This report offers concrete recommendations for how the Union can show added value to European citizens in the areas of security and justice, socio-economics and monetary policy.
SOCIO-ECONOMIC AND MONETARY INTEGRATION
Euro area management
Although the euro was intended to foster European unity, the national policies underpinning it have created divisions, embittered relations between Greece and Germany and caused widespread resentment in both debtor and creditor states. Some would argue that pursuing the current policies will at best result in Southern Europe limping along for years to come, with low growth, high unemployment and mounting support for anti-euro parties. But this picture of a euro area riven by a generalised conflict between an austerity-obsessed Germany and a virtually bankrupt South is a caricature based on a mistaken analysis of the fundamental problems, and which is anyway becoming less and less apt as a description of reality.
The key question is whether the continuing economic underperformance in some member states is really due to the ‘straitjacket’ imposed by the euro. The cases of Ireland and Spain suggest that a sustainable recovery is possible within the euro area. Seen through this prism, the main problem of the euro is a political one: in countries with economic problems and a persistent lack of growth, like Italy and Greece, the euro and its rules make an ideal scapegoat to mask the inability of the national political and social structures to solve deep-seated domestic problems.
This tendency to make the euro responsible for weak economic performance is likely to intensify over the medium term. The overall potential growth rate of the euro area is just above 1%. Among other factors, such a low level is due to a shrinking working age population, a process that is expected to continue in the next few decades at a pace of almost half a percent per annum. It is thus likely that the medium-term future of the euro area will resemble the recent past of Japan, whose headline growth rate has been very low and whose current account is in surplus. Demographic trends and similarities with Japan are thus likely to reinforce the negative picture, which builds on the flaws of the original EMU design and the excessive austerity imposed by Germany. These arguments are the basis of much of the doomsday narrative.
A more optimistic outlook might be found in the idea that the future will be different from the recent past: the crisis has been beaten by a combination of adjustment and a stabilisation of the financial system. The euro area is continuing a slow but steady expansion that has already brought the average employment rate back to the pre-crisis level. The banking union is likely to protect the euro area against the repetition of large financial shocks while the remaining disequilibria in competitiveness are gradually worked out via the normal functioning of the labour markets, with wages rising faster in Germany than in the rest of the euro area. This perspective evokes the experience of Germany, which not too long ago was considered the ‘sick man of Europe’ because it entered the euro area with excessively high wages. The ‘austerity doomsday’ view of the euro might thus be simply too coloured by recent events.
Nevertheless, widespread consensus remains that profound reforms are needed for the euro area. But apart from the general refrain that ‘something needs to be done’ there is no agreement on what could and should be done. No major initiatives are in the pipeline that could resolve the two key problems, namely the debt overhang in parts of the euro area and the restoration of competitiveness. Governments are wary of scaring financial markets – and voters. Finance minister meetings produce an unedifying succession of stalemates. Southern states want more pooled sovereignty, and economic and fiscal strength to insulate their vulnerable economies. Northerners demur, until their balance-sheet risk is reduced. As long as these two views dominate the debate40 little progress will be made.
An official roadmap to deepen the Economic and Monetary Union does exist: the Five Presidents’ report. Officially, the first steps outlined in this report have already been taken: there is a euro area Fiscal Board (which advises the Commission on fiscal matters), and national productivity boards (to monitor the competitiveness performance and policies in each member state) are being created. However, the nature of these bodies is purely consultative and, while useful, these two steps are unlikely to have a significant impact on the true deepening of the EMU. In order to render the EMU governance framework and the EU’s economic and financial performance more resilient and effective, this Task Force recommends stronger fiscal cooperation among euro countries. Acknowledging that the euro area countries possess very diverse tax-raising and public-spending cultures, which translate into significant differences in terms of tolerance towards deficits and resistance to share fiscal responsibilities, this Task Force nevertheless considers that stronger centralised fiscal policies are necessary to strengthen the economic governance framework.
Deviating from the ‘Verhofstadt’ report of the European Parliament, this Task Force does not support the idea of creating an EP subgroup made up of euro area countries. Bearing in mind that without the UK Denmark will be the only remaining member state with an opt-out of the euro area (all other member states are obliged to introduce the euro), a euro area parliament does not seem the right measure to address the EMU’s weaknesses. It might set a dangerous precedent in dividing the EU and cement a two-tier approach. The euro is the currency of the EU as a whole and the assembly as a whole should therefore be responsible for the democratic oversight and legislation of the euro area.
