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[...]For the euro area to move forward, its member states have to overcome the existing stalemate. The gridlock hampers both the resolution of the remaining debt overhang – which continues to exert a drag on the region’s recovery – and the reform of euro area institutions. This reform needs to address some of the principal gaps in the monetary union’s construction; and, perhaps more important, it needs to provide assurances to the citizens of the euro area that it will be managed more responsibly in the future.
What are the principal, legitimate, concerns of the euro area’s citizens? Those in the peripheral, debtor countries see the euro area as a mechanism to impose austerity on them. They believe that the creditor countries have used their massive bargaining power to force onto the borrowers virtually all of the burden of dealing with the fallout from a decade of irresponsible lending. For their part, citizens of the core, creditor nations see the euro area as a mechanism to force them to send their money to dissolute southern Europeans, to turn the euro area into a transfer union. There is some truth in both sets of beliefs; but, of course, both are misguided.
What, then, are the economic policy and political tasks faced by the member states?
Any serious reform needs to prove to citizens of the indebted, crisis-ridden periphery that the institutions of the euro area – and, most important, the other member states – will take seriously their legitimate concerns. This means ensuring that the creditor nations take on at least some of the sacrifice necessary to wind up the ongoing crisis – and that future crises will be resolved in a more timely and equitable manner.
By the same token, any serious reform needs to prove to citizens of the core, creditor nations that the institutions of the euro area – and, most important, the other member states – will undertake serious reform measures to avoid a recurrence of the current disaster. This means ensuring that the peripheral nations undertake a credible commitment not to abuse the common pool components of a monetary union in order to engage in uncontrolled and unjustified borrowing and spending.
Would the measures suggested by the current reform document accomplish these tasks? To a large extent, they would. The proposals for a meaningful mechanism to restructure troubled debts, along with a common deposit insurance scheme, would help guarantee that the risks inherent in lending among euro area members would be more equitably shared. A strengthening of the banking union, of common regulation, and of mechanisms to bail in creditors of failing banks, would all go in this direction as well.
On the other hand, sovereign concentration charges would limit opportunistic behaviour by debtor sovereigns and banks; and a more reasonable – hence credible – system of fiscal and debt oversight would limit excessive sovereign borrowing. This would complement a reform of relevant euro area institutions, first and foremost of the ESM, to play a more consequential part in monitoring the operation of the monetary union.
So the reform proposals are eminently reasonable. They are, more to the point, necessary if the euro area is to move forward without risking another catastrophic crisis. And they would go a long way towards addressing the legitimate concerns of citizens of the euro area, core and periphery. This in turn would help limit the ability of anti-European populists to point to the disastrous mismanagement of the crisis as evidence for their rejection of European integration.
Whether these reform proposals are politically feasible is another matter. Perhaps growth will soften hearts on all sides of the bargaining table. Perhaps, also, the continuing and escalating economic policy threats from the Trump administration will lead to a greater sense of solidarity among the EU’s member states.
Progress in this direction is certainly to be desired. Failure to move forward with a reform of the euro area now may lead to its collapse in the future.