In 2020, the Covid-19 crisis generated a long-awaited paradigm shift in European economic governance. An unprecedented policy response was provided, together with an entirely new approach to fiscal capacity. The dogma of keeping the EU budget around 1 per cent of the Gross National Income (GNI) and keeping it in balance every year evaporated within a few months.
As we look forward to building the Europe of of the next ten years, it is clear that it is not enough to create a new model budget, under the fancy name Next Generation EU (NGEU). Instead this moment in history should be seen as an opportunity to discuss a more substantial reconstruction of the Economic and Monetary Union (EMU) and to take crucial steps in practice. Changes are needed for truly improving the resilience, performance and cohesion of Europe, going beyond securing the short-term survival of the single currency.
The fundamental weaknesses in the design of the single currency were exposed already a decade ago, but the excessive focus on Greece in public discourse did not help a more comprehensive systemic analysis to take place. However, it was established in the 2012 Four Presidents’ Report, and subsequently confirmed by the 2015 Five Presidents’ Report, that divergence within the euro area between core and periphery was indeed a threat not only to the survival of the single currency but also to the stability of the EU as a whole.
The reinforcement of the EMU architecture, together with its social dimension, and through this the strengthening of real economic performance in the EU became a crucial issue of public confidence in the entire integration project. In academic as well as policy documents, a variety of steps have been identified to make the EMU resilient and sustainable in the long-run. The usual shopping list includes the completion of the Banking Union (with deposit insurance), the widening of the mandate of the European Central Bank (ECB), the creation of safe assets, and the integration of the European Stability Mechanism (ESM) into community law.
Another important area of reinforcement is the revision of the fiscal rules of the EMU. This process was launched by EU Commissioner for Economy Paolo Gentiloni in early 2020, but now it has to catch up and become consistent with the new thinking embodied in NGEU. If the rules of the Stability and Growth Pact (and the so-called „six-pack”) are just suspended in order to tackle the pandemic, but re-introduced unchanged in 2022, we can easily end up like in 2011 with premature fiscal consolidation and a self-inflicted recession.
Undoubtedly, rebalancing the euro area is a key question. The EU has already made the first steps towards minimum wage coordination in order to facilitate upward convergence and a better management of aggregate demand. Various models of rule-based, though limited mechanism of solidarity have already been explored. Make no mistake, more solidarity involves various forms of fiscal transfers, and ideally automatic stabilizers based on well-defined rules and under transparent governance. Some form of unemployment insurance (or reinsurance) would also be necessary and justified. The expert community is well prepared for this, and the more progressive political tendencies have been pushing for this for some time.
Neither a bigger EU budget, nor cross-country transfers should be seen as goals in themselves. In a broader context, the question is whether we want to see again the International Monetary Fund (IMF) as part of a crisis response inside the euro area, or we can reach a point soon when the Fund is not needed any longer as a lender or an analyst of debt sustainability. This question of course is also linked to the settling the external representation of the euro.
Another important question is the balance and division of labour between fiscal and monetary policies. In 2012, ECB intervention was indeed a game changer. But monetary policy also has its limits, and the ECB be should not be left in a function in which it always has to be defended from constant legal challenges when it acts in defense of the integrity of the single currency.
There should also be a way to better articulate economic policy for the euro area as a whole, in order to optimize policy coordination for growth altogether, especially when the recovery strategy has to be framed in the context of the Green Deal, i.e. ensuring that investment is aligned on the shared objective of tackling climate change. This is a new era when member states should not be allowed to pursue arbitrary targets (e.g. “black zero”), or accumulate excessive current account surpluses, if those are detrimental to the community as a whole.
Better governance is necessary, but it is not obvious that member states would hand over competences to a stronger EMU level governance structure without more risk sharing. This latter would also help strengthening public acceptance of the EMU, and fit well in the concept of an EU that protects. Strengthening coordination, solidarity and legitimacy simultaneously would probably pay-off economically as well as politically.
Due to the Covid-19 pandemic, European citizens are now looking at the EU as the most likely and desirable coordinator of crisis response as well as reconstruction. This newly found confidence should help raising the necessary political capital to ensure countering internal imbalances and eliminating divergence between the core and periphery within the euro area.