25 April 2017

A Eurobill Proposal for the Commission Reflection Paper on Completing the Economic and Monetary Union

The European Commission has undertaken to produce a Reflection Paper on “ideas, proposals and options” by end-May on the deepening of the EMU. Accordingly, Graham Bishop has refined further his plan for a Temporary Eurobill Fund (TEF), and commends it to the EC for consideration in its Reflections.

The Rome Declaration by the Heads of State/Government of EU27 on the EU’s 60th anniversary flowed past without much comment. However, that may easily turn out to be a mistake – especially for Britain, where such visionary statements are routinely derided until they turn out to have some real substance a few years later. 

Once the UK has leaves the EU in March 2019, the relative importance of the Eurozone (EZ) 19 will rise significantly as the Eurozone will have a substantial Qualified Majority in any voting: 19 states and 75% of the population versus the QMV threshold of 15 states and 55% of the population. Moreover, for any “multi-speed Europe” policies that need “enhanced co-operation”, the EZ is clearly above the required minimum of 9 states and the chances of a non-EZ state withholding its consent will be much reduced. So the EZ’s desire to “complete EMU” may not face much opposition – leading it to become the ever more dominant economic (and thus political) grouping.

The path towards Completing EMU has been signposted since the Four Presidents Report of 2012 began the process of rationalising the forced responses to the 2008 Great Financial Crash and considering a politically–acceptable way forward for European society. The rise of “Eurosceptic” opinion has raised many questions about what European society is willing to accept but these will be settled by the votes of the population rather that the writings of the commentariat. In particular, both France and Germany go to the polls during 2017 and the results could be decisive.

Should conventional pro-EU governments emerge, then the Rome Declaration may turn out to have real substance just as the UK steps off the European power stage by choosing to face neighbours with 6-7 times its population and GDP.

Accordingly, the European Commission has undertaken to produce a Reflection Paper on “ideas, proposals and options” by end-May on the deepening of the Economic and Monetary  Union.

Graham Bishop has refined his plan for a Temporary Eurobill Fund (TEF) since it was reviewed favourably by the European Commission Expert Group[1]on DRF and Eurobills in 2013, and commends it to the Commission for consideration.

The structure and governance of the TEF – in reality – provide a comprehensive political, economic and financial plan to deepen the Economic and Monetary Union, quite apart from meeting the technical need for a `safe asset’ for banks. 

The TEF could be operational quickly and, in due course, the political governance could reflect the Community method so that its European Treasury function could indeed become the locus of European “collective decision-making” between the European Parliament and Eurogroup. The revamped European Semester process could readily provide a mechanism to manage some of the `European’ liabilities created by the TEF. Accountability to the European peoples, and corresponding liability for `moral hazard’[2], would both be at the European level.

Beyond the direct benefits to financial integration and stability, this Eurobill plan can provide the savers of Europe as a whole with a cheap, safe, savings vehicle and - state-by-state - a concrete mechanism to: (i) reward good economic `homework’ (ii) penalise lack of effort (iii) operate with the grain of the markets to graduate the carrot and stick incentives for each state and (iv) minimise the eventual costs if a state insists on pursuing economic policies that are likely to end `badly’.  It could be operational in time to take over euro area `solidarity’ when the ECB’s QE programme winds down and interest rates normalise. 

© Graham Bishop