Pop­ulism forces Brus­sels to put euro re­form on back burner

Plans to re­view rules that un­der­pin sin­gle cur­rency will only emerge af­ter French poll

Financial Times Middle East - - International - JIM BRUNSDEN — BRUS­SELS

When the Euro­pean Com­mis­sion pub­lished a “white paper” this month on the fu­ture of Europe, some­thing was miss­ing. Two weeks ear­lier Pierre Moscovici, EU econ­omy com­mis­sioner, had said in Athens that the blue­print would in­clude “am­bi­tious ideas” for “deep­en­ing of the eco­nomic and mon­e­tary union” — code for over­haul­ing the sys­tem of bud­get rules and pol­icy co-or­di­na­tion that un­der­pins the sin­gle cur­rency.

In­stead, amid warn­ings from na­tional cap­i­tals that the plans could stoke divi­sion ahead of the EU’s 60th an­niver­sary sum­mit in Rome, and even heighten ten­sions in the Dutch elec­tion cam­paign, the com­mis­sion changed course. It now ex­pects to pub­lish a reflection paper in late May, thereby also leap frog­ging France’s pres­i­den­tial poll.

The move is the lat­est sign that ques­tions of euro area gov­er­nance have been driven to the pol­i­cy­mak­ing side­lines by fac­tors rang­ing from the ham­mer blow of Brexit to an eas­ing of the eco­nomic cri­sis. But Europe’s lead­ers — gath­er­ing in Rome this week to try to rein­vig­o­rate the EU project — know re­form can only be ducked for so long.

Pri­or­i­ties for change vary wildly be­tween cap­i­tals but on one point there is agree­ment: the sta­tus quo is not a long-term op­tion for the euro.

“You can’t be half-preg­nant; we need to fin­ish the ar­chi­tec­tural struc­ture of the sin­gle cur­rency,” says Jo­han Van Overtveldt, Bel­gium’s fi­nance min­is­ter. “If we await an­other ma­jor cri­sis, we will be obliged to do then what we do not suc­ceed in do­ing now.”

Man­fred We­ber, a Ger­man cen­treright MEP who leads the Euro­pean People’s party group in the EU par­lia­ment, con­curs, say­ing Europe will “have to come back to fun­da­men­tal dis­cus­sions and fun­da­men­tal decisions” on the euro once this year’s run of ma­jor elec­tions — cul­mi­nat­ing in Ger­many in Septem­ber — is over.

The rea­son is clear. The sin­gle cur­rency and its per­ceived in­iq­ui­ties go to the heart of the pop­u­lar back­lash threat­en­ing Europe’s gov­ern­ments, and a wider sense of dis­en­chant­ment with the EU. For many, the euro has fo­mented dis­cord where it was meant to bring har­mony. Anti-es­tab­lish­ment par­ties lam­bast the cur­rency as a cause of eco­nomic mis­ery, or com­plain that it serves as a ve­hi­cle for Ber­lin to main­tain its eco­nomic dom­i­nance. Marine Le Pen, leader of France’s Na­tional Front, has called it “a corpse that still moves” — one that length­ens do le queues.

Com­pet­ing frus­tra­tions sim­mer on the other side of the Rhine: Ger­man con­cerns about the Euro­pean Cen­tral Bank’s ex­pan­sion­ary mon­e­tary pol­icy have min­gled with tax­pay­ers’ re­sent­ment at be­ing re­peat­edly put on the hook for bail­ing out other coun­tries.

Pol­icy mak­ers ac­knowl­edge a conundrum.How does one solve pop­u­lar un­rest about the euro if do­ing so re­quires more in­te­gra­tion and more Brus­sels — pre­cisely what the pop­ulists are rail­ing against? For Luis de Guin­dos, Spain’s econ­omy min­is­ter, the first goal of any re­form drive “should be to have a com­mon view that we should take fur­ther steps in in­te­gra­tion . . . we do not have such a con­sen­sus now ”, he said.

