Future of the euro area [Ten issues to watch in 2018]

Written by Etienne Bassot,

The euro area twice came under immense pressure in recent years: in 2007, when the US financial crisis spilled over to Europe, and then, when the European sovereign debt crisis broke out, peaking in 2010-2012. The latter clearly revealed weaknesses in the original architecture of economic and monetary union (EMU). During and after the crises, a major legislative overhaul aimed to strengthen and complete the framework of EMU. The biggest changes involved revamping economic governance, henceforth to be accomplished through the European Semester and, most notably, its Six Pack set of rules for economic and fiscal surveillance. Moreover, changes were made through an inter-governmental approach, introducing the European Stability Mechanism (ESM), the Treaty on Stability, Convergence and Growth (TSCG) and the Europlus Pact. To alleviate the crises, the European Central Bank (ECB) took robust action, lowering its interest rates and engaging in quantitative easing. In parallel, the framework for regulation of financial services was extensively revamped. These efforts resulted in a more stable EMU, sometimes referred to as ‘EMU 2.0’.

Two main schools of thought exist with regard to the future of EMU. The first deems EMU nearly completed, while the second would like to see a substantially different EMU, or erect a lot more on top of what already exists. The latter strand of thought is exemplified by the 2015 ‘Five Presidents’ Report‘, which advocated that to complete EMU, further steps must be taken towards achieving a union in economic, financial, fiscal and ultimately in political terms. It is important to remember that the report reflects the personal views of five EU institutions’ presidents, but is not an agreement between the institutions they headed.

Several ideas from the Five Presidents’ Report have since been implemented rapidly. Among them are the establishment of national competitiveness boards and an independent advisory European fiscal board within the euro area, and the drafting of an action plan on building a capital markets union. The latter set out numerous measures to be adopted or implemented by 2019, including a European Deposit Guarantee Scheme (EDIS). Finally, the European Pillar of Social Rights, introducing 20 principles and rights to EMU, including the right to fair wages, was proclaimed and signed in Gothenburg in November 2017. Similarly, a roadmap towards Banking Union had already been launched in 2012.

European Commission’s view and proposals

In March 2017, the Commission presented a white paper on the future of Europe. Rather than proposing concrete ways forward, it outlined five possible scenarios of varying degrees of ambition, ranging from ‘carrying on’ with the current framework, to ‘doing much more together’. It also announced further reflection papers, including one on the deepening of EMU. The latter was published in May 2017, but just like the white paper, only suggested ideas for the future EMU, such as a macroeconomic stabilisation function or a European unemployment reinsurance scheme, and sought to inspire debate.

However, the Commission President, Jean-Claude Juncker, was more specific during his State of the Union speech, delivered to the Parliament in September 2017, and in the accompanying letter of intent. He proposed using the ‘passerelle clauses‘ to move from unanimity to qualified majority voting in several policy fields, including taxation. He further advocated steps to incorporate substantial parts of the inter-governmental TSCG into the EU legal framework. The inter-governmental ESM would be transformed into a European Monetary Fund (EMF) under EU law. A strong dedicated euro-area budget line would be created within the existing EU budget, which would offer (1) structural reform assistance, (2) a stabilisation function, (3) a backstop for the banking union’s single resolution fund (SRF), and (4) EMU pre-accession assistance. As part of the completion of banking union, measures would be taken to reduce the level of non-performing loans, and an enabling framework for the development of sovereign bond-backed securities would be created. In a 2025 perspective, the post of a European minister of economy and finance would be created to support structural reforms in the Member States (for the Commission, this figure should be a Commission vice-president who also presides over the Eurogroup), and exploratory work would be done on the possible development of a euro-area safe asset.

Building on these announcements, the Commission’s 2018 work programme, published in October 2017, envisaged concrete new legislative proposals concerning the ESM/EMF, the creation of a dedicated euro-area budget and the integration of the TSCG into EU law. Accordingly, legislative proposals as well as a roadmap for deepening EMU were published on 6 December 2017. Other legislative proposals planned include an enabling framework for the development of EU sovereign bond-backed securities.

The Parliament, which as co-legislator played a considerable role in establishing EMU 2.0, is also open to changes, as shown in the three resolutions prepared by rapporteurs Brok/Bresso (‘Improving the functioning of the EU’), Verhofstadt (‘Possible evolution and adjustment of the current institutional set of the EU’) and Böge/Berès (‘Budgetary capacity for the euro area’), which were adopted in plenary in February 2017.

The debate in 2018

Throughout 2017, many offered ideas about the future of Europe, but the French President, Emmanuel Macron, may well have stolen the limelight, including with his landmark speech at the Sorbonne on 26 September, in which he proposed a major step forward towards European integration. Although Presidents Juncker and Macron both suggest scenarios for making Europe advance, their solutions are sometimes diametrically opposed. Concerning EMU, Juncker wants a complete shift to the Community method, an increase in the Commission’s powers, more prerogatives for the EP and the creation of a strong EU budget with a dedicated euro-area budget line. Macron, on the other hand, tends to favour an approach featuring strong inter-governmental elements, such as a separate parliament and budget for the euro area. The issue is therefore not only where Europe is heading, but also how the balance of power within the EU may shift. Others, such as the Dutch and German governments, which are of the opinion that EMU 2.0 needs little change but would benefit from better enforcement, will also weigh in strongly.

In 2018, two more aspects – legal feasibility and political acceptance – should also be expected to move centre-stage in discussions. So far, most EMU integration advocates have avoided indicating which of their proposals would require amendment of the EU Treaties. Concerning political acceptance, any new step forward would require broad consensus between governments or even unanimity in case of Treaty changes. Public expectations regarding EMU vary considerably from country to country. Therefore, not all governments will be inclined to support change, and even those that are will need to take rising euroscepticism and its implications for elections into account.

At the 15 December 2017 Euro Summit meeting, at which the diversity of views concerning the future of the euro area became evident, it was decided to convene a further Euro Summit in March 2018. Issues such as the completion of the banking union and the transformation of the ESM, will be at the centre of that debate.