On Wednesday 31 May, the European Commission laid out some ideas to relaunch the reflection on the deepening of Economic and Monetary Union (EMU) up to 2025.
These ideas - such as creating a macro-economic stabilisation function or increased democratic control - have been around in the public debate ever since the financial crisis of 2008 threw the shortcomings inherent to the single currency into sharp relief. However, the European institution is confident that the importance of European issues in the French election campaign, and in the campaign underway in Germany, provide a ripe opportunity to move forward the process of consolidating the Eurozone.
“A few months ago, Europe was on the defensive. It is time to return to the offensive at European level” said the Commissioner for Economic and Financial Affairs, Pierre Moscovici, who firmly believes that it is time to conclude the journey that started with the Maastricht treaty.
In its document, the European Commission notes that “the convergence trends of the single currency’s first years have proven partly illusory” and that it is therefore necessary to act to make the euro a vehicle of shared prosperity. Without this, the citizens will start to call the currency into question, Moscovici warns.
Macro-economic stabilisation. As well as an immediate improved coordination of national policy in the framework of the budgetary process of the ‘European Semester’ and a tightening of links between national reforms and existing European funds, the Commission reiterates the importance of creating a macro-economic stabilisation mechanism for the Eurozone.
There are three possible options: - a European investment protection system, which would protect investments in the event of a downturn in activity; - a European unemployment reinsurance scheme, to support national aid on condition that a prior convergence of the national employment market has been achieved; - a ‘rainy day fund’, which could have a borrowing capacity, to help the beneficiary countries to deaden large-scale shocks.
The Commissioner for the euro, Valdis Dombrovskis, believes that creating a European investment protection system is possible without treaty change. He also stressed the importance of making sure that the financial instruments do not lead to permanent transfers from a creditor country to another debtor. This condition is a line drawn in the sand by Germany long ago.
In the longer term, it may be possible to consider the creation of a Eurozone budget, to support both convergence and stabilisation, and this would require a stable flow of revenue, the Commission notes. The 'Berès/Böge' report of the European Parliament calls for the Eurozone to have this budgetary capacity, which countries would be able to access under conditions and that would come on top of the multi-annual financial framework 2014-2020 and the European Stability Mechanism (ESM) (see EUROPE 11725).
Financial union. Consolidating the EMU is ultimately only possible if the financial sector is permanently stabilised.
The Commission therefore calls on European legislators to conclude dossiers already on the table, moving forward in parallel on reducing and pooling financial risks. In this way, banking union in the Eurozone must be completed with the creation of a backstop for the Single Resolution Fund and of a European Deposit Insurance System (EDIS).
Moscovici acknowledged, however, that this dossier would see little progress before the end of the year due to the German general election scheduled for September.
To reduce the financial risks, the European institution proposes a “European strategy for non-performing loans (that) could help to address one of the most damaging legacies of the crisis”. At the informal meeting of the finance ministers in Valletta, the idea of a European approach to tackling non-performing loans made some headway, although the option of a European bad bank did not go down entirely well (see EUROPE 11765).
It is worth noting that the idea of cautiously and progressively bringing in a weighted risk for sovereign bonds crops up once again. The general principle of zero risk for sovereign debt instruments will not encourage banks to diversify their portfolios, the Commission observes. It is also aware that too sudden a change in the treatment of risk in this area could disturb the functioning of national financial systems.
Safe assets. The Commission also puts forward the idea of creating a “European safe asset”, in euro, a concept developed within the European Systemic Risk Committee steered by the ECB. This asset, similar to American Treasury bonds, would constitute “a new financial instrument for the common issuance of debt, which would reinforce integration and financial stability” and “help diversify the assets held by banks” it states in its document, acknowledging that this instrument would raise complex legal, political and institutional questions.
In an attempt to extinguish any nascent row in Germany, Dombrovskis furthermore took pains to stress that this asset would not involve pooling the debt of the Eurozone countries. This idea was buried in 2015 with the report of the ‘five presidents’ on deepening the EMU (see EUROPE 11340).
Democratic legitimacy. The Commission goes on to consider the best way of promoting the general interest within the Eurozone.
It argues that “a new balance could be established between the Commission and the Eurogroup”. Creating a permanent Presidency of the Eurogroup, that would itself be made into an official formation of the Council of the EU, could lead in the longer term to merging the positions of President of the Eurogroup and Commissioner with responsibility for the EMU. The Commission is prepared to take such a step, but I am not sure that the member states are, Moscovici said ironically. He went on to say that it requires democratic leadership, as Greece’s fate can no longer be decided “between four walls”. In early May, President Juncker was not greatly forthcoming on this point, questioning what real budgetary supervisory powers a ‘European finance minister’ would actually have.
In order to reinforce the democratic legitimacy of the Eurozone, the Commission considers that the European Parliament and the national parliaments should be given sufficient supervisory powers, depending on the level at which decisions are made.
Observing that the treaties have little to say on the matter, the Commission also suggests work on an agreement on the democratic accountability of the Eurozone, involving all players concerned, to be signed ahead of the European elections of spring 2019.
Finally, the idea of a Eurozone Treasury, which could take responsibility for the budgetary supervision of the Nineteen, coordinate the issuance of safe assets and manage a macro-economic stabilisation mechanism, is briefly touched upon, as is the idea of a European Monetary Fund, based on the experience of the ESM, that would “give the euro area more autonomy from other international institutions”. This is a reference to the current problems the IMF is having in coming on board the third Greek bailout plan (see EUROPE 11794).
The European Parliament's June plenary session is to discuss the options put forward by the Commission. The leader of the EPP group, Manfred Weber of Germany, said that the reflection document is a “good basis for reflection” to allow the EMU to be based on both its pillars, economic and monetary. Udo Bullmann (S&D, Germany) appreciated the fact that the Commission has taken the measure of the danger to the integrity of the euro posed by social inequality. Pervenche Berès (S&D, France) welcomed the fact that the Commission has taken up the Parliament’s calls for a Eurozone budget. On behalf of the ECR group, Germany’s Bernd Lucke described the document as the Commission’s “capitulation” to the Eurozone’s economic problems.
The document can be consulted here: http://bit.ly/2rUmiJn (Original version in French by Mathieu Bion)