to change, that is that these groups, some of them, one of my colleagues in Brussels, Natalie Black, wrote a book on the European Parliament which showed there are different kinds of Eurosceptics, at least four kinds, and some of them are criticising policies, not the polity, not the existence of the EU. They´re just very critical of what the EU does. So we need to distinguish between those who criticise what the EU is, I call them existential Eurosceptics, and those who criticise what the EU does. They can be transformative. They want to change the polity. Sometimes they go too far, sometimes not, but they have things to say. And if integration continues to refuse those who argue that, then we will be caught in this tyranny of dichotomy. So there is a silver lining even though I’am a passionate European, and passionate European integrationist, I think this populist rise, there is a silver lining to it.



About the Author

Julia Pastor
Julia Pastor has broad experience in business writing for Consejeros Media Group at Consejeros, Consenso del Mercado and The Corner. Previously, she worked for the financial news agency GBA and contributed to El País Business. She holds a Master's in Financial Journalism and a degree in English from the Complutense University in Madrid.