The idea that the European Monetary Union can only exist with some form of political integration and a proper budget is not new. In 1977, the MacDougall report suggested that a budget of the order of 5-7% of GDP was necessary, and in the run-up of the Maastricht treaty, Jacques Delors was insistent on the needs for political integration (see, e.g., Delors 1991). Yet, for lack of political consensus, it was decided to proceed with monetary union alone in the hope that monetary and financial integration would eventually precipitate both fiscal and political integration over time. The dominant view (Emerson report 1990) was to consider monetary unification as a key, technical complement to the single market that by eliminating transaction costs and foreign exchange risks would foster macroeconomic convergence. As for the macroeconomic costs of losing an adjustment device at the country level, it was generally believed that such loss would be benign because:
- Monetary policy would take care of symmetric shocks that were considered prominent in the Eurozone; and
- Having brought their public finances back to equilibrium, member states would have ample room for counter-cyclical fiscal policies.
The European crisis has raised serious doubts on these assertions, as well as on the underlying assumptions embedded in the Maastricht Eurozone architecture.
- First, due to insufficient fiscal savings in good times and/or of the size of the shocks incurred, many member states were unable to run counter-cyclical policies. On the contrary – because of coordination failures – fiscal policies in the Eurozone quickly turned pro-cyclical.
- Second, the ECB proved unable to fully play its role of a symmetric shock absorber as it was confronted with broken monetary transmission channels for conventional policy and appeared enthralled in the politics of developing its unconventional policy toolkit.
The reaction of the Eurozone to this varying combination of banking, current account, and fiscal crises was to offer conditional assistance to distressed countries, and to enforce macroeconomic adjustment programmes through enhanced monitoring. Although the cushioning impact of such assistance should be acknowledged, and although relative price adjustments have started to produce some positive results in a number of countries, the severe asymmetric adjustments contributed to a huge increase in unemployment and poverty. It is unclear to this day the extent to which it will help rebuild the economic potential of these economies. Above all, it has contributed to digging a political gulf between creditor and debtor countries, and raising social and political disaffection for the EU. Today, the democratic deficit and the limited success of the economic strategy tend to feed off each other, with the risk of a double rejection that makes the current situation highly unstable.
In October 2013, the Glienicker group (a group of 11 German economists and political scientists) raised the alarm bell against muddling through, calling for an optimal EU rather than a minimal one. They suggested the Eurozone to introduce a fully-fledged European executive that would be “chosen and scrutinized by the European parliament”. This executive body would be in charge of negotiating reform packages with crisis countries. It would also manage a small Eurozone budget that would fund public goods and possibly a common unemployment insurance system but would not amount to a “transfer union” (only a “controlled transfer mechanism”). This would be one condition to restore the credibility of the no bailout clause.
In February 2014, the Eiffel group (a group of 12 French experts from academia, think tanks, business, administration, and the political sphere) issued a call for a “Political community of the euro”. It is grounded in the same concerns about the political and economic unsustainability of the status quo and echoes some of the proposals advanced by the Glienicker Gruppe. We discuss below the economic and political rationales of the proposals.
Economic side of the proposals
Since the start of the crisis, the Eurozone has not been able to deliver an effective and coordinated policy response. This is not going to change in the coming years because the new economic governance that was put in place with the crisis still fails to consider the monetary union as a whole when designing economic and fiscal policies. As a result, policy rules and recommendations, applied on a country-by-country basis, provide a poor stabilisation outcome. This largely undermines the ability of the Eurozone to absorb and recover from economic shocks, be they external or idiosyncratic.
Still, the world will remain uncertain and the Eurozone needs to be able to respond swiftly to shocks. Surely, having enough national fiscal space is absolutely necessary to allow the automatic stabilisers to play their role and cushion small shocks but they are usually insufficient to deal with larger shocks. This is the reason why in existing federations, federated entities are usually constrained by tight fiscal rules, but this is compensated by a federal budget that concentrates most of the stabilisation function. Existing federations also enjoy macroeconomic risk-sharing through financial integration, while in the Eurozone, because of inadequate institutions, the crisis has led to financial disintegration. In a nutshell, the Eurozone lacks instruments of macroeconomic risk sharing (Allard et al. 2013).
While financial fragmentation is being tackled by the banking union project, the discussion on fiscal risk-sharing has remained muted. A small federal budget could be helpful not only as a backstop to the banking union, but could also play some fiscal stabilisation purpose, for instance through a Eurozone pillar to unemployment insurance. It would need to be backed by own resources in order to avoid the ‘I want my money back’ paralysis, which has crippled the EU budget, and would need to focus its resources on counter-cyclical policies.
