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Commentary & analysis with a focus on European economic policy

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Analysis of the proposal „A constructive approach to Euro Area reform“

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A group of 14 prominent economists, seven each from France and from Germany, has issued a detailed and rather comprehensive proposal for reform of the Euro Area (CEPR 2018).* This is a welcome initiative. There is a window of opportunity for reform in the Euro Area. Economically it has been created by the strengthening and increasingly broad economic upturn: policymakers can leave firefighting mode and focus on structural governance reforms. Politically it has been opened up by the 2015 report by the five presidents of the EU institutions, the initiatives by the new French President Macron, the proposals by the European Commission of December 2017, and, most recently, the declarations of intent on Europe emerging from the grand-coalition talks in Germany.

Together Germany and France account for half of Euro Area GDP. The authors of the report are all well-known in policy-oriented circles, while coming from different traditions. For all these reasons the report is set to be very influential. This appraisal follows the structure of the report itself, examining the underlying philosophy and problem analysis (1), the proposals relating to the financial sector (2), to fiscal governance (3) and finally institutional questions (4). An overall assessment with recommendations for extensions and alternatives concludes (5). [Read more…]

Deepening EMU: Commission makes limited steps (mostly) forward

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Today the EU Commission launched a long-awaited set of concrete proposals to deepen European Monetary Union (EMU). The proposals are voluminous and in some areas detailed. Here’s a summary of the most important points and a first evaluation.

First, the European Stability Mechanism, currently intergovernmental, is to be transformed into a European Monetary Fund as a fully-fledged EU institution. Beyond the legal change – which is surely welcome, the intergovernmental solution having been chosen under the pressure of imminent crisis – the Commission envisages few functional changes. The main task of crisis-lending to Member States in need and the related ability to issue bonds to raise finance remain. New is that the EMF is to back-stop the Single Resolution Fund as part of the Banking Union. By providing guarantees or a credit line, and in parallel by reducing the policy areas subject to unanimity, the EMF will be able to offer swift assistance in the case of banking crises, plugging a notable hole in the policy framework. By underpinning confidence in financial stability, this should reduce the likelihood of its having to be used.

Reference is made to the possibility for the EMF develop new financial instruments “over time”. This is a door left open to a future extension of borrowing – and thus stabilization – capacity in the future.

Equally important, unlike in the vision of now-departed German finance minister Wolfgang Schäuble, the EMF is not foreseen to play a key role in disciplining member states and ensuring the implementation of structural reforms. Oversight responsibility is to remain unchanged (i.e. divided between the Commission and the Council). [Read more…]

Wolfgang Schäuble’s poisoned parting gift to the Euro Area

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Those who wish to leave – so a German saying – you should not seek to dissuade from so doing. To few people is the phrase more applicable than to Wolfgang Schäuble who is resigning the post of German finance minister and, with it, that of de facto head of the Euro Group. He held these roles since 2009,  that is virtually since the onset of the Euro Area crisis. While the crisis and the associated double-dip recession was a failure that had many fathers, Dr. Schäuble was arguably the most wanton of those who, to paraphrase Keynes, blundered in the control of a delicate machine, the working of which he does not understand.

On the other hand, the fact that someone who has caused much harm is leaving an influential post does not mean that his or her influence falls to zero. His arty certainly remains the dominant force in German politics. Nor, alas, does it necessarily mean that the successor will be an improvement: it seems likely that he or she will come from the liberal FDP which campaigned on a manifesto of rejecting any form of transfers or bail-outs, and threatening countries that fail to meet tough fiscal targets with being forced out of the single currency.

At his last Eurogroup meeting the departing German finance minister left a chilling message of his own in the form of a short non-paper on European economic policy. I will go through point by point, but the spoiler is simple: it represents a doubling down of believers in Maastricht and a complete rejection of all the risk-sharing and stability-promoting ideas tabled by the European authorities and, most vividly, by French President Macron. [Read more…]