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EU - euro area governance – a messy rebuilding

Publishing date
06 April 2012

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).

About the authors

  • Jean Pisani-Ferry

    Jean Pisani-Ferry holds the Tommaso Padoa Schioppa chair of the European University Institute. He is a Senior Fellow at Bruegel, the European think tank, and a Non-Resident Senior Fellow at the Peterson Institute (Washington DC). He is also a professor of economics with Sciences Po (Paris).

    He sits on the supervisory board of the French Caisse des Dépôts and serves as non-executive chair of I4CE, the French institute for climate economics.

    Pisani-Ferry served from 2013 to 2016 as Commissioner-General of France Stratégie, the ideas lab of the French government. In 2017, he contributed to Emmanuel Macron’s presidential bid as the Director of programme and ideas of his campaign. He was from 2005 to 2013 the Founding Director of Bruegel, the Brussels-based economic think tank that he had contributed to create. Beforehand, he was Executive President of the French PM’s Council of Economic Analysis (2001-2002), Senior Economic Adviser to the French Minister of Finance (1997-2000), and Director of CEPII, the French institute for international economics (1992-1997).

    Pisani-Ferry has taught at University Paris-Dauphine, École Polytechnique, École Centrale and the Free University of Brussels. His publications include numerous books and articles on economic policy and European policy issues. He has also been an active contributor to public debates with regular columns in Le Monde and for Project Syndicate.

  • André Sapir

    André Sapir, a Belgian citizen, is Senior Fellow at Bruegel. He is also University Professor at the Université libre de Bruxelles (ULB) and Research Fellow of the London-based Centre for Economic Policy Research.

    Between 1990 and 2004, he worked for the European Commission, first as Economic Advisor to the Director-General for Economic and Financial Affairs, and then as Principal Economic Advisor to President Prodi, also heading his Economic Advisory Group. In 2004, he published 'An Agenda for a Growing Europe', a report to the president of the Commission by a group of independent experts that is known as the Sapir report. After leaving the Commission, he first served as External Member of President Barroso’s Economic Advisory Group and then as Member of the General Board (and Chair of the Advisory Scientific Committee) of the European Systemic Risk Board based at the European Central Bank in Frankfurt.

    André has written extensively on European integration, international trade, and globalisation. He holds a PhD in economics from the Johns Hopkins University in Baltimore, where he worked under the supervision of Béla Balassa. He was elected Member of the Academia Europaea and of the Royal Academy of Belgium for Science and the Arts.

  • Guntram B. Wolff

    Guntram Wolff was the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

    A recognized thought leader and academic, he regularly testifies at the European Finance Ministers' ECOFIN meeting, the European Parliament, the German Parliament (Bundestag) and the French Parliament (Assemblée Nationale). From 2012-16, he was a member of the French prime minister's Conseil d'Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed to the G20 high level independent panel on pandemic prevention, preparedness and response. He is also a professor (part-time) at the Solvay Brussels School of Université Libre de Bruxelles, where he teaches economics of European integration.

    He joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he was coordinating the research team on fiscal policy at Deutsche Bundesbank. He also worked as an external adviser to the International Monetary Fund.

    He holds a PhD in economics from the University of Bonn and studied in Bonn, Toulouse, Pittsburgh and Passau. He taught economics at the University of Pittsburgh and at Université libre de Bruxelles. He has published numerous papers in leading academic journals. His columns and policy work are published and cited in leading international media and policy outlets. Guntram is fluent in German, English, French and has good notions of Bulgarian and Spanish.

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