Fiscal friendship

Pushing the Euro Zone Closer Together

Protest labor reform italy
Protesters in Rome come out against labor reform.
  • Why it matters

    Why it matters

    Debate about the euro zone’s future structure is raging, as it will dictate the roles the European Union and the individual states play in determining economic and monetary policy.

  • Facts

    Facts

    • The E.U. Commission and its newly-installed president, Jean-Claude Juncker, aim to make the monetary union stronger, according to a working paper obtained by Handelsblatt.
    • The German Council of Economic Experts, which advises the German government, favors more national responsibility for financial policy.
    • The E.U. reform package is scheduled to be announced in fall 2015.
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  • Audio

    Audio

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The European Union’s executive branch would like to push the monetary union of the euro zone even further ahead – according to a draft of the new European Commission’s working paper obtained by Handelsblatt.

It announces “a package to strengthen monetary union” for the third quarter of 2015, and proposes creating a new central steering mechanism for essential structural reforms in the states that use the common euro currency.

Commission president, Jean-Claude Juncker, had already given a rough idea what this could look like in his inaugural speech to the European Parliament in July. He indicated that governments would have to be “encouraged” to make structural reforms and “if necessary, with additional financial incentives and a targeted fiscal capacity on the euro-zone level.”

Germany’s chancellor, Angela Merkel, voiced similar ideas a few weeks ago.

Germany’s leading economists, on the other hand, are against using financial incentives to encourage euro countries to make structural reforms. In its annual report, the German Council of Economic Experts under chairman Christoph Schmidt spoke out against more European involvement in financial and economic policy.

“Effective direct access rights in matters of financial policy would require member states to waive sovereignty on a big scale,” said the report. Most euro states would not agree to that, according to the council.

In its “Maastricht 2.0” proposal, the council, which advises Ms. Merkel’s government, recommended a return to national responsibility for financial policy and a strengthening of the no-bail-out clause in the Lisbon Treaty, which precludes members of the European Union from taking on the debts of other member state. Maastricht is a reference to the early 1990s treaty that created the currency union. The Lisbon Treaty was passed in 2009 and was an attempt to streamline the functioning of the 28-member European Union.

A dissenting opinion by one of the council’s experts, Peter Bofinger, shows the depth of controversy about the euro zone’s future structure. He called for greater fiscal integration so the euro zone could liberate itself from financial markets – as is the case in the United States, the United Kingdom and Japan, all of which emerged from the financial crisis in better shape.

“The European rules on fiscal policy are extremely important for the stability of the euro zone. They have to be strengthened.”

Marcel Fratzscher, German Institute for Economic Research

An expert who is not on the council, Marcel Fratzscher, president of the German Institute for Economic Research, is also against a return to more national responsibility.

“The European rules on fiscal policy are extremely important for the stability of the euro zone. They have to be strengthened – not weakened,” he told Handelsblatt.

The idea of joint euro bonds, has apparently been discarded. Mr. Juncker had been advocating them for years,but they do not feature in the commission’s working paper. Mr. Juncker conceded recently that the Lisbon Treaty excluded joint liability and therefore also euro bonds. A change here would require adjustments in the treaty, a requirement not mentioned in the working paper.

The commission also wants to re-examine how the euro zone represents itself on the international stage. In Brussels, there has been talk about merging the representations of the euro states at the International Monetary Fund (IMF) or at the Organization for Economic Cooperation and Development, so the states could speak with one voice.

Mr. Juncker also plans a reform of the controversial so-called Troika. The group, made up of representatives of the IMF, the E.U. Commission and the European Central Bank, has been responsible up to now for monitoring the progress of reforms in the crisis-hit euro states. The Troika would have to be replaced by an entity with better democratic credentials, as Mr. Juncker put it in July. He attaches particular importance to adding a “social dimension” to monetary union.

If the euro zone were to impose economic reform programs on crisis-hit states in the future, he wants the possible social effects to be examined beforehand. These prior examinations are also to be a feature of the reform package, scheduled to be announced in fall 2015.

Euro Zone Countries-Neu

 

Ruth Berschens is the Handelsblatt Brussels correspondent. Donata Riedel is a financial policy editor at Handelsblatt Berlin. To contact the authors: berschens@handelsblatt.com, riedel@handelsblatt.com.

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