Blog Post

A genuine monetary union?

The European Commission’s president, José Manuel Barroso, last week proposed a roadmap setting out how to transform Europe’s current set-up into a better-functioning monetary union. The paper has two major weaknesses, but it makes three very good and ambitious points. First, on the positive side, the communication stresses the need to move ahead with a […]

By: Date: December 6, 2012 European Macroeconomics & Governance Tags & Topics

The European Commission’s president, José Manuel Barroso, last week proposed a roadmap setting out how to transform Europe’s current set-up into a better-functioning monetary union. The paper has two major weaknesses, but it makes three very good and ambitious points.

First, on the positive side, the communication stresses the need to move ahead with a common bank-resolution authority and acknowledges that a purely national system of resolution would not be effective. This is a major and very important change in the Commission’s policy stance: until very recently, the Commission’s view was that national resolution would suffice. A banking union without a common resolution authority would not be a genuine banking union. Without a common form of resolution, there can be no form of risk-sharing. And without risk-sharing, one of the main aims of the banking union – to break the vicious circle between bank debt and sovereign debt – cannot be achieved. The single financial market would remain fragmented.

Second, the Commission’s communication elaborates on what to do with the current debt overhang in the eurozone. Its solution – a redemption fund coupled with ‘eurobills’ (short-term debt backed by all 17 members of the eurozone) – is very controversial, but the Commission deserves credit for highlighting that there is a debt problem. It is high time that Europe thought more deeply about how to organise the large process of deleveraging its debt. It is unlikely that prolonged high levels of savings would alone be enough to do the trick.

Third, the communication rightly accepts the need for a common eurozone budget. A eurozone budget would serve as a stabilising factor in the event of both ordinary shocks and asymmetric shocks. The communication also clearly states that the budget must be designed to ensure that there are no permanent transfers and that it fosters structural change. The Commission fails, though, to point out that a common budget is only needed when there are extremely deep recessions.

Two important issues are entirely missing from the communication, however.

First, the section on bank resolution appears strangely incomplete. Centralising resolution powers entails a major transfer of sovereignty, which in turn requires very deep reforms and clear thinking about democratic accountability. Contrary to the Commission’s claims, changes to the EU treaty therefore appear indispensable. It is also possible that we would end up with a new resolution authority inadequately equipped to wind up banks in a way that minimises the cost to the taxpayer. The Commission should therefore re-think its approach to bank regulation. Is the implementation of a single rulebook enough to prevent major risks to taxpayers? Finally, contributions from the financial industry would be an excellent way of reducing costs to the ordinary taxpayer. At the same time, though, general tax resources will need to be called on in extreme cases

A second criticism concerns the Commission’s analysis of the macroeconomic situation. The Commission sets out relatively detailed timetables for a banking and fiscal union, but it suggests no specific steps to restore growth in Europe quickly. There is obviously a major structural component to Europe’s weak growth. That structural element needs to be addressed urgently. However, remedial, structural action would produce growth in perhaps three years’ time, and so the outlook for the next two years would remain bleak. This holds true particularly for the countries of southern Europe.

What does the Commission consider to be the truly important macroeconomic policies that Europe should enact now in order to overcome its dramatic decline in growth? The Commission will have to take a position on Europe’s macroeconomic policy. Long-term reforms are no substitute for this, because anaemic growth in Europe will undermine them. 

A version of this column was originally published in the European Voice


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Past Event

Past Event

Lessons for the euro from early US monetary and financial history

The United States has a monetary union that many look to when considering the future of the EU. But how easy was it really to create such a union and what can Europe learn from the US process?

Speakers: Jeffry Frieden and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 25, 2016
Read article Download PDF More by this author

Parliamentary Testimony

The European Deposit Insurance SchemeEuropean Parliament

The European Deposit Insurance Scheme

Statement prepared for the European Parliament’s ECON Committee Public Hearing of 23 May.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Parliamentary Testimonies Date: May 23, 2016
Read article More on this topic

Blog Post

Pia Hüttl
Silvia Merler

Sovereign bond holdings in the euro area - the impact of QE

Since the announcement of the QE programme by the European Central Bank (ECB) on 22 January 2015, national central banks have been buying government and national agency bonds. In this post we look at the effect of QE on sectoral holdings of government bonds, based on our recently updated dataset.

