The global euro needs stronger institutions

By: Wolfgang Münchau

It happened to François Mitterrand in the run-up to the Maastricht Treaty on the European Union. It happened to Jacques Chirac a few years later and now it is happening to Nicolas Sarkozy. Successive French presidents have tried but failed to give the eurozone a layer of gouvernance économique beyond the present institutional setting.

Mr Sarkozy had planned to call a political summit among eurozone leaders during the French EU presidency that starts next month. But that is now off the agenda. Mr Sarkozy’s irresistible force has met the immovable object of Angela Merkel, the German chancellor.

The beneficiary of this stalemate is the European Commission, which last week produced a level-headed blueprint* about the future of the eurozone. I expect the report to set the framework for this debate during the next few years. The Commission is proposing some real change, though probably not what Mr Sarkozy had in mind – for example, improved macroeconomic surveillance that would restrict his own room for fiscal manoeuvre.

The report makes a large number of proposals, of which two seem the most important. The first is the co-ordination of structural reforms among eurozone members. It sounds technical but its political and economic significance should not be underestimated. If accepted, it would allow the finance ministers of the current 15 eurozone countries – the so-called eurogroup – to play a much more active policy role. It would produce a new policy layer between national and EU levels. My guess is that this layer will become more important over time. The EU’s own microeconomic programme, the Lisbon Agenda, has been too diffuse and only partially successful, while many national programmes – as in Germany under the grand coalition – have lacked strategic direction.

Policy co-ordination is also important from an economic perspective, as it recognises the importance of spillovers. One example is the discussion about inflation persistence, the tendency for a rise in inflation to remain. One reason is that companies in several countries change their prices only infrequently. But the inflation this generates is not just a national problem: it affects the eurozone as a whole – though not the EU itself. The regulatory aspects of this problem are therefore a legitimate issue for discussion in the eurozone. It puts substance to the ambition, set out in the Maastricht treaty, that governments should pursue economic policy as a matter of common concern.

This proposal is also a good example of what you can do under the new Treaty of Lisbon. One of the more important, and not much talked-about, measures it has introduced is an upgrading of the status of the eurogroup. So far it has been an unofficial dining club. Under the Lisbon treaty, it will become an official organ of the EU. The history of the union has shown us time and again that institutions matter. They create their own agendas. Nobody knows this better than the European Commission itself.

The second important proposal is for the eurozone to have a single representative in international organisations such as the International Monetary Fund. The argument in favour of single representation is overwhelming. The euro has already established itself as the world’s second most important currency – in terms of foreign exchange reserves, as a pegging currency, as a global invoicing currency and as a currency of denomination for financial instruments. There is a chance that the euro’s global role will increase significantly in the years to come.

But the eurozone is clearly not yet prepared for a global role. European economic debate has been historically parochial. Last year’s first joint foreign visit by the eurozone’s three most important policy officials – to China – was applauded as the beginning of a more outward-looking approach. But it is also telling that it took nine years for this to happen. So do not hold your breath.

There is also a lot of resistance within national capitals to the idea of pooling representation. I recall a bombastic official of a large European country who admitted openly that he would fight any such moves on the grounds that these international organisations provide plum jobs for his staff. The Commission has clearly set itself an ambitious goal.

The blueprint contains a lot more detail but these two issues appear to me the most important because they introduce a minimal necessary layer of economic policy co-ordination and recognise the global role of the euro. Yet it is not a sufficient agenda by any standard. For example, the eurozone is still not well equipped to deal with strong asymmetric shocks, such as the current financial crisis, beyond the automatic stabilisers of national fiscal policy.

An idea I find intriguing is to base short-term unemployment insurance at eurozone level. It would be complicated but might introduce a useful stabiliser. Another important and long overdue change would be to give the European Central Bank a formal banking supervisory role.

So this is not the full Monty of economic governance. But it is more than just a useful start – and it gets us out of an ideological and pointless Franco-German trench war.

*EMU@10: Successes and Challenges After 10 years of Economic and Monetary Union http://ec.europa.eu/economy_finance

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© Financial Times Limited 2008

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