Reform of the euro zone: A wind of hope?

In a context marked by the shock of Brexit, German political uncertainties and the rebound of a still...

convalescent economy, the European Commission has presented a roadmap setting out milestones that are realistic and decisive, with a view to the completion of the Economic and Monetary Union (1). This programme shows a desire for reunification of the Union around the euro area. European leaders should now seize it with determination. The Franco-German agreement expected in the spring on this point will be crucial.

By Dominique Perrut

Against the backdrop of Brexit, the recovery is uneven and the reforms of the euro zone remain unfinished.

Brexit is an opportunity. The departure of the United Kingdom profoundly changes the internal balance of the Union. Three-quarters of the Union's population and 86% of its production are now in the euro zone. England has for a long time also represented a destabilizing element in the construction of Europe. By closing the door on a two-speed Europe, Brexit opens the door to a refocusing of the Union.

Although showing clear signs of recovery, the economies of the euro area remain weakened and divergent. The euro zone is still hampered by the heavy fall in investment. France lies between two poles, North and South, strongly divergent in terms of production, unemployment and public debt. A vital condition for the stability of the euro, convergence of the economies has yet to be achieved.

Reforms in the euro area need to be completed. Undertaken under the pressure of the crisis, in 2010, intense legislative work redefined all the economic tools of the euro zone. However, "Five Presidents’ Report" of June 2015 highlights the urgent need to strengthen economic governance, the fragile pillar of the euro.

The Commission's package for the completion of the euro.

This package includes the following points.

The creation of the European Monetary Fund. Established in 2012 by an intergovernmental treaty, the European Stability Mechanism (ESM), the Eurozone's anti-crisis weapon, would be transformed into a European Monetary Fund (EMF) and integrated into EU law. It would be a safety net for the Banking Union, and would be involved in the future budget of the euro zone (called the stabilization function), to protect the investments of the Member States.

The establishment of a European Minister of Economy and Finance. This Ministerial function would be created simply by merging the functions of the Vice-President of the Commission in charge of the euro and of the President of the Eurogroup (2). Equipped with executive means, this Minister would be the single coordinator of multiple functions. He would chair the EMF and thus the budget of the euro area. His would be the sole voice of the euro at European and world levels.

Finally, the Banking Union, well advanced since 2012, should be completed with a risk reduction programme and a European Deposit Insurance Scheme. Access to the ESM/EMF and the Banking Union is open to all non-euro countries. The clearly drawn perspective is that of the accession of all non-euro countries of the Union to the euro zone (3).

Towards European reunification

Efficiency, speed, unity and democracy are the watchwords of the roadmap placed on the table before the European leaders by the Commission.

Efficiency and realism. Simple to implement, the establishment of a Minister of Economy and Finance with operational means would answer the main deficiency of current economic governance: the lack of decision-making capacity. The Minister could thus tackle the crucial problem posed by the divergence of national economies by accelerating structural reforms and reducing fiscal and external imbalances. This aspect is seen in the North as the prerequisite for the establishment of a solidarity mechanism. Furthermore, all Commission proposals could be implemented without raising the spectre of a change in the Treaties for several years.

A quick timetable. The Minister could be in office by autumn 2019, after the European elections. New budgetary tools (including the stabilization function) would be integrated into the Union's post-2020 Financial Framework. For the EMF, the legislative proposal could be adopted in mid-2019.

A process of unity. With this programme, the Commission is taking advantage of the new internal balances created by Brexit and proposes to align the structures and tools of the euro area with those of the Union. This would put an end to the visions of a two-speed Europe fraught with threats of fractures. This united Europe would have as characteristics: the maintenance of a single Parliament, which would be better informed and consulted; the integration of intergovernmental treaties and budgetary tools of the euro area into the legal framework of the Union. Let us recall here that of the eight non-euro countries, six are future members of the single currency.

The Commission's proposals address the main threat to the sustainability of the euro: the economic divide between countries. They rely as much on the important reforms carried out since 2010 as on the recommendations of the leaders of the Union. It is not expected that the June 2018 European Council will miss this decisive opportunity to consolidate the euro by adopting the proposed measures. By promising, on December 15, an agreement between their two countries in the spring, Emmanuel Macron and Angela Merkel pledged to take a major step in this direction. Essential for the European project, the implementation of the roadmap of 6 December could help stem the worrying rise of populist voices. A united and strong Europe, that is today's question. A Europe that brings hope.

An economist and a member of European think-tanks, the author has recently published a study for Fondation Robert Schuman entitled: “Strengthening economic governance of the euro”, European Issues, n° 395, 6 June 2016.

1 - See the Commission’s Communication of 6 December 2017, ‘Further steps towards completing Europe’s EMU: a roadmap', and the attached documents.

2 – The Eurogroup brings together the euro zone’s Ministers of Economy and Finance.

3 - With the exception of Denmark, because of its opt-out clause from the EMU.

Photo Courtesy of Mick Baker