A union too far
The Greek crisis has given new life to a superficial argument: that the euro zone isn’t working because its monetary union hasn’t been accompanied by fiscal and political union.
France’s President Francois Hollande has called for a euro zone government, with its own budget, which would be accountable to the people via a new euro zone parliament. Pier Carlo Padoan, the Italian finance minister, has backed the idea – also advocating a euro zone unemployment scheme.
The European Union’s so-called five presidents have given nuanced support for these ideas. In their June report, European Commission President Jean-Claude Juncker, European Central Bank chief Mario Draghi, European Parliament President Martin Schulz, European Council President Donald Tusk and head of the Eurogroup Jeroen Dijsselbloem called for a euro zone treasury – effectively a finance ministry for the bloc – and a “common macroeconomic stabilisation fund” to help countries weather shocks.
The five presidents first want euro zone countries to converge towards best practice on boosting competitiveness. They then want legally binding rules to ensure they stay competitive. They also advocate more coordination of macro-economic policy between the bloc’s 19 countries, ultimately with some joint decisions on national budgets.
Such an ambitious centralisation of economic power is neither needed nor desirable. Nor is it politically achievable.
Creating a common euro zone finance ministry, government, parliament and budget would require a new treaty. This would need unanimous approval of the 19 countries in the bloc, and probably of the nine other members of the European Union, such as Britain, which don’t use the euro.
Euro zone governments do not agree on the details. Germany, for example, thinks more fiscal discipline is the main imperative. Wolfgang Schaeuble, its finance minster, wants to take away the Commission’s power to police budget rules on the grounds that it is too political and soft, according to German newspaper Frankfurter Allgemeine.
Some other governments, by contrast, think the euro zone has already signed up to too much austerity. Not only is there the original growth and stability pact; there is also the six-pack, the two-pack and the fiscal compact – a bewildering array of budgetary rules that are so constraining in theory that they have often been breached in practice.
Say the governments could agree on what they wanted. Given the sharp rise in euroscepticism, there is little prospect they could then persuade their people to back them.
If Hollande called a referendum, the far-right National Front’s Marine Le Pen would have a fantastic platform to rail against the loss of French sovereignty. Even the Italians are becoming eurosceptic: Beppe Grillo, leader of the Five Star Movement, the country’s second most popular party, has called for the country to abandon the euro, describing it as an “anti-democratic straitjacket”.
Doesn’t this then mean the euro zone is doomed? If 19 countries share the same currency and lose the ability to devalue when they hit problems, it might sound like they also need a common treasury to cushion the blow, and a common government and parliament to give legitimacy to their actions.
Not so fast. The crisis of recent years has two main causes: lack of competitiveness and excessive government borrowing. There are better ways to address problems of competitiveness than by agreeing a treaty to mandate it; and it is already clear that treaties requiring fiscal rectitude have been pretty useless. To boost competitiveness, the euro zone needs to free up markets. This will also allow the bloc’s economies to adjust more rapidly to shocks without millions of people being turfed out of work.
To be fair, the five presidents acknowledge this. Action is needed at a pan-European level to complete the single market in services, the internet and energy. Creating a so-called capital markets union would soften the blow when a national economy suffered a downturn by spreading the pain across Europe.
The presidents also rightly call for more efficient national labour and product markets. They want each country to set up an independent competitiveness authority to drive this forward. But the presidents are wrong to suggest that common standards for competitiveness should be hard-wired into laws applying to all 19 countries. This looks like a recipe for rigidity that will hamper innovation.
Finally, there’s debt. It’s tempting to think there needs to be rules to stop countries borrowing too much. There too though, market forces provide a possible solution. The key is to allow excessively indebted euro zone states to go bust. Preventing this was the cardinal sin in the Greek crisis.
If investors knew that governments could go bankrupt, they would be more cautious about lending to them in the first place. The discipline of the markets would replace the discipline of the bureaucrats. The German Council of Economic Experts, known as the country’s five “wise” economists, backed this idea in their special report on the Greek crisis last week.
So there are market-based alternatives to political union that could keep the euro zone’s monetary union on the road. They don’t involve a large transfer of sovereignty to Brussels or the imposition of one-size-fits-all policies on 19 diverse countries. That makes them a better solution.