The euro crisis, and the subsequent policy response, have created challenges for the governance of the euro area and the relationship between euro- and non-euro EU countries. Further governance changes may become necessary to restore the financial integrity of the euro area. This could increase the tensions between euro-area 'ins' and 'outs'.
The euro's pre-crisis governance model was based on three assumptions: first, that the euro only required delegation of monetary policy to the common central bank and the avoidance of excessive budget deficits in addition to European Union single market provisions; second, that governance could be grounded on rules-based prevention only, and that there was no need for crisis management; third, that all EU countries would eventually join. This made the governance of the euro-area/EU relationship relatively simple. Euro area-relevant provisions were self contained and applied only to euro members. These provisions interfered to only a minimal extent with general rules applicable to all EU members. Single market integration was good for the euro and the EU. Governance essentially relied on the ECOFIN (Economic and Financial Affairs Council) machinery, while the Eurogroup limited itself to the preparation of decisions on the Stability and Growth Pact for the euro-area countries.
The crisis has radically changed this set-up. Integration of policy making within the euro area has increased and this has created some tensions between the euro-area ins and outs. Surveillance mechanisms have been extended to cover areas far beyond fiscal policy. Discussions in the Eurogroup have become more substantive, giving less room for discussions of substance in ECOFIN. The governance set-up has also become more complex, with different variable geometries established in which some countries that are part of the euro area may not participate in all of the new governance apparatus, such as the fiscal compact. Meanwhile, some countries outside the euro area subscribe to certain rules while others do not. Financial assistance programmes have been put in place and involve different actors depending on the country receiving aid. EU banking regulation has been stepped up and covers the EU as a whole. However, fewer member states appear to be inclined to join the euro quickly because of the large financial contributions that need to be made and the still uncertain future of the euro.
The current set-up looks messy with different variable geometries and complex allocation of competences weighing on the efficiency of the decision-making process, and thereby on the efficiency of the EU economy. In a recent paper, we outlined two extreme scenarios for the evolution of EU governance: first, a two-speed EU with a strong and coherent euro area; second, a fragmented EU, with fragmentation even within the euro area. A third scenario would consist of a continuation of a variable geometry.
Scenario 1 would imply that the euro area evolves from being simply a monetary union with some fiscal rules to a fully-fledged monetary union, with a fiscal and banking union. This scenario would certainly render the euro area much more stable than currently. At the same time, it could seriously strain the relationship between the euro-area and non-euro area countries. In fact, the euro area would de facto come to dominate economic policy making in the EU, and this could seriously reduce the attractiveness of the EU for non-euro area countries. This might speed up euro-area accession as countries prefer to be part of the decision-making process. However, some countries might choose to drop out of the EU framework to the greatest extent possible. To prevent the latter, it may be necessary to establish some safeguard clauses that preserve the vital interests of the minority of EU countries outside the euro area.
In the second scenario, euro-area countries would only accept limited common disciplines in the budgetary field, resist significant steps towards economic integration and judge that banking supervision and resolution needs to remain a purely national prerogative. In times of crisis, as we witnessed recently, and perhaps even in normal times, this would likely lead to a fragmentation of financial markets and perhaps even product markets. This situation of “one money, but several financial markets” would effectively mean the coexistence of several monetary policies within the euro area. The big question in this regard is if degeneration of the monetary union and potentially of the EU itself can be prevented.
Scenario 3 would see not only the continuation but even the further development of the variable geometry architecture witnessed in recent months. In addition to having most euro-area and some non-euro area countries sign and (in principle) ratify the fiscal compact, one could see in the future some euro-area and some non-euro area countries sign other intergovernmental treaties, primarily aimed at reinforcing the fiscal and financial dimensions of EMU. We would then have a series of intergovernmental treaties signed and ratified by different groupings of countries, some inside and others outside the euro area. Compared with scenario 1, this would have the advantage of being less confrontational, because the frontiers between groupings would be blurred. However, it would not achieve the kind of coherence and efficiency in decision making that seems necessary to ensure the smooth functioning of the monetary union.
EU governance is likely to remain in between the two extreme scenarios for some time. In the short term, it will be important to improve the current decision-making process to minimise the costs, in particular for the single market. This means that the rules of the game for information sharing and the sharing of responsibilities need to be reconsidered. At the same time, we need to discuss where to go with euro area and EU governance. And we need to do so rather quickly.
This column draws on a recent work by Jean Pisani-Ferry, André Sapir and Guntram B. Wolff on “The messy rebuilding of Europe”, Bruegel Policy Brief 1/2012.
The issues raised in this contribution, along with other issues, will be discussed in Session 1, titled ‘European Economic Integration: Saving the Union from Itself’, of the Globsec 2012 Global Security Forum in Bratislava, April 12-14, which session is co-organised by Bruegel and the Slovak Atlantic Commission. The panellists will be John Fitzgerald (The Economic and Social Research Institute), Jean Pisani-Ferry (Bruegel) and Giulio Tremonti (University of Pavia, Italian Parliament and Aspen Institute Italia). The panel is chaired by Peter Spiegel (Financial Times).