This op-ed was originally published in a shortened version in Le Monde.
Spring has brought signs of economic recovery to the euro area. This is obviously good news, especially for the millions of unemployed who need growth to increase their hopes of finding a job. But recovery has also its dark side. It has lowered the appetite of EU and national politicians to continue the process of euro area reform that they launched at the height of the crisis. Yet euro area economic governance remains unsatisfactory. The banking union was a major achievement, but it remains unfinished.
Besides improving banking union, two other subjects require urgent attention to calm fears about weak euro area governance: better fiscal governance and a mechanism to ensure competitiveness despite the absence of the exchange rate instrument.
The euro area requires a fiscal governance system that ensures two objectives: the fiscal sustainability of its members, and co-ordinates an appropriate area-wide fiscal stance that supports the ECB’s monetary policy geared towards price stability. We propose five measures.
First, the closer a country moves toward fiscal unsustainability, the tighter European intervention should be. Ultimately European institutions must be able to completely remove a euro area government's ability to borrow. As events in Greece have demonstrated, This should have been introduced much earlier.
Second, in order to ensure an appropriate area-wide fiscal stance, the euro area needs to be able not only to ban borrowing by some member states, but also to force others to run higher deficits. In both instances, this means having the possibility, during exceptional circumstances like euro area recessions, to overrule decisions by national parliaments.
Third, fiscal governance should be organised in a “Eurosystem of Fiscal Policy” (EFP) comparable to the Eurosystem of central banks, which would also oversee the current European Stability Mechanism (ESM). The EFP would be chaired by a euro area Finance Minister. The members of the EFP would be the national Finance Ministers of the euro area countries, plus five other members, including representatives from the European Commission. The EFP would take fiscal policy decisions by majority – which, in times of substantial danger to debt sustainability or a substantial euro area recession, would be binding on the national level.
Fourth, in a reformed ESM, the EFP would have the power to call on fiscal resources for special purposes in a reformed ESM. This would include providing essential support to member states, and backing up banks in cases of severe systemic stress.
Fifth, decisions by the EFP that overrule national decisions would need approval by a new euro area chamber of the European Parliament. This would be an essential element in making the new governance framework democratically accountable. An independent euro area Fiscal Council would give guidance on whether or not the EFP assessment of exceptional circumstances were correct.
The other proposal concerns measures to prevent wage and competitiveness divergences between member states, which are often due to the functioning of national labour market and social systems that are in some instances in contradiction with their membership of a monetary union. Since the euro area cannot hope to overcome these divergences by creating a single labour market with common rules and high mobility, national systems must produce wage outcomes that closely reflect labour productivity developments.
The euro area needs a mechanism to prevent and correct substantial misalignments of wage productivity competitiveness that complements the existing Macroeconomic Imbalance Procedure (MIP) used by the European Commission to monitor competitiveness and other developments. The new mechanism would bring two innovations to the existing system. It would add national bodies and be binding in some circumstances. It would involve the creation of a Eurosystem Competitiveness Council (ECC), consisting of national competitiveness councils and the European Commission. The ECC’s primary task would be to coordinate the actions of national competitiveness councils to ensure that no euro area country fixes and enforces a wage norm that implies significant competitiveness problems for itself or others. In case coordination fails, the ECC should be able to overrule national councils and make a wage norm binding.
Our proposals require significant powers to be handed over to the European level by euro area countries. They may sound radical and far-reaching, but are in fact much less radical than proposals by some academics, or by the Four-president report initiated by the former President of the European Council, that propose creating a euro area budget and call for high labour mobility to smooth adjustment. Contrary to these proposals, ours accept the notion that labour markets and fiscal policy remain mainly national. Nonetheless, our relatively modest proposals would require changes to the European Union treaty, or at least a new intergovernmental treaty. This may be a painful process, but in order to establish a stable basis for renewed growth and employment, the euro area needs to continue reforming its architecture.