No one ex­pects such a con­sen­sus to ma­te­ri­alise be­fore the Ger­man elec­tion. But of­fi­cials in Brus­sels think that, de­pend­ing on the out­come of this year’s votes, the pe­riod af­ter­wards lead­ing up to Euro­pean Par­lia­ment elec­tions in mid-2019 could of­fer po­ten­tially fer­tile pol­i­cy­mak­ing ter­rain.

Ideas are not in short sup­ply. EU in­sti---- tut ions in 2015 pub­lished re­form op­tion­sstretch­ing to a 10- year hori­zon. The blue­print in­cluded short-term mea­sures, such as more co-or­di­na­tion of eco­nomic poli­cies, and com­ple­tion of a project to cen­tralise over­sight of the cur­rency bloc’s banks; it also out­lined longterm ideas for a “euro area trea­sury” and a stim­u­lus fund that could be tapped to tackle macroe­co­nomic shocks.

The au­thors, which in­cluded the ECB, said the plans could nar­row the gulf in pro­duc­tiv­ity be­tween coun­tries such as Ger­many and Greece, boost growth and in­crease re­silience to fi­nan­cial crises.

But even progress on short-term goals has been mixed. One pri­or­ity was a scheme to guar­an­tee bank de­posits in the euro area. The plan was cham­pi­oned by France and south­ern Europe but en­coun­tered op­po­si­tion from Ber­lin, which feared a safety net would lead to ir­re­spon­si­ble risk-tak­ing by banks.

Olli Rehn, a board mem­ber at the Bank of Fin­land and the EU’s econ­omy com­mis­sioner un­til 2014, says this is one ex­am­ple of a north-south “in­tel­lec­tual cleav­age” that has per­sisted since the ear­li­est days of the euro, and that has “of­ten slowed the devel­op­ment of eco­nomic and mon­e­tary union”.

“When it comes to eco­nomic and fis­calpol­icy, many in France see the Ger­mans as too rigid, while many in Ger­many see the French as in­suf­fi­ciently cred­i­ble,” Mr Moscovici says. “If we are to build the trust we need to re­form the eu­ro­zone, we need to see cred­i­bil­ity from France and open­ness from Ger­many .”

The cur­rent po­lit­i­cal cli­mate means that “now in the eu­ro­zone we are in the mid­dle of nowhere”, Mr de Guin­dos says. “We do not know if we should go fur­ther or take some steps back­wards .”

It will only partly be re­solved by pro-EU elec­tion out­comes, as pop­ulism “is go­ing to mark the agenda”. “The only way for­ward is to have more in­te­gra­tion — to share more risks, to have more in­stru­ments . . . to avoid lead­ers and lag­gards in the euro zone .”

For some, the so­lu­tion lies in moves to­wards eco­nomic risk shar­ing in the euro area bal­anced by greater “risk re­duc­tion” mea­sures pro­mot­ing mar­ket dis­ci­pline. Ger­many has ad­vo­cated such an ap­proach in fi­nan­cial ser­vices.

“Full-blown mon­e­tary union de­mands full-blown po­lit­i­cal union — I’m not sure that’s re­al­is­tic,” Mr Van Overtveldt says. “But we can de­velop a sec­ond-best so­lu­tion, and we can do that bet­ter than we have done so far .”

‘Now in the eu­ro­zone we are in the mid­dle of nowhere. We do not know if we should go fur­ther or take some steps back­wards’

— Louisa Gou­lia­maki, Em­manuel Du­nand/AFP/Getty Images; Stephanie Le­cocq/Epa; Fran­cois Lenoir/Reuters

Protest of note: demon­stra­tors hold a ban­ner, be­low, de­pict­ing a mock euro in Athens last year. An­ti­estab­lish­ment par­ties in Europe have lam­basted the cur­rency as a cause of eco­nomic mis­ery

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