01 September 2017

Carnegie Europe: Germany and the Future of the Eurozone

Together with France, Germany’s next finance minister must push to further integrate the eurozone, writes the president of the Center for Progressive Policy Research Yannos Papantoniou.

[...]As it is, the European economy, though gradually improving, continues to display serious weaknesses. The eurozone’s per capita GDP is only 0.8 percent higher than it was in 2008. This compares to a 5.9 percent rise in per capita GDP growth in the United States over the same period. And, at 9.1 percent, the eurozone’s unemployment rate is currently twice as high as that in the United States. Income disparities in Europe are also on the rise, while the divide has widened between the continent’s more advanced northern countries and the weaker economies in the south.

The challenge for Germany’s next finance minister is to overcome this legacy by adopting a more flexible fiscal policy and supporting further integration. Here are few ideas on how to do that.

A revision of the Stability and Growth Pact would increase the responsiveness of fiscal policy to cyclical movements of economic activity. Moreover, the creation of a eurozone budget would provide an additional instrument of macroeconomic policy, particularly if a European finance minister position is created.

Furthermore, debt mutualization—through the issuance of Eurobonds—would reinforce confidence in the sustainability of the euro. So too would the establishment of a fully-fledged deposit insurance scheme.

Finally, this new institutional setup would contribute to reducing existing tensions between Berlin and the European Central Bank, as responsibility for economic policy would be shared in a more balanced way between fiscal and monetary authorities, thus permitting more harmonious cooperation, similar to the U.S. approach. In the United States, the two economic policy centers—the U.S. Treasury and the Federal Reserve—consult each other within the constitutional framework that protects the central bank’s independence and coordinates their activities, instead of publicly exposing differences and harming effectiveness as a result.

It remains to be seen whether such a policy shift would be supported by the current German political class. Substantial parts of the economic and academic establishments oppose deviation from financial orthodoxy. On the other hand, France’s newly elected president, Emmanuel Macron, is pushing in the direction of reform.

The political change in France could revive the Franco-German partnership, especially if—as expected—Angela Merkel is reelected German Chancellor. This would install new power into the European motor. A more flexible fiscal policy and the restructuring of the eurozone could unleash confidence effects leading to a faster pace of reforms and a more prosperous Europe with stronger global standing.

However, the extent of reform will be ultimately decided by how Germany prefers to exercise its power within the EU: by assuming, as the stronger partner, wider responsibilities in organizing the currency union, or by weighing short-term costs and advantages. It is hoped that any temptation to take a “Germany First” approach will not prevail. Such a move would risk demolishing the entire EU project. In the long term, responsible partnership offers the best guarantee for a European revival that would sustain Germany’s own economic prosperity.

Full article on Carnegie Europe

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