A momentary reprieve

EMMANUEL Macron’s victory in the French presidential election on May 7 triggered a surge of optimism about the future of the EU, and the euro zone in particular. This is partly because Macron ran an unambiguously pro-EU campaign, and was rewarded for it. But it is also because the threat of a populist government in one of the EU’s founding states is, for the moment at least, a thing of the past.

Yet renewed EU enthusiasm should not be mistaken for unwavering confidence. As Macron himself surely understands, the EU’s long- term viability requires that the “European project” appeal to its citizens more than its leadership. EU leaders therefore must — and probably will — take this opportunity to revitalize efforts to address security, migration and growth challenges.

There is, however, an elephant in the room: The need for euro zone governance reform. At the moment, euro zone reform talks are not a priority for leaders in France, Germany, or anywhere else. That partly reflects a decrease in the risk of financial instability; but “reform fatigue” among members is a factor as well. The EU’s institution- building efforts pursued over the last few years have stalled. Further progress will require accepting a degree of risk- sharing throughout the bloc, and that will be possible only with more campaigning and possible national referenda. For now, political expedience favors the status quo.

But Macron’s victory gives the EU only a momentary reprieve. The fact remains that a strong EU depends on a credible and stable euro, and much work remains to be done to ensure the euro’s long- term viability. If the euro zone economy were to face a severe shock today, it would be unprepared. A new grand bargain between the euro zone’s two largest economies, France and Germany, will be needed sooner rather than later. In the meantime, the search for technical solutions to the euro’s woes must be pursued.

A few key principles should guide these efforts. For starters, the euro zone’s reformed fiscal and financial frameworks should be based less on rules and more on discretion. The euro zone’s experience during the recent financial crisis — especially when contrasted with that of the US — highlighted the need for rapid, flexible decision- making by governments, not just monetary authorities.

If the public is to support such a shift toward discretion over rules, however, the system of fiscal governance for the euro zone members must be subject to real market discipline. A debt- restructuring framework should therefore be a pillar of a reformed euro zone governance structure. Such a framework could be administered under the auspices of the European Stability Mechanism, complementing the ESM’s crisis- lending facility.

Given the legacy of high indebtedness in many member states, the transition to such a framework could be dangerously destabilizing. To avoid problems, a kind of debt-management agency should be established as well — possibly also under the auspices of the ESM — with a mandate to buy back member states’