The Euro Zone Needs More Than a New Roadmap
(Bloomberg View) -- When the European Council meets Thursday and Friday, one document for discussion will be the European Commission's new plan for the future of monetary union. Many of the ideas are not so much innovative as useful. Others look difficult to enforce. Most importantly, the reform plan will remain yet another meaningless document until euro zone heads of governments actually spell out what they want.
The "Roadmap for deepening Europe's Economic and Monetary Union" which was published last week follows a string of reports in the last couple of years, each loftier than the previous in its goals. The trouble: They have largely remained on paper. The euro zone adopted significant institutional reforms at the height of the sovereign debt crisis, including initiating a banking union. However, their completion has proven elusive, mainly because of political resistances coming from member states.
The plan, presented by President Jean-Claude Juncker, includes ideas which would address some of these shortcomings. One is to establish a European Monetary Fund which, among other things, would provide additional resources to restructure or wind down failing banks. Such a move would foster investor confidence in the European banking system and ensure that individual governments do not have to handle banking crises on their own.
While this idea is sensible, it is hardly novel: member states envisaged such a backstop when they created the Single Resolution Mechanism in 2013. However, they failed to follow through because of fears from countries such as Germany that they would end up bailing out the banking systems of other countries. For all the Commission’s hopefulness, Berlin’s position on the issue remains an open question.
The EMF would also take over the functions of the existing European Stability Mechanism in supporting member states in trouble. Unlike the ESM, which is based on an intergovernmental agreement, the European Monetary Fund would be enshrined in the EU's legal framework. It would be accompanied by the creation of a euro zone finance minister in order to improve policy coordination within the monetary union.
Wolfgang Schaeuble, Germany's former finance minister, endorsed the creation of the EMF upon retiring from his job. The trouble is that governments cannot quite agree upon how this new institution should work, for example whether there should be automatic restructuring of sovereign debt whenever a country applies for help. The Commission document does little to address these problems, which can only be resolved by member governments.
The least convincing idea endorsed by Juncker is the creation of a financial vehicle for dealing with economic shocks that affect only a few countries. The objectives are laudable: The euro zone needs a joint fiscal policy, to help countries in need and complement the efforts of the European Central Bank. However, it's not clear how the project would address the concern of low-debt countries such as Germany, who fear a common budget would fund reckless spending in other member states.
The Commission suggests that countries asking for help would need to be compliant with euro zone fiscal rules for a period before they are hit by a shock. However, recent experience has shown that the Commission is open to a flexible interpretation of its budgetary benchmarks -- for example, in the last couple of years Italy has been able to run much higher budget deficits than a strict interpretatin of the rules would have allowed. Moreover, it is very hard to determine when a shock has begun: as such, it will be difficult to distinguish between profligacy and necessity.
Completing the banking union -- for example, creating a joint deposit guarantee scheme -- and building elements of a fiscal union will help strengthen the euro zone's institutional infrastructure. But this depends on European capitals, not Brussels.
In France, President Emmanuel Macron has set out an ambitious agenda for euro zone integration, though there are recent reports he may have become more cautious about it. Germany is edging closer to the formation of a grand coalition government between the Christian Democrats and the Social Democrats. Martin Schultz, SPD leader, has recently called for the creation of "United States of Europe", but it is unlikely that chancellor Angela Merkel will play ball.
The European Commission is right to serve in a coordinating role for governments and offering them technical support. But in the absence of clear political will, documents such as last week's Commission Roadmap will remain a long list of empty words.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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