By: Pia Hüttl and Silvia Merler Topic: European Macroeconomics & Governance Date: May 19, 2016
Read article More on this topic

Blog Post

Grégory Claeys
Alvaro Leandro

Assessing the Juncker Plan after one year

With the Juncker Plan, the European Commission intends to support valuable risky projects by expanding the risk capacity of the EIB. But has the new European Fund for Strategic Investments really been used to finance 'additional' projects?

By: Grégory Claeys and Alvaro Leandro Topic: European Macroeconomics & Governance Date: May 17, 2016
Read about event More on this topic

Upcoming Event

Jun
27
08:30

Britain and the EU after the referendum

No matter the result, the UK's referendum on EU membership will be an important moment for Britain and Europe. The days after the result will offer an opportunity to reflect on what has happened, and what has changed.

Speakers: Sylvie Goulard, André Sapir, Philipp Steinberg and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

Guntram B. Wolff

European financing for the European refugee crisis

Protecting the EU's external borders is a shared task, which can be most effectively carried out if paid for with common funding. A tax on carbon combined with borrowing could fund refugee policy and also help the EU achieve its climate goals.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: May 11, 2016
Read article

Blog Post

Zsolt Darvas
Pia Hüttl

Is Greek public debt unsustainable?

Greek public debt does not look sustainable if the country has to return to market borrowing at the end of the third bail-out programme, but could be sustainable if preferential ESM funding continues in the long-term. Our advice is to offer hope for Greece in the form of delayed fiscal adjustment toward a target of 2.5% of GDP primary balance and adopt various measures to ease the debt burden, for the benefit of both Greece and its official lenders.

By: Zsolt Darvas and Pia Hüttl Topic: European Macroeconomics & Governance Date: May 7, 2016
Read article More on this topic

Blog Post

Pia Hüttl
jaume

Northern Ireland and EU funds

EU funding for the UK has risen considerably since 2000, but funding predominantly goes to rural and less developed areas, meaning that Northern Ireland, Scotland and Wales receive more funding relative to their GDP than England.

By: Pia Hüttl and Jaume Martí Romero Topic: European Macroeconomics & Governance Date: May 3, 2016
Read about event More on this topic

Past Event

Past Event

Fighting corruption: from headlines to real impact

Despite recent efforts to tackle corruption there is not much evidence that these strategies are producing results. Why is this the case and what can we do to improve the situation?

Speakers: Carl Dolan, Mihaly Fazekas, Alina Mungiu-Pippidi and Alessio Terzi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 28, 2016
Read about event More on this topic

Past Event

Past Event

Active labour market policies, what works?

How are Europe's labour markets performing, and what policies can best help them function?

Speakers: Alfonso Arpaia, Clyde Caruana, Grégory Claeys, Dan Finn, Regina Konle-Seidl, Alfred Mifsud, Godwin Mifsud, Edward Scicluna and Paul Swaim Topic: European Macroeconomics & Governance Location: Mediterranean Conference Centre Triq l-Isptar, Valletta, Malta Date: April 27, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Understanding HM Treasury’s Brexit analysis

What’s at stake: The UK will hold a referendum on its membership of the EU on June 23rd 2016. Her Majesty’s Treasury released an assessment of the impact of Brexit finding that the economy would be between 3 and 7% smaller in 2030 if the UK left the EU than it would be if it stayed in.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: April 25, 2016
Read article More on this topic More by this author

Blog Post

jaume

Are regional governments causing deficit overshooting in Spain?

Spain once again missed its deficit target in 2015 and it seems unlikely that 2016 will be any better. The central government has pointed to regional deficits as being the cause of the fiscal slippage. However, regional governments claim that their deficit is due to under-financing and overly strict deficit targets.

By: Jaume Martí Romero Topic: European Macroeconomics & Governance Date: April 19, 2016
Load more posts