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[...]From France’s standpoint, there is no better time than now to implement economic reforms. Although the eurozone is showing signs of a solid economic recovery, the European Central Bank is feeling increasing pressure to taper its ultra-expansionary monetary policies. Macron’s government thus has no time to lose, especially given that economic reforms can take time to deliver results, and the next elections are always just around the corner.
In light of this small window of opportunity, the last thing France needs is more joint investment schemes, as some have proposed. Economic growth requires not just capital investments, but also a business environment where innovation is encouraged and rewarded. And at any rate, it wouldn’t make sense for France to rely on other member states for investments. How can France claim to have restored its past grandeur if it is asking for Germany’s help?
Beyond implementing domestic reforms, France can still work with Germany to send a powerful message in support of European integration. But as both countries seek areas where they can cooperate, they must be careful to avoid policies that would threaten the eurozone’s long-term stability.
Unfortunately, some proposals currently being discussed would do precisely that. For example, establishing a shared eurozone-level budget or unemployment-insurance regime would, at this stage, sow the seeds of future conflicts. It is inconceivable that national policymakers, seeing to their countries’ own interests, would prevent these arrangements from mutating into permanent asymmetric transfer schemes.
To avoid distributional conflicts that would only poison the European project, any institutional reform that is proposed in the name of Franco-German cooperation should have to pass a strict sustainability test. European policymakers must ensure that there is congruence between the power to make decisions and the liabilities associated with any decisions that are made. It would be naive to think that member states will not offload the costs of their choices onto other member states if given the chance.
And besides, there are many other areas where France and Germany can strengthen cooperation and give new momentum to European integration. To determine where to focus their efforts, French and German leaders should keep three related principles in mind. First, any joint endeavor must respect diversity. The central strength of the European project is that it unites its member states in pursuit of peace and prosperity. But this requires a rich reservoir of ideas, not a single, unified approach.
The second principle is subsidiarity, which holds that decision-making should be decentralized whenever possible. This ensures that local and regional preferences are considered alongside the effects of eurozone-wide harmonization and economies of scale.
The last principle is congruity, to ensure that decision-makers are accountable for the outcomes of their decisions. This means that as long as European electorates insist on retaining sovereignty over fiscal and economic policymaking, shared liability will be a pipe dream. [...]
On economic policy, France and Germany should look for ways to fortify the eurozone and complete the single market. The privilege that government debt enjoys under current banking regulations should be eliminated, and an independent banking regulator, separate from the European Central Bank, should be established within the eurozone. Beyond that, it is time to start phasing in a viable sovereign-insolvency scheme for the bloc.
All of these initiatives could be implemented simultaneously with domestic reforms in France. But there is a risk that they will take a back seat to other proposals, such as shared-liability schemes. To avoid this pitfall, policymakers should consider the roots of the eurozone’s low growth potential, which is not a result of insufficient solidarity, but of individual member states abnegating their national responsibilities. Rather than provide a cure for these problems, shared liability would make them worse. [...]
Full article on Project Syndicate