October 24, 2018
Can the eurozone be governed without a parliament?
We have argued that eurozone reform is one of the most likely casualties from the budget standoff between Italy and the European Commission even if politicians have not dared pronounce the reform process dead yet. But economists are already getting impatient about the lack of progress. We note two separate comments, by Paul de Grauwe on his personal blog and by Anne-Laure Delatte on VoxEU, questioning the EU's political governance structures. Both argue for the need to give an elected European assembly a greater say over fiscal policy.
De Grauwe's comment is framed explicitly in terms of the Italian budget conflict. He argues that the European Commission is not accountable to voters for the consequences of tax and spending decisions - national governments are. The Commission is authorised by the treaties to exert top-down control over national budgets, but lacks the political legitimacy to do so. De Grauwe predicts recurrent episodes where democratically elected national governments defy the EU fiscal rules. He points to the precedent of Germany and France breaching the deficit rules in 2003. In the absence of greater political unification, De Grauwe says the Commission should avoid reigniting the eurozone debt crisis by being flexible on the Italian budget and accepting the democratic mandate given by the Italian electorate.
Delatte observes that intergovernmental compromises have been effective for advancing European integration several times in the past, but do not seem to be effective for eurozone reform. The reason may be that past compromises were ultimately seen as win-win whereas the risk-reduction vs. risk-sharing compromise currently under discussion for the eurozone appears to be more about limiting the size of losses in a lose-lose situation. The risk reduction proposals, aimed at breaking the doom loop between banks and their governments, puts debtor governments at risk of a market liquidity crisis. The risk sharing proposals, aimed at giving the banking union common backstops such as deposit insurance, put creditor countries at risk of permanent transfers. Both sides end up preferring the imperfect status quo to what they see a a lose-lose compromise.
De Grauwe is right in substance but the immediate consequences of the Commission relenting as he suggests would be a loss of credibility for the fiscal compact, without necessarily any progress on political unification. Currently, the main issue dividing the European governments is one of mutual trust, not one of interest. And that may be the source of the European governments' inability to see the eurozone reform as a win-win compromise as Delatte frames the issue.