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Speech of François Villeroy de Galhau, Governor of Banque de France at Bruegel, Brussels
[...]Last year, the Five Presidents Report, followed by the EMU pack of the European Commission reflected a more consensual view of how to deepen and strengthen EMU in four different areas: financial, fiscal, economic, and political — and with two different horizons, the short term and the long term, recognising that the latter may require a revision of the Treaty.
How to reform the Euro Area(EA)’s economic governance is the subject of a loaded but much-needed debate requiring some principled choices (I). Among the latter, I will elaborate on the priority towards a “full coordination” of national economic policies, and the subsequent need for a strong EA Finance Minister with very concrete tasks I will detail today (II).
Let me summarise the loaded debate we must have and some fundamental principled choices we need to make.
The debate is loaded because of at least three fault lines.
First, in the relationship between the EA and the rest of the EU, deepening integration across both perimeters at the same time, let alone at the same pace, is not warranted. This raises the prospect of a multi-speed Europe, especially at a time when EU membership could become a reversible matter. We shouldn’t fear different speeds. In clearer terms: whatever the limits of the February “Brussels agreement”, I am strongly in favour of the UK remaining within the EU; yet, irrespective of the outcome of the British referendum, the EA can and should pursue further integration.
Second, tensions and heterogeneity within the EA, especially between the so-called core and periphery, have been exacerbated by the crisis so that the prospect of risk sharing may be perceived as involving permanent transfers across economies. Pooling risks would thus be seen as involving moral hazard, with permanent suspicion of “free rider” behaviour. Yet, we must realise that heterogeneity across countries calls for reinforced cooperation, based on risk reduction together with risk sharing. It is the only way forward to resolve the tension between solidarity and responsibility.
Last, on the crucial issue of economic governance for the EA, France and Germany have not always seen eye to eye. [...]A weak outcome would be that nothing would happen before the French and German elections of 2017. But even in this case, 2016 can and must be a year of intense preparation.
A. Why this remains a necessary debate and why we must make the economic case
We know there is deep political resistance to sharing fiscal resources and sovereignty, as well as Euroscepticism and lack of a sense of national ownership of European matters. [...]
This is why we need to make the economic case. If we are to promote a stronger governance of the euro area, it cannot be a purely institutional case out of blind belief in ever closer integration. It is not a theological issue and not solely a political one either. It is a very concrete tool to achieve the full economic potential of the euro area. [...]
Clearly, monetary policy cannot be a substitute for economic policy coordination or the lack of reforms. The ECB has worked extremely hard to fulfil its mandate. Yet, there are economic and even political risks to overburdening monetary policy: these are risks to financial stability, to the proper functioning of credit channels, and to central bank independence, as enshrined in the treaties. For that reason alone central bankers need to take part in this debate. [...]
In sum, all these figures point to a significant cost of non-coordination, of at least 2% of the EA GDP at present.
B. To take the debate forward, three principled choices have to be made
These principled choices are needed: (i) to resolve the debate between coordination and reforms; (ii) to simplify rules and embrace institution-based policymaking; in order (iii) to achieve full coordination.
First, we do not have to choose between coordinating economic policies and domestic reforms. [...]
Second, institutions with a mandate are superior to rules without institutions. To bolster policy consistency and coordination, we admittedly need simpler rules. For instance, the complexity of the reforms of the Stability and Growth Pact (SGP) and the so-called “Fiscal Compact” is such that Finance ministers privately admit they do not know whether their country is abiding by the rules. [...]
Third, there is room for an intermediate level of integration, which I would call “full coordination of national policies”, a presently missing link between integration, as we have for monetary policy decision-making, and rule-based surveillance such as is currently the case for national fiscal policies. [...]
I could elaborate on the financial dimension of EMU. The Banking Union, when completed, has the potential to move up to the highest level of institutional integration. Similarly, the Juncker Plan is a useful integrated instrument, although too weak and slow at present. I have stressed elsewhere the need for and the benefits of moving ahead with a much stronger ‘Financing and Investment Union’, incorporating these steps forward and going well beyond the proposed Capital Markets Union. [...]
