There we go again with questions, this time on the future of the Eurozone. Yet again. After 7 years of financial and economic strain, are we still wondering what a monetary union really is and what it needs to succeed in the long-run?
At the informal meeting of the European Council yesterday evening in Brussels, the spotlights were on Ukraine and Greece. However, a presentation by the Commission President Jean-Claude Juncker (Analytical Note – Preparing for next steps on better economic governance in the Euro area) may have longer lasting impact. So we should hope. Prepared in close cooperation with the President of the European Council, the President of the Eurogroup and the President of the European Central Bank, the Note is meant to be the first step towards a report of the Four Presidents on the future of the Economic and Monetary Union. Requested by the meeting of the European Council last December, it should be presented at the European Council meeting in June 2015.
Juncker’s Note explains well the weaknesses of a Eurozone with a single currency and single monetary policy, but with economic and fiscal policies that remain largely national and in Member States’ hands. He highlights the limits of the (important) measures taken since 2010 to strengthen the Economic and Monetary Union (the European Stability Mechanism, the Banking Union, the Fiscal Compact, the reform of the Stability and Growth Pact and the new rules to more closely coordinate national economic policies and try to prevent and correct imbalances). With ruthless graphs and statistics, he depicts the bleak status of the Eurozone economy. Debt and unemployment remain record high. Countries struggle to achieve sustainable debt reduction. Competitiveness and output gaps are broad. European recommendation go systematically neglected and the EU institution have little to no enforcement powers. Since the inception of the Euro, countries have spent years in breach of European rules (France was under the so-called Excessive Deficit Procedure for in 11 years, as much as Greece and Ireland, and Germany for 8 years, as much as Spain and longer than Italy). Juncker encourages to be forward-looking and assess what steps are required towards an Economic and Monetary Union that is deep, fair and sustainable. Warnings that “the Euro is more than a currency. It is also a political project” and that “the integrity of the euro area as a whole is at stake” add a dose of pathos to the storyline.
So far, so good. Then politics kick-in.
Juncker warns that citizens and markets (Member States and politicians are, oddly, not included in the warning) must develop a long-term perspective on how the framework of the Economic and Monetary Union should develop. Then he asks questions. Questions with no answer.
How can we ensure sound fiscal and economic positions in all euro area Member States? How could a better implementation and enforcement of the economic and fiscal governance framework be ensured? Is the current governance framework – if fully implemented – sufficient to make the euro area shock-resilient and prosperous in the long run? To what extent can the framework of EMU mainly rely on strong rules and to what extent are strong common institutions also required? What instruments are needed in situations in which national policies continue – despite surveillance under the governance framework – to go harmfully astray? Has the fiscal-financial nexus been sufficiently dealt with in order to prevent the repetition of negative feedback loops between banks and sovereign debt? How could private risk-sharing through financial markets in the euro area be enhanced to ensure a better absorption of asymmetric shocks? To what extent is the present sharing of sovereignty adequate to meet the economic, financial and fiscal framework requirements of the common currency? Is a further risk-sharing in the fiscal realm desirable? What would be the preconditions? Under which conditions and in which form could a stronger common governance over structural reforms be envisaged? How could it foster real convergence? How can accountability and legitimacy be best achieved in a multilevel setup such as EMU?
They are the right questions. Between the lines one can certainly read the answers that Juncker and the European Commission would give. With a leap of faith, a Eurozone budget and a Eurozone Parliament and Government in a multi-level EU come to mind. But, for the moment, questions they remain.
It seems now forgotten that only 2 years ago, in November 2012, the European Commission presented a very elaborate Blueprint for a deep and genuine Economic and Monetary Union. That report laid out very precise proposals, with different options and a timetable, to move in stages towards a fiscal and economic union. It envisaged a collective conduct of budgetary and economic policies and of national structural reforms. A dedicated “fiscal capacity” for the Euro Area (a EU budget) with sufficient own resources to support national structural reforms and to conduct anti-cyclical investments at European level. A redemption fund and Eurobills to collectively reduce member states debt. Prospectively, the common issuance of European public debt to finance European projects. In December 2012, the report “Towards a Genuine Economic and Monetary Union” of the previous Four Presidents watered down the Commission’s proposals, but nevertheless it defended the project of moving in stages from pure coordination of national economic policies to a European fiscal and economic union. It also raised the issue of democratic legitimacy and accountability that call for political union alongside fiscal and economic union.
After 2 years of intense public debate on the future of the Economic and Monetary Union, and the interface between national reforms and European institutions and policies, we are back to questions, back to mapping, back to scouting Member States’ positions and intentions. Consensus among Member States is obviously not there and at best the Commission can start asking questions and hope to create a climate that favour consensus-building. This is welcome, but the time to address these questions and create consensus to move forward is not indefinite. Member States should let the Commission work, refresh the proposals of 2012 into a new a wide-raging report in June, and then move swiftly forward to its implementation.Paolo Vacca