The EU needs to take a big leap forward if the eurozone is to survive a downturn
Published 10/05/2016 | 02:30
Apart from Brexit, the other big European task facing our new Government must be fireproofing the euro against global financial turbulence.
One must seriously question whether, despite the hard lessons of the financial crisis, the EU has yet put in place institutions that would enable the euro to weather a future financial crisis in a democratically acceptable way.
The 2008 crisis was not a one-off event. Risks remain. Globally, overall debt has risen by $57 trillion (€50 trillion) since 2007. It was 269pc of GDP then and is now over 286pc. Global economic growth is forecast to be 2.9pc in 2016, the lowest rate since 2009.
In Europe, as the population ages, pension and health costs are escalating. There is less fiscal space available to prop up the euro than there was in 2008. Structural reforms in countries like France are moving at a snail's pace. Blockages to growth have not been removed. European public opinion has hardened against helping neighbouring countries.
Non-performing loans in the banking system remain high (7pc of GDP) and the banks have not been reorganised, so the stimulus being given to the economy by the European Central Bank (ECB) is being soaked up on keeping banks afloat, instead of going into new lending. Money is there alright, but it is not circulating fast enough.
Faced with these problems, Europe's leaders tend to think of their own national electorates, rather than of the eurozone as a whole. This is because they are each elected by national electorates, rather than by Europe. Political incentives and economic responsibilities are not aligned in Europe. That needs to change if a sufficiently robust structure is to be built to protect the eurozone against the next global crisis.
A roadmap towards a complete economic and monetary union was produced by the presidents of the European Parliament, the European Council, the European Commission, the ECB and the euro group in 2015.
It called for reforms in three stages, with a view to completion of the final stage by 2025.
The first stage is from 2015 to 2017. Progress has been made on some first-stage reforms. A single EU system for winding up banks has been agreed. But Slovenia and Belgium have still had to be taken to court to get them to implement it.
Progress is also being made on a union of EU capital markets.
The five presidents also proposed, in the first stage, a networking system of European competitiveness authorities to promote structural reforms, but little is happening on that.
They also proposed an advisory European fiscal board. The members of this will be part-time (10 days a year), so it is hard to see this making much difference. If states ignore advice from the European Commission and the OECD, one must question whether they will pay much attention to this new advisory board.
As part of the first stage, the Commission has proposed a system of mutual deposit insurance. This is crucial because, without it, the link between the solvency of banks and the solvency of states will not be broken.
Some countries are reluctant to agree to this because they fear their banks will find themselves bailing out depositors in banks in less well-managed countries.
Banks in individual states are still buying an unhealthily large amount of the government bonds of their own countries and this aggravates the symbiotic link between banks and states.
The eurozone continues to rely on 'naming and shaming' and on possible fines to get member states to manage their fiscal policies in accordance with the agreed rules. It is relying on politics to discipline politics. On its face, this is naive.
It would be much better if the bond markets did some of that job, through differentiating interest rates between well and less well-managed countries. But that will not happen as long as investing in government bonds of eurozone states can be assumed to be risk-free. A bail-in system for government bonds would change that. But that is not on the agenda.
In stage two, the five presidents proposed a "macro-economic stabilisation function" for the euro area. This, in effect, would be a common eurozone fund that could be used to support the budgets of states that are in difficulty.
If properly managed, this could be a big confidence-giver to the eurozone economy but it would require a huge increase in the present level of trust between governments and in feelings of solidarity between their peoples.
The criteria on which the proposed fund would work remain unclear. Would it be used to cushion against short-term shocks or to promote long-term reforms?
It is also unclear where the money might come from. Some have suggested a financial-transactions tax, others an increased share of VAT revenue. All very controversial.
The other missing element in the five presidents' report is a convincing system for mobilising European opinion. This will be needed if some countries are to accept the possibility of short-term sacrifices for the greater good. We accept this within states. But such solidarity is weak at European level.
The only proposal to enhance the democratic legitimacy, in stage two, is for closer involvement of the 19 national parliaments in eurozone policy-making. This would allow a lot of good work to be done in committee rooms by national politicians from the 19 capitals, working along with MEPs.
But such work would be largely anonymous and technical. It would not paint the big picture for public opinion. It would not give the great European public a sense of ownership of the cross-border risk and resource sharing that a crisis-proof European economic and monetary union must involve.
One way to do this would be to have a popular election, across the 19 countries of the eurozone, of the president of the euro group.
This might be done before we move on to stages two and three of the proposed full economic and monetary union.
During such a campaign, rival economic programmes for the final phases of economic and monetary union could be canvassed by rival candidates. A deeper understanding would be promoted among the public of what having a single currency requires.
The public of all eurozone countries could have their say on polling day and also have a chance of throwing their chosen president out at a subsequent election, if they are not happy. Without some such democratic exercise, we may not have enough popular solidarity across borders to sustain the euro when the next crisis happens.