Sir, You are certainly right that a strong eurozone needs a full banking union (editorial, December 28) and that, in order to attain such a union, the eurozone needs not only the single supervisory mechanism created in November 2014 and the single resolution mechanism that will come into being on January 1 2016 but, in addition and notwithstanding Germany’s intense opposition, a common deposit insurance scheme.
But it needs more than that. It also needs a strong fiscal union in order to reduce the asymmetry that now exists between a centralised monetary policy controlled by the European Central Bank and a decentralised fiscal policy controlled by the member states — an asymmetry that limits the co-ordination between the two arms of macroeconomic policy and induces the ECB to pursue an aggressively expansionary monetary policy while, thanks to the excessive deficit procedure, simultaneously requiring the member states to pursue a contractionary fiscal policy. In so doing, the asymmetry reduces the effectiveness of the ECB’s efforts. Were the member states not required to limit their deficits to the sacrosanct target of 3 per cent of gross domestic product, they could do more to promote growth and employment, thereby complementing the ECB’s efforts rather than offsetting them. That would, of course, also reduce the magnitude of the expansionary effort needed from the ECB.
Despite the ECB’s expansionary efforts, Europe remains mired in low growth and high unemployment, and the European Commission and ECB both predict more of the same in the near term — a growth rate of 1.7 to 1.9 per cent in 2016 and 2017 and unemployment ranging between 10.1 and 10.6 per cent. With some semblance of a fiscal union that could undertake a targeted countercyclical fiscal stimulus — for example, through a common employment programme that provided assistance to member states with unusually high rates of unemployment — the eurozone could, while reducing its dependence on the ECB for an expansionary stimulus, nevertheless increase its ability to generate growth and reduce unemployment. Having moved most of the way towards a full banking union, the eurozone should now turn to building a fiscal union.
David R Cameron
Professor of Political Science,
Yale University, US