13 March 2015

Wall Street Journal: Revisiting the big plan to save the euro

It was supposed to be the missing piece in the revamped eurozone architecture, ensuring that the euro will be spared “existential threats” of the kind it faced from 2010 to 2012. Or so it was presented, back in 2012, when a quartet of top European officials tabled a plan for a “genuine” economic and monetary union.

The plan spoke of a joint budget for the eurozone, a cross-border bank-deposit guarantee program and “common debt issuance.”

All would be underpinned by more transfers of sovereignty in the form of “binding contracts” that would commit national governments to economic policies approved by the Brussels-based European Commission.

Three years later, there has been no progress on any of these ideas. And yet the debate hasn’t completely died, either.

“The bad thing about the European Union is that if you put something on a paper, we never drop it,” said one European diplomat.

Jean-Claude Juncker, the commission president, is set to produce a report on the next steps in June, together with the heads of the European Central Bank, the Eurogroup of eurozone finance ministers and the European Parliament.

Early preparation for that report began on Wednesday in Brussels at a three-hour dinner attended by senior officials from all 28 EU countries and representatives of the four institutions. (All 28 EU countries get a say, including the nine that don’t use the euro, in part because changes to EU treaties will probably be necessary.) 

At a European summit in February, ECB President Mario Draghi made a strong plea for more convergence of eurozone economies. 

“He explained to leaders what the difference is between a fixed-exchange-rate system and a euro union,” said an official familiar with the talks. “He told them that in the long run, a construction with permanent debtor and permanent creditor countries is not sustainable.” 

Mr. Draghi’s point was that during Europe’s protracted slump, the eurozone has become less, rather than more, integrated. A gulf separates near-bankrupt Greece from export-champion Germany.

Yet, many governments aren’t ready for further change. Three officials familiar with Wednesday’s talks say there was a wide disparity of views around the table.

At one extreme was Hungary, which wants no changes at all and certainly no more transfers of sovereignty. Budapest fears its future euro membership—all EU members except Denmark and the U.K. are required to join the euro—might be made more difficult if existing members of the club move to tighter integration.

About 10 countries, including France, Italy, Spain, Portugal and Belgium, favor a eurozone budget—a so-called fiscal capacity—and a central authority able to issue joint debt.

But Germany says such steps can happen only in return for binding rules that would commit countries to structural reforms. That implies a big concession of national sovereignty that many governments are reluctant to concede.

The U.K. supports eurozone integration plans (though it has no intention to partake in them) as long as they are mindful of the euro “outs.”

The main sticking point is that EU treaties will likely need to be changed.

None of the participants at the Wednesday meeting showed any appetite for changing the treaties soon. That process would require years of negotiations and is subject to potentially precarious referendums in several countries.

Another reason for not contemplating treaty change now is the U.K. general election.

British Prime Minister David Cameron has promised to renegotiate the terms of the U.K.’s membership in the EU and hold an “in-out” referendum if he wins on May 7.

Other governments want to wait until it becomes clear whether Mr. Cameron will win or what he will ask for if he does.

“If the Brits come up with concrete proposals, you have to give them something,” one European official said. “There are some ideas already, and they may require treaty change—which could be done in parallel with [eurozone] reform.”

The EU also has the experience of a “minor treaty change,” a simpler process that was used to set up the European Stability Mechanism, the eurozone bailout fund, over two years.

The minimalist treaty-change option is something Germany backs. One senior diplomat argued that playing down the need for a major treaty change would give other governments more ammunition to bargain with Mr. Cameron in any future negotiation.

Janis Emmanouilidis from the European Policy Centre, a Brussels-based think tank, said he has “not very high expectations” of future reform. The lower Mr. Juncker’s ambitions, the more chance he has of success, he says.

Full article on Wall Street Journal (subscription required)

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