The financial crisis of 2007-2012 was the first wake up call to the inadequacy of the euro area architecture when facing a large systemic crisis. This column re-introduces the Vox debate on Europe’s economic architecture .. Contributions to the debate are welcome.
The Maastricht Treaty, which established the principles of the
economic governance of the EU and the euro, was the result of a
compromise between different views on policy and institutions. Until the
financial crisis of 2007–2012, that compromise had delivered
macroeconomic stability. This consolidated consensus was based on a
number of principles, and in particular on the idea that macroeconomic
stability could be assured in any circumstance by the combination of an
independent central bank with a narrow mandate in terms of price
stability and centrally defined fiscal rules setting public deficit and
public debt limits at the national level. The consensus also extended to
the principle of subsidiarity, which was based on a narrow definition
of European public goods and therefore attributed minimal
responsibilities at the federal level and a high degree of
decentralisation of economic decisions.
The financial crisis of 2007–2012 was the first wake up call to the
inadequacy of this architecture when facing a large systemic crisis. A
wave of reforms, foremost of which was the establishment of the banking
union, followed. Although many considered that the reform process was
unfinished business, they doubted the feasibility of treaty change.
Thus, the debate at the time remained relatively narrow and few
questioned the pillars of the Maastricht consensus.
The pandemic crisis has transformed the EU
The Covid-19 pandemic crisis will leave a deeper impact on the European policy system, for six major reasons.
1. Long-standing European taboos have been broken.
Monetary union was built on the premise that a fiscal pillar at the EU
level would not be needed. The issue resurfaced on the occasion of the
euro crisis, but to no immediate avail. However, the pandemic crisis has
given birth to the Recovery and Resilience initiative, a major
experiment whose outcome and as yet unknown long-term consequences – for
stabilisation, redistribution, and the financing of the EU budget
through new own resources – will determine the future of the European
2. The macroeconomic policy consensus that provided the backbone of the Maastricht system has been shattered.
In response to emergencies, the ECB has taken on a new role of
market-maker and, through its bond purchase programmes, has assumed
risks on its balance sheet which could, in principle, have fiscal
consequences. Moreover, in in a world of structurally low equilibrium
interest rates, it has become clear that some degree of monetary and
fiscal coordination is needed and that debt and deficit limits can lead
to procyclicality. Finally, with high public debt, the fiscal imprint of
monetary policy is large whether or not there is fiscal dominance. For
all these reasons, the wisdom of keeping a Chinese wall between monetary
and fiscal policy is being questioned.
3. Policy priorities have changed. Efficiency and
stability are imperatives, but environmental sustainability has risen to
the top of the policy agenda and so has the idea that this is a
European public good. The consequences of this reordering have not yet
been defined, though. The transition to a net zero economy will have a
major macroeconomic impact in the medium term. The intertemporal
burden-sharing questions it raises have not yet been addressed. The
Covid crisis has also shown that research and innovation in Europe are
public goods that should become policy priorities.
4. New risks have emerged. Public debt levels are
expected to increase by about 20 percentage points, and possibly more in
the event of a persistent Covid scenario. Although markets so far do
not seem to care, risks may emerge in the medium and long run with the
consequence that debt restructuring and fiscal dominance may become a
reality. The design of a reformed policy framework should aim at
broadening the policy space while containing these risks.
5. The EU must connect to a greater extent the internal and external dimensions of its policy agenda.
The external environment is being transformed radically, especially by
the rise of China and its growing confrontation with the US. The focus
on internal integration and the benign neglect of external dimensions of
the last decades are no longer viable. This applies especially to the
international role of the euro, towards which the traditionally neutral
stance of the EU cannot be maintained.
6. A variable-geometry Europe is no longer on the table, but faultlines remain.
The possibility of a two-speed Europe was long considered and in some
cases advocated. Brexit and the choice of an EU rather than a euro area
vehicle for providing support to member states in trouble has widened
the range of options. This long-standing issue may be settled, but new
faultlines may open up. At the same time, the old faultlines in the
monetary union remain and anti-European populists will continue to
challenge the democratic legitimacy of the European project in years to
At the same time, critical elements of the post-euro crisis reform
vision hit a roadblock even before the pandemic. The plan to decouple
bank stability from home state solvency, thereby containing systemic
risk at the EU level, has not been implemented to date. After the global
financial crisis, the creation of a new insolvency law for banks, the
BRRD, accompanied by a novel European institutions dedicated to
supervision and resolution – the SSM, SRB and SRF – was supposed to
allow weak banks to exit a crowded market, without stirring a crisis.
But it was never tried. Instead, national policies have regained
influence and, as a result, European monetary policy has become
interconnected with solvency concerns at the national level.
Answering the questions raised by these transformations is certainly
not an easy endeavour. The agenda is large and touches on many issues:
monetary-fiscal complementarity, providing public goods to ensure
resilience while preserving national strategic autonomy, risk-sharing
and insurance via an integrated banking system and the development of
the capital market union but also redistribution via fiscal mechanisms,
to name just a few.
Policy concepts that have emerged are often still fuzzy. Trade-offs
between objectives – resilience versus efficiency, sustainability versus
growth, environmental versus financial sustainability, openness versus
autonomy, economics versus geopolitics, treaty change versus national
sovereignity – have hardly been explored. As exemplified by the Next
Generation EU initiative, hard questions lie ahead regarding the
distribution of policy roles, short-term and long-term, between the EU
and its member states, and disagreements abound.
The reform agenda has to be revived in the context of a still fragile
and uncertain economic and health situation. As Europe emerges from the
pandemic, strategies for macroeconomic policy synchronisation and the
sequencing of stimulus withdrawal will remain crucial for a number of
The EU cannot shy away from the conceptual retooling it needs.
Whatever the difficulty of reaching agreement on reformed policy
principles, it must not succumb to the temptation to return to the
compromises of the past. But in a context where citizens have been
bewildered by a series of shocks and policy reversals, this will be a
challenging discussion to have. A possible holding back of the Next
Generation EU by national courts may only accelerate the need to find
sustainable answers to the institutional challenges we are facing today.
Policy research should play a major role in structuring this.
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