Populism forces Brussels to put euro reform on back burner
Plans to review rules that underpin single currency will only emerge after French poll
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’
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