14 December 2011

Schoenmaker/Goodhart: The political endgame for the euro crisis

We need to fix the political dimension before we can finally solve the financial side of the sovereign and banking crisis. It is not sufficient to elevate the current Commissioner for Economic and Monetary Affairs to Finance Minister status. A full democratic setting – including an elected president of the European Commission – is necessary to complete political union.

The idea of a eurozone Minister of Finance has its raison d’être in the need for enforcement of the Stability and Growth Pact (Trichet 2011). The intergovernmental approach has clearly failed, as ECOFIN ministers followed the principle of non-intervention – ministers would not interfere with each other on the understanding that each of them would not be touched when they ran into problems. The eurozone Minister of Finance would have full supranational powers to impose sanctions if a country transgresses the fiscal deficit rules.

Nevertheless, the concept of sanctions needs much further thought. Imposing pecuniary fines on a country already in fiscal difficulties does not make much sense. An alternative is to give the eurozone Minister of Finance supranational powers to block budgetary expenditures, or to require his or her prior approval of expenditures by transgressing countries.

The eurozone Minister of Finance would thus be the counterpart for the ECB president. In any country, the minister of finance and the central bank president are de facto choosing the appropriate monetary-fiscal policy mix. When the central bank is operating on an independent basis, the appropriate mix can emerge tacitly.

The aim of our proposal is to keep the Internal Market on financial services. The financial system can then continue to support the real economy in an efficient way and thus foster economic growth. By contrast, an Alleingang of the eurozone in financial services would force a split in the EU’s financial system. This may end up in an internationally-competitive financial centre outside the “European” framework, and a more traditional financial system inside the “European” framework. This is clearly a lose-lose situation – London may lose some business from its European neighbours, while the remaining European countries face a less dynamic financial system.

The new banking supervision and resolution powers could be introduced by regulations, i.e. by standard EU law-making that does not involve changing the Treaties The new European System of Financial Supervision allows specific powers to be transferred to the European Supervisory Authorities (ESAs). For example:

• The European Securities and Markets Authority (ESMA) has received the power to supervise directly credit-rating agencies.
• Similarly, banking directives and regulations could transfer the supervision of large cross-border banks from the national banking authorities to the EBA.
• In addition, a new European Resolution Authority could be established by a regulation.
• Finally, a special resolution regime laid down in an EU regulation would ensure application to the European-wide operations of a bank.

Such a regulation would provide a European mandate and override national legislation. This European mandate is crucial to overcome national interests. The Maastricht Treaty assigns, for example, the ECB with the task of monitoring price stability in the eurozone (instead of the inflation in the participating members). This ensures that both the ECB President (and executive directors) and the national central bank governors focus on eurozone inflation.

Conclusions

Any complete solution to the euro crisis needs to be political. A technocratic solution will not do. This includes:

• A strong eurozone Minister of Finance with budgetary and banking powers.
• An elected president of the European Commission.
• A two-chamber parliament representing EU citizens and EU Member States.

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