Speech by Guy Verhofstadt, President of the Alliance of Liberals and Democrats for Europe (ALDE) Group in the European Parliament at the Centre for Strategic and International Studies (CSIS)
28 February 2012 - Washington D.C.
"Only a United States of Europe can save the Euro"
Ladies and Gentlemen,
I told you in 2006 that we absolutely needed a United States of Europe.
At that I was not referring to the dream of Victor Hugo or Winston Churchill. No
I quoted an American, George Washington.
Over two hundred years ago in a letter to his European friend, the Marquis of Lafayette, Washington wrote, and I quote:
"I am a citizen of the greatest Republic of Mankind. I see the human race united like a huge family by brotherly ties. We have made a sowing of liberty which will, little by little, spring up across the whole world. One day, on the model of the United States of America, a United States of Europe will come into being. The United States of Europe will legislate for all its nationalities".
Today, I am back six years later, but in a very different context. Europe is in the midst of a serious crisis. The European Union and particularly the Member States of the euro area, indeed, are in great trouble. For about three years now, a debt crisis is challenging Europe, is challenging the future of the European Union. The outbreak of the so-called Greek crisis in December 2009, was followed by a Portuguese financial crisis in 2010 and an Irish last year. So called technocratic governments were installed in Greece and Italy. More technical in Italy, than in Greece I have to say as Papademos might be a technocrat, but the rest of his cabinets are old wolves of the Greek political scene. There was also a change of guard in Madrid. So without exaggerating, we can say that the euro area is confronted with the most severe test since the birth of the European Union. And we have to recognise, the 27 Member States of the Union and particularly the 17 Member States of the euro area, still fail to combat this crisis effectively. We are still confronted with growing debts. With rating agencies downgrading banks and countries alike.
Let me first answer the question, what went wrong?
First of all, I think we have made a big strategic mistake at the beginning, when we launched the euro. We launched a monetary union, but we did not install an economic and fiscal union. And today we all know that this is impossible. A single currency with 17 different governments, 17 different bond markets, 17 different economic strategies can simply not work. There never was a currency, and there is no currency in the actual world without a state’s authority. A state's authority to guarantee the economic, financial and political conditions to do so.
Nevertheless, the European decision-makers thirteen years ago, thought the opposite. Thought that it was possible to introduce a single European currency without the necessary means and instruments to do so.
Summarised in a nutshell, they thought to be able to have a single currency solely based on two basic rules. First, no public debts higher than 60%. Second, no budget deficits higher than 3%. Do not misunderstand me these basic rules proved to be sound, I do not criticise them. But, the founding fathers of the Eurozone made the mistake not to foresee a public authority on the Eurozone-level to impose them.
A public authority strong enough to prevent Member States to breach the rules. A public authority with the necessary means and tools to sanction them, to penalise the sinners.
In fact, the founding fathers of the euro assumed financial and economic discipline within the Member States would be strong enough. But we have to recognise: from the very start of the Eurozone in 2002, Member States failed to do so. France and Germany were first to break the rules. But as long as economic growth was in the air, the Eurozone could survive this, could survive a few sinners. However, following the world financial and economic crisis of 2008, the Eurozone as well as many other countries got into big trouble. All over the world, but particularly in the US and the EU, public authorities pumped billions of dollars and euros into collapsing banks and faltering insurance-companies. For the European Union alone, taxpayers since 2008 granted aid and provided guarantees of a staggering €4600 billion euro, more than 6 trillion dollar.
At the same time, public authorities mobilised other billions of dollars and euros to save their economies and their jobs. All this was the real cause, I guess, for public finances to collapse.
This – in my opinion – is the deepest root of the Eurozone-crisis. The fall-out from the financial crisis combined with the absence of a genuine Eurozone-authority. That is the origin of the euro crisis. And not Greece. The Greek crisis is in my view only the trigger, not the cause.
An other cause of great concern in this crisis around the euro, are the spreads, I mean the unsustainable differences between the Member States of the Eurozone. A single currency for 17 Member States can not survive if one Member State has a public debt of 150% of its GDP (Greece today), while another Member State only bears a debt of 7% (Estonia). The same counts for fiscal deficits, actually ranging from -1,7% (again Estonia) to -32% (Ireland).
Naturally the most killing spread concerns the differences in interest rates to be paid on longterm bank loans and national public bonds, ranging now from less then 2 % for Germany to around 6% for Italy, 12% for Portugal, 30% for Greece. Never have the spreads in the bond market been so high. Before the financial crisis the average spreads measured against the German bund were 19 basic points, today they are above 200. Ten times more!
But ladies and gentlemen, not only do I think we have made strategic mistakes. The last ten years we also used the wrong method to tackle our problems in Europe. We used a weak method, the intergovernmental method.
To be frank, markets simply do not believe that independent Member States can produce enough discipline and enough solidarity to control themselves, to penalise themselves and to maintain a single currency. That is what we in fact lack today: discipline and solidarity. What is so striking is that for the first time in recorded history, markets are not asking for more deregulation. No, they are requesting more unity in Europe, a transfer of power to the European institutions.
The biggest friend of the European integration, this time around is the Standards&Poor not the EU Member States. In their report Standards&Poor have called for more European integration, a real economic government, a real economic and fiscal union.
To end my analysis of this crisis, I think that we have also to recognise that we made tactical mistakes. What we have seen in Europe is a political leadership crisis that was hesitating taking half-measures, simply reacting to the dramatic facts and events, lacking a global approach, lacking global vision.
So this brings me to the essence of my message today: how do we grasp control over this crisis? How do we overcome what can become a systemic crisis?
I believe that the salvation of the Euro is linked to the future of the European project as a whole. The solution lies in the rapid promotion of a financial, economic and political Union for Europe, the establishment of a real federal Europe. A Union based not just on discipline, as suggested by the conservatives, nor solely on solidarity, as proposed by the socialists.
What we need, I repeat myself, is both discipline and solidarity. They are two faces of the same coin.
We need a strong fiscal pact. We need a common bond market. We need more supra national or federal authority. What we don't need is intergovernmental solution, where decisions are pre- cooked by a few powerful European countries. Who put their national interest above the European interest.
At least we have to set up what I call a European collective redemption fund. Originally, it is a German idea. Made by so called five wise economists who advise Mrs. Merkel. It should be a fund of 2.3 trillion euros that mutualises all debts above the 60% mark. A fund that would reduce interest rates paid by all member states - even the triple A countries like Germany. A fund that would be temporary. A fund that would convince the markets, convince them better than half measures that we have taken in the last two years.
Besides one or other form of common bonds it is also necessary to transform the European Commission in to a real European executive, that sits in the middle of the European decision making process. That’s the opposite of what is happening now, where we increase the power of European Council of Heads of States and Government. What proves to be inefficient.
As we witnessed, decisions of the European Council take at least three-four months to be ratified. Only taking their full effect after ratification. A ratification process can be stopped by any Member State, moreover by one eurosceptic party in a Member State.
Ladies and gentlemen, we are coping with a financial crisis of unseen magnitude with financial markets reacting within a few minutes. European decision making that takes 3 to 4 months, can simply not work.
All this a European economic government, a European collective redemption fund, we need to save the euro. These are crucial steps that will bring us very close to my initial dream of the United States of Europe.
This is the only way to save the euro.
Let me remember a few facts of how United States did it.
In 1775, following the outbreak of the American Revolutionary War, the thirteen new independent states that had formerly been British colonies formalised their cooperation.
In 1776, the declaration of independence was adopted by the Continental Congress.
In 1781, Articles of Confederation were agreed. They formally created a Union. Those Articles of Confederation created the United States of America, which did not have a government, but did have a Continental Congress in which each of the 13 states had one vote. That Union was weak. The Articles of Confederation allowed states to leave the Confederation if they felt that their freedom and sovereignty were threatened.
Moreover, articles could only be amended by unanimous agreement between all the members of the Union.
As you know better than I do, during the early years of the Articles, various attempts were made to give the Union more power, since discord had arisen between the states on how to regulate and tax foreign trade. Yet all these attempts failed, due to a lack of consensus. A few important amendments were defeated following their opposition by a single state. This situation irritated the first group of Americans, led by James Madison, who subsequently became better known as the 'Federalists', and in the end, the Federalists managed to convince Congress to arrange a Convention to improve the Articles of Confederation.
In 1787, at the Philadelphia Convention the Federalists drew up a completely new Constitution under which the Union had far greater powers. One article proved particularly important in this process. In contrast to the unanimity required under the Articles of Confederation, Article VII stipulated that approval by nine of the thirteen states was sufficient to approve the Constitution and bring it into force.
In 1790, Hamilton, the first head of the Treasury, introduced Treasury certificates after a huge battle with Thomas Jefferson, what was the very beginning of the American bond market.
And only in 1792 the U.S. dollar was created by the Constitution and defined by the Coinage Act. Only in 1913, the Federal Reserve System emerged.
So the historic development in the US is quite clear, the establishment of a federal political structure, an expansion of federal responsibilities, then followed by the establishment of a Treasury. Only later came the dollar and the actual federal monetary system.
In European Union, process took place in the inverse order. We first created the currency and then only now elaborating the economic governance and the political union we need.
In fact a European federal economic and fiscal Union should have preceded currency creation. However it is not too late, to take our responsibility and establish a European economic and fiscal union, a European Minister of Finance, a euro bond market. All this together can break the European deadlock and can overcome the crisis.
Only then the markets will know that we are willing to go all the way to save the euro.
I'm convinced that Europe can learn a great deal from the United States and from your country's response to key economic developments. The United States saw that closer cooperation was the only viable option, to face huge economic challenges as the stock market crash of 1929. That is why I too am convinced that the challenges of today, at this pivotal moment, leave Europe with just one real option: the option of a United States of Europe.
Ladies and Gentlemen, George Washington was convinced that no matter what, the Europeans will come together and form the United States of Europe. This was thinking outside of the box. Few would have thought that there is a chance for that to happen. But there were those, like Jean Monnet or Robert Shuman who saw the United States as an inspiration.
In difficult moments the United States of America has opted for more cooperation, more federalism. Having done so, not only did it survive, but it flourished as never before.
Today, globalisation demands it from us Europeans. Europe has to follow the same path and strive to establish a 'United States of Europe'.
Thank you.
