05 June 2017

LSE: Seizing the moment for euro area reform: A three-step action plan

[...]There is momentum in Berlin and Paris now behind the belief that the euro is incomplete and cannot last without major reforms.

Henrik Enderlein, Enrico Letta and Aart De Geus share this view and they also want the single currency to succeed and bring back growth to the euro area. Make no mistake: Europe will inevitably be hit by a fresh economic crisis. They do not know whether this will happen in six weeks, six months or six years. But they fear the European Monetary Union (EMU) will be ill-prepared: too few of the structural weaknesses that triggered the last (and continuing) crisis have been addressed.

The European Commission has just published a reflection paper on the deepening of EMU. Here is what they think should have been in the paper: Authors set out below (and, in more detail, in a joint report) their proposals for a staged but lasting and workable reform. This will be more comprehensive than the previous post-2008 effort that relied excessively on the European Central Bank doing “whatever it takes” to save the euro. European governments must step in, collectively and individually, to build a stronger euro. A revived and more effective EMU must be reconstructed on the basis of both structural reforms and investments. That way the euro can deliver stability, economic growth and political strength.

The authors' action plan in a nutshell

• Building block 1: Design a first aid kit consisting of a reinforced European Stability Mechanism (ESM+), an enhanced Banking Union and better economic policy coordination under improved democratic control. We do not have to change the EU Treaties for that.
• Building block 2: Combine a focused structural reform agenda with a comprehensive investment initiative. We should put a strong emphasis on what member states can do, rather than just shift powers to the euro-area level.
• Building block 3: Base EMU on significant risk- and sovereignty- sharing within a coherent and legitimate framework of supranational economic governance. We should turn the ESM into a fully-fledged European Monetary Fund and strengthen parliamentary control to enhance European legitimacy.

Today Europe does not have a coherent strategy. It is not even muddling through, as often in past crises, when piecemeal solutions took the place of grand strategy but still contributed to further integration. The individual elements are not connected in a consistent manner and make for political instability. Their plan does not call for a European super-state or a transfer union. It sets out a pragmatic solution designed to protect the euro. Because, if the currency fails, the entire European integration project will be in danger. We cannot take that risk.

Do not focus exclusively on Brexit

The EU and the euro area especially cannot afford to focus exclusively on the challenge posed by Brexit, significant though it is. Europe needs to protect its citizens by making sure that its economies perform well and the benefits of growth are shared by all. The common currency is an insufficient link in Europe’s architecture. In any new crisis, international market participants might question Europe’s determination to engage in true risk-sharing and sovereignty-sharing to overcome such a crisis.

Do not rely on the ECB alone

What ultimately stabilised the euro area during the crisis was central-bank action. Yet depending on the ECB alone is economically dangerous and politically unsustainable. Its policies are removed from democratic checks and public deliberation, even if they substitute for absent fiscal stimuli at national level. Consequently, many perceive the rescue measures to lack democratic legitimacy. In 2007, one out of two Europeans trusted the ECB. Today this has declined to one out of three.

The euro may now not be in an immediate crisis but that does not mean we can declare it will be stable. Why wait for the next crisis to find out? It must be protected today. Brexit is yet another reason why Europe can no longer afford to keep taking ad hoc decisions on the euro. A credible strengthening of the single currency would be the proof that Europe can solve its challenges even in these difficult times. This would significantly enhance the credibility and resilience of the European integration project. A more robust EMU would not weaken its individual member states. On the contrary, it would strengthen their capacity to deliver the stability and prosperity that citizens are asking for. Let us repair EMU now and prepare it for whatever the future may bring. [...]

Full report

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