A pilot for the governance of the euro is required immediately


Since the Greek bankruptcy in 2010, the leaders of the eurozone have made intense efforts to reform the Economic and Monetary Union. If the banking Union is a success, the reformed economic governance has not succeeded in stimulating growth or bringing about the necessary convergence of the national economies. Since the “Five Presidents’ Report” (June 2015), aimed at completing the euro, the European Council has postponed its examination from one meeting to another. The recent Commission’s White Paper on the Future of Europe (March 2017) can be seen de facto as a deferment of the reform. And yet the viability of the euro implies today that a leader should be placed at the head of economic governance to achieve the above-mentioned aims.

A lost decade for the euro zone. While the U.S. economy rose by 10 points in 2015 beyond its pre-crisis level, production in the euro zone was only slightly above this level, with an unemployment rate of 11% (compared with 5.3% in the U.S.A.), while displaying strong disparities: Germany and its satellites have a good production catch-up, low unemployment, and public accounts in order, with considerable external surplus. By contrast, countries in the South combine a marked decline in production with very high unemployment rates and deteriorated public finances. On average, both with regard to production and unemployment, France has a heavy budgetary deficit, with a clear drop off in its competitiveness.

Three causes underlie the economic stagnation of the euro zone: delay in purging the balance sheets of banks (carried out in 2014, i.e. five years after the United States); the reduction in investment, which affects potential growth; and shortfalls in economic governance leading to so-called “pro-cyclical” policies and a situation of disparity between countries.

Reorganised between 2011 and 2013, this governance comes under the European Semester, which includes budgetary discipline, within the framework of the renewed Stability and Growth Pact (SGP), and economic monitoring, according to the new Macroeconomic Imbalance Procedure (MIP). The “Five Presidents’ Report” plans to continue the overall reform of the EMU until 2025, but does not respond sufficiently to the current weaknesses of governance.

Economic governance shows indeed severe limitations, in spite of the recent reorganisation. First, depending on the domains, the system piles up disparate texts regarding their legal nature, the perimeter of the countries concerned, voting modalities, or the institutions involved. Next, the calendar is very complex. In the European Semester of 2017 three procedures run in parallel according to an agenda that is such an imbroglio and so obscure that only a few technocrats can understand it.

Furthermore, the instruments used raise serious questions. Does the SGP not curtail growth? The aim of structural budget balance should, from this point of view, exclude public investments, a factor of future growth. Are budgetary norms not pro-cyclic, as is shown by the new recession of 2012 and 2013, after the austerity turn of 2010? Is the eurozone strategy armed with the right instruments? It may be noted here that the constraints of the SGP impede progress towards the objectives set. There is also reason to doubt the effectiveness of the MIP of 2011, aimed at compensating for the flagrant lack of a tool of convergence.

To this we may add that the application of the Country Specific Recommendations by member states is largely insufficient, which results from weak decision-making capacity amongst intergovernmental bodies. This is where the soft underbelly of the system lies. This is true, first and foremost, of the Eurogroup whose functioning, which relies on “peer pressure”, is ineffective: having little or no effect on the major countries, it encourages each country to play on mutual clemency, while the application of the recommendations is at best controlled only by a few members.

A Finance minister to pilot the economic governance of the euro. Merging the Presidency of the Eurogroup with the Vice-Presidency of the Commission responsible for the euro, which is possible in the current legal framework, would strength the Eurogroup by providing it with executive resources according to the model applied to Foreign Affairs.

The President of the Eurogroup would implement the strategy for the eurozone, represent the unified eurozone internationally, particularly at the IMF, and be accountable to the European parliament. He or she would also have the task of revising the procedures and tools of governance in order (1) to integrate national strategies with that of the eurozone; (2) to refocus the MIP on correcting external imbalances; and (3) to make budgetary norms more flexible in the service of growth. Eventually, the Eurogroup could be reorganised, in line with the model of the ECB. It would comprise, apart from national Finance Ministers, a board consisting of the President and 5 full-time members.

Aware of the threats caused by the sovereign crises and the unsustainable differences between countries, the leaders have undertaken a global reform of the euro. Within this frame, the reform of the banking pillar has largely been a success, whereas the economic pillar, redefined with urgency, is as heteroclite as it is ineffective. The appointment of a Minister of Finances at the head of the Eurogroup seems to be indispensable in order to correct the shortcomings of governance, favour the convergence of the economies, and raise growth objectives. This decision, which is absolutely vital if the euro is to be maintained, would prepare its completion by establishing a real economic government.

A Ph D in Ecopnomics and a member of European think-tanks, the author has recently published a study for Fondation Robert Schuman entitled: “Strengthening economic governance of the euro”, European Issues, n° 395.