Nicolas Véron: Testimony to the US Senate - Challenges of Europe’s fourfold union
01 August 2012
Véron suggests that a sustained effort to achieve a "fourfold union" agenda (banking union, fiscal union, competitiveness union and political union), with progress made in parallel on each of the four components, is the only way to resolve the crisis successfully.
Véron testified on 1 August 2012 in front of the US Senate Committee on Foreign Relations, Subcommittee on European Affairs, as one of three witnesses in a hearing on “The Future of the Eurozone: Outlook and Lessons”. In his statement (see link below), he argues that the absence of a democratically accountable decision-making framework is what has made the eurozone crisis unique. He suggests (echoing Herman Van Rompuy’s report of June 26 and recent statements by Mario Draghi) that a sustained effort to achieve a “fourfold union” agenda (banking union, fiscal union, competitiveness union and political union), with progress made in parallel on each of the four components, is the only way to resolve the crisis successfully.
In the second part of his testimony, he explores a few topical questions about the first of these four components, namely banking union.
The key points of Véron's statement are as follows:
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The deterioration of credit conditions in the eurozone stems less from inadequate decisions than from an absence of decisions when they were needed. This “executive deficit” is partly a consequence of the European institutions’ lack of democratic accountability, often referred to in Europe as democratic deficit. It also contributes to a loss of European citizens’ trust in those same institutions. The European Central Bank (ECB) is a partial exception to this problem but cannot make up for the lack of decisiveness of the other institutions.
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Accordingly, profound changes must be made to Europe’s institutional framework to make it effective in resolving the current crisis and preventing future ones. An authoritative European-level executive framework must oversee banking, fiscal and structural policies. This executive framework must be made accountable to Europe’s citizens, and for this the European Parliament must become more representative and exert better control over policymaking. Those four components of banking, fiscal, competitiveness and political union will take several years to be completed. They are mutually interdependent and must be taken together, ideally in parallel increments. In particular, the completion of a banking union relies on federal deposit insurance which itself requires a credible supranational fiscal backstop. And without the democratic accountability provided by political union, no new integrated policy framework can be sustainable.
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Europe must also overcome its tendency to jump to permanent solutions, and acknowledge the need for pragmatic short-term actions that are tailored to the urgency of the crisis. Europeans have repeatedly tried to resolve long-term issues before deciding on short-term fixes, but that strategy is a luxury they no longer have. Specifically regarding banking issues, a proper crisis management and resolution system must be put in place before all longer-term institutional questions are answered.
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Thus, leaders should establish a temporary eurozone bank resolution authority, as none of the existing institutions has the skills and mandate that would allow it to perform the thankless task of identifying failing financial institutions and restructure them back to soundness. A successful bank crisis resolution process will require temporary guarantees, including a temporary central reinsurance of national deposit insurance systems by the soon-to-be-created European Stability Mechanism (ESM) or by a more robust future central financial instrument.
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In the longer term, the eurozone needs not only a single supervisory mechanism for banks but also a regionally based deposit insurance system and a central resolution authority for failing banks. The ECB can play a large role in this future framework but cannot be its only component. National bank supervisors will retain many of their attributes but their governance will need to change. Ultimately the banking union should cover all banks in the eurozone and possibly in other European Union (EU) Member States, even though it seems likely that exceptions will be initially negotiated by Member States to exclude some smaller banks from its oversight.
A break-up of the eurozone would be disastrous for Europeans and to a large extent for the global economy. The choices facing Europe’s leaders and citizens are daunting. Their slow pace of decision-making has exacted a large cost for Europe’s economies, societies and families. Greece remains a burning concern. No one can be assured that the eurozone would survive its disorderly exit; but there is still no clear enforcement framework available if its adjustment trajectory keeps veering off track, as it has repeatedly over the last two years. Investors have good reasons to be nervous. Yet Véron believes it is not too late for Europeans to take actions to ensure the survival, sustainability and success of their monetary and economic union. He trusts and expects such decisions will be made.
The rest of Véron's statement expands on these points and provides additional analysis.
© Nicolas Véron
