Opinion

A new way for Germany and Europe

When the new German government takes over, it should not wait for long until it makes the euro area a central topic on its agenda.

By: and Date: September 30, 2013 Topic: European Macroeconomics & Governance

Related publication:Memo to Merkel: Post-election Germany and Europe

When the new German government takes over after Sunday’s election in Berlin, it should not wait for long until it makes the euro area a central topic on its agenda.

Although the architecture of the euro area has been improved since the crisis hit, not all elements are in place to make monetary union work efficiently. Major risks remain: economic recovery is shallow, relative price levels adjust too slowly and hence public debt sustainability is far from being achieved. Unemployment numbers are high, the banking system is weak and decision making is complicated so that accidents such as the one of Cyprus can reproduce. All of those risks can undermine the stability of monetary union and would hence have serious repercussions on Germany. There is thus no time for complacency and more reforms are needed. We see three central elements that the German government should pursue, which include a change in the philosophy of crisis management.

First, while an overall inflation rate of 2% should be maintained for the euro area, it is in Germany’s interest to allow market forces to drive German inflation rates above 2% If this does not happen, the necessary relative price adjustment will drive inflation rates in the South of Europe to zero or even below zero. As a consequence, the ECB would miss its inflation target of close to but below 2%. More worryingly, simple simulations show that these developments may make it very difficult to guarantee debt sustainability in the South. Also, the balance sheets of banks, corporations and households would be further stressed. More financial aid to crisis countries would be the consequence unless governments decide to let a country default. The market-driven adjustment process in Germany would be greatly supported by a significant increase in public investment, both in infrastructure and education. On both counts Germany significantly underperforms the rest of the EU which risks undermining its competitiveness in the medium-term. The new German government should also carefully review which parts of the services sector could be liberalized to unleash the growth potential in this sector.

The second important task is to complete banking union. This is of central importance to end financial fragmentation in the euro area which currently makes a meaningful recovery in Southern Europe illusionary as investment will remain subdued. To complete banking union, the most important element is to agree on a centralized resolution authority with bail-in and fiscal back-stop. To achieve quick resolution that leads to less fragmentation along national borders, it is of central importance to create a mechanism that does not operate on a unanimity basis. There is still a fair chance that a decisive step in this direction before the European election would allow to overcome the banking crisis in the summer of 2014 finally ending fragmentation and restoring the foundations of growth, namely functioning financial intermediation.

To further support this process, the capital of the European Investment Bank should be increased and the activities of the EIB should be more targeted to meaningfully finance SME investment in Southern Europe. Moreover, the desperation of the Southern European member states to overcome unemployment should be taken seriously. A European Youth Unemployment Fund should provide support for training, incentive for corporates to hire and train youths and enable cross-border mobility. These measures should help prepare the grounds for deeper-running governance reform.

The overall strategy to reform the euro area governance structures should be changed. At the height of the crisis, it was crucially important to quickly create new and powerful instruments. Those included a stepping up of fiscal governance and economic policy coordination as well as the creation of the European Stability Mechanism. However, the ESM, which could turn out to become the center piece of economic governance in the euro area, has been created in an intergovernmental logic, in which every member state has a strong veto power. Germany, as the most important economy and the most powerful country, has become the central veto player in this set-up. This increase in power has gone hand in hand with a decreasing relevance of community institutions and in particular the European Commission. This development is neither in Germany’s nor in Europe’s long term interest as it undermines legitimacy and increase antipathy between countries. The more integrated Europe becomes, the more decision making will have to be done and legitimized at the European level. Well functioning community institutions can best define the common interest and can derive legitimacy from the European level. A meaningful transfer of competences in those areas needed together with the repatriation of competences in other areas should be combined with a transfer of parliamentary legitimacy. This will require a Treaty change and Germany should promote this among its partners.

Related publication:Memo to Merkel: Post-election Germany and Europe


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article Download PDF More on this topic

Blueprint

People on the move: migration and mobility in the European Union

Migration is one of the most divisive policy topics in today’s Europe. In this publication, the authors assess the immigration challenge that the EU faces, analyse public perceptions, map migration patterns in the EU and review the literature on the economic impact of immigration to reflect on immigration policies and the role of private institutions in fostering integration.

By: Uuriintuya Batsaikhan, Zsolt Darvas and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: January 22, 2018
Read about event

Upcoming Event

Jan
24
12:30

Corporate taxation in the digital era

How can we address digital taxation in the EU? Is the proposed "equalisation tax" on turnover the best policy to tackle the challeges posed by digital taxation?

