Growth and the euro after Brexit
Mr Letta, is the euro area sufficiently solid at the present moment to survive another crisis?
No, it is not. Too few of the structural weaknesses that triggered the previous crisis in the euro area have been addressed. In the end it was the European Central Bank (ECB) that brought back stability to the euro area. It won enough time to allow national governments in the euro area to strengthen Economic and Monetary Union (EMU), to invest in and reform their domestic economies, but this time has not been used effectively.
In most of the Member States today there is very little room for budgetary manœuvre in order to survive a potential future crisis. We also lack the necessary tools to stabilise the euro area by using budgetary policy at EU level. Some of the promising new projects in the pipeline, such as the Banking Union and the Capital Markets Union, are still at their earliest stages, while exposure to risk is still too high in Europe’s banking sector. Very little political goodwill is left for embarking on new risk sharing schemes or to put in place new reforms in exchange for a programme of support. By turning a blind eye to these weaknesses of the euro and just hoping that a rapid solution will be found to the next crisis – you adopt an attitude that is both dangerous and costly.
What should be done right now to tackle these weaknesses?
In the report that we recently published, Repair and Prepare: Growth and the Euro after Brexit) we recommend that action should be taken on two fronts.
Firstly, we have to put in place a ‘first aid kit’ to shore up the euro against any possible new crisis in the short and medium term. This first aid kit would include a reinforcement of the European Stability Mechanism (ESM), a further strengthening of the Banking Union and better economic policy coordination under improved democratic control.
Secondly, we need to have a global agreement combining structural reforms at national level with a global public-private investment initiative (including especially a reinforcement of the Juncker Plan and the introduction of a European budget capacity).
This package of measures, aiming to encourage convergence and growth, should start off in parallel with the first aid kit but should be continued on a much longer-term horizon (about 10 years).
In the long term, should there be any reforms in the institutions?
The measures that we are recommending for immediate implementation are capable of stabilising Economic and Monetary Union in the short and medium term. However, even with these changes, EMU would still retain its intergovernmental character which is essentially rule-based. Such a structure cannot offer either the necessary flexibility needed to respond to emerging economic challenges, nor the strict democratic control that is indispensible for guaranteeing public approval.
That is why we believe that EMU will have to rely in the long term upon a coherent and legitimate framework of supra-national economic governance. That implies the transformation of the European Stability Mechanism (ESM) into a fully-fledged European Monetary Fund and a significant strengthening of parliamentary control to enhance European legitimacy.
That would mean more occasions for sharing sovereignty. How could citizens and their governments be persuaded to accept them?
It is true that the third pillar implies a major sharing of sovereignty, but this would be accompanied by a substantial reinforcement of democratic control of the decisions taken at European level. We are recommending, for example, the creation of the post of European Finance Minister, who would replace the Troika in the negotiations for and supervision of aid programmes. This minister would report to a committee made up of representatives of the European Parliament and national parliaments (which could always submit a veto to any of its decisions by qualified majority vote).
We also think that with the measures of the second pillar (the global agreement combining reform and investment), the euro area will steadily get back to growth and will be back on track for convergence, and this will make risk sharing among countries much easier. Finally, all this will need a major reform of the EU Treaties, but amending the legal framework to accommodate Brexit may in any case lead to a reform of the Treaties.
Interviewed by Johanna Touzel
Translated from the original text in French
The views expressed in europeinfos are those of the authors and do not necessarily represent the position of COMECE and the Jesuit European Office.