In addition, one might argue that Eurozone member states have self-selected themselves as countries that consider European integration as much more than just a single market. This could involve instruments to facilitate convergence from the parts of the monetary union that are lagging behind and that may suffer from concentration of productive capacities at the core. Indeed, encouraging capital and labour mobility within the Eurozone is key to foster growth at the aggregate level; but such strategy will also generate structural geographical inequality that need to be addressed.
On the whole, the rationale for a Eurozone budget can be found in the three traditional motives of public interventions (Musgrave and Musgrave 1989): allocation, stabilisation, and redistribution. However, the most convincing motivation at this stage is stabilisation. Such pooling of resources needs to be made ‘under the veil of ignorance’, that is with the genuine belief that all parties will be benefiting and paying equally into this budget. This can only happen if the build-up of a European pillar of unemployment insurance, for example, is accompanied by deep efforts of convergence between Eurozone economies. Such insurance can indeed not be envisaged without a minimum of harmonisation of labour markets across the union. Offering some European risk-sharing in exchange of difficult reforms could, however, change the perception of these reforms in lagging countries and would give a new purpose to the idea of European integration.
Yet, going in this direction would make even more acute the necessity of reshuffling Eurozone institutions to raise accountability and democratic legitimacy.
In June 2009, the German Constitutional Court exposed in its ruling on the Lisbon Treaty what it described as a “structural democratic deficit” embedded in the functioning of the European institutions. Since then, the crisis has exposed a form of executive deficit that has prevented taking resolute and early action to deal with the crisis as the democratic and executive deficit tended to feed off of each other.
Major reforms to the governance have been undertaken. However, this evolution, which de facto entrusts more power at the level of the Commission, lacks accountability and falls short of adequately coordinating economic policies at the level of the Eurozone. Additionally, adjustment programmes fall within the cracks of the IMF, the Commission, the ECB and the Eurogroup in a maze that dilutes policy recommendations and responsibilities.
Outsourcing economic policy to a purely technocratic European Commission or to national rules is economically and democratically unsatisfactory. Economic policy always imposes a form of political discretion. It can be discussed whether the Commission in its current incarnation is appropriately accountable for exerting such executive discretionary powers.
The only way to provide both input and output legitimacy is to clarify responsibilities and ensure that executive decisions that need to be taken at the European level are taken by what would amount to a government of the Eurozone. That is, not a loosely defined gathering of national and European decision-making processes, but a truly European one for those decisions that need to be European, in a move that would actually not weaken but clarify the principles of subsidiarity. The democratic control of this Eurozone executive should be exercised by European Parliamentarians (of Eurozone countries) and not by national ones or any combination of both. Indeed, the premise of this project is to clarify responsibilities rather than blur them. In many countries (including France), National Parliament should increase its participation in European decisions by exercising a stricter control over its respective country’s position in the Council of Ministers. The ill-design of some national institutions or political practices cannot and shouldn’t be addressed by institutional innovation at the European level.
Although important disagreements between France and Germany do persist – most notably on the role of political discretion in economic policy and on the need for government intervention to stabilise the economy against shocks – there is a growing sense on both sides of the Rhine that the current economic situation and the existing institutional set up is both economically and politically destructive. This calls for a real debate about the architecture and the institutions underpinning the European Monetary Union. Political leaders have managed to resist these difficult questions for the time being but time is working against them.
Delors Report (1991), Address to the European Parliament and his reply to the debate, Strasbourg, 23 January and 20 February 1991, http://aei.pitt.edu/8560/.
Emerson report (1990), “One Market, One Money. An Evaluation of the benefits and costs of forming an economic and monetary union”, European Economy No. 44, October.
Glienicker gruppe (2013), „Towards a euro union“, www.glienickergruppe.eu/english.html
Groupe Eiffel (2014), “For a euro community”, www.groupe-eiffel.eu/our-manifesto/
Allard C, P K Brooks, J C Bluedorn, F Bornhorst, K Christopherson, F Ohnsorge, T Poghosyan, and an IMF Staff Team (2013), “Towards a fiscal union for the Eurozone”, IMF Staff Discussion Note, September.
MacDougall report (1977), “Report of the study group on the role of public finance in European integration”, April.
Musgrave, R and P Musgrave, 1989, Public Finance in Theory and Practice, McGraw Hill Higher Education.