On Tuesday, April 17th 2018, the Center for International Security and Governance in cooperation with the Reinhard Selten Institute hosted a panel discussion on the topic of Euro area reform at the University Forum. While the event had to compete with best conditions for an evening outdoors as the warm and sunny weather reminded of early summer, the high attendance signaled the significance of the topic.
Two leading experts in the field discussed the perspectives of Euro area reform and possible ways to move forward: Prof. Dr. Isabel Schnabel, Professor of Financial Economics at Bonn University and Member of the German Council of Economic Experts, and Gabriele Giudice, Head of Unit for the EMU Deepening and the Macroeconomy of the Euro Area, European Comission (DG ECFIN). The event was moderated by Prof. James Bindenagel, Henry-Kissinger Professor and Head of the CISG.
In his opening remarks, Prof. Bindenagel highlighted the importance of the topic for the European Union’s health and prosperity as the Euro represents confidence in the community on a deeper level, quoting Mrs. Merkel’s now-famous statement that “if the Euro falls, Europe falls”. Today, the worst days of the financial crisis finally seem to lay behind us, but the Euro zone is still far from full health.
Reforming the Euro zone, therefore, is at the heart of President Macron’s proposals for a new era of European integration. If the German-French ‘engine of European integration’ can be restarted has to be seen, say Prof. Bindenagel.
In her presentation, Prof. Dr. Isabel Schnabel explained a proposal produced by a group of 14 French and German economic experts with diverse backgrounds to address the issue that the Euro architecture currently is too fragile to withstand another crisis – or even a recession. Despite this fact, European member states are divided on how to deal with the problem resulting in an unstable status quo particularly due to clashing philosophies (and thus possible solutions) in Germany and France.
Schnabel outlined six main areas of reform to the European financial, fiscal, and institutional architecture that would meet the aim of reconciling risk sharing and market discipline. In short:
- First, breaking the vicious circle between banks and sovereigns through the coordinated introduction of sovereign concentration charges for banks and a common deposit insurance
- Second, replacing the current system of fiscal rules focused on the ‘structural deficit’ by a simple expenditure rule guided by a long-term debt reduction target
- Third, creating the economic, legal and institutional underpinnings for orderly sovereign-debt restructuring of countries whose solvency cannot be restored through conditional crisis lending
- Fourth, creating a euro area fund, financed by national contributions, that helps participating member countries absorb large economic disruptions
- Fifth, an initiative to create a synthetic euro area safe asset that would offer investors an alternative to national sovereign bonds
- Sixth, reforming the euro area institutional architecture
Gabriele Giudice started by reinforcing Schnabel’s view that there is an urgent need to move forward and supported many of Schnabel’s points, esp. given high public and private debt with high amounts of non-performing loans. He furthermore illustrated the tendency to assign blame among member states which makes discussions difficult – as addressed by President Macron that morning, there is a need to look at the issue from a European perspective
A paper from May 2017 offers a synthesis of possible solutions and a roadmap on three levels (financial union; economic and fiscal union; and institutions and governance). It’s medium-term goal being an introduction of a European safe asset and changes in regulatory treatment of banks.
In December 2017 a toolbox for a renewed convergence process, which is built on the paper from May 2017 was introduced, emphasizing that the goal is not to bypass national decision making but to “out the EU level on top”, speeding up EU financial decision making and increasing accountability.
Giudice offered his opinion on the 14 FGE initiative, stressing the need to proceed with risk reduction and risk sharing in parallel, and to adopt a package as soon as possible, while putting forward several attractive ideas on how this can be achieved. He furthermore criticized, that some shortcomings miss issues such as macroeconomic imbalance and adjustments within the Euro area. They don’t seem to recognize that size matters, meaning that differently sized economies are not affected by certain problems in the same way, e.g. many problems, particularly liquidity flows that are crucial for small countries do not apply to Germany and France. He concluded, that the debate on the EMU deepening is entering a critical stage and for it to be viable, a comprehensive and coherent package would be required.
The following discussion mainly revolved around the issue of loss of legitimacy and sovereignty. Particularly the ECB has been overburdened with tasks during crisis management that stretched the limits of its mandate and that should have been tackled by politicians. This is one of many reasons, why a political consensus on how to move forward is urgently needed, as we are currently not prepared for the next crisis.
Giudice exclaimed, that member states like to pretend to have monetary and economic national sovereignty – but they don’t. However, the commission is tasked with tackling the urgent problems facing the Euro area in a joint way, but can only do so if met with the political will in national states.
The audience agreed that European financial politics is a highly complex and technocratic issue that makes accessibility and unbiased public debate more difficult, therefore leading to a much more complicated political implementation.
Professor Bindenagel closed the discussion by highlighting that the long-term project of the EU is still going forward, through crises. While their remains a long way to go, a lot of work is already done to reach that goal.
This event was supported by: