At the meeting of the European Council at the end of June, the Presidents of the European Commission, European Central Bank, European Council and Eurogroup are expected to submit a “Report on Preparing for Next Steps on Better Economic Governance in the Euro Area” requested by the European Council in December 2014. The report follows a previous report of the four Presidents “Towards a Genuine Economic and Monetary Union” submitted to the European Council in 2012 and then largely neglected.
At the informal meeting of the European Council last February, the President of the European Commission Jean-Claude Juncker submitted an Analytical Note including key questions to be addressed in the report. In the past few months, a working group with sherpas of the heads of states and governments has been discussing the preparation of the report and providing inputs to the four Presidents. The Financial Times has recently reported the status of these discussions (“Future of the eurozone: Leaked sherpas’ note”), which is all but encouraging. The subsiding of the financial and economic crisis has had a clear effect on the appetite of national governments for further strengthening the Economic and Monetary Union (EMU): consensus on major reforms is lacking and the recommendations that command consensus seem few and vague.
The still ongoing difficulties in the negotiations of the financial assistance package for Greece, the high level of debt of many Member States, the sluggish condition of the Eurozone economy, the difficulties (or unwillingness) of many Member States to implement the EU recommendations on the reform of their economy, should remind everybody that this is not time for delays or for complacency in addressing the future of the EMU. For the EMU to be more resilient, more effective at the time of economic shocks affecting one or more Member States or the EMU as a whole, more able to have its decisions enforced across the euro area, and more proactive in its approach to economic policies, some key reforms remain essential.
In the current set-up of the EMU, rules are fundamental to ensure the coordination and convergence of national economic policies by EMU member states. However, as recently often repeated by the President of the European Central Bank, the long-term credibility and sustainability of the EMU and its resilience in economic downturns require strong institutions that can, on one hand, ensure that EMU rules are really respected (which is obviously not always the case today) and, on the other hand, go beyond a mere coordination of national policies and conduct economic and fiscal policies for the EMU as a whole as an integrated economic area.
In order to ensure that EMU rules are respected by all member states, the EMU should be equipped with adequate incentive instruments and enforcement mechanisms. With respect to incentives, the recommendations made by the Commission for a Convergence and Competitiveness Instrument in 2013 is a basis for reflection on incentive schemes that could facilitate convergence and structural reforms and compensate for their eventual short term social costs, thus going beyond the current system of arrangements with member states under financial assistance.
With respect to enforcement of the EMU rules, although clearly highly sensitive, a reflection is needed on a common governance (more “shared sovereignty”, in the words of Mario Draghi) in the implementation of key structural reforms and key yearly country-specific recommendations. An alternative even more effective in its impact would obviously be to harmonise at EU or at least Eurozone level legislation in the most contentious fields addressed by structural reforms (which would require an increase in competences in the social field).
In order to implement an EMU economic and fiscal policy, the establishment of an EMU fiscal capacity (a Eurozone budget) is an essential step, as in any existing mature currency union. If expedient to its creation, at the outset its size may be limited and its financing ensured by national contributions. Eventually, however, it should have a size adequate to have macro-economic impact and it should be financed by own resources, through adequate forms of European taxation and eventually new European debt instruments. The latter should not replace the existing debts of member states but should be aimed at financing policies of the EMU as such.
Such a Eurozone budget could be used to address symmetric and asymmetric shocks, particularly through direct anti-cyclical investments in European public goods (energy, transport and digital market infrastructure being the obvious candidates). The recent proposal of the Portuguese Prime Minister (Towards a Eurozone architecture we can trust) of a European Monetary Fund combining the roles of the current European Stability Mechanism and the role of an investment fund backed by a Eurozone fiscal capacity look certainly farsighted.
The EMU should be more flexible and able to react quickly to crisis situations. Over the last years the intergovernmental method (centred on the European Council as a “quasi-executive” of the EMU) has imposed heavy and long procedures on decision making, and the agreements that have been reached are in many cases unsatisfactory for all concerned. The institutional setup of any future reforms should better have the European Commission and the development of its “government role” as a fundamental backbone. In this frame, it would represent a significant step forward to merge the position of the Vice President of the European Commission and the President of the Eurogroup and to concentrate overall responsibility for EMU fiscal and economic policies, the use of all EMU financial instruments and the external representation of the euro area in international financial institutions in this position. This would represent the creation of a powerful, yet accountable, EMU “Finance Minister”.
In the interest of democracy and accountability, any increase in the powers of the EMU needs to be accompanied by a reinforced role of the European Parliament, and particularly of the MEPs elected from the EMU, in the conduct and monitoring of economic, fiscal and social policies at the European level.
There are clear advantages in a two-stage approach. The EMU should first exploit all the possibilities offered by the current Treaties. The Treaty of Lisbon still holds great potential to improve the economic governance of the EMU, as highlighted in a recent Policy Brief issued by the Union of European Federalists on Strengthening and deepening the Economic and Monetary Union within the current Treaties: possibilities and limits (25 proposals). The implementation of these measures would increase the effectiveness and the legitimacy of the EMU, paving the way for a second wave of reforms that require treaty revision.
It would be deplorable if the four Presidents report expected for June would be delayed because of a lack of consensus among Member States or if eventually it would not at least match the recommendations of the previous report of December 2012 and include a clear stage-based roadmap of reforms, including strict deadlines for each step to be taken (including with respect to treaty revisions). The Commission should play its role of initiative and leadership in the face of the inclination of Member States to postpone and soften reforms.Paolo Vacca