Trust Needed Before Euro Area Can Be Fiscal Union, Bruegel Says
(Bloomberg) -- Political leaders in the euro area must work to build trust between each other and with the general public if the fiscal pillar that the euro needs to survive is ever to become a reality, according to a new paper by the Brussels-based Bruegel Institute.
The study sets out a three-step process to a federation with centralized spending powers, beginning with the completion of the region’s banking union -- a process started in 2012 but as yet without sight of its final component, joint deposit insurance. The authors, Guntram Wolff and Maria Demertzis, say that political will even to achieve that limited advance is lacking for the time being.
“A monetary union without fiscal union is generally considered to be incomplete,” they wrote in the paper presented Friday in Bratislava at the European Union’s bi-annual informal meeting of finance ministers and central bank chiefs. “Above all, fiscal integration is a matter of trust, which is currently at a low level.”
The lessons of the debt crisis that began in 2010 are now splitting political opinion into two camps similar to those that shaped the debate that led to the single currency’s creation almost 17 years ago.
Akin to the “economists” that then argued economic convergence needed to happen before the euro arrived, countries like Germany and the Netherlands are now contending that political and financial conditions have to be right in advance of any new centralization. On the other side -- like the ‘‘monetarists’’ of an earlier age -- countries including France and Italy now believe the way to greater integration is to first create the institutions -- like a joint unemployment insurance scheme -- and let the political support come later.
Bruegel’s point is that somehow the economic divergence that characterizes the euro area -- think of the difference between Hamburg and Heraklion -- needs to be narrowed in order to generate support for more power for the center.
“Reducing real economic differences could help increase the appetite for risk sharing,” the authors write.
They propose a middle step that could help in this direction, namely a more limited central spending capacity, which could finance “public goods that are of true European nature,” including external and internal security, climate policies and migration policies.
Bruegel, which counts the central banks of France, Italy and Luxembourg among its institutional members, is an institution that has been in the intellectual vanguard of Europe’s response to the debt-crisis woes, particularly in the creation of the banking union from 2012.
Those structures, starting with a financial-supervision unit at the European Central Bank that commenced work only two years later, and followed by a joint bank-resolution authority that took up work this year, were created, for euro-area standards, in the blink of an eye.
The way to fiscal union, which reaches beyond mere financial administration and into the fundamental rights of states to tax and spend, is much less sure, Bruegel says.
“Historical-comparative research typically finds that monetary and fiscal unions go hand in hand,” the authors write. “The full fiscal union of the last step on the other hand involves a level of political integration that is very different from today.”