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Over-indebtedness of states: a danger for democracy and
human rights

Recommendation 1961 (2011)1

1.       There
can be no good governance without sound economic governance.
In their quest for bringing European nations closer together,
a group of states defined the rules of the Stability and
Growth Pact and engaged in the euro project. However, the
recent decade, in particular the last few years, has revealed
a worrying inability of many European governments to pursue
prudent regulatory and appropriate public debt policies. A
dangerous vicious circle of excessive debt, large budget
deficits and anaemic economic growth is now threatening the
very foundations of European structures and the quality of
life of European citizens.

2.       The
grand European undertaking originated from human tragedies and
evolved through crises. The current problems encountered by
the states at the hard core of European integration should
serve as an impetus for more concerted action in terms of
political and economic governance. There is a strong need to
repair the economic system that failed to assess risk
correctly and to perform responsibly in boom years. Although
too much power has shifted towards global financial markets
and the private sector, the state remains the key regulator
and the guarantor of the rule of law which underpins
democracy, fundamental rights and the orderly functioning of
market economy.

3.       The
Parliamentary Assembly is concerned that short-sighted
national policy decisions have eroded public trust in state
institutions, fuelled speculations about the viability of the
European welfare model and raised tensions between the public
and private sectors. Excessive reliance on the sprawl of
financial services to the detriment of other economic sectors
has generated macroeconomic imbalances and financial bubbles.
Whilst some bank bailouts have been justified by the necessity
to preserve economic stability, overall it is not fair to
transfer private sector’s losses onto the states and
ultimately onto all their taxpayers. This distortion in market
and governance has to be fixed to avert similar crises in the
future.

4.       The
Assembly appreciates that increased international economic
interdependence has led to closer multilateral co-operation,
via the G20, aimed at improving regulation of the financial
sector, strengthening the oversight of credit rating agencies,
and curbing tax evasion. It notes the creation of the European
Financial Stability Fund in May 2010 as a temporary measure
and of the European Systemic Risk Board operational since
January 2011, together with three European supervisory
authorities for the banking, insurance and securities sectors.
These authorities’ supervision powers should help detect and
correct at an early stage the emerging macroeconomic
imbalances and enable better structuring of the activities of
credit rating agencies registered in the European Union.

5.
Moreover, the Assembly notes the intention of the European
Commission to propose, in summer 2011, a comprehensive
legislative framework for dealing with ailing banks (that are
too big, complex and interconnected to be allowed to fail) so
that these could be restructured or resolved without making
taxpayers carry the burden. It similarly considers that
options for a partial restructuring of excessive public debt
should not be a taboo and that framework mechanisms for
orderly restructuring should be examined.

6.       The
crisis was partially caused by the combination of financial
deregulation and state guarantees to the financial sector.
That combination now leads to the nationalisation of private
debt: public authorities pay the price which should have been
paid by shareholders and bond holders of financial
institutions. In the future, guarantees should always be
combined with strict regulation to manage the public risk of
those guarantees. If these guarantees are called upon, the
managers of the financial institutions should pay the price
and have their salaries lowered and refrain from accepting
bonus payments. For if the public sector had not stepped in,
their institutions might well have gone bankrupt. This should
be the case as long as they continue to receive public
support.

7.       The
Assembly is aware that some of the Council of Europe member
states have used dubious practices to minimise their
short-term public deficit. These practices typically lack
transparency and may have grave repercussions on future and
long-term state indebtedness. Notably, derivatives can serve
as a useful tool for state debt management but also help hide
more public debt if they are misused. As disclosure regarding
derivative activity by sovereign borrowers is extremely
scarce, monitoring by “government shareholders” (that is to
say, the taxpayers) can only be weak at best. This lack of
disclosure makes governments less accountable as regards the
public debt situation and reduces the transparency of national
statistics.

