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Europe faces unfinished business on the euro

When the European Commission published a “white paper” this month on the future of Europe, something was missing.

Two weeks earlier Pierre Moscovici, EU economy commissioner, had told an audience in Athens that the blueprint would include “ambitious ideas” for “deepening of the economic and monetary union” — code for overhauling the system of budget rules and policy co-ordination that underpins the single currency.

Instead, amid warnings from national capitals that the plans could stoke division ahead of the EU’s 60th anniversary summit in Rome, and even heighten tensions in the Dutch election campaign, the commission changed course. It now expects to publish a reflection paper in late May, thereby also leapfrogging France’s presidential poll.

The move is the latest sign that questions of euro area governance have been driven to the policymaking sidelines by factors ranging from the hammer blow of Brexit to an easing of the economic crisis. But Europe’s leaders — gathering in Rome this week to try to reinvigorate the EU project — know reform can only be ducked for so long.

Priorities for change vary wildly between capitals but on one point there is agreement: the status quo is not a long-term option for the euro.

“You can’t be half pregnant — we need to finish the architectural structure of the single currency,” says Johan Van Overtveldt, Belgium’s finance minister. “If we await another major crisis we will be obliged to do then what we do not succeed in doing now.”

Manfred Weber, a German centre-right MEP who leads the European People’s Party group in the EU parliament, concurs, saying Europe will “have to come back to fundamental discussions and fundamental decisions” on the euro once this year’s slalom of major elections — culminating in Germany in September — is over.

The reason is clear. The single currency and its perceived iniquities go to the heart of the popular backlash threatening Europe’s governments, and a wider sense of disenchantment with the EU.

For many, the euro has fomented discord where it was meant to bring harmony. Anti-establishment parties lambast the currency as a cause of economic misery, or complain that it serves as a vehicle for Berlin to maintain its economic dominance. Marine Le Pen, leader of France’s Front National, has described it as “a corpse that still moves” — one that shutters businesses and lengthens dole queues.

Competing frustrations simmer on the other side of the Rhine: German concerns about the European Central Bank’s expansionary monetary policy have mingled with taxpayers’ resentment at being repeatedly put on the hook for bailing out other countries.

Policymakers acknowledge a clear conundrum. How does one solve popular unrest about the euro if doing so requires more integration and more Brussels — precisely what the populists are railing against?

For Luis de Guindos, Spain’s economy minister, the first goal of any reform drive “should be to have a common view that we should take further steps in integration . . . we do not have such a consensus now”, he told the FT.

No one expects such a consensus to materialise before the German election. But officials in Brussels think that, depending on the outcome of this year’s votes, the period afterwards leading up to European Parliament elections in mid-2019 could offer potentially fertile policymaking terrain.

Ideas are not in short supply. The EU institutions in 2015 published reform options stretching to a 10-year horizon. The blueprint included short-term measures, such as more co-ordination of economic policies, and completion of a project to centralise oversight of the currency bloc’s banks; it also outlined longer-term ideas for a “euro area treasury” and a stimulus fund that could be tapped to deal with macroeconomic shocks.

The authors, which included the European Central Bank, said the plans could narrow the gulf in productivity between countries such as Germany and Greece, boost growth and increase resilience to financial crises.

But even progress on the short-term goals has been mixed. One priority was a common scheme to guarantee bank deposits in the euro area. The plan was championed by France and southern Europe but encountered strong opposition from Berlin, which feared a safety net would lead to irresponsible risk-taking by banks.

Olli Rehn, a board member at the Bank of Finland and the EU’s economy commissioner until 2014, says this is one example of a north-south “intellectual cleavage” that has persisted since the earliest days of the euro, and that has “often slowed down the development of economic and monetary union.”

When it comes to economic and fiscal policy, many in France see the Germans as too rigid, while many in Germany see the French as insufficiently credible

“When it comes to economic and fiscal policy, many in France see the Germans as too rigid, while many in Germany see the French as insufficiently credible,” Mr Moscovici notes. “If we are to build the trust we need to move forward with reforming the eurozone, we will need to see credibility from France and openness from Germany.”

The current political climate means that “now in the eurozone we are in the middle of nowhere”, Mr de Guindos says. “We do not know if we should go further or take some steps backwards.”

It is a situation, he says, that will only partly be resolved by pro-EU election outcomes, as populism “is going to mark the agenda”.

“I think the only way forward is to have more integration — to share more risks, to have more instruments . . . to avoid leaders and laggards in the eurozone.”

For some, the solution lies in a gradual approach, with moves towards economic risk-sharing in the euro area balanced by greater “risk reduction” measures promoting market discipline. Germany has advocated such an approach in the area of financial services — saying a deposit guarantee scheme could only come after steps to make sure losses can be imposed on failed banks’ creditors.

Reform has practical as well as political constraints. Many of the more ambitious ideas in circulation would require EU treaty change, something which is firmly off the political agenda.

“Full-blown monetary union demands full-blown political union — I’m not sure that’s realistic,” Mr Van Overtveldt says. “But we can make a valuable positive contribution by developing a second-best solution, and we can do that better than we have done so far.”

Via FT

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