It is against this backdrop that the European Commission initiated a process of deliberation and consultation in March of this year on the eve of the 60th anniversary of the signing of the Treaties of Rome.
The eurozone is clearly a lynchpin in the European project. And though the future has brightened with the election of pro-European French President Emmanuel Macron and signs of a stronger business environment, there is still a pressing need to strengthen the eurozone’s institutions. One need look no further than Italy’s ongoing banking crisis and continuing financial difficulties in Greece for proof of this.
To explore what needs to be done to bolster the eurozone, France Stratégie invited Agnès Bénassy-Quéré, professor, Paris School of Economics, chair, French Council of Economic Analysis (CAE), and Francesco Giavazzi, professor, Bocconi University, research fellow, Centre for Economic Policy Research (CEPR), to discuss their new eBook, Europe’s Political Spring: Fixing the Eurozone and Beyond. It also invited Muriel Lacoue-Labarthe, adviser, European Commission, and Marcin Zogala, economist, European Commission, to present the paper the Commission published on deepening the economic and monetary union as part of the deliberative process launched in March.
The Commission’s roadmap
Zogala and Lacoue-Labarthe pointed to the June 2015 report “Completing Europe’s Economic and Monetary Union”, drawn up by the presidents of the European Council, the European Commission, the ECB, the Eurogroup and the European Parliament and referred to as the Five President’s Report. The paper aims to build on the roadmap put forth in the report on consolidating the set of policies that have been crafted to converge member states’ economies.
The guiding principles outlined in the paper are fourfold: jobs and growth, with social equity, economic convergence and financial stability; a process open to all member states; responsibility and solidarity; and transparent, democratic and accountable decision-making.
First and foremost, the paper advocates a series of measures by 2019 to avert another financial crisis, namely improving banks’ capitalization and increasing the EU’s oversight of banking policy for member states. It also backs the European Commission’s capital markets union (CMU), which seeks to mobilize capital from across Europe for corporate investment and infrastructure projects.
“Brussels has been in firefighting mode for a long time,” said Lacoue-Labarthe. She stressed the importance of breaking the so-called doom loop, whereby weak banks and financially strapped governments drag each other down. This mutual exposure can take the form of either banks accumulating excessive amounts of national debt or governments underwriting risky investments made by banks.
One way to do this by 2025 would be to create a European safe asset denominated in euros, which would be debt obligations like those issued by the US Treasury. This would allow the eurozone’s lenders to diversify their assets, moving away from purely domestic sovereign debt.
In addition to shoring up the banking union and the capital market union, the paper pushes for renewing the convergence process by 2025 through action such as increasing coordination of economic policy and reinforcing the links between national reforms and existing EU funding.
Lastly, Lacoue-Labarthe and Zogala highlighted the paper’s emphasis on undergirding the political and legal framework for the economic and monetary union (EMU) and ensuring democratic accountability and transparency. Some of their proposals to achieve this include a full-time permanent chair for the Eurogroup (i.e. the meetings of eurozone finance ministers) and setting up a eurozone treasury and a European monetary fund.
An opportunity to seize
Not surprisingly, Bénassy-Quéré and Giavazzi advocate similar paths of action for redressing the eurozone. In Europe’s Political Spring they put forward a twin strategy of on the one hand sharing and reducing risk and on the other striking a balance in structural reforms between efficiency and equity.
They identify four fault lines running through the eurozone: its ability to withstand a financial shock such as a halt in capital flows or a banking crisis; unclear debt restructuring rules for sovereigns and the doom loop; an incomplete banking union; and an inability to control aggregate demand in a liquidity trap when interest rates have reached the zero lower bound (ZLB) and monetary policy is no longer effective.
To address financial instability, they propose bolstering the European Stability Mechanism, which provides financial assistance to member states in financial difficulty, by reforming its governance, increasing its resources and introducing tools such as precautionary credit lines. Like the European Commission, they also argue in favour of a safe asset to help sever the doom loop between banks and public debt.
With respect to the banking union, they point out it would stand to gain from a more powerful resolution fund and a eurozone asset management company for non-performing loans (NPLs). They also propose centralized supervision for the CMU.
Completing the fiscal union also faces some important hurdles. There is the problem of countries with high legacy debts, which they point out preclude possible insurance schemes across member states. Perhaps more importantly, this has created distrust between debtor and creditor countries, which has halted progress on the fiscal union.
Bénassy-Quéré and Giavazzi raise the question of oversight by Brussels of national structural reforms. With this in mind, they propose a European jobs union to foster a convergence of national labour markets through things like common standards for contracts, a minimum wage, unemployment insurance, training and full portability of unemployment benefits and pensions. They stress it is time for the experts to start making concrete proposals with regard to structural reforms.