European leaders nudged forward plans for a fiscal union with discipline as its leitmotif at last week’s summit. But such a “Disziplin union” is neither desirable nor necessary. It may not even be politically feasible.
The consensus among the euro zone political elite is that fiscal union is needed to complete the crisis-ridden monetary union. There are two rival views of what this should consist of: a panoply of rules to prevent and punish irresponsible behaviour; or financial payments to help weaker economies. The former view, espoused by Germany, is in the ascendant. It involves lots of sticks but not many carrots.
The summiteers’ main achievement was to give further impetus to the idea that the European Central Bank should act as the zone’s central banking supervisor from the start of next year after Berlin dropped its insistence that its own savings banks should be excluded from the regime. That was an important political concession. It’s also conceivable that the new supervisor will be better able to clean the cesspits in parts of the euro zone than the current often-conflicted national supervisors.
However, banking supervision is only part of what the experts call “banking union” which, in turn, is only part of a planned fiscal and political union. Just looking at banking union, what has been agreed is the stick. Back in June, when the plan was first agreed, there was also supposed to be a carrot: the euro zone would inject capital directly into struggling banks in countries such as Spain. But Angela Merkel, Germany’s Chancellor, made clear after the summit that this would not happen retroactively.
Full banking union would also include a common deposit guarantee scheme. But there was no mention of this carrot in the summit’s communiqué. There were, though, more sticks to ensure budgetary discipline and economic reform.
First, the summiteers called for the “two-pack” to be implemented by the end of the year. Even aficionados of euro-speak find it hard to stay up-to-date with the whirlwind of rules designed to keep countries on the fiscal straight and narrow. The original “stability and growth pact” was augmented by first the “six-pack”, then the “fiscal compact” and now, if everything goes to plan, the “two-pack”. The basic idea is that there will be coordination of countries’ budgets and enhanced surveillance of those experiencing financial difficulties.
Mind you, this is not sufficiently tough for Wolfgang Schaeuble, Germany’s finance minister. He wants a new European Commissioner to be have the power to veto a national budget if he or she feels the deficit is too large. While that’s not yet a euro-wide consensus, the summit did give some support for the idea that individual countries should be required to enter contracts with the centre spelling out what reforms they would commit to undertake.
Counterbalancing these potential new sticks, one new carrot was dangled: what the eurocrats call an “fiscal capacity”. This is code for a centralised budget which could be used to help countries adjust to economic shocks or even as an inducement to persuade them to move ahead with unpopular reforms. This may turn out to be an important idea. But, as yet, there is no detail on how big such a central budget would be, where the money would come from or what exactly it would be used for.
Plans for yet more bureaucratically-mandated discipline are not desirable. They would hard-wire austerity into the circuitry, potentially deepening the recession in parts of the euro zone. They would also involve a further transfer of sovereignty to the centre, even from those countries that are not in trouble. That is a mistake. It is one thing to turn Greece or even Spain into a quasi-protectorate for a temporary period; it is quite another to centralise partial control of all countries’ budgets permanently.
It may not even be feasible to push through such a Disziplin union. While Germany and other northern countries want rules, the southerners are much keener on a “transfer union” involving ideas such as joint guarantees for their debts. Such mutualisation of debt didn’t get mentioned in the summit’s communiqué, because the southern countries’ bargaining position vis-a-vis Germany is weak. But even if their leaders are eventually browbeat into signing up to a Disziplin union, there must be some doubt over whether the people – who may be asked to vote in referendums sanctioning loss of sovereignty – will agree to it.
A fiscal union is, in fact, not even necessary. There clearly has to be some discipline in order to prevent countries running up excessive debts. But that can be better achieved by making clear that insolvent governments can go bust. The Greek debt restructuring earlier this year was a step in the right direction. But it should have been deeper and occurred earlier. If bondholders know they will suffer a haircut when debts spiral out of control, they will have a stronger incentive to hold countries to account in the first place.
There also has to be some sort of support system for countries in trouble. And the quid pro quo should be a loss of sovereignty for the period of the rescue operation. Deficits have to be cut and economies reformed. But that is quite different from either permanent rules for everybody or permanent mutualisation of debt. The euro zone needs neither a Disziplin union nor a transfer union.