(Bloomberg Opinion) -- Spare a thought for Mario Draghi, if you can. The European Central Bank president never tires of telling politicians about the urgent need to complete the euro zone’s half-finished monetary union.
His logic is sound about this being the best way to fight future crises. Yet after a year in which the region’s leaders failed to do even the most basic reforms, one can’t help feeling that Draghi is preaching in the desert.
He was at it again last week in a speech at Berlin’s Hertie School of Governance, where he presented a comprehensive plan for strengthening both the EU and the euro zone. For a start, the 28-member EU (27 in the event of Brexit) should finalize its single market by bringing in the sectors where it isn’t functioning, especially in services.
Then the smaller club of euro countries should complete their so-called “banking union,” which has moved the supervision of the largest lenders from national authorities to the ECB. This means, for example, creating a backstop fund for the euro zone to help if a bank gets into trouble. Draghi also wants the member states to create another pot of money to help countries when markets turn against them in an irrational way. That would avoid the kind of excessive fiscal tightening we saw after the last financial crisis.
Most economists agree that Draghi’s suggestions would help the euro zone thrive. The currency area has made big changes since the start of the sovereign debt crisis in 2011, for example by setting up the European Stability Mechanism. That joint fund will lend money at low rates to member states in a full-blown crisis. But the experience of 2011-2012 shows that euro zone countries still shoulder too much of the cost during a period of difficulty. So long as the member state can show it’s acting in a disciplined way, it only seems right to show greater solidarity after an external shock or a banking crisis.
Political leaders are aware of all this, but they’re doing precious little about it. This was meant to be the year when stuff finally started to happen, ahead of the European Parliament elections in 2019. But after a June summit of European leaders made only limited progress on the banking union, there’s not much appetite to reopen the discussion.
It’s all very similar to “Murder on the Orient Express” in that it’s impossible to pin the blame on any one state. The most obvious culprit is, of course, Germany. Berlin has refused any concrete progress on creating a joint deposit insurance scheme, which would protect depositors for up to 100,000 euros in a crisis. Berlin fears it would lead to the continuous transfer of money from northern Europe to southern Europe. But it’s ignoring the fact that joint insurance would make crises less likely, to Germany’s benefit. Germany could use it itself in the event of a banking collapse, which isn’t impossible.
It’s not all Berlin’s fault, though. French president Emmanuel Macron did make a brave push for a more integrated euro zone when he took power. He also implemented French labor market reforms that bolstered France’s credibility with Germany. But his efforts on monetary union lacked focus. He insisted on getting the June summit to agree to a symbolic euro zone budget, even though it’s too small to make any difference. He’d have done far better to pursue a speedier completion of the banking union.
Italy is a whole other story. Its election of a populist government makes it very difficult for other euro zone members to agree to greater solidarity. A big part of buttressing the monetary union is that financial “risk-sharing” between countries should go hand in hand with “risk reduction.” Yet Italy’s ruling League and Five Star Movement are loudly critical of the euro zone fiscal rules, which demand that countries cut their budget deficit when the economy is recovering. They’ve opposed too the so-called “bail in”, where bondholders take a hit when a bank is resolved. It’s hard to imagine much progress on risk-sharing when the commitment to risk reduction is weak.
More generally, the EU seems too busy with other crises to care. The number of immigrants from Africa and Asia has fallen dramatically since three years ago, but the subject remains at the top of voter concerns. The clock’s also ticking on Brexit. While this is chiefly a problem for the British government, a catastrophic “no deal” departure would hurt the EU too, so the final stages of the process need careful stewardship.
For all Draghi’s efforts, the monetary union is unlikely to make significant progress by the time he steps down in autumn 2019. He saved the euro, but he can’t guarantee its future.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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 Opinion. 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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