Euro Zone

Taskmaster or Paymaster?

G7 Leaders Meet In Sicily: welcome ceremony and photo family
Will these three finally align their views? Source: Picture Alliance.

A Franco-German working group has until July to hammer out proposals to reform the monetary union. Part of the plan is for the euro zone to get its own finance minister. Angela Merkel framed this as a way for Europe to more forcefully take “its fate into its own hands.”

But as usual, once you get down to specifics, things get complicated. Everybody says they want a finance minister, but each means something different.

The German federal government’s idea of a European finance minister is a kind of European chief money manager who makes sure the monetary union’s member states don’t overspend. Finance Minister Wolfgang Schäuble wants countries to require the minister’s approval on any new debt. If a national finance minister goes deeper into debt than allowed, their European counterpart could file an objection, in much the same way as the European Competition Commissioner can oppose a corporate merger.

Ms. Merkel’s CDU party believes Europe got into crisis because the member states didn’t follow with the rules. Strengthening Europe first and foremost means cracking down on future violations.

The French see things differently. They want a European finance minister with his own budget to jump-start investment in countries with economic difficulties. This would either be funded through taxes, with a portion of national tax revenues flowing into a common euro-area treasury, or through issuing of bonds – or a combination of the two.

Emmanuel Macron’s idea of a European finance minister is basically a minister for doling out cash. Mr. Macron believes there will always be crises – even if everyone complies with the rules – because members states can’t devalue their currency to prop up their economies. A common budget should be used to narrow the gap between the weak and the strong.

The working group is supposed to find common ground between the German desire for increased control and France's soft spot for new transfer mechanisms.

These fundamentally different concepts have hamstrung the debate over reform of the monetary union for years. But Ms. Merkel now appears convinced she needs the French on side to stand up to Donald Trump and Vladimir Putin, and she’s open to discussion.

The working group is supposed to find common ground between the German desire for increased control and France’s soft spot for new transfer mechanisms. Think tanks have already developed such concepts.

The Jacques Delors Institute in Berlin suggests the European finance ministry take over budget monitoring, and at the same time be given control of budgetary funds. The result would be a kind of super minister who takes over the tasks of the monetary affairs commissioner but also those of the chairman of the group of euro finance ministers, currently a rotating position.

In a reflection paper presented last week, the European Commission proposed integrating the bailout fund — the European Stability Mechanism (ESM) — into a European finance ministry, too. The finance minister would draft and implement decisions taken by a strengthened euro group.

What exactly would be financed from the common purse is still being debated. More investment? Emergency aid for acute crises? Permanent financial transfers? Causes popular in all member states – like protection of outer borders or the fight against terrorism – are likely to come first. Eventually, the Commission envisages the common budget subsidizing member states to relieve the pressure of unemployment spikes on national insurance. But this isn’t seen as feasible yet.

That’s partly because a finance minister with so much power would only be democratically acceptable if held to account by a parliament. The euro zone would have to establish its own parliament with extensive powers, and that would legal present challenges. But if less money were involved, it might be enough to have the European finance minister monitored by a parliamentary commission. This board could be composed of, for example, members of national parliaments and the European parliament.

Even that would probably require a change to the European treaties, raising the possibility of referenda in a number of countries. Which is why there is also talk of establishing the European finance minister outside the European institutions, at least provisionally.

At the center of the debate is the ESM. It operates as an independent organization located in Luxembourg on the basis of an intergovernmental treaty. In the German government’s eyes, this offers one crucial advantage – it’s comparatively easy to amend. For some time now, Mr. Schäuble has been making the case for expanding the ESM into a European monetary fund. So far, it has provided assistance loans to states no longer able to borrow on the capital markets. In future, it could monitor national budgets and might be led by the chairman of the euro group.

One thing is clear, however. The French will only accept this if a reallocation component is built in. By all accounts, Berlin has long secretly resigned to that.

This article first appeared in Die Zeit, a sister publication of Handelsblatt. To contact the author:

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