Opinion

European Monetary Union

Guntram Wollf answers the 11 questions submitted by the Commission president to the member states.

By: Date: March 18, 2015 Topic: Macroeconomic policy

More on this topic: Euro-area governance: what to reform and how to do it

The European Commission President published an analytic note together with the European Council, ECB, euro area Presidents raising a number of questions on euro area governance. Europolitics asked Guntram Wolff  to provide short answers to difficult questions, which are reproduced below:

How can we ensure sound fiscal and economic positions in all euro area Member States?

The key to ensure a sound fiscal and economic position is to have the right economic policies in good times, not to run excessive deficits in good times, and to gradually adjust in bad times and implement the right productivity promoting reforms. Currently, these are national prerogatives.

How could a better implementation and enforcement of the economic and fiscal governance framework be ensured?

The current framework for economic and fiscal governance is too technocratic and too rigid in many respects, which makes implementation difficult. Ultimately, we need more centralized decision making power and political discretion – at least for exceptional times.

Is the current governance framework – if fully implemented – sufficient to make the euro area shock-resilient and prosperous in the long run?

The current governance framework is not sufficient.  We are still far from being shock resilient, as events in Greece and volatility in other countries have shown. The euro area needs a double goal for fiscal policy: debt sustainability and an appropriate fiscal stance for the area as a whole.

To what extent can the framework of EMU mainly rely on strong rules and to what extent are strong common institutions also required?

A framework based only on rules is bound to be insufficient. There is no such thing as a perfect rule that covers all eventualities.  So you need institutions that think about and assess situations and then come to clear policy conclusions. The institutions that we have so far are insufficient.

What instruments are needed in situations in which national policies continue – despite surveillance under the governance framework – to go harmfully astray?

What we are seeing at the moment is that the Euro area is stuck and doesn’t have a good answer to that question.  For extremely bad cases, we need a credible framework of no-bailout policies. So if a country really does not deliver, one has to be able to force that country to go bust and not be able to access the market any more.  In extreme cases, the policy that we have currently, where the threat of euro area exit is on the table, may continue to have to be there. A union can only function if a certain set of commitments are being followed.

Has the fiscal-financial nexus been sufficiently dealt with in order to prevent the repetition of negative feedback loops between banks and sovereign debt?

The answer is clearly no.  The banks remain highly dependent on the health of the government in the country in which they are located, and banking remains largely national.  To really address this we need integration of banks across borders, we really need European banks.  We also need to end ring-fencing across borders.

How could private risk-sharing through financial markets in the euro area be enhanced to ensure a better absorption of asymmetric shocks?

The principal idea of having more capital market integration across borders in all 3 major segments of markets  –  securities markets, equity markets, and bond markets –  is the right way forward.  To tackle that, we need to really tackle the deeper issues that prevent better integration, and that’s a long term agenda.  We’re talking about decades rather than years.

To what extent is the present sharing of sovereignty adequate to meet the economic, financial and fiscal framework requirements of the common currency?

The current sharing of sovereignty is inadequate.  Ultimately in the area of fiscal policy, sovereignty is national, so national parliaments have the final say. We need to have a framework where, at least in exceptional circumstances, a European level decision, democratically backed by the European parliament, can override national parliamentary decisions.  That means we need treaty change and national constitutional change.

Is a further risk-sharing in the fiscal realm desirable? What would be the preconditions?

Further fiscal risk sharing is desirable, but at this stage unfeasible.  Ideally, the precondition is the veil of ignorance, so you know that shocks are random shocks against which you insure and not policy induced shocks, or shocks based on policy mistakes of the past. We will live without large risk sharing for quite some time.

Under which conditions and in which form could a stronger common governance over structural reforms be envisaged? How could it foster real convergence?

I’m not quite that convinced we need real convergence.  We can have countries with different levels of economic performance in a monetary union, as long as they don’t live beyond their means. What we need, in contrast, is a framework in which wages develop in line with productivity.  On the fiscal side, we need to add to the framework the goal of a proper area wide fiscal stance, to which also the stronger countries have to contribute.

How can accountability and legitimacy be best achieved in a multilevel setup such as EMU?

The accountability and legitimacy of decisions needs to be at the level at which such decisions have to be taken.  Currently we have a problem in that policy is decided at the national level, and the legitimacy is at that level, while the need to decide on these national fiscal policies, at least in exceptional circumstances, is a European prerogative. In other words, at least for exceptional circumstances, we need to be able to shift the accountability and the legitimacy of the decisions on national fiscal policy to the European level.

This article was originally published on Europolitics


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