Speakers: Johannes Becker, Dmitri Jegorov, Maria Demertzis, Stephen Quest and Stef van Weeghel Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Jan
29
09:30

Integration of migrants in the EU

This event will discuss the integration of migrants in the EU as well as the EU's response to the recent refugee crisis

Speakers: Herbert Brücker, Jutta Cordt, Zsolt Darvas, Naika Foroutan, Marcel Fratzscher, Manjula M. Luthria, Walt Macnee and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Mohrenstraße 58, 10117 Berlin, Germany
Read about event More on this topic

Upcoming Event

Jan
30
12:30

Why think tanks matter in the era of digital and political disruptions

Bruegel is pleased to host this panel discussion as part of the global launch of the 2018 Global Go To Think Tank Index, published by the University of Pennsylvania’s Think Tanks and Civil Societies Program.

Speakers: Matt Dann, Shada Islam, Blanche Leridon and Hlib Vyshlinsky Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Podcast

Podcast

Remaking Europe

This instalment of the Sound of Economics features Bruegel fellows Reinhilde Veugelers, Simone Tagliapietra and J. Scott Marcus explain how European industries are adapting to new manufacturing, and what more can be done to help EU countries and companies keep pace with the burgeoning 'Industry 4.0'

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: January 19, 2018
Read about event More on this topic

Upcoming Event

Feb
2
10:30

Europe’s immigration and integration challenges: Financial and labour market dimensions

The event, organised by Bruegel in cooperation with the Institute for International Affairs will discuss these and related questions and will also feature the launch in Rome of the study authored by Zsolt Darvas on the impact and integration of migrants in the European Union.

Speakers: Roberto Ciciani, Zsolt Darvas, Marcela Escobari, Tatiana Esposito, Manjula M. Luthria, Carlo Monticelli, James Politi and Nathalie Tocci Topic: European Macroeconomics & Governance Location: Rome, Italy
Read article More on this topic More by this author

Blog Post

Macroprudential policy: The Maginot line of financial stability

The ability of macroprudential policies to assure financial stability and thus leave central banks free to assign the interest rate tool exclusively to price stability is unproven. As the Maginot line did not protect France from a German invasion in WWII, so macroprudential policy may not be sufficient to counter financial instability. Central banks should prepare to deal with dilemmas in the use of the interest rate.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: January 17, 2018
Read article Download PDF More on this topic

External Publication

Reconciling risk sharing with market discipline: A constructive approach to euro area reform

This publication, written by a group of independent French and German economists, proposes six reforms which, if delivered as a package, would improve the Eurozone’s financial stability, political cohesion, and potential for delivering prosperity to its citizens, all while addressing the priorities and concerns of participating countries.

By: Agnès Bénassy-Quéré, Markus K. Brunnermeier, Henrik Enderlein, Emmanuel Farhi, Marcel Fratzscher, Clemens Fuest, Pierre-Olivier Gourinchas, Philippe Martin, Jean Pisani-Ferry, Hélène Rey, Isabel Schnabel, Nicolas Véron, Beatrice Weder di Mauro and Jeromin Zettelmeyer Topic: European Macroeconomics & Governance Date: January 17, 2018
Read article More on this topic

Blog Post

Does the European Parliament miss an opportunity to reform after Brexit?

While Brexit negotiations are beginning to progress, the European Parliament is preparing to vote on the possible reallocation of seats following the UK's departure. With many of the current proposals reflecting Member States' concerns about losing seats, this paper advocates for options that could better achieve equality of representation even within the constraints of the EU treaties.

By: Robert Kalcik, Nicolas Moës and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 10, 2018
Read article Download PDF More by this author

Policy Contribution

European Parliament

Bank liquidation in the European Union: clarification needed

Critical functions and public interest. What role do they play in Member States’ decision to grant liquidation aid? The author of this paper looks at how resolution and liquidation differ substantially when it comes to the scope of legislation applicable to the use of public funds and how the diversity in national insolvency regimes is a source of uncertainty about the outcome of liquidation procedures.

By: Silvia Merler Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: January 10, 2018
Read about event More on this topic

Upcoming Event

Feb
27
12:30

Bruegel - Financial Times Forum: The future of euro-area governance

The third event in the Bruegel - Financial Times Forum series will look into the future of euro-area governance.

Speakers: Maria Demertzis, Gideon Rachman, Manfred Weber 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

Podcast

Podcast

Multispeed Europe

In this episode of the Sound of Economics, Maria Demertzis, and Italy's State Secretary for European Affairs Sandro Gozi, discussed about the issue of member-state integration in two or more speeds, one of the recurring questions in the debate about the European project.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: January 3, 2018
Load more posts