May 31, 2017
Getting real in the debate on the euro's future
Werner Mussler offers a solid discussion of the debate the future of the euro, on the day when the European Commission will publish its much leaked reflection paper which will be followed by a more detailed set of proposals in the autumn. Mussler’s main point is that none of the proposals under discussion address the underlying problem of a fundamental misalignment between eurozone member states. With a fixed exchange rate between them, this misalignments have become worse to the point that this would either require a reversion to national currencies, or fiscal transfers. The monetary union was constructed without a political union, and nobody wants the latter. While we do not agree with the last statement, he is probably right in saying that a genuine political union would currently not have sufficient political support. These constraints naturally limit any eurozone reforms.
He notes that there are various proposals for joint financing, like ESBies, but nobody is demanding vanilla eurobonds any longer. The proposals have become more moderate: common funding for a eurozone budget, but nothing that would change the fundamental constructional misalignment. Everything that matters would require treaty change, and this is not going to happen for a long time, partly also because of the Brexit timetable.
We agree with his overall scepticism, and note a report by Hendrik Enderlein, Enrico Letta, et al., for the Delors Institute, on how to ensure that the eurozone returns to strong and sustainable growth. The proposals try to combine the conflicting ideas of the northern and southern member states. The authors recommend three broad categories of action. The first is a reinforcement of the ESM, and a further strengthening of the banking union to increase the eurozone's crisis resistance. The second is more structural reform at the member-state level, to achieve convergence and growth. And third - but only for the longer term - a true economic and monetary union with significant sharing of risk and sovereignty. The proposal reads to us like debt relief for Greece - the reforms come first, while the promises of debt relief remain an illusion forever in the future.
In our view the only realistic proposal would be a three-step agenda that would introduce the various quid-pro-quos in a clearly laid out timetable agreed in advance, similarly to the process that produced the euro in the first place.