The current Eurozone situation has not really convinced the public that the reforms made were sufficient to fix the economic crisis, the deep and constant divergence among the Eurozone countries still goes on. But if we persist with this debate a rare window of opportunity will open in the coming years.
What is wrong with the Eurozone?
On an optimistic note, the euro represents the most recent stage of more than 50 years of European integration. It was an instant success back when it was introduced in 1999. The currency was stable, trade and economic growth increased. But then years later, after shock waves from the global financial crisis, it catapulted into a crisis. It became clear that the institutional set up was deeply flawed.
Why the Eurozone needs reform?
1) The functioning of the currency union needs to work
Experts agree that it will be extremely difficult to preserve the euro with the current level of economic divergence among the member states. Their adjustment capacity at the Eurozone- and member state-level to adverse economic developments is not sufficient. Member states can no longer respond to economic shocks by devaluing their currencies, the adjustment needs to start with the fiscal policy. In theory, adjustment of price and wage levels could also provide for the necessary flexibility in a currency union. But based on the experience of steep wage reductions in southern European countries, this adjustment mechanism is not powerful enough to balance a sufficiently economic discrepancy in the zone.
2) Coordination of the intergovernmental governance in the Eurozone
The Economic and Monetary Union (EMU) increasingly affects core state powers, such as budgetary policy. It is not unreasonable to expect that national governments will therefore be ready to make to break the community rules if necessary. The result will be that governance gets increasingly politicised until it might collapse altogether.
3) Pressures on national and labour markets and welfare states
Even with a common fiscal capacity, adjustment to economic downturns through wage levels plays a significant role in any currency union. In practice, this creates pressures to deregulate labour markets and riddles collective bargaining and social partnership. Constraints on fiscal policy have led to cuts of social expenditure increasing pressures on welfare states. This has undermined public support for progressives who are seen to dismantle social institutions, and undermines many of the social institutions that make up the comparative advantage of European economies in global markets.
Which reforms does the eurozone need?
1) A Eurozone budget and automatic stabiliser
In the absence of adjustment through national monetary policy, the flexibility provided by fiscal policy at the Eurozone-level should be increased. A common budget could stimulate growth in those parts of the currency union that perform under Eurozone average.The size of the budget will depend on its exact purpose, but current proposals range from four to seven per cent of Eurozone GDP.
Another frequently discussed proposal involves insurance-based mechanisms that function as automatic stabilisers. The basic idea is that a Eurozone insurance withdraws money from economies that are over-performing and transfers them to those whose economic development is below average.
2) Establish a euro finance minister
The common fiscal capacity will need a political institution that decides over which programmes and regions are supported and monitors the compliance with the fiscal rules of the Eurozone. This could be achieved through a euro finance minister. The euro finance minister should have a strong role in coordinating national budgetary policies and enforcing common fiscal rules, and carry the political responsibility for the effectiveness of European fiscal policy through the common budget. This means that she has to be elected and controlled by a joint chamber of members of the European parliament and national parliaments.
3) Social union
The major comparative advantage of European economies lies in the economic productivity generated by social institutions. We need a reform agenda that increases the productivity of our social institutions. Though not all social institutions are economically beneficial and many countries are currently struggling to find the right balance, almost all European countries have sectors that are highly competitive. Examples are the Lombardy region in Italy, Catalonia in Spain, and Rohne-Alpes in France.
How will the Eurozone get there?
By setting up the debate on this issue. The type of solution that comes from the many expert reports commissioned by governments is mostly designed to accommodate for some technical shortcoming of monetary union, that minimise political exposure and maintaining the power-sharing structures that make up the EU today. Solutions will have to come from a broad political debate about the future of the union. Even though the politicisation of European politics carries many risks, it may very well be the most viable option for the future of Europe and the Eurozone.