On Wednesday 17 January, a group of French and German economists published a report in which they call for several measures to reform Economic and Monetary Union (EMU). This text echoes the proposals of the European Commission of December 2017 on deepening EMU (see EUROPE 11920).
Taking note of good news on the economic front and a return to growth in the Eurozone, the economists however consider that “reforms are urgently required in the euro area if monetary union is to keep its promise of prosperity and be adequately equipped to deal with future crises”, explained Marcel Fratzscher, a lecturer at Berlin’s Humboldt University.
The central point of the conclusions presented in this report is the need to step up risk-sharing and budgetary discipline within the Eurozone. With regard to this, the experts regret the fact that these principles have in very many cases been simplified, for instance due to differences in assessment on the part of French and German policy-makers.
Revision of the Stability Pact. The measures proposed by the economists include a revision of the European budgetary rules, particularly the requirement for Eurozone countries to keep their budgetary deficit below 3% of national GDP.
Under the system they put forward, an independent national authority, whose actions will be supervised by a European authority, and who would have to draw up a medium-term (e.g. over five years) debt reduction target every year, as well as growth forecasts. On the basis of this, a five-year budgetary trajectory, plus one for the following year, would be drawn up. Should the government deviate from this trajectory, it would have to finance excess expenditure on the markets by means of ‘junior’ debt instruments, whose maturities would be automatically extended for countries under the assistance programme of the European Stability Mechanism (ESM). In particular, the experts consider that a reform of this kind would make it possible to better control public finances and pursue counter-cyclical policies.
In the budgetary field, a ‘Eurozone fund’, paid for by national contributions, could be set up to support member states facing macro-economic shocks. Contributions to this fund would be larger for states that act faster to deal with economic crises. This idea refers to the debate on the creation of a budgetary capacity for the Eurozone.
Making any bailout plan conditional on the sustainability of the debt. Another proposal put forward by the experts is that states with an unsustainable level of debt should not be able to benefit from an ESM financial assistance programme, as called for by the former German finance minister, Wolfgang Schäuble.
This would be achieved by an orderly restructuring of the debt of the country concerned, limiting economic and financial disturbances in the event of restructuring.
In the banking field, a European deposit insurance scheme (EDIS) should also be created to complete Banking Union in the Eurozone. Towards the end of 2017, the Commission proposed to breathe new life into the legislative proposal, which is at stalemate at the Council (see EUROPE 11916 and 11881).
Furthermore, to limit the exposure of banks to sovereign debts, a risk premium could be brought in when holding sovereign debt instruments on an investment portfolio (‘sovereign concentration charges’).
In favour of a European finance minister. As the Eurogroup has both decision-making and supervisory responsibilities, the economists propose that these two missions be separated, entrusting the supervisory mission to the European Commission or another body. They argue that the chairmanship of the Eurogroup should be held by a member of the Commission, as the Commission proposed on 6 December with the creation of the European finance minister.
Link to the report: http://bit.ly/2EOPSD8 . (Original version in French by Lucas Tripoteau)