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For starters, the Stability and Growth Pact, intended to ensure sound fiscal policies in the eurozone, was never correctly implemented. On the contrary, in 2003 and 2004, France, Italy, and Germany, sought to weaken it... Moreover, eurozone governance did not include monitoring and surveillance of competitiveness indicators – trends in nominal prices and costs in member states, and countries’ external imbalances within the eurozone.
A third source of weakness is that no crisis-management tools were envisaged at the euro’s launch. For much of the world at the time, “benign neglect” was the order of the day, particularly in the advanced economies. Finally, the high correlation between the creditworthiness of a particular country’s commercial banks and that of its government creates an additional source of vulnerability, which is particularly damaging in the eurozone.
Fortunately, much progress has been made, including significant improvements to the SGP and the introduction of surveillance of competitiveness indicators and national imbalances. New crisis-management tools have been put in place. And there is a consensus that the EU’s stability and prosperity requires completion of the single market and obligatory structural reforms for all 27 members. A proposed banking union would help to separate the commercial banks’ creditworthiness from that of their government.
But none of this is enough. Instead of imposing fines on countries that transgress rules and ignore recommendations, as the SGP was supposed to do, the European Commission, the European Council, and – this is essential – the European Parliament should decide directly on measures to be immediately implemented in the country concerned. Fiscal and certain other economic policies should be subject to activation of a eurozone “federation by exception”.
In the past, I have suggested establishing a eurozone finance ministry, which would be responsible for activating economic and fiscal federation when and where necessary, and for managing new crisis-management tools like the European Stability Mechanism. It would also be responsible for overseeing the banking union, and it would represent the eurozone in all international financial institutions and informal groupings.
But, most important, “federation by exception” would ultimately cease to be an exception. The finance minister would be a member of the EU’s future executive branch, together with the other ministers responsible for other federal departments.
From this perspective, the Commission presages a future European democratic government, as German Finance Minister Wolfgang Schäuble, who has proposed instituting an elected president, has suggested. The Council, meanwhile, appears to anticipate the European Parliament’s future upper house, with the lower house already elected by all EU citizens.