Verhofstadt: 'Speculators are doing Europe a favour'

Former Belgian prime minister Verhofstadt, now an MEP, believes the 500 billion worth of eurobonds bear the seed of structural reform within the EU.

"Until now, no real means existed to force euro countries to observe fiscal discipline. Those days are over," said a satisfied Guy Verhofstadt, the former Belgian prime minister and current leader of the liberal group in the European parliament. He believes last weekend’s pledges by European leaders of 500 billion euros worth of loans, mainly guarantees, to weak eurozone countries sent "a strong signal" in defence of the stability of the currency. Together with the 250 billion added by the IMF, the package also bears the seed of structural reform that is absolutely essential, said Verhofstadt. "Since these loans can only be granted to member states that make dramatic cuts and restructure, the system will reinforce the Stability Pact."

After months of bickering over which national instruments would be used to put an end to the Greek crisis, the euro countries have finally chosen a strong European method in the form of eurobonds, Verhofstadt said. "For months, I had warned that bilateral loans would not solve the problem. Eurobonds, which are collectively guaranteed, were the only answer."

Only 60 of the 500 billion came out of the European budget. Aren't you making this more European than it really is?

"No. The European Commission can borrow 60 billion on financial markets using the EU budget as collateral, and the other 440 billion with guarantees from the euro countries. The Netherlands and Germany kept pushing for bilateral loans, but we got guarantees. And the Commission will oversee the entire process. Of course, as with all European decisions, the countries and parliament will have to approve it. This system is European, because everyone is pulling his weight. Collectively."

The term 'eurobonds' is controversial, but Verhofstadt uses it adamantly. "Here, look at the agreement: ‘The Commission shall be empowered to contract borrowings on the capital markets’.”

The agreement outlines a temporary system that will remain in place for three years and will only be used if necessary?

"That is what the text says. In fact, this was a concession to Germany and the Netherlands late Sunday night to make them rescind their demand for bilateral loans. But I don't think it will be temporary. And maybe it will have to be used. The Greek issue proves that the eurozone needs a crisis mechanism. We need a backup plan that allows us to act forcefully if the euro is weakened. Everybody agrees on that, but until recently some countries thought we didn't have to organise this at the European level because we had the bilateral option. It took five months of squabbling, while at the same time, modern global financial markets respond in a heartbeat. We could see the problem growing out of control. Only after the stability of the euro came under threat and an international bond crisis loomed, did the euro countries opt for a European system. With their backs against the wall."

How does this system reinforce the Stability Pact? Considering the reaction of the markets, investors also want an answer to this question.

"Because the conditions are so strict. Euro countries need to make incredible cuts and structural reforms to obtain credit. They have no choice."

Stability and Growth Pact The two key rules of the Stability and Growth Pact are that signatories must have an annual budget deficit no higher than 3 percent of GDP and a national debt lower than 60 percent of GDP. Most countries have broken these rules in the current economic crisis.

The pact already stipulates harsh conditions, doesn’t it? What makes you think this will suddenly do the trick?

"Because it is backed by loans. Euro countries have a direct interest in everyone respecting the rules. This system ensures credibility and liquidity. Credibility, because institutions like the Commission, the ECB and the IMF control the system; liquidity because it is backed by collective financial power. Bilateral loans achieve neither. It will also prove a great instrument for the future, though it cannot be used alone. "

What else do you have in mind?

"A European Monetary Fund and permanent eurobonds, for instance. Ideas along those lines are emerging everywhere. Belgian Economist Paul de Grauwe has made a proposal. The Bruegel think-tank in Brussels has proposed a 'blue bond' that divides member states' debt in two parts, keeping pressure on the countries to clean up their act. If the eurozone imposes stricter conditions, those will benefit all. The IMF always has the same demands: make budget cuts now, or there will be no loans. You have to take a tough stand, and Europe can do that. Madrid and Lisbon announced further austerity measures this week. We have learned our lesson."

Some say this doesn't mean politicians have seen the European light all of a sudden.

"I agree. Sometimes you need crises to force a breakthrough. Something similar happened with the European arrest warrant. It was discussed for 20 years, then came 9/11 and it was pushed through in no time."

Europe has become more intergovernmental over the last years. Was last weekend a turnaround?

"One swallow does not make a summer. The Commission, member states and parliament are fighting over three major issues, with the main point of contention for all three being whether they should be dealt with in an intergovernmental or communal way. The first is financial supervision. The European parliament fears countries want to have leave too much power with their national supervisors. For pan-European banks and institutions especially, we argue one European supervisor should have more power. The second case on the table is ‘Europe 2020’, the long term strategy for the European economy. Member states want to monitor progress in this department themselves, but we tell them: 'sorry, that is up to the Commission'. Just look at the economic gap between Germany and Greece, this alone proves countries can't go it alone. Issue number three is the European diplomatic service. Today, it falls under the Commission. There is a proposal on the table that would give the European Council [which is the members states] authority over it as well. But if 90 percent of the service's funding comes from the Commission, why would we want to take it away from them? It could set a precedent. What else can we take from the Commission?"

You seem to be more European than the Commission itself.

Bio Guy Verhofstadt (1953) was the prime minister of Belgium from 1999 to 2008. After last year's European elections he became the leader of the liberal group in European parliament. In the 1980s, Verhofstadt was known as ‘Baby Thatcher’ for the neo-liberal reforms he implemented as budget minister to get Belgium into the European Monetary Union. His book, The Way out of the Crisis: How Europe Can Save the World, was published last year.

"I keep telling [Commission president José Manuel] Barroso: take the initiative, change your attitude! It is his duty to draft proposals that are in the European interest, even if he doesn’t always get the desired results. Do you think [former Commission president] Jacques Delors always got his way? Even when he proposed the common market and the EMU [monetary union that preceded the euro], there wasn't a single country that said 'okay'. You have to ask a lot to get a little."

Barroso was the only one who brought a proposal for a crisis mechanism to the table last weekend.

"Exactly, and this is how it should be. There were only a few alterations. The commission has to be the engine that drives European integration. If it doesn't, the member states end up making all the decisions."

Do governments put their national interests first in a time of crisis?

"That has been the trend in the past ten years: politics are national. The crisis has reinforced that. Everybody retreats. Protectionism rears its head. Some are abusing the Greek crisis for national political objectives.

“Few ministers and government leaders told their citizens what was really at stake during the Greek crisis. It was something Delors had pointed out when the euro was first introduced: a monetary union alone is not enough. A stable currency also needs a political union. That never materialised for a number of reasons and we are now suffering for it. The markets picked up on that and attacked. They are testing Europe's willingness to create an effective union. In a way, speculators are doing Europe a huge favour. By putting pressure on the euro, they have accomplished more in a couple of days that politicians have accomplished in years."

What happens next?

"We have to make the union tighter to prevent this from happening again. We need more economic cooperation, more coercion and better means of verification."

The Dutch are saying: 'we have been very careful, we refuse to adjust because of the Mediterranean countries.'

"Some countries are in better shape than others, both economically and in budgetary terms. If others don't comply with what you want, you have two options: either you break away or you devise new mechanisms to get others in check. I advocate the latter. We need a closer economic union, a strategy for 2020, with sanctions to boot, with sticks and carrots. Some countries will need those more than others, like my own country. To join the [monetary] union, we had to cut back for years. Our national debt had to be reduced from 130 to 80 percent [of GDP]. Without European pressure, we would not have gotten the budget in order as fast as we did."