This is the first in a series of posts about the future of Europe as envisaged by European leaders. It starts with the perspective offered by Mario Draghi, because it would appear to me that his was the first one expressed in the recent list of such views. According to the Monetary Policy supremo, we’ve got the tools we need.
No Need for Treaty Change – Reforms Are Feasible Within Present Framework
After filtering through the pandering to his German audience, it is possible to discern the narrative of his article in Die Zeit. Mr Draghi finds 1 original design flaw with the Euro-Zone and 2 problems arising from it. However, he does not find any need for the sort of radical reforms that would need treaty reform. He argues that
All necessary measures are firmly within our reach.
before dismissing Eurosceptics and Federalists by arguing that
Those who want to go back to the past misunderstand the significance of the euro. Those who claim only a full federation can be sustainable set the bar too high. What we need is a gradual structured effort to complete EMU.
Institutional Failures Cause Fiscal and Financial Problems
Notwithstanding these considerations, the truth remains that the fiscal rules of the Stability and Growth Pact that were to govern the Euro-Zone were weak and the financial rulebook fairly inexistent. As the president of the ECB recognises,
“this institutional framework left the euro area insufficiently equipped to ensure sound economic policies and effectively manage crises.”
This institutional failure is moral hazard, of a 2 pronged nature which is further elaborated upon, by describing the fiscal and financial problems plaguing the Euro-Zone:
For fiscal policies, we need true oversight over national budgets. The consequences of misguided fiscal policies in a monetary union are too severe to remain self-policed. For broader economic policies, we need to guarantee competitiveness. Countries must be able to generate sustainable growth and high employment without excessive imbalances. The euro area is not a nation-state where persistent cross-regional subsidies have sufficient popular support. Therefore, we cannot afford a situation where some regions run permanently large deficits vis-à-vis others.
For financial policies, there need to be powers at the centre to limit excessive risk-taking by banks and regulatory capture by supervisors. This is the best way to protect euro area taxpayers. There also needs to be a framework for bank resolution that safeguards public finances, as we see in other federations. In the U.S., for example, on average about 90, mostly smaller, banks per year have been resolved since 2008 and this had no impact on the solvency of the sovereign.
Understanding the Implication of Draghi’s Arguments
I should begin by stating that I have no quarrel with the argument in favour of financial policies. I do object to the lack of prominance of the joint deposit guarantee scheme, but I do think that this is one of those issues about reform sequencing.
However, I believe that his comments about fiscal policy are not convincing at all. Fiscal transfers are rejected because the “euro area is not a nation-state where persistent cross-regional subsidies have sufficient popular support”. It is widely accepted that a monetary union requires adjusments in the presence of asymmetric shocks. Without the currency union, the central bank will have the ungrateful task of shoring up the balance of payments through forex depreciation and reserves. In a monetary union the adjustment becomes completely nominal. Either the quality of life falls in the weaker country or the richer country offers fiscal transfers to keep it from contracting too much. While I am not advocating the mezzogiornalisation of Southern Europe, it should be clear that when Mr Draghi says that “we need to guarantee competitiveness. Countries must be able to generate sustainable growth and high employment without excessive imbalances”, this implies a new equilibrium at a lower level of GDP and inflation, visible to anyone who bothers to look.
Lastly, while I do agree that “those who want to go back to the past misunderstand the significance of the euro”, no one has really taken the time to explain it to them either. But more than anything else, I really do take issue with the idea that a fiscal union is “too ambitious”.
- First off, it’s an intellectually lazy argument. It dismisses an option on the assumption that it is impossible to convince people of its merits, based on the priors present among the electorate.
- Secondly, it is ignorant. As Cerniglia and Pagani showed back in 2007, there is support for further integration. Clearly, there seems to be a substantial level of support for European expenditure on issues of unemployment, fight against social exclusion, research. I would argue that since the beginning of the crisis, with the erosion of fiscal power in many peripheral countries, I would expect the Greeks, the Portuguese, the Spanish and the Italian to favour some sort of shared system for funding health care and social security systems.
- Finally, and this is my last problem with this assumption, it is politically lazy. Just because it may be difficult, there’s no point in even discussing the one option that would resolve this? It’s just plain lazy! If Draghi, who does not need to get elected, can’t bother to push politicians to stand for Europe, to use political capital for a vision of Europe, rather than for crisis mechanisms, it must truly be difficult.
I see no leaders… Only people who see where the masses are going and run to walk in front. Then again, may be they just don’t know…