Eurozone reform has appeared stymied by the tension between purportedly abstemious northern and spendthrift southern members. It needn’t be.
The paralysis of reform of the European Union, in particular of the monetary union, is usually seen as stemming from geography, with the northern eurozone (NEZ) countries on one side and the southern eurozone (SEZ) countries on the other—although the divergences have more to do with economics and politics.
In a recent report for the Friedrich Ebert Stiftung, we argue that the north-south divide in the eurozone can only be overcome with a confederal and co-operative model, on which the SEZ and NEZ might agree as it contains a balance of costs and benefits. The basic assumption is that new common institutions are necessary and there should be a move towards sovereignty sharing.
Neither further devolution of sovereignty to technical entities, supposed to enforce rules mechanically, nor extensions of the disorderly intergovernmental approach, which seized the helm during the eurozone crisis, offers a way ahead. Both roads have led to serious failures.
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Rules, which are necessary in a monetary union, should be aimed at disciplining discretion, not suppressing it entirely—impossible anyway in the governance of a complex, evolving system. Shared sovereignty is the right approach.
The first pillar of the reform in almost all proposals in circulation—as well as in the mission letter to the new commissioner for the economy—concerns the system of fiscal regulation. The new system should reconcile long-term sustainability of public debt with stronger stabilisation tools and policies, and the accumulation of public capital. This does not necessitate a major overhaul of the treaties.
Debt reduction must take place where and when necessary. Member states should comply with the principle that national governments are free to broaden or restrict welfare-state provisions, granted that fiscal revenues are attuned to match public spending, at least over a reasonable timespan. No new structural current expenditure should be permanently debt-financed.
A shift of focus from year-by-year deficits to medium-to long-term debt sustainability, while taking into account the cyclical position of the economy, has already occurred with the Fiscal Compact—alas increasing, instead of reducing, the complexity and opacity of the apparatus of rules. This hardly promotes compliance. The quest for more simplicity, transparency and efficacy with regard to the rules is now widely shared.
As suggested by the European Fiscal Board, a single indicator of fiscal performance should be introduced—a ceiling on the growth rate of net primary expenditures over three years, such that public debt reduction is allowed while long-term fixed (net) investment expenditures are subtracted up to a predefined amount (a ‘golden rule’). This indicator, although not entirely uncontroversial, satisfies simplicity, observability and room for fiscal stabilisation when needed.
The fairly common view among mainstream economists, and a basic tenet of fiscal federalism, is that fiscal discipline and fiscal rules at the country level should be complemented by a common budget. Even better conceived fiscal rules might still reduce the fiscal space in those countries more in need of implementing expansionary policies after a negative shock.
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The first building block should be a European (or eurozone) unemployment insurance scheme, funded by each member state in proportion to its gross domestic product. This is supported politically by the German finance minister, Olaf Scholz, and is present in the current commission’s programme. With such a scheme only cyclical changes in unemployment (beyond a given threshold) would be financed by the eurozone or EU funds, ensuring that no permanent transfer between countries took place.
Another prominent component of the eurozone budget should address public investments. In spite of a zero, or even negative, cost of borrowing, overall investments have stagnated right across Europe since the crisis. Decentralised decisions are not a solution, since low-debt governments do not want to spend more and nor do they want high-debt countries to do so. A Sustainable Europe Investment Plan, aimed at digital, ‘green’ and public infrastructures, also ranks high in the mission letter to the economy commissioner.
The final key arm of the common fiscal capacity, which combines a wide selection of proposals, conmprises backstops against systemic financial crises. Paralysing controversies focus on apparent details of the two main institutions on which general agreement exists in principle: a common deposit insurance and a European Monetary Fund.
The moral-hazard problem, apparently of overwhelming importance to the NEZ countries, is addressed in all the numerous technical proposals lying on the table. A simple idea at the basis of insurance is that contributions to the capital of common insurance entities should be commensurate, not with the size but the riskiness of the member countries. Yet this is the area in which mistrust matters most, and challenges political will and leadership.
Coordination of national fiscal policies and a common fiscal stance vis-à-vis monetary policy is also necessary. Saying that this would jeopardise the hallowed independence of the European Central Bank runs counter to the new ‘conventional wisdom’, which is demanding more active and co-ordinated fiscal policies to overcome the limits of monetary policy in the face of today’s challenges.
The pursuit of co-operative policies and controlled discretion in this regard require a genuinely supranational policy-making institution, such as the proposal for a European Ministry of Economy and Finance advanced by the French president, Emmanuel Macron. Two issues which need to be dealt with first are how this body should be appointed and with what mandate and powers.
A lot of stumbling blocks stand in the way. Yet this is the time for genuine pro-Europe reformers, if such there be, to take the lead.