Enhancing compliance: incentive-based enforcement
The euro cannot remain stable unless euro area public finances are sound and the public debt-to-GDP ratio is stable. The main insight of the Stability and Growth Pact (SGP) is that member states keep deficits under 3%. Over time, this rule was considered as too simplistic and to some extent misleading. It has since been refined in many ways to take into account the business cycle, the medium-term evolution of expenditure and various exceptional circumstances, to name a few of the changes. The Fiscal Compact (officially: the Treaty on Stability, Coordination and Governance (TSCG)) has added two provisos: a lower limit of the structural deficit of 0.5% of GDP43 and a commitment of the countries to ensure rapid convergence towards their respective medium-term objective.
The main responsibility for enforcing limits on deficit and public debt falls to the Commission. If the Commission sees a violation of the deficit limit, it recommends that the ECOFIN Council launch the Excessive Deficit Procedure (EDP) against the member state concerned. Hence, it is the Council that ultimately decides on sanctions. Even under the new reversed qualified majority system, sanctions have never been imposed: the Commission’s warnings have been disregarded or withdrawn; the Council has launched the EDP several times, but the procedure was always discontinued – officially due to the respective member state’s economic difficulties. However, member states seem to be reluctant to impose sanctions, as the judges of today might be the defendants of tomorrow.
A member state’s political unwillingness is not always the reason for its non-compliance with the rules. When the economic cycle is experiencing a downturn or the economy is affected by exceptional circumstances, making the fiscal efforts required by the rules is not necessarily a wise decision because of their counterproductive effects. A member state’s lack of administrative and financial abilities (i.e. non-voluntary reasons) can also be the reason for noncompliance. Imposing sanctions on states that are unable to comply with the rules is therefore meaningless. In these cases, obsessive enforcement will not result in better compliance. Instead, administrative cooperation and assistance programmes could be set up and made available to member states even before a threat to financial stability materialises. Furthermore, an incentive-based enforcement mechanism building on the precautionary financial assistance foreseen under the Treaty establishing the European Stability Mechanism (ESM) could be envisaged so that access to such a mechanism, which rewards compliance rather than punishing non-compliance, could be granted even before financial stability is threatened. Such an incentive-based enforcement mechanism could form the nucleus of a future fiscal capacity for the euro area. Rules should be set that are realistic and which incentivise and empower member states to respect them. Taking Article 13 of the TSCG as a legal starting point, country-specific recommendations should be drafted that include the opinion of the European Parliament.45 Proactive and constructive involvement by national parliaments may further enhance compliance.
Completing the Banking Union: deposit insurance scheme
All member states have deposit guarantee schemes at national level to build trust among depositors regarding the safety of their deposits in banks and ultimately to facilitate financial stability and banking stability. The Commission also aims to establish such an insurance system at EU level, as a necessary step to completing the Banking Union.
An integrated European banking system would allow for the centralised supervision and resolution of banks in the euro area, and would break the dangerous interdependence between national sovereigns and their domestic banks. The Banking Union was called for by the European Council in June 2012 and designed according to a Commission roadmap. Based on a common set of rules for banks in all 28 member states, the ‘single rulebook’ is composed of a Single Supervisory Mechanism (SSM) and a Single Resolution Mechanism (SRM) for banks. Both are mandatory for euro area members and open to all other EU countries. As a result of these innovations, the European Central Bank has become the main prudential supervisor of financial institutions in the euro area. The SSM is supposed to reduce the risk of bank failures. If they occur anyway, the SRM comes into play, which covers all banks overseen by the SSM/ECB and became operational in 2016. It is made up of the Single Resolution Board (SRB) and the Single Resolution Fund (SRF).46 Its purpose is to ensure an orderly resolution of failing banks with minimal costs to the real economy and taxpayers.
