Opinion piece

A Schuman compact for the euro area

Five years of crisis have pushed Europe to take emergency financial measures to cushion the free fall of distressed countries. However, efforts to tur

Publishing date
20 November 2013
Authors
Ashoka Mody

Five years of crisis have pushed Europe to take emergency financial measures to cushion the free fall of distressed countries. However, efforts to turn the crisis into a spur for “an ever closer union” have met with political resistance to the surrender of fiscal sovereignty. If such a union remains elusive, a perpetual muddling ahead risks generating economic and political dysfunction. It may be time to recognize and render more effective the de facto decentralisation in Europe.

The Schuman Compact, proposed by Ashoka Mody and published today by Bruegel, is based on the idea that since the very inception of the EU, Europe’s leaders have been unwilling to cross a threshold that compromised core national sovereignty. Instead, the solidarity visualized by Robert Schuman in his 1950 speech can be achieved through three agreements that allow national governments to move forward within a coherent framework.

  • The Fiscal Compact: The delegation of European fiscal governance to the European Commission has created complex structures that have encouraged costly delays, deceptions and half-measures. For this reason, fiscal policy should be the responsibility of the member states where the sovereignty lies. This concept is already present in the Fiscal Compact to which states voluntarily commit.
  • The Sovereign Debt Compact: To minimise the risk of excessive future sovereign borrowing, a credible “no bailout” regime must ensure that private lenders bear losses when sovereign debt becomes unsustainable. This will require writing the possibility of restructuring in debt contracts, using sovereign CoCos.
  • The Banking Compact: The current debate is focused on the intractable financing details of the complex banking union. But financial stability requires a much smaller euro-area banking system. The compact would encourage states to pro-actively downsize the growing crowd of zombie banks (using debt-equity swaps) while bolstering viable banks. A centralised banking union is desirable; but tackling the here and now must be the priority.

Ashoka Mody’s Schuman Compact creates a decentralised resting stop to reflect on the best course toward a more stable, more integrated Europe. Continuing to stumble forward could lead to a debilitating, if not fatal, fall.

I sincerely hope that this essay helps policymakers to reflect on the current approach to crisis resolution. Bruegel’s role as a think tank at the heart of Europe is to do exactly this: provide policymakers and citizens with new ideas and approaches to the most burning policy questions of strategic relevance. Decision-makers may decide to continue their current approach, to go forward with a strategy as outlined by me with colleagues of the Glienicker Gruppe, or decide to follow the path towards a Schuman Compact as outlined here. Reading well-argued pieces like this essay, and debating the central questions with the Bruegel community, will help in making the right decision.

Guntram Wolff, Director, Bruegel Brussels, November 2013"

More on this topic:

Europe’s integration overdrive

About the authors

  • Ashoka Mody

    Ashoka Mody is the Charles and Marie Robertson Visiting Professor in International Economic Policy at the Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments. He was responsible for the IMF’s Article IV consultations with Germany, Ireland, Switzerland, and Hungary, and also for the design of Ireland's financial rescue program. Earlier, at the World Bank, his management positions included those in Project Finance and Guarantees and in the Prospects Group, where he coordinated and was principal author of the Global Development Finance Report of 2001. He has advised governments worldwide on developmental and financial projects and policies, while writing extensively for policy and scholarly audiences.

    Mody has been a Member of Staff at AT&T’s Bell Laboratories, a Research Associate at the Centre for Development Studies, Trivandrum, and a Visiting Professor at the University of Pennsylvania’s Wharton School. He is a non-resident fellow at the Center for Financial Studies, Frankfurt and the Center for Global Government, Washington D.C. He received his Ph.D. in Economics from Boston University.

    Declaration of outside interests 2014

    Declaration of outside interests 2015

Related content

Opinion piece

Greece: a European tragedy

Wrapped up in the details of pension reforms and home foreclosure—matters that, no doubt, have important consequences for many— the big picture has fa

Ashoka Mody
Opinion piece

The market's troubling message

Amid one of the worst market routs on record, a chorus of reassuring economic commentators insists that global fundamentals are sound and investors ar

Ashoka Mody