To be sure, the highest level of policy integration would logically involve building a genuine fiscal union, as well as completing the Single Market; but that would surely require more ex ante convergence and resolution of legacies from the past. My view is that we should leave the door open to further integration for countries that are willing and ready to consider it. I will come back to it, but first I would like to highlight what I consider to be the most urgently needed part of EMU reform, namely.
I. how to set up a strong institution to fully coordinate national fiscal and structural policies.
This institution is what would enable us to achieve the second level of integration, i.e. full coordination of national policies.[...]I am convinced that establishing a strong institution led by a euro area Finance Minister would contribute to cement further integration of economic policy.
So let me describe first the mandate and the shared strategy, then the tasks of a euro area Finance minister, and last the way to anchor its legitimacy and capacity.
A. Which mandate and what strategy?
The Commission has already introduced a two-stage European semester, so that the discussion of the outlook for the euro area precedes country-by-country analysis. We must take this further by formally mandating a new institution to seek the benefits of full coordination of national policy making. [...]
• A preparation phase would provide the macro framework and take on board individual country contributions, as well as the expertise from the Fiscal and Competitiveness Councils. [...]
• In a decision phase, the euro area Finance Minister would propose a strategy, consisting of the collective objective and – as far as necessary – its country specific translations in terms of reforms and policy stance. [...]
B. Which tasks for a euro area Finance Minister?
First, the Minister would be in charge of preparing the euro area-wide collective strategy to fulfill the mandate I already described. She or he would in particular propose the reform priorities. In line with existing proposals, she or he would also determine the priorities for stabilisation policies in the Euro area.
Second, the Finance Minister would be responsible for supervising the implementation of policy objectives and institutional discipline, using adequate instruments to provide symmetric incentives. [...]
Third, the Finance Minister would be responsible for implementing centralised crisis management. [...]
Last, while moving towards further integration, the Minister could be given the authority for managing a Euro area Convergence Fund, evolving towards a Euro budget. We are touching here on the issue of a common fiscal capacity, promoted recently by Pier Carlo Padoan or Benoît Coeuré. I think it reasonable, as successfully done in the past, to build it in three stages. In the first stage, Member States would be free to join, and the Convergence Fund would be allocated to financing common goods such as European infrastructure investment or refugee settlement. In a second stage that would represent a significant step up, this budget could become a stabilisation instrument, centralising a well-defined set of policy instruments, such as a European layer of unemployment insurance. The third and final stage of fiscal integration would only be achieved if agreement can be found both on financing (direct revenue-raising capacity and common debt issuance) and on the desirable level of business cycle synchronization. As access to this third stage would be linked to reduced risks, this perspective would be a powerful incentive for national discipline and commitment as shown during the march to the Euro.
C. How to set up a legitimate institution with a genuine administrative capacity?
Further integration and democratic accountability should progress together, as discussed in my recent article with Jens Weidmann. We need to enable the European economic administration to be more efficient, while establishing strong enough political legitimacy to ensure balance between liability and control. A European Treasury headed by a euro area Finance Minister would have a chance of embodying such a delicate undertaking. These institutional changes obviously require a new Treaty, notwithstanding the “low hanging fruits” we can and must pick up in the coming year.
First, we need a legitimacy-enhancing appointment process. [...]The Minister would thereby have the legitimacy to represent internationally the euro area in Economic and Financial fora, alongside the President of the ECB.
Second, the euro area Finance Minister would need to be backed by a genuine Treasury administration, which could include staff from the Commission’s Economic and Financial Directorate General, the ESM, and the Economic and Financial Committee Secretariat. Such a civil service would also benefit from the public advice of two independent bodies, the European Fiscal Board and the Competitiveness Council.
Last, if we succeed in implementing further integration, we will need stronger democratic control over euro area affairs. To this end, we will need to consider institutionalising a euro area format of the European Parliament. Relationships between euro area MPs and national parliaments will also need to be enhanced, through an inter-institutional agreement, or by creating dedicated commissions. [...]