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A new approach to Eurozone reform
The Eurozone is undoubtedly in better shape than when the Juncker Commission took office in 2014. Growth has been robust; unemployment has fallen significantly pretty much across the board. Most importantly, the Eurozone is still in one piece. We tend to forget that it was only in 2015 that Grexit was a real possibility only averted at the last minute.
At the same time, the ECB has been struggling to push inflation rates closer to its objective and has deployed a wide range of instruments along the way. Debt levels greatly vary across member states and some have more ample room for fiscal manoeuvre than others. The Eurozone will thus likely enter any future crisis with a strained monetary policy toolbox and a very unequally distributed capacity to lean against a downturn. This is particularly relevant now that Eurozone growth is slowing down and global downside risks are rising by the day. The next crisis might not be as far away as we think.
The fact that the Eurozone is ill-prepared is also because the last five years have seen little or no progress in building a Eurozone architecture fit for purpose. Banking Union is still missing relevant parts and, critically, a shared understanding of how “European” our banking system should be. There is no agreement whatsoever what form a common fiscal response to any new crisis should take and whether the European level should play any part. There is simply no common vision of where member states want the Eurozone to go. The Five Presidents’ Report in 2015 was the last attempt to provide a (very modest) frame for the Eurozone’s future architecture but member states have not yet even endorsed its general direction.
So, the new Commission inherits a rather timid policy package consisting of the backstop for the Single Resolution Fund, a mini-budget for the Eurozone, and a cosmetic reform of the European Stability Mechanism (ESM). This package still requires some political effort to be completed.
Its timidity results, however, not only from the above-delineated lack of shared political vision but also from a lack of trust among member states. Accordingly, a meta challenge for the new Commission is to foster that trust with every action it takes.
In addition, political capital is scarce and needs to be used wisely. Eurozone matters aren’t central on anyone’s mind for the moment, neither in Brussels nor in the member states, and Eurozone fatigue has set in. Therefore, instead of investing ever more political capital in smaller and smaller technical fixes and improvements, the new Commission should look for the biggest bang for the political buck.
The new Commission faces a dual-pronged challenge at the start of its mandate: On the one hand, the economy has been doing well but is getting worse. On the other hand, the political and institutional foundations of the Eurozone are still shaky and unlikely to improve: a combination that precludes any complacency.
The new Commission should concentrate on two parallel tracks:
• First, it should shift its focus to replenishing political capital and recreating trust by developing new ways to build a lasting consensus on the direction of Eurozone reform.
• Second, it should take targeted steps to prepare the Eurozone for the next downturn, namely
* Finalise the current package on the table and improve it where possible;
* Make Banking Union work in the next downturn;
* Prepare the playbook for a joint fiscal response. These tasks need to be tackled in parallel. Ideally, we would focus on the former. But the current global environment makes time short.