Good evening and thanks to Bruegel for inviting me to be here with you tonight.
It’s refreshing and encouraging to learn that ideas of a eurozone finance minister are still of merit … that we still have something to say.
One small thing before we set sail …
I need to warn you I’m a pragmatic optimist, I can‘t help it . I am someone who is genuinely convinced that an integrated Europe is the right and only answer for the future of Europe …
Tonight, I would like to sketch a path towards creation of the fiscal union. To get there we need to pass several checkpoints, including:
- A full completion of the Banking Union
- Rainy-day umbrellas shielding us from macro shocks
- A smart fiscal rule-book
- New enforcement mechanism for fiscal rules
- And a safe asset for the Euro Area
Does the eurozone need to be reformed in such an extent? My answer to that is a simple Yes.
The crisis was ruthless in exposing weaknesses and flaws in the system. We have managed to contain and resolve some. Yet, a temporary quick fix is not going to be good enough… that’s why the reform is inevitable.
That’s the reason why, this time last year, when Slovakia took over the Council Presidency, we decided to stage a discussion on shock-absorbing mechanisms. In other words, on fiscal capacity.
Many were trying to discourage us, many talked of “integration fatigue”.
We were all shocked by Britain’s decision to leave the European Union and we were nervously awaiting outcome of the Dutch and French elections.
My very, very experienced colleague Wolfgang Schauble warned already in 2012 that if the crisis is W-shaped, then after the economic trouble, political problems might follow.
We all became worried that a tide of populist & anti-European forces could turn into a tsunami and cripple the European project luckily that didn’t happen.
On the contrary … instead of doom and gloom … we were blessed with a unique window of opportunity, positive European sentiment and a new burst of energy to push things forward.
Right now, the Godfathers of Europe and the euro - Paris and Berlin - are working together to use all that positive energy to draw up a road-map, an action plan …
Trying to outline how to make the ‘multiverse’ that is our monetary union more resilient and modern.
The need for an internally consistent EZ architecture
The beauty of the eurozone, and the trouble with the eurozone, is that it is colourful and diverse.
It binds together economies large and small, advanced as well as catching up, those with high levels of savings and capital and those with relatively more labour.
This diversity is our strength. This is not just a cliché.
It’s obviously good for the smaller, weaker, less advanced members. But the larger and stronger economies also benefit.
They share a currency with weaker economies – and so the exchange rate is lower than it otherwise would be.
This is not just some academic point. It’s an important fact of life that a diverse eurozone naturally helps with the export performance of the stronger economies.
If we are talking about the completion of the eurozone, we need an architecture that is suitable for this variety of members. The problem is that we are often too attached to domestic politics.
It’s natural to cherry-pick, to propose only integration solutions that our voters back home will like. I understand, I am a politician, after all. I am not saying we should go on a suicide mission. But some political capital will have to be spent on what needs to be done.
For the eurozone, we cannot just demand what we like and reject what we don’t. We need an architecture where the individual blocks actually fit together. We may like some of these building blocks and dislike others. But nothing vital can be left out.
Reasons for fiscal capacity
Because while diversity brings benefits – as I said, to weaker economies as well as stronger economies – it also has costs, which need to be addressed.
For example, the Member States of the eurozone lose one of the most important domestic policy tools: the national monetary policy. We all know the obvious consequences.
No devaluation possible to deal with shocks. Same interest rate for countries at different stages of development, different phases of the business cycle. Having to use fiscal space just to compensate for that.
That’s why, to make up for the loss of national monetary policy, and for the constrained fiscal policy, there should be fiscal mechanisms at the central level. Indeed, in most successful monetary unions, this is precisely the case.
That’s the reason why Slovakia decided to stage a discussion on such common fiscal mechanisms, as I mentioned. Many different mechanisms are possible – it doesn’t matter what is the colour of the umbrella, as long as it stops the rain.
Complementarity of rules and capacity
I want to stress, however, that fiscal capacity does not replace the need for fiscal discipline. On the contrary – I believe that fiscal mechanisms and fiscal rules are complements. To be even more clear about it – fiscal capacity cannot possibly exist without fiscal discipline.
It is quite sad that the crisis created a division and mistrust among Member States, and in many minds, the common mechanisms became linked with irresponsibility.
But we are where we are. In order to overcome mistrust on all sides, the debates on sharing risk and reducing risk need to go in parallel, in my view.
Some countries would like to have more risk-sharing, others more risk-reduction. This debate reminds me of the film, Lost in Translation – we cannot understand and agree with each other, because none of us speak Japanese. Take the example of the Banking Union.
BU – legacy assets and sovereign exposures
A fully fledged, functioning banking union obviously requires the establishment of a common backstop. This needs to be fiscally neutral in the medium term. So it’s really outside of the risk-reduction and risk-sharing debate.
However, when we come to the third pillar, the European Deposit Insurance scheme, we cannot avoid that debate. There are legacy issues of the crisis and we’re still suffering from them. Because of these skeletons in the closet, we still haven‘t fully achieved the main aim of the banking union – to break the vicious circle between banks and sovereigns.
To get to EDIS, we will also need to re-visit the issue of the banks’ exposure to their sovereigns. On the face of it, this is a risk reduction measure. However, the solutions that were proposed would restrict the ability of governments to sell their debt at the time of trouble, when it is most needed.
I can tell you from personal experience that this in itself certainly does not mean a reduction of risk. Forcing a smaller, fiscally responsible country to rely on the mercy of the financial market, instead of the regulated bank market, can make life quite difficult.
It’s different for larger countries. But most countries in the eurozone aren’t actually that large. So if we go down this road, we need some kind of carrot. That is, some kind of a safe asset, through which fiscally responsible governments could finance themselves.
The Eurobond – yes, the taboo word! – so, the Eurobond would be the simplest solution in terms of economics, but I don’t need to tell you that it is by far the most difficult in terms of politics. So we need to look for alternatives.
There are proposals on the table to create a safe asset without debt mutualisation, through financial engineering. The details are quite esoteric even for a Finance Minister – so I will not go into these details. But I do believe that with all the brainpower available, such a European safe asset should be possible.
Pivot to fiscal rules
But here we come again to the issue of trust – especially trust in fiscal responsibility.
What I’d like to see … fight for … is a more integrated, stronger eurozone built on modern fiscal and economic rules … rules respected and followed by all countries with no double standards, no vague flexibilities and ambiguities allowing short-cuts and by-passes.
At the moment, the rules don’t seem to be working very well. On the one hand, the complexity and density of the Stability and Growth Pact has increased over time. Always with a good reason, of course. But the end result is now quite a top-heavy structure. And secondly, the current enforcement mechanism is questionable – on paper, everything works fine, but you know how it’s in practice.
I don’t need to tell you that SGP reform is not an easy task. The truth is that no matter how hard we try, we will never find fiscal rules that will work in every situation and for every Member State. Admitting that the rules are not perfect and never will be is the first step on a twelve step journey towards recovery.
But one relatively painless way of making the SGP smarter and more growth-friendly would be to look at accounting conventions. Personally, rather than creating new flexibilities which muddle the picture, I would much prefer clear changes to the rules – which will then be strictly enforced.
New enforcement mechanisms
But how should this strict enforcement work? Either we create a much stronger centralised supervision, perhaps even including automatic sanctions. Or we go back to basics and let the market decide the appropriateness of our actions – restoring the full credibility of the no-bailout rule.
Both journeys have shortcomings and hidden traps.
Strict enforcement of imperfect rules by faceless men and women in Brussels, Frankfurt or even Bratislava .. Oh, I’m sorry I meant Luxembourg … can spark further public dissatisfaction.
If a new centralised authority had the power to punish countries for their fiscal sins, I think such loss of sovereignty would be too much for many Member States.
Especially today, when the populist anger is lower but not gone, it would add more fuel to the fire. If the extremists cry out against a “dictate from Brussels” today, we can just imagine what they would be saying tomorrow.
Moreover, automatic sanctions would require that the rules were ideal, fit for every country and every situation. As I already said, this is a Utopia. But if the sanctions are not automatic, then politics will always intrude – we would be back where we are today.
The second way, a fully credible no-bailout rule, basically means introducing an insolvency procedure for sovereigns.
That is a very hot potato. The market is not always the most rational animal. As I suggested before, every finance minister is fully aware how much markets can overreact. And I think that most politicians, if they were asked to choose between the market and an institution, would almost always go for the institution – for somebody they can phone up and talk to.
But keeping in our ‘comfortable’ ways is exactly what has gotten us here in the first place. If we are serious about enforcement, we need to avoid political interference as much as possible.
There may be a place for an institution to provide correct assessment of the fiscal health of the Member States, since markets don’t process information perfectly. The independent Fiscal Councils in my country and other Member States work quite well, I think. They may be role models for a European body.
But more importantly, and thankfully, we can put checks on the market, dampen its overreaction and improve its functioning. After all, the markets could even help, through private risk-sharing, once we complete the Capital Markets Union.
So I think a full no-bailout rule could work – if all the proper checks and balances on the market are in place. Specifically, a fully-functional Banking Union, common mechanisms against shocks, and last but definitely not least, the European safe asset. These are all pieces of the puzzle that actually fit together and support each other. Let me explain how.
If we have an insolvency procedure for sovereigns, then the completed Banking Union is obviously necessary. Otherwise, the insolvency of one Member State could threaten the national banking system – and then, in turn, drag down the financial system in the rest of the eurozone.
I already explained the need for fiscal capacity, but it becomes even more important under the full no-bailout rule. We must have a cushion for those shocks which are a little too large for national fiscal policy, but not quite bad enough for the ESM. The fiscal capacity should step in, and prevent such moderate shocks from turning into catastrophic ones.
Finally, the safe asset is needed in order to prevent self-fulfilling prophecies, when market overreaction pushes countries into insolvency, even though this there is no good fundamental reason for that.
This would be an ambitious architecture indeed. However, it is a way in which all the pieces of the puzzle would fit together.
I’m convinced the monetary union has to be complemented with the fiscal union, despite all difficulties and controversies of a model with more inclusive integration of countries willing to move forward, but also affecting countries that, for now, stay out.
It won’t be easy, and it will take time This kind of political integration goes, understandably, beyond the absorption capacity of many politicians and voters, but it has to happen. We should stop trying to compete with each other, and cooperate more, in order to compete with the rest of the world.
I am not saying the way I sketched out is the only way.
The end result will probably be different.
What I am saying is what I suggested at the beginning: that we cannot cherry-pick our way to completing the eurozone.
The end result will necessarily be a compromise. Hopefully the kind of compromise where everyone gets something they want – not a compromise which leaves everyone unhappy.
Either way, all the pieces need to fit together, sharp edges will need to be rounded. That is the only way to create an architecture suitable for the whole of the diverse eurozone.
Long story short. We need delivery to get ahead of the curve, for once.
We should be truthful and genuine when talking about further integration, not just pretending to be nice
We need to know what we really want.
We need to be ready to burn the midnight oil to get there. There’s never the sweet without the sour.
I believe we don’t have much of a choice here, if winning is what we’re striving for and if we want to prove to Europeans that the European project is the best option that exists.
For me the best option, the end-game, is the fiscal union. A union with institutions and instruments designed to fortify all of the eurozone, with real powers and responsibilities, accompanied by a fiscal capacity to shield our economies and financial sectors from harm.
Thank you very much