THE FUTURE OF THE EURO

The Bertelsmann Stiftung organized on the 10th of March a Brussels Briefing*, a meeting for Eurocrats, Europoliticians and Eurolobbyists , about “The future of the Euro: more discipline or more solidarity?” This is not an easy subject because of its complexity. The Euro is  a single currency for countries with different economies, different economic rules, different systems of government, different social and tax systems and different histories.

As long as the Euro-economies were growing, which was the case before 2008, everybody was happy, no questions asked about the Euro except by those whose profession is to be skeptical, as for example monetary experts and economists. When a crisis starts to develop more people become skeptical and critical, especially those who never liked much the Euro and the European Union. People started to look for who should be blamed for the problems. But blaming does not give solutions. In such a situation, it takes a lot of political courage to continue the dialogue for searching a solution. In this sense, the Euro countries have proven, to have sufficient political will and solidarity to solve the crisis together.

During the debt crisis of the last years have been developed new instruments and institutions to stabilize the Euro currency. But as professor Hendrik Enderlein explained on the Brussels Briefing “the crisis is not over”.  It is his opinion that if there are no changes, the Euro will not be viable in the long run because of more divergence instead of convergence between the Euro-countries, unclear competences in EU economic governance and a waning EU legitimacy as for example shows the coming referendum on a possible Brexit.

Europe is still suffering of high debt levels and low investment rates, low economic growth ( a lost decennium since 2008), a reform gap and distrust between the EU members. Besides all this, the EU is confronted with another crisis;  the massive influx of refugees from the Middle East what puts under pressure the Schengen agreement as one of the most practical and concrete results of the EU for Europeans.   

Enderlein therefore advocates a 'Repair and Prepare Strategy' based on the following principles:

As much integration as necessary, as little as possible

EMU level as part of multi-level governance ( EMU: European Monetary Union)

More sovereignty sharing together with more risk sharing.

Although, it was expected as a result of the Euro that the European countries would converge, the opposite happened, the Euro did bring divergence. “This divergence was not really surprising in view of the fact that the euro-area was a heterogenous economic space from the very beginning. Structural differences, such as labor market and product market structures, social security and welfare policies, and the banking and financial systems persisted. They reflect a history of different political choices and economic strategies." (page 13, What kind of convergence does the euro need?, edited by the Jacques Delors Institut and the Bertelsmann Stiftung). 

How do you keep so many different economies in one Eurobasket to guarantee a minimum of Euro Stability? The solution should be more convergence in prices. For example today we are confronted with a single interest rate based on the average inflation rate. “However, inflation rates diverse significantly within the euro area. Thus interest rates will be too low for countries with a high inflation rate, and vice versa. This means that the single interest rate destabilizes the euro. For this reason, inflation differentials should be as small as possible.” (page 13) 

The second requirement for convergence in the euro-area is to make sure that they are on a par with other countries in competitiveness and therefore keep wage growth pace with productivity. “Third, countries in the euro area ought to avoid permanent external imbalances. Both, excessive surpluses as well as excessive deficits, can cause problems for other member states.”

Professor Enderlein prescribes another set of measures to strengthen the single market as to stabilize more the euro: complete the single market for services (in the past strong contested by the European trade unions), improve labor mobility, portability of pension rights, recognition of professional qualifications, cooperation across employment agencies, domestic reforms facilitating price and wage adjustments. It is easy to see that all these measures will lead to much political debate on all levels, including the European trade unions.

Another proposal is to create an European Monetary Fund and the function of European Finance Minister. Both proposals suppose a transfer of  national sovereignty to Brussels and as we know, on this point more people feel  very uncomfortable and are even opposed to loss of more national sovereignty to Brussels. Britain is preparing a referendum on a possible Brexit, in the Netherlands a referendum will be held on the Association Treaty between Ukraine and the EU, in France the nationalist and anti Europe party Front National is becoming stronger and so on.

The 4th proposal is to complete the Banking Union. Although a lot has been done since the debt crisis much remains to be done. An important step would be the creation of a deposit insurance scheme and to organize macro prudential supervision.

In summary, Europe needs more convergence to improve monetary transmission, more risk-sharing to fight fragmentation and sovereignty-sharing to fight moral hazard. This should be based on the basic principle of “as much integration as needed, but as little as possible.” Therefore there is no need for a European super state and room for subsidiarity, in other words “Europe as part of multi-level governance.” Will this be enough to convince the anti Europeans, as well as the international financial markets and the political powers on world level? The answers are hidden in the future.

* Brussels Briefing of Prof. Dr. Hendrik Underlain, Jacques Delors Institut-Berlin & Hertie School of Governance and Dr. Katharina Gnath, Bertelsmann Stiftung, Brussels 10 March 2016

EU ELECTIONS: THE EUROPEAN PEOPLE'S PARTY EPP

Within about a year, from 22 until 25 of May 2014, elections will be held for the European Parliament (EP). In the 27member states of the European Union 754 Members of Parliament (MP’s) will be elected. The MP’s in the European Parliament are like in all other parliaments in the world organized in political party groupings. The European People’s Party (dominated by Christian Democratic oriented parties) is with 270 MP's the biggest one in the EP (36%). The other two classical political movements are represented by the Socialist Grouping having 191 MP’s (25%) and the Liberal Grouping having 85 MP’s (11%). With the elections in sight it is time to start to look to the political programs of the political party groupings in the European Parliament. We start with the EPP, being the biggest fraction in the European Parliament.

