The European economy is in good health. In principle, now would be a good time to strengthen the monetary union—but as ever, it’s complicatedby / December 15, 2017 / Leave a comment
Strange though it may seem to the British, European leaders meeting this week in Brussels had plenty on their plate other than Brexit. Donald Tusk, the European Council’s president, highlighted two other big issues where reforms are needed: the single currency and migration. Although the EU remains bitterly divided over how to deal with asylum-seekers, it pledged to make progress in strengthening the monetary union in the first half of 2018. But will it make good on these early new year’s resolutions?
The economic background certainly favours a concerted push to fortify the single currency. After years of crisis summits, the monetary union of 19 states at the core of the EU is no longer on the verge of breaking up. Now it is the British economy rather than the euro area that is sickly. Growth in the eurozone has been stronger than expected while unemployment has been tumbling. The outlook for next year is more of the same thanks to the continuing ultra-loose policies of the European Central Bank (ECB) led by Mario Draghi, including negative interest rates and quantitative easing.
The political auspices are also far brighter than seemed conceivable a year ago. If nothing else, Brexit has brought the other 27 member states together, at least in the first phase of negotiations including the divorce settlement. To the extent that Britain has tended to act as a brake on integration, its departure from the EU may help the cause of reform, for example in greater collaboration on defence.
More important, the spectre of a populist uprising in this year’s Dutch and French elections that loomed so large at the start of 2017 did not materialise. In electing Emmanuel Macron as their president the French have a Europhile leader who is urging new reforms to deepen European integration, including a controversial proposal for the euro area to have its own budget.
The return of confidence has in turn spurred a fresh push for further integration by the European Commission, the EU’s executive. Jean-Claude Juncker, its president, recently presented a laundry list of reforms as part of that effort. Maybe it was just a coincidence but they had the Commission at the fore, such as a proposal that one of its vice-presidents could become a European minister for economy and finance. In a further power grab for the Commission, Juncker proposed that the minister would chