Belatedly and after many recommendations, I went to see Ben Affleck’s Argo recently before heading home for the holidays. True to the reviews, it was smart, suspenseful (particularly since one knew walking in how it all ended) and had its share of dark humor, particularly about the limitation on decision-making within a government bureaucracy and amidst crushing political pressures. Midway through the film, Affleck’s CIA operative convinces the secretary of state to accept his hostage extraction plan with an unvarnished and unapologetic candor: “It’s the best bad idea we have, sir.” It was a good laugh line for any audience, but the Georgetown theater I was in seemed to laugh knowingly.
It’s a radically different and policy area, but I noticed a similarity in the tone of guarded optimism that has greeted the agreement earlier this month by EU finance ministers to establish a Single Supervisory Mechanism (SSM) administered by the European Central Bank. The Peterson Institute’s Nicholas Veron applauded both the intent of the agreement – to deepen and unify EU banking regulation to ensure that Europe survives the current crisis intact and remains competitive – and the fact that the EU policymakers met self-imposed deadlines for doing so. Veron was only slightly Argo-like in his enthusiasm, calling the agreement “a big European success, high up on what was the range of possible outcomes.”
Veron praises both the agreement’s degree of coverage – all banks with over 30 billion euro in assets, representing 75-85 percent of European bank assets – and its governance – a small steering committee to drive its decision-making. However, despite representing “one of the most constructive EU policy initiatives since the start of the crisis,” and assuming that the European Parliament approves the measure, Veron is quick to qualify the agreement as merely the first step of what will be a much longer and more involved process of re-capitalizing Europe’s banks. Agreement on an SSM was a prerequisite for consideration of a European Stability Mechanism (ESM), the terms of which will be negotiated over the next 12-24 months. Although it is a difficult decision that opens the door to a more difficult one, Veron reports it is nonetheless “unqualified good news”; a signal of long-term commitment to the common currency.
Veron’s Peterson Institute colleague Jacob Funk Kirkegaard seconds the enthusiasm for the progress on European banking reform. Kirkegaard also pushes back pre-emptively against criticism that anything short of fully consolidated EU budget dooms the Euro to failure. Fiscal consolidation requires reform of the EU’s political institutions that will take time, and Kirkegaard argues that Europe should not be expected to approach a common fiscal policy the U.S. itself did not begin to achieve until the 1930s and the advent of the New Deal (Kierkegaard does not discuss the role of defense, but World War II military spending also marked a watershed in U.S. fiscal policy.) It is not reasonable to expect Europe to “develop into a copy of the United States” Kirkegaard argues. But it’s also not necessary. Short of a fully federalized EU-area fiscal structure, a smaller common fiscal mechanism – amounting to 1-2 percent of Euro area GDP – would act as “accident insurance” against fiscal shocks and serve a stabilizing function. Some Euro-critics doubt that first, EU member states would ever relinquish control of their social welfare systems to common administration, and second, this dooms the potential for common EU budget. Kirkegaard concedes the political reality of the former point but does not see the political need for the latter; the Euro can survive on something other than a carbon copy of the U.S. fiscal framework, at least for the near term.
To complete the Argo analogy, not all successful policymaking follows a clear linear narrative. There are stops, starts and successes achieved piecemeal. The enthusiasm surrounding this month’s agreement seems centered on the commitment contained within it to continue the messy business of Europe’s ever closer union.