The year-long path towards the crunch time summit on eurozone reform in June, which I described yesterday, might seem to have left France isolated in its push for an ambitious reform of the eurozone. President Emmanuel Macron’s challenge always seemed to be to convince Germany to join him halfway. But other countries, the president of the European Council and a highly influential proposal by Franco-German economists have largely leaned towards a preference for taking one step at a time rather than a big leap beyond what national publics seem ready to stomach.
This could mean that the most realistic expectation for June is that the eurozone will agree to complete banking union, with a workable and funded common resolution regime for banks and at least a nailed-down timetable for cross-border deposit insurance. There is no reason to lament this technocratic lowest common denominator: it would be a good outcome. But it is also too soon to write off the prospect of a bit more statecraft.
Two important interventions last week injected new energy into the politics of eurozone reform. In Aachen, Macron used his Obamaesque rhetorical powers when he accepted the Charlemagne prize for European unity with four imperatives: “Let us not be weak. Let us not be divided. Let us not fear. Let us not wait.” (Francophones may want to read the whole speech.)
More heavy-hitting still was Mario Draghi’s speech (which you can also watch) to the European University Institute’s State of the Union conference in Florence, an annual affair that draws the top decision makers and advisers in the EU universe. The European Central Bank president has been reticent about fiscal integration, but now weighed in to argue for a common fiscal instrument “to prevent countries from diverging too much during crises” in terms of growth. Because of the “potential of some euro area economies to become trapped in bad equilibria . . . Put simply, we will not be able to foster private risk-sharing in our union if crises can call its very integrity into question.”
While Draghi did not commit to any particular design of such an instrument, and recognised the technical, legal and political difficulties, he insisted the case was “compelling” for working towards a fiscal instrument to remove the “tail risk of bad equilibria”. He also echoed an argument emphasised in the paper earlier this year by seven French and seven German economists that risk reduction and risk sharing should not be seen as alternative priorities, because each contributes to the other.
This is important. It illustrates how the different parties’ overall political goals are perhaps not as far apart as entrenched disagreements over specific solutions might suggest. That is partly a statement of technical fact: it means there is room for solutions; there is no circle to be squared here. Indeed the 7+7 economists’ proposals were an important contribution towards engineering a package that could suit all sides.
Draghi’s argument should be taken in the same spirit. It is undeniably in the common interest to avoid “bad equilibria” with self-reinforcing “death spirals” between growth and debt that invite financial market speculation on the euro’s disintegration. But there are many ways to achieve this beyond mechanisms of fiscal redistribution between countries. (Two that I have proposed are to use the existing EU budget for unilateral fiscal stabilisation, and a more progressive interpretation of what EU law demands of public finances.)
The bigger point, however, is political. Precisely because there is no technical shortage of solutions, the work to be done by politicians must not be held up by technical quibbles and pet peeves. The political work to be done, then, is to win agreement on the overall goals and the functions eurozone countries need to be able to fulfil.
This was the main conclusion I drew from the panel I chaired immediately after Draghi’s speech (also recorded on video). Under the surface of predictable disagreements on specifics, there was a shared sense of political urgency. And I, for one, saw a glimpse of hope that working towards shared political goals might overcome a stalemate over specific technical proposals.
Jean Pisani-Ferry, one of the 7+7 and a highly influential French economist (he wrote Macron’s election programme), illustrated this by explaining why he was in favour of a sovereign debt restructuring mechanism, thus crossing what often seems to be a red line for French officials (and those from Italy and several other countries).
Lars Peter Feld and Lucrezia Reichlin both raised Italy as a particular challenge; my synthesis of their arguments is that reforms must both solve problems in Italy (such as bad loans in its banks) and for Italy (such as the economic underperformance that has fuelled anti-Europeanism). That, again, requires a more political rather than mere technical understanding of what is at stake.
The most poignant remark came from Marco Buti, the European Commission’s director-general for economics and finance. Of all the divisions between member states, such as northern versus southern or new versus old member states, that between creditor and debtor economies was, he said, “the ugliest”. We should add that many policy choices made in the crisis, including by Brussels, contributed to worsening this debtor-creditor relationship between members of the eurozone. But that just makes it more important to try to undo the harm done.
This, I suggest, is the standard we should hold the leaders to when they decide on eurozone reform next month: whether the solutions they agree contribute to the political goal of removing the debtor-creditor relationship as a salient division between member states. It is more important, for example, to achieve a common understanding (including, importantly, by Germany) that Draghi is right about the need to avoid growth divergence in a crisis-hit country, than to insist on a specific way to do so. In other words, the political effect of any reforms is far more important than how technically efficient they are.
Nobody understands and expresses this better than Macron. Nor is anybody better positioned to shift the politics. He stands a good chance, if he does not let an insistence on specific technical solutions stop him.