The Euro’s Nar­row Path

The Myanmar Times - - Business | International - BARRY EICHENGREEN

WITH Em­manuel Macron’s vic­tory in the French pres­i­den­tial elec­tion, and An­gela Merkel’s Christian Demo­cratic Union en­joy­ing a com­fort­able lead in opin­ion polls ahead of Ger­many’s gen­eral elec­tion on Septem­ber 24, a win­dow has opened for eu­ro­zone re­form. The euro has al­ways been a Franco-Ger­man project.

With a dy­namic new leader in one coun­try and a fresh pop­u­lar man­date in the other, there is now an op­por­tu­nity for France and Ger­many to cor­rect their cre­ation’s worst flaws.But the two sides re­main deeply di­vided. Macron, in long-stand­ing French tra­di­tion, in­sists that the mon­e­tary union suf­fers from too lit­tle cen­tral­iza­tion. The eu­ro­zone, he ar­gues, needs its own fi­nance min­is­ter and its own par­lia­ment. It needs a bud­get in the hun­dreds of bil­lions of eu­ros to un­der­write in­vest­ment projects and aug­ment spend­ing in coun­tries with high un­em­ploy­ment.

Merkel, on the other hand, views the mon­e­tary union’s prob­lem as one of too much cen­tral­iza­tion and too lit­tle na­tional re­spon­si­bil­ity. She wor­ries that a large eu­ro­zone bud­get wouldn’t be spent re­spon­si­bly. While not op­posed to a eu­ro­zone fi­nance min­is­ter, she does not en­vi­sion that of­fi­cial pos­sess­ing ex­pan­sive pow­ers.

But there is a nar­row path for­ward that should be ac­cept­able to both sides. It starts with com­plet­ing the bank­ing union. Europe now has a sin­gle su­per­vi­sor in the Euro­pean Cen­tral Bank, but it lacks a com­mon de­posit in­surance scheme, which Ger­man of­fi­cials op­pose on the grounds that there has been in­ad­e­quate risk re­duc­tion in the Euro­pean bank­ing sys­tem. In other words, they worry that the fees levied on Ger­man banks will be used to pay off de­pos­i­tors in other coun­tries.

The solution lies in bul­let­proof­ing the banks by strictly ap­ply­ing the de­mand­ing cap­i­tal stan­dards of Basel III and lim­it­ing con­cen­trated hold­ings of govern­ment bonds. The para­dox here is that Euro­pean reg­u­la­tors, in­clud­ing Ger­man reg­u­la­tors, have in fact been ar­gu­ing for looser ap­pli­ca­tion of those reg­u­la­tions in ne­go­ti­a­tions with the United States. In do­ing so, they have been ar­gu­ing against their own best in­ter­ests.

Next, Europe needs to trans­form the Euro­pean Sta­bil­ity Mech­a­nism, its proto-res­cue fund, into a true Euro­pean Mon­e­tary Fund (EMF). Its re­sources could be aug­mented by in­creas­ing gov­ern­ments’ cap­i­tal sub­scrip­tions and ex­pand­ing its abil­ity to bor­row. De­ci­sion-mak­ing could be stream­lined by mov­ing from the cur­rent una­nim­ity rule to qual­i­fied ma­jor­ity vot­ing.

The EMF could then take the place of the ECB and the Euro­pean Com­mis­sion in ne­go­ti­at­ing the terms of fi­nanc­ing pro­grams with gov­ern­ments. The fi­nal de­ci­sion of whether to ex­tend an emer­gency loan would no longer fall to heads of state in all-night talks. Rather, it would be taken by a board made up of eu­ro­zone rep­re­sen­ta­tives, in­clud­ing from civil so­ci­ety, nom­i­nated by the Euro­pean Council and con­firmed by the Euro­pean Par­lia­ment, giv­ing the process a le­git­i­macy it cur­rently lacks.

But Ger­many will agree only if it sees steps lim­it­ing the like­li­hood of ex­pen­sive in­ter­ven­tion. This brings us to the vexed ques­tion of fis­cal pol­icy. It is past time to aban­don the fic­tion that the ul­ti­mate source of fis­cal dis­ci­pline is a set of strictly en­forced EU rules. Tax­a­tion and pub­lic spend­ing re­main sen­si­tive na­tional pre­rog­a­tives, ren­der­ing out­side over­sight in­ef­fec­tual.

As­sign­ing over­sight to the Euro­pean Com­mis­sion in Brus­sels prom­ises, in­evitably, not dis­ci­pline but a dan­ger­ous pop­ulist back­lash.

The al­ter­na­tive is to re­turn con­trol of fis­cal pol­icy to na­tional gov­ern­ments, aban­don­ing the pre­tense that pol­icy can be reg­i­mented by EU rules. Gov­ern­ments could then make their own de­ci­sions; if they make bad de­ci­sions, they will have to re­struc­ture their debts. Adopt­ing a Euro­pean debt-re­struc­tur­ing mech­a­nism would help to avoid the worst fall­out. Any ad­verse con­se­quences would no longer spread to other coun­tries, be­cause their banks would no longer hold con­cen­tra­tions of govern­ment bonds. They would not bank­rupt the EMF, which would be able to lend only in cases of illiq­uid­ity, not in­sol­vency.

Th­ese ideas will hor­rify ded­i­cated euro-fed­er­al­ists. One bone they can be thrown is a pi­lot un­em­ploy­ment in­surance fund amount­ing to, say, 1% of eu­ro­zone GDP.

This would be anal­o­gous to US ar­range­ments un­der which the fed­eral govern­ment pro­vides par­tial fund­ing for statead­min­is­tered un­em­ploy­ment in­surance. And it would give the eu­ro­zone fi­nance min­is­ter some­thing to do. If the ini­tial mod­est pro­gram was shown to work, it could be scaled up.

But Ger­man politi­cians are aware that un­em­ploy­ment is 2.5 times higher in France than at home, rais­ing the dan­ger that trans­fers would all go one way. That’s why such pro­pos­als are con­tin­gent on struc­tural re­forms that re­duce un­em­ploy­ment where it is high and in­crease the flex­i­bil­ity of la­bor and prod­uct mar­kets.

This is es­sen­tially the bar­gain Macron has of­fered Merkel. To para­phrase, “I’ll un­der­take deep struc­tural re­forms if you agree to mod­est steps in the di­rec­tion of fis­cal fed­er­al­ism, com­plet­ing the bank­ing union, and cre­at­ing a Euro­pean Mon­e­tary Fund.”

No one on ei­ther side of the Rhine will re­gard this bar­gain as per­fect. But with the euro in the bal­ance, the per­fect should not be al­lowed to be­come the en­emy of the good. – Project Syn­di­cate

Barry Eichengreen is Pro­fes­sor of Eco­nom­ics at the Univer­sity of Cal­i­for­nia, Berke­ley, and a for­mer se­nior pol­icy ad­viser at the In­ter­na­tional Mon­e­tary Fund.

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