With Germany and Italy not ready to compromise yet on reforms of the Eurozone, the focus should be put on strengthening the banking union, experts from CEPS and Bruegel say.
All EU leaders agree a Eurozone reform is needed: the area’s vulnerabilities have been harshly revealed during the financial crisis.
However, there still is no agreement on the way forward.
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French President Emmanuel Macron and German Chancellor Angela Merkel engaged to table a joint reform roadmap at the EU summit. But they have not agreed on how to go about it yet.
For Daniel Gros, Director Economy and Finance at European think-tank CEPS, EU leaders should instead focus on reforming the banking system. Strengthening the existing mechanisms in the banking sphere would get the EU prepared for the next crisis”, Gros told Euranet Plus.
Daniel Gros, Director Economy and Finance, CEPS : “The priority is to complete the banking union”
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“The crisis which we have seen in the EU area was essentially a crisis of our banking systems, and that is why it is really important to complete the banking union and to find new mechanisms to stabilise our financial markets. I think that is much more important than having grandiose, but vague ideas of coordinating fiscal policy, having some small [euro] budget or having a European finance minister – all these ideas about fiscal policy remain rather vague and probably without concrete impacts.”
The topic will be on the menu of a Franco-German ministerial meeting on June 19.
Italy is “the main obstacle”
But according to Gros, the real challenge is not so much about aligning visions in Berlin and Paris – but rather in Berlin and Rome.
In his view, Italy is “the main obstacle to reform the Eurozone. Other EU states have experienced a crisis and “learnt the lesson that they have to be more prudent in the future.” But this is not the case in Italy, Gros said.
Daniel Gros, Director Economy and Finance, CEPS : “The real problem is between Germany and Italy”
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“In Italy the thinking is that one needs more risk-sharing and unfortunately that Italy has already done enough – that’s what Italians think at least. And they think that many of their problems are actually due to Germany, because Germany has this very large current account surplus, and some Italians think there was too much imposed austerity. So the real problem in the euro areas is not so much between Macron and Merkel, but it is between Germany and Italy.”
Prospects being dim for both parties to agree on a reform package, the German economist does not expect concrete decisions at the European council at the end of the month.
Grégory Claeys, a research fellow at economic think tank Bruegel, concurs with this pessimistic view, although he hopes that progress on the banking union can be achieved.
Grégory Claeys, Research Fellow, Bruegel: “I hope that everybody will agree that EDIS is a good thing”
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“I still hope that there will be some things decided about the banking union, for example on the backstop for the single resolution fund, that would be a good thing. On the European deposit resolution fund I think it is less likely that we will see things advancing quickly, but still I hope that there will be a roadmap on this and that everybody will agree that EDIS [the European deposit insurance scheme] is a good thing, maybe that there will be conditions to implement it in the next few years, for example that the non-performing loans of Southern countries of Europe go down by a large amount before we do that.”
New fiscal rules are needed
However for Claeys, reforming the Eurozone is necessary.
It should help address existing flaws in the current framework – in particular in the budgetary rules. He recommends dumping the structural deficit rules, which he said are “not functional” and “very complex.”
Structural deficit is not observable and cannot be calculated in real time, Claeys explained. The Commission, which makes those calculations and provides recommendations on that basis, has made major measurement errors, the Bruegel scholar added.
They should be replaced by an expenditure rule, whereby the growth of expenditure of a country is capped, Claeys explained.
Grégory Claeys, Research Fellow, Bruegel: “Expenditure rules would be much more helpful for countries”
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“In good times it would provide them an incentive not to increase expenditure like crazy – a trend that we have noticed in countries like Spain and Ireland before the 2017 crisis – and in bad times, on the contrary, they massively reduce expenditure. Therefore I think an expenditure growth cap at all time would make fiscal policy much more counter-cyclical, it would help support growth in bad times and to avoid crazy expenditure in good times”.
According to the French researcher, expenditure rules are gaining some traction in the debate at the moment , including in France and Germany.
“Putting a cap in good times will also help austerity in bad times,” Claeys concluded.
- Author: Hermine Donceel, Euranet Plus News Agency
