Decision time is looming for euro reform

We are coming into the final stretch of the marathon towards a reformed euro. At the European Council next month, EU leaders are supposed to settle their differences on how to make their monetary union permanently better equipped for any future crisis. The shape of the agreement they will reach — if any — remains shrouded in uncertainty however.

That is not just a bad thing: it is a reflection of the fact that the EU’s entire political system has over the past year revved up to actually make some final decisions in June. While the substance of those decisions will perhaps only be settled on the night, even that fact is only possible because of a process that has primed all parties for a decision-making moment. As usual, the European project has a geological quality: outside of a crisis, it normally constructs itself through the slow but solid accumulation of small changes. Most of the time, therefore, it is a slow, methodical process or nothing.

To understand next month’s showdown, then, it is useful to retrace developments over the past year. In May 2017, the political and technocratic wheels were set in motion by two events: the former by the election of Emmanuel Macron as French president and the latter by the European Commission’s reflection paper setting up possible directions for euro reform. Brussels followed up with more detailed proposals in December. Donald Tusk added to the political momentum by committing the European Council to making concrete decisions on euro reform by June in his leaders’ agenda.

Together, these moves set up a tale of two visions. On the one hand, Macron leads the effort to commit euro countries to a path towards a much more integrated monetary union, in particular with a strong common “fiscal capacity”, ie policy tools backed by taxpayer funds, to stabilise individual countries hit by economic events that affect them worse than others. On the other is the extreme caution of the German political class, which so far prefers to focus (and even there sceptically) on deepening the banking union under which authority, but also responsibility, for banks is lifted from the national to the eurozone level. The same contrast is visible between the commission, willing to contemplate far-reaching reforms, and Tusk, who wants to prioritise the narrower reforms where greater consensus could be seen.

This stand-off triggered the most interesting development on the euro issue during the winter: a collaborative effort by seven French and seven German economists to come up with a consensus reform package. I gave my endorsement of the proposals in a Free Lunch comment back then, when I also pointed out that “it looks like a package Berlin should find easier than Paris to endorse”. That is no doubt why the proposals have triggered vigorous debate and much criticism from others calling for more ambition.

This is not only a matter of Franco-German divisions that need to be overcome. Of course, no broader agreement will be achieved without those two leading states making one between them, but other countries also have views and need to be brought on board. And their preferences may well influence what sort of compromise Paris and Berlin could clinch on the night.

Three developments matter here. First, the common statement by finance ministers of the northern grouping of states known as the New Hanseatic League. Intriguingly, non-euro members Sweden and Denmark joined the communiqué of their eurozone colleagues in Ireland, the Netherlands, Finland and the Baltic countries. Their statement emphasised the need not to go beyond what the political appetite of national publics could stomach, highlighted the ability of individual governments to make their economies more resilient to crisis through unilateral actions, and insisted that any euro reform should be such as to be open to voluntary participation by non-euro states, as has been the case with banking union.

That aligns the New Hanseatics with the moderate end of the ambition spectrum. The same can be said of a second statement of views, set out recently by the government of Spain. This, too, signalled a hierarchy of priorities, aiming above all to get all the elements of banking union in place, in particular a workable and funded common resolution system. (A reaction quickly followed in the form of a statement by Spanish academic economists calling for much more ambitious moves towards fiscal union.)

The third is a non-development: Italy, the third-largest eurozone economy and a founding state of the European project, has been missing in action. That is partly because of its particular economic vulnerabilities, in particular problems in its banking system that are not fully resolved. But more importantly, it is because of its political status as anti-European parties have overtaken the mainstream establishment. Over the past year, Italy’s sitting centre-left government has not had the political capital to make a serious contribution to the eurozone debate; what a putative populist government will want is impossible to tell and may in any case come too late.

That brings us up to the present moment. Tomorrow, I will discuss what a number of interventions last week teach us about where things may go as the clock ticks down to the June summit.

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Decision time is looming for euro reform

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