“Sovereignty ends when solvency ends,” says report
By Irina Smirnova-Godoy | Wednesday 11 July 2012
A new publication by Notre Europe suggests the creation of a European debt agency and a cyclical stabilisation insurance fund. The report is yet another contribution to the growing body of proposals for dealing with the eurozone crisis. Entitled ’Completing the euro: A road map towards fiscal union in Europe’ and authored by the Tommaso Padoa-Schioppa Group (TPS)
(1), it offers an analysis of the challenges facing the European Monetary Union (EMU) and includes a road map for what it calls sui generis form of fiscal federalism.
Taking stock of the current state of economic and political integration, the report warns that the social contract between the Union and its member states is at risk in its four dimensions: competitive markets, monetary stability, equitable distribution of the gains in economic welfare and actual growth performance. Among the functional deficiencies of common currency framework is the single interest rate set by the European Central Bank (ECB), which has had adverse effects on most member states. The ‘one size fits none’ rate has produced excessive cyclical divergences and imbalances in the eurozone. Other root causes of the crisis lie in the fact that eurozone countries issue their debt in a currency they have no control over, thus disallowing such traditional monetary policy levers as devaluation. At the same time, whereas national authorities carry out banking supervision and potential bailouts, the banking systems are highly interdependent, raising the risk of contagion in the eurozone.
WHAT TO DO
The road map proposes policy actions in four areas to address the imperfections and imbalances of the existing eurozone regime.
Firstly, the eurozone needs to become a truly integrated economic area. This would require domestic institutional adjustments to increase the responsiveness of wages and prices.
Second is the need for a cyclical stabilisation insurance fund that would address the EMU’s inherent imbalances and would counter some of the effects of the ‘one size fits none’ monetary policy. This fund should not be part of the EU budget and would function automatically as a sort of insurance scheme. National budgets would pay into this fund in exceptionally good years, thus ridding themselves of surpluses, and they could resort to it during downturns.
The third element is the creation of European debt agency (EDA), whose purpose would be to ensure fiscal policy coordination and discipline. According to the experts, the new agency would correct the asymmetric limits to fiscal behaviour under the Maastricht Treaty. The lessons learned from the crisis reveal the need for a “hierarchical incentive system in which sub-central fiscal discipline is enforced by central rules and administrative procedures”. The creation of EDA may require a new intergovernmental treaty.
Finally, the authors propose the establishment of a eurozone banking supervision authority, which was already announced in the conclusions of the recent European Council.
In his foreword, Jacques Delors, Notre Europe’s founding president, stresses that as opposed to the current short-term approach to EMU problems, the report “designs a clear conceptual and political horizon, well beyond the first political agreements already reached, and in which the meaning and impact of technical options mentioned appear even more consistent”.(1) Henrik Enderlein, Peter Bofinger, Laurence Boone, Paul de Grauwe, Jean-Claude Piris, Jean Pisani-Ferry, Maria Joao Rodrigues, André Sapir and António Vitorino - see www.notre-europe.eu