MADRID — The return to
economic growth in the eurozone has produced a dangerous sense of complacency
on the Old Continent, especially in the richer countries of the north. But
Italy’s flirtation with an exit from the euro under a populist government is a
stark reminder that, if left unaddressed, the deep structural weaknesses that
plague the single currency could trigger an existential crisis across the EU.
It would be a mistake, therefore, to believe we can drive along in
business-as-usual mode, or just take a few small steps toward more European
integration.
This week’s Meseberg
Declaration signed by Angela Merkel and Emmanuel Macron, although a step in the
right direction, is part of a collective denial about what needs to be done.
You don’t need to be a populist to recognize that Europe’s monetary union is dysfunctional
and in dire need of more substantial reforms that those proposed by Germany and
France.
To keep the single currency
alive, it needs two major structural improvements.
First, it needs to reduce the
fragmentation in Europe’s banking system that has caused the Continent to
experience more severe crises than other parts of the world — most notably in
comparison to the U.S.
Second, it has to develop a
streamlined and legitimate decision-making process to respond quickly and
boldly to the next major recession.
The next crisis is likely to
hit some countries harder than others. The problem is that the only tools at
the eurozone’s disposal to tackle these recessions are internal devaluations
— which invariably lead to income cuts and job losses.
The European Commission,
academics and national governments broadly agree on this diagnosis. The problem
is that there is no consensus on the way forward.
Some argue that eurozone
countries should take on more responsibility when it comes to prevention and
reform. That means putting public finances in order, boosting the solvency of
banks — by reducing the incidence of non-performing loans — and reforming their
labor and product markets.
Action at EU level, according
to this view, should only become an option when each country has taken the
necessary measures to get their house in order. In other words, risks should be
minimized before they are shared among the group.
But the experience of Spain
and others shows that this approach, although it may work in normal times,
tends to produce unnecessary economic damage during a crisis. The strategy of
placing most of the burden on crisis-stricken countries under the adjustment
logic of the so-called troika can — in the long run — prove to
be politically unsustainable and undermine European citizens’ confidence in the
euro. We saw it in Greece. We are now seeing it in Italy.
Yes, Germany carried out
successful reforms in the early 2000s. But their success owes much to the fact
that other European countries were sustaining demand for German goods and
services. What might be good for one country can be damaging if several
countries act at the same time.
We need to be more ambitious
than simply proposing a eurozone budget. Designing a relatively well-sourced
fiscal capacity, managed by a central fiscal authority at the European level
will be crucial to offset country-specific shocks.
This can take several forms: a
Europe-wide fund to be mobilized depending on a country’s circumstances, an
investment fund; or an unemployment reinsurance system that tops up national
schemes. What matters is that it can be quickly activated in the event of a
major shock and that there are safeguards to avoid irresponsible behavior.
This eurozone budget — which
should be closer to €100 billion than the €10 billion presently foreseen
— would smooth macroeconomic shocks and fund pan-European projects to
increase growth potential, ensure sufficient public investment, reduce
inequality, protect the borders and facilitate debt sustainability.
It would be an ambitious
measure, and it can only happen if there is trust among member countries and a
willingness to pool more fiscal sovereignty. For it to work, every member
country would need the backing of its citizens.
Merkel and Macron neglect this
point in their declaration. But the truth is that reform will be politically
impossible without first explaining to voters why their government needs to contribute
to a eurozone-wide fund, when it should be activated and how it should be
deployed. The eurozone is, after all, a public good. Politicians have a
responsibility to make a convincing case for why it needs a eurozone budget to
sustain it.
They must also address the
concern — common in northern member countries — that creating a central
fiscal capacity will encourage some to misbehave and overspend.
This can be avoided with the
right incentives. The new framework should be set up in a way that ensures that
only countries that stick to fiscal prudence and commit to structural reforms
will receive support.
The question of what happens
when a member country misbehaves must also be answered. Introducing formal
sovereign debt restructuring in the eurozone to ensure market discipline ex
ante — as Merkel has suggested — is problematic.
As long as the central fiscal
capacity is not large enough — and it won’t be for some time
— sovereign debt restructuring will be both traumatic and destabilizing
for Europe as a whole. Instead, a member country should be able to obtain
financial support from the central fiscal authority, while relinquishing its
fiscal sovereignty temporarily, and signing a memorandum of understanding of
macroeconomic reforms.
This fiscal authority would
have to represent the interests of the eurozone as a whole and not the sum of
the individual members, as is now the case with the European Stability
Mechanism as well as the future European Monetary Fund proposed by Merkel and
Macron.
To ensure this, the permanent
head of the central fiscal authority should be put forward by the Eurogroup and
ratified by a newly established euro committee in the European Parliament.
The bottom line is simple. For
the eurozone to be successful, we need to inject more democratic legitimacy
into how it is governed.
Miguel Otero-Iglesias is
senior analyst at Elcano Royal Institute and professor at the IE School of
International Relations. Raymond Torres is director for macroeconomic and
international analysis at FUNCAS. They are co-authors of the paper “Quit kicking the can down the road: A
Spanish view of EMU reforms.”
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