8.       The
Assembly therefore stresses the importance of transparency in
a democracy and market economy. Without transparency,
democracy remains incomplete because only an adequately
informed population can vote advisedly and thereby exercise
political rights in full knowledge of the facts. In this
context, the Assembly recalls the merit of the media as a
watchdog of democracy, as they enable the public to react to
potential overspills of political power or economic
wrongdoing. As public finance management requires faultless
transparency and the principle of consent to taxation is
considered one of the sureties for democracy, governments must
show proof of good intentions and ensure full transparency of
state accounts in order to uphold democracy.

9.       In
this respect it is extremely worrying that member states have
been forced to guarantee each other’s sovereign debt, for
instance in the cases of Iceland and Greece. State debt has
thus become interstate debt. This is only acceptable in truly
exceptional circumstances and should be a very temporary
emergency measure. Interstate debt and guarantees increase
systemic risk within Europe as default of a state may lead to
a chain reaction of debt restructuring, emergency budgets,
increase in money supply and great suffering for European
citizens.

10.       The
risk of state guarantees and other guarantees should not be
obscured in the accounts, as they are a real risk to public
finances. The crises in both Ireland and Iceland were the
direct consequences of unbearable guarantees. Those guarantees
should therefore be reported in full and separately from other
business to the parliaments of the member states. Countries
that guarantee sovereign debt and other debt should fully
report in an internationally consistent way on those
guarantees. This also concerns deposit guarantee systems and
loans and guarantees to the financial sector. Off-balance
book-keeping has been a problem in the build up of the crisis
and should thus be avoided in the state accounts. Therefore,
the Assembly invites the Organisation for Economic
Co-operation and Development (OECD) and the Eurostat to issue
methodological guidelines to states with regard to a more
transparent reporting on state guarantees, no later than
within six months from the adoption of this
recommendation.

11.       The
influence of the financial markets on the state governance,
the public interest, the public conduct of economic policies
and the European democratic institutions is worrying. The
Assembly considers that it is necessary to continue the
discussions of this issue further within the Council of
Europe, including through the Forum for the Future of
Democracy, and in member states’ national parliaments. It
underscores the need for closer interaction and information
exchange between national parliaments, governments and the
Bretton Woods institutions, in particular when the latters’
assistance is sought.

12.       The
Assembly deplores that states have effectively nationalised
private debt. Article 1 of the First Protocol to the European
Convention on Human Rights explicitly prohibits expropriation
of private property. It should also prohibit the expropriation
of private debt, so that taxpayers are not called upon to pay
the price of failure by private sector institutions.

13.       The
Assembly recommends that the Committee of Ministers ask the
governments of member states to:

13.1.
ensure full transparency and accountability for state
guarantees and to prepare plans for a gradual scaling down
of such guarantees;

13.2.
contain the erosion in the living standards and citizen’s
socio-economic rights by making every effort to spread the
effects of austerity measures fairly across the population
and to spare vulnerable groups the weight of
adjustments;

13.3.
show realism in devising graduated strategies for public
debt stabilisation and subsequent reduction through
continued fiscal consolidation combined with structural
reforms, sustained stimulus for growth sectors, improved tax
administration and enhanced correlation between the level of
welfare benefits and state revenue;

13.4.
have a closer look at the integrity of economists whose
advice to policymakers is as indispensable as it is dubious,
or even manipulative, at times. The Assembly is convinced
that the ethics and responsibility of this profession could
be strengthened, for example by inviting competent bodies to
draw up a global, or at least European, code of conduct,
which includes disciplinary measures.

1 Assembly debate on 11 April
2011 (11th Sitting) (see Doc.
12556, report of the Committee on Economic Affairs and
Development, rapporteur: Mr Omtzigt; Doc.
12571, opinion of the Social, Health and Family Affairs
Committee, rapporteur: Mr Hunko; and Doc.
12572, opinion of the Committee on the Environment,
Agriculture and Local and Regional Affairs, rapporteur: Mr
Meale). Text adopted by the Assembly on 11 April 2011
(11th Sitting).

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