The SSM and SRM are important steps in the right direction. But the Banking Union needs to be complemented by an EU-wide deposit guarantee scheme. Only such a mechanism would decouple banks and national sovereigns and set conditions for financial stability. Like the authority for banking supervision and resolution, the deposit guarantee scheme should be located at the supranational level. In 2015 the Commission proposed such a euro- areawide deposit insurance scheme (EDIS) for bank deposits. EDIS implies a degree of risk-sharing among countries participating in the scheme, which is considered unacceptable by some countries, at least until existing weaknesses – in some member states – are dealt with first (risk reduction). Well aware of the strong resistance within the Council, the Task Force has called on member states to reach political consensus and to set up this much-needed insurance scheme. Certainly, there is a trade-off that needs to be recognised and addressed: if national banks have a high concentration of national assets, then there is a distortion of national risks that will make it difficult to advance towards mutualisation and risk sharing. Limits on assets concentration for the national public debt in the respective bank systems should therefore be introduced.
Euro area ‘finance minister’ and fiscal capacity
As a consequence of the marked shift towards intergovernmental governance in the course of the financial crisis, a need for supranational mechanisms emerged. In particular, the idea to create a position of EU ‘finance minister’ deserves implementation. Similar to the High Representative/Vice-President for Foreign Affairs and Security Policy, the new finance position would be ‘multihatted’ and comprise simultaneously the posts of Commissioner for Economic and Monetary Affairs and Vice-President of the Commission; President of the Eurogroup (who is also the chair of the board of governors of the ESM); and President of the ECOFIN Council, which should, when the next treaty occurs, be transferred to the EU treaties.
The figure of a multi-hatted high representative for economic policy and finance would facilitate the adequate enforcement of existing rules and safeguard the economic and fiscal interests of the euro area and the EU as a whole, as s/he would serve the interests of both the member states and the common European good. This would help to reduce uncertainty, improve resilience and create a rapid reaction capacity to emergency situations. S/he would be equipped with sufficient political authority to coordinate fiscal and economic policies and to enforce rules in the event of non-compliance.
The merger of the Commissioner’s position, of the Eurogroup presidency and the chair of the ESM Board of Governors could already be achieved under the existing rules. The merger with the role of the president of the ECOFIN Council would, however, require a revision of the existing EU treaties since the current rules require that all Council configurations (except for foreign affairs) be presided over by member state representatives. Furthermore, the shift of competences from the Council (which currently has the core role in EU economic governance) to the Commission would also require treaty change.
Although in part legally possible, the establishment of such a post is politically only convincing if linked to the existence of fiscal capacity in the form of a euro area budget. After all, the multi-hatted representative would only be meaningful and credible if s/he could manage a budget, rather than only being the executor of austerity measures. The euro area budget could be established as a complementary part of the EU budget, financed through a newly introduced own resource raised with euro area member states and earmarked for the exclusive use of the euro area fiscal capacity. Such assigned revenue would fall outside the ceilings of the multi-annual financial framework and this budget would thus complement, not replace, the general EU budget. Arguably, this would require willingness on the part of the euro countries to pay up.
As a member of the Commission, the multi-hatted Finance Minister would be held democratically accountable by the European Parliament through the normal procedures of appointment and dismissal. Further control by the European Parliament would relate to the budgetary responsibilities vested in this position. Finally, indirect democratic legitimacy would stem from the national parliaments of those euro area countries whose ministerial representatives are held to account for their actions in the Eurogroup.
As a first step, the fiscal capacity could be constituted of the abovementioned incentive-based enforcement mechanism to achieve progress in convergence and sustainable structural reforms, which provides for financial support in return for policy reforms. As a second step, the incentive-based enforcement mechanism could be complemented by a mechanism absorbing asymmetric shocks such as a rainy-day fund reinsuring national unemployment benefit schemes or as a genuine European Unemployment Benefit Scheme (see next section). Finally, the fiscal capacity could be expanded to a mechanism absorbing symmetric shocks.
Deepening the EMU is not only about enhancing compliance, improving the Banking Union, introducing a finance minister and fiscal capacity but also about upward the convergence of social standards on the basis of common goals, a well-designed investment strategy, and a comprehensive trade strategy, which all go beyond the euro area proper. [...]
Recommendations
Euro area management
1. Set up administrative cooperation and assistance programmes as well as an incentive-based enforcement mechanism in order to enable states to comply with EU rules, instead of plain rule enforcement.
2. Set up a deposit insurance scheme to complete the Banking Union to break dangerous ties between banks and national sovereigns and facilitate financial stability in the euro area.
3. Create the post of an EU ‘finance minister’ and a euro area financial capacity to facilitate adequate coordination and enforcement of fiscal and economic policies and bridge between the common European, as well as member states’ interests.
Full report
© CEPS - Centre for European Policy Studies
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