There are two possible readings of the current situation in the eurozone. The first is to focus on the fact that we have weathered an existential crisis and come out stronger; we are in the seventh year of an economic expansion with unemployment at a 20-year low. Grexit is behind us and there are today more euro area members than at the beginning of the crisis. A slowdown is indeed ahead, but we have the tools and mechanisms to handle it; it is not likely to be a violent asymmetric shock like a decade ago.
The alternative reading suggests that despite putting in place significant reforms which helped defuse the crisis, nothing much has happened in the last five years. The institutional architecture of the euro area remains frozen in its current state since 2014: the banking union is not complete, the “new” fiscal toolkit is clearly in need of an overhaul, the so-called “Euro area budget” is insignificant, and the “backstops” are not at their full potential. The doom-loop between banks and sovereigns is alive and well, and countries continue to diverge rather than converge. To cap it all, we are nearing the limits of what monetary policy and the ECB can deliver, while countries disagree strongly on using the limited existing fiscal space.
In a non-crisis setting, policymakers have lost momentum on reform. By doing so, however, they take a large political and economic risk: at worst, we will not be prepared for the next crisis; at best we will watch “eurosclerosis” creep back. Instead, they should rise to the occasion. The right time is now, with a new European Commission outlining its priorities and unveiling a plan for a “new Green Deal”, a new European Parliament about to discuss the EU medium-term financial framework and a succession at the helm of the European Central Bank which can take it further on the road so perfectly captured by the “whatever it takes” 2012 statement. And the current environment, with no inflation, negative interest rates, and new conditions for competition, is conducive to bold initiatives.
But while the timing and conditions may be right, we seem to be stuck. Political “windows of opportunity” have come and gone, and yet we seem to be reverting to traditional stereotypes where the euro area core is from Mars and the periphery is from Venus. The elusive compromise between risk-sharing and risk-reduction seems out of reach; instead we have become deadlocked in all the reform areas outlined in the 2015 Five Presidents report (already a watered down version of the 2012 Four Presidents Report).
In a banking union, the crucial missing piece, the European Deposit Insurance Scheme, is facing resistance. Counter-cyclical stabilisation tools, such as the socially appealing European Unemployment Insurance, are still on the drawing board while a European Safe Asset that would help financial stability is lost in the details of the various possible schemes. The proposed euro area budget is a pale version of a central fiscal capacity. And while there is near-consensus that fiscal rules are pro-cyclical, too complex and will likely fail again, we cannot find the political will and common ground to change them.
What is striking in this situation is the stark contrast between clear support of the euro and the EU by Europeans and the political gridlock that prevents us going forward. How does one break this? We submit that the key is two-fold. Firstly, to fund European investment by moving decidedly to give the EU its own resources, divorced from national budgets, and secondly, to focus such investment around European public goods. These steps do not replace the need for a genuine Economic and Monetary Union (EMU) reform, but without them no such reform will be possible.
Giving the EU its own resources is the only way to overcome country divisions on EU spending from national budgets. A survey conducted in 10 member states by YouGov, together with the School of Transnational Governance of the EUI (Florence), backs this. European citizens are deeply divided on the extent to which their national budgets should provide more funding for the EU, but, instead, there is an overwhelming support for new own resources at European level, such as supra-national levies on emissions (a carbon tax), internet companies, or business profits in general. This suggests the best way to push the debate forward would be to severe the link between national budgets and the EU budget and instead develop mechanisms for own resources linked to economic activity at EU level.
The second tool would be using the new “Green Deal,” and the mission ethos it entails, as a way to unblock the fiscal debate. We should be focused on investment capacity where European common goods are at stake. Our aim should be to leverage European capital for an innovative, inclusive and sustainable society which embraces technology. A green pact with public and private investment related to environmental transition, climate adaptation, infrastructure and skills upgrading can provide the lever necessary to reinvent the European economic and social model.
This is not a solution for everything. As stated, the case for the rest of the EMU reform agenda remains strong; there are welfare-enhancing gains from eurozone macro stabilisation policies. And green bonds are not a stability instrument; we will still need a central fiscal capacity with ability to tax and borrow. Therefore, a safe asset which would in a sense be the provision of a common good and represent a true leap in EMU. But to move the debate forward, we need to focus on EU own resources and aim for a new “Green Deal.”
- László Andor is Secretary General at the Foundation for European Progressive Studies and a former EU commissioner. George Papaconstantinou is a professor at the School of Transnational Governance at the European University Institute and a former Greek finance minister. Miguel Poiares Maduro is Director of the School of Transnational Governance at the European University Institute and former Portuguese Minister for Regional Development.
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