Fragile Euro Zone

After the Crisis is Before the Crisis

eurozone meeting
German Finance Minister Wolfgang Schäuble (left) will soon lose his key sparring partner Jeroen Dijsselbloem (right). The need for reforms, however, continues. Source: DPA/Picture Alliance

Everything is interconnected these days in the 19-nation euro currency zone, which is why the negotiations due to begin Wednesday in the Netherlands will be watched closely. Prime Minister Mark Rutte, winner of the Dutch election earlier this year, will be meeting with representatives of three parties to form a new coalition government. The outcome will affect the EU capital Brussels because the so-called Euro Group, a body of finance ministers that  sets policy for the euro zone, will soon need a new chair. The current chairman, Jeroen Dijsselbloem, is likely to lose his post as finance minister in the new Dutch cabinet.

Who will replace Mr. Dijsselbloem? French Finance Minister Bruno Le Maire is the only politician considered to have the stature for the office. But the search for a new chair is hardly the most important decision facing this body of finance ministers. Far more important is a reform of the monetary union, which experts agree still has fundamental design flaws that could be exposed the next time this 19-nation bloc enters a crisis.

True, the last major crisis from 2009-2010 seems far away at the moment. The euro zone is experiencing an impressive comeback these days: The euro is getting stronger again against the dollar; the economies of the 19 euro countries have been growing for 17 consecutive quarters; and the latest data suggest economic output in the euro zone will increase by 2.1 percent this year. “On a per capita basis, the euro zone is growing faster than the United States,” said Daniel Gros, director of the Centre for European Policy Studies, a Brussels-based think tank.

And yet, while the euro zone may have left its last major crisis behind, it is still far from crisis-proof.

Even the labor market is showing signs of life in this long suffering region. Last week, the EU statistics agency Eurostat reported a 9.1-percent unemployment rate, the lowest since February 2009. Unemployment might be half that in the United States, but disappointed job seekers have not withdrawn from the labor market here like they have across the Atlantic. “Over the past five years, 2.5 million new jobs have been added to the labor market in the euro zone,” said economist Mr. Gros, adding that the euro zone has actually overtaken the US when it comes to its labor participation rate.

And yet, while the euro zone may have left its last major crisis behind, it is still far from crisis-proof. There are differences among the euro countries in terms of competitiveness and discrepancies in the standard of living among the 12 founding countries. The introduction of the euro at the turn of the millennium was supposed to reduce these differences, but many are still waiting for that to happen.

The International Monetary Fund argues the current recovery creates the perfect setting for a debate over the new institutional architect of the euro zone, an issue the euro finance ministers plan to discuss at their next meeting in mid-September. Germany and France, ever the motor that drives decisions in the European Union, intend to unveil a joint reform proposal by the end of the year. Task forces are already working on the plans.

True, there are obvious gaps in the euro’s architecture,. Yet the debates over exactly what to do about it are going to be fierce. So far, “everyone is still presenting the same concepts they have always presented,” according to one EU insider. The key issue is sovereignty. To date, each country has pursued the kinds of independent economic policies that would suggest that there is no common currency. Indeed that’s a big part of the reason the euro zone descended into crisis in 2009-2010. The key question is: How much sovereignty are the euro countries prepared to give up?

The new French president, Emmanuel Macron, has called for the creation of a European finance minister and a dedicated euro-zone budget. German Chancellor Angela Merkel has said she agrees in principle. The devil, as always, will be in the details. “It’s easy to agree on a European finance minister,” said Guntram Wolff, director of Bruegel, a Brussels think tank, “but not on what he or she should do.”

For example, it seems hard to imagine the European finance minister interfering in the national budgets of the member states. And unlike a national finance minister, he or she will not be dealing directly with tax revenues. The Europeans are not likely to be sending additional funds to Brussels, nor are they likely to let the finance minister incur joint debt for the euro zone. That is currently inconceivable in Berlin.

The idea of a budget for the euro zone is more likely to succeed. There is talk in Brussels of relatively quickly establishing an emergency fund for countries that come into economic troubles through no fault of their own – like Ireland in the event of a Brexit. It could amount to €10-20 billion ($12-24 billion), with funds coming from the European Stability Mechanism, the EU’s existing firewall for debt crises. In an internal document, the Spanish government has proposed tying payments from this rainy-day fund to specific economic indicators, in order to reduce the potential for abuse. These funds could then be used to help boost public investment in a struggling state.

Depending on its size, such a fund could help stabilize the euro zone. But it would not solve the euro zone’s central problem, namely how to compel member states to implement structural reforms – the key to bringing their economies more in line with each other. Chancellor Merkel had previously proposed making funds available only to countries willing to pursue broader reforms, in order to cushion the short-term impact of those reforms. But the idea met with little response, perhaps partly because some EU member states quietly complain it is over-competitive Germany, not them, that needs to reform.

There are plenty of other stumbling blocks to a major euro-zone reforms. For example, a quick consensus seems unlikely in the debate over a European banking union. The Italian government called into question the wisdom of binding rules for all euro zone states when it chose to bail out its own troubled banks with tax funds instead of liquidating them, as new European rules had demanded. That flouting of the rules has in turn hardened Germany’s own line when it comes to pooling resources: “As a result, the chances that Berlin will agree to a joint European deposit insurance have dropped to zero,” said a senior EU official.

It will be difficult enough to find a common German-French position. But winning over Italy could be the real problem. Besides, the euro zone’s smaller member states are worried they will be presented with a fait accompli by the larger countries. The Dutch, who tend to align with the Germans, have already made it clear that they want stricter rules on national budgets. There was no mention of a euro-zone budget in their document.

Nor is it a given that the German government will accommodate France and President Macron, its new hope. It will depend on what he delivers. Mr. Macron has promised to finally reduce the country’s budget deficit. “Germany will be paying very close attention to how France progresses with its reforms,” predicted economist Mr. Wolff. A potential tradeoff could mean reforms in France in return for a reform of the euro zone.


This article first appeared in the German weekly WirtschaftsWoche, a sister publication of Handelsblatt Global. Silke Wettach is a political correspondent in Brussels for WirtschaftsWoche. To contact the author:

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