NO MORE PUBLIC SPENDING

The EPP believes that more public spending is not the answer on the actual financial and economic crisis. The EPP does not believe that a further exacerbation of debt and deficit levels is the right way to create growth in Europe and to emerge from the crisis. While recent years have shown that more spending is not the answer, it also has become evident that EU members that took rapid and strong action to reform and reshape public expenditure have seen strong economic growth in the last couple of years. The decline in competitiveness and productivity was one of the causes of the crisis in Europe. The EU economies can only compete in a globalised world if they are strong.

SMART PUBLIC INVESTMENTS

Public investments should first and foremost focus on growth-generating areas, such as education, research and innovation. Transforming the European economy into a worldwide competitive knowledge economy is one of the most important challenges for the European Union in the years to come. Know-how is central to economic growth and job creation, therefore, the best conditions must be created for transforming our society into a knowledge society. Research and innovation, especially centres of excellence, are key elements in this respect. High-quality education, as well as increased mobility for students and researchers, are crucial for improving the competitiveness of the European economy. Public funding for R&D will trigger private investment in research and innovation and make Europe a global hub for the world’s best researchers.

PRIVATE CAPITAL

Since the start of the crisis the level of private investments in the EU has fallen with 350 billion a year. Creating the right conditions to get these investments back is one of the most important challenges, says the EPP. Structural reforms are pivotal to improving the conditions for investment, to attracting private capital and to creating the right conditions for economic growth.

LABOUR MARKET REFORMS

The EPP believes that labour markets need to be reformed in order to promote a greater number of people working more and at an older age. High levels of unemployment, and particularly youth unemployment, are a danger for social cohesion and for European integration. An inclusive and active employment policy is needed, better education and better qualifications for the European citizens as well as modern, life-long learning concepts in order to provide access to high-quality jobs. Labour market mobility should be encouraged to allow all citizens to benefit from the largest economy in the world. Remaining legal barriers that hinder labour mobility across all EU Member States must be removed. The EPP wants a better European coordination to provide relevant training to unemployed people, not least to benefit from labour mobility in Europe.

A STRONG EURO WITH A STRONG EU GOVERNANCE

Profound economic reforms at national level are needed, while reforming economic governance at European level. The EU needs strong governance to protect the stability of the European economy. The euro needs to support the Single Market and help the EU maximize the benefits of being the biggest economy in the world. The EU needs strong rules, and these rules have to be respected. The European Commission shall make full use of its powers to ensure that EU countries reform and respect already agreed rules to reduce debt and deficits. The Commission needs effective tools to sanction those Member States that do not fulfil their obligations.

EUROPEAN BANKING UNION FOR HEALTHY BANKS

A first set of measures to ensure a stable banking sector includes the implementation of the single rule book, i.e. bank capital rules, the recovery and resolution framework, a rule for national deposit guarantees schemes and a common effective supervision mechanism. The EPP supports the creation of a European Banking Union ensuring a common system for supervision and therefore more stable financial markets.

EUROPEAN BANKING UNION

In the night of 21 on 13 December, after fourteen hours of meeting of the European Council of the Ministers of Finance of the 27 European Union members, a compromise was reached on a European banking supervisor. Such a supervisor is needed because since 2008 many banks have been rescued by their governments. One of the main lessons of the credit crisis is that dozens of banks are to big to fail. The financial obligations of these banks are so significant that a bankruptcy threatens the entire financial system. If such a 'banking system' threatens to capsize, the government always must help. In recent years a number of governments (Spain and Ireland) have pumped so much money in their banks that they themselves have entered in payment problems. The European debt crisis was born.That is why the European governments now want to create a system for an orderly and timely remediation of unhealthy banks. This should prevent governments te be faced again with emergency situations in which they have no other choice than to put money into a bank. As a first step in June the European Government leaders decided that the European Central Bank (ECB) will be the European banking supervisor.

The principle agreement is that in the European Banking Union, the 200 European Banks with more than € 30 billion on their balance sheets (the so called 'systemic banks' that are to big to fail) and the banks receiving financial support from the state will be supervised by the European Central Bank ECB (Frankfurt, Germany). De non-euro countries Great Britain with London as a financial world centre, Sweden and the Czech Republic decided not to participate. All other non-euro countries are expected to participate in the EBC supervising system. All the involved banks together will guarantee each others savings and there will be a common procedure in case a bank is going to fall. The ultimate goal is that the taxpayers don't pay anymore for the rescue of a bank.

The € 30 billion limit is the result of a compromise between Germany and France. The latter wanted together with the European Parliament and the European Commission that all 6000 European banks would be controlled by the ECB. However, Germany did not want to put at risk the financial reserves of the about 1600 local and regional Landes- and Volksbanken. These smaller banks with their many financial reserves are influenced by local and regional authorities. It would be difficult for Federal Chancellor Agela Merkel to confront on gthis matter these local and regional politicians before elections in september 2013.

The main supervisor is thus the European Central Bank. This requires, however, the Convention for the ECB to be adjusted to make sure separation between the 'prudential supervision' on the health of the banks, and the "monetary control 'on the financial stability of the eurozone economy. The ECB in Frankfurt should hire a lot of new employees in order to perform the monitoring.

Another important measure is that at the moment the ECB indicates that the supervising system is working the so called European emergency fund EMS (European Stability Mechanism) can be authorised to give loans to banks without influencing the public debt of the country.

German Chancellor Angela Merkel called the agreement invaluable. "We will have a clear separation between the responsibilities for monetary policy and banking supervision." However, some critics are concerned that the political independence of the monitoring of the banks is not sufficiently guaranteed. They point to the need for proper procedures for this to ensure. The Cypriot Minister of Finance Vassos Shiarly Shiarly spoke of the agreement as a Christmas present for all of Europe. "According to him, the overall objective of the Bank agrees to restore confidence in the sector, he added.