Two weeks on from the Euro Summit, reactions have started to come in to what was once billed as a make-or-break meeting for eurozone reform. The lack of grand announcements, especially after the Franco-German agreement at Meseberg shortly beforehand, has left many observers disappointed. More nuanced, more positive and more interesting is the succinct take by the 7+7 French and German economists who last winter produced a strong reform blueprint.
The real test of the summit was always whether national leaders could begin to move towards a common political understanding of what the euro needs. In that context, it is significant too that the 7+7 scholars continue to maintain a consensus view of the matter. As they write in their verdict on the summit’s conclusions, “the statement is a constructive first step and has substantial symbolic value as it crosses red lines that were considered taboos only a few months ago”.
This includes a commitment to making the pan-eurozone banking system work better — by far the most important challenge for the monetary union. If addressed well, it will reduce the need for the politically harder proposals for fiscal risk-sharing. The conclusions explicitly mention a common deposit insurance scheme for the first time at leaders’ level, a clear sign of political progress (even the imperative for such a scheme may be weaker than many think).
There is a catch-all instruction to keep talking about all the contested ideas raised in the letter to leaders from Mário Centeno, president of the eurogroup of finance ministers. On reforming the union’s rescue fund, it should “be strengthened working on the basis of all elements” set out in the letter. Finance ministers are asked to “further discuss all the items in the letter”. That means, in particular, that previously controversial ideas such as better mechanisms for sovereign debt restructuring (more effective “collective action clauses” in government bonds) and a common recognition of the need for macroeconomic stabilisation, are now firmly on the agenda rather than ruled out by opponents.
The 7+7 also set out a wish list of the three most important further steps they think leaders missed an opportunity to take. The first is to “finish the job . . . of breaking the vicious circle between banks and national governments” by putting limits on banks’ exposures to their own government’s debt. They are right. They are right, too, about ways to achieve this, for example through capital charges on excessive exposure and new securities that pool different countries’ debt (which should be exempt from such limits). There are easier steps, too, such as Daniel Gros’s proposal to give more generous regulatory treatment to already existing private securities that pool eurozone sovereign bonds.
Second, the biggest missing theme is how to make the fiscal rules more fit for purpose. The 7+7 rightly state that these “have proven to be overly complex, hard to enforce, and procyclical”. I am unconvinced about their preferred alternative of an expenditure rule; in any case, the main challenge here is, again, the political as well as the economic function of the fiscal rules. Their political function — and hence the need to design rules above all with their political economy in mind — is well set out by Thomas Wieser’s recent contribution. It may well be that more national autonomy, combined with more transparency and accountability between countries for actions that affect others, is a better way to go than improving the codification of political choices.
Finally, the 7+7 complain that “the statement is silent on the issue of macroeconomic stabilisation”. I think this is wrong — as mentioned above, the need for stabilisation is implicitly recognised. The principle, in other words, is more broadly accepted at the political level than ever before; it is the acceptable form of stabilisation that is contested. And here it is not constructive to insist stabilisation must take the form of a centralised institution, such as a common budget or a shared unemployment insurance scheme. The same function can be achieved by facilitating better use of national fiscal policy (this goes back to the rules) and existing institutions such as the EU budget, as I have proposed.
Beyond the substance, it is reasonable to worry about the process, in particular the risk that substantive decisions are dragged out by interminable stalling techniques. But taking time is not only negative. The whole debate about risk-reduction versus risk-sharing becomes more easily resolved as losses from the financial crisis recede. Taking this into account, time can be made the friend of decisiveness rather than the enemy. A case in point: Centeno commissioned a study of the evolution of riskiness in eurozone banks, now public, which shows in quantified terms how risk is declining on all the relevant measures. This is the sort of work that can tie in substance with process: it is easier to make decisions conditionally on certain difficulties disappearing.
All in all, the naysayers are wrong. The eurozone is in better shape than in a very long time. Not just economically, but politically — which matters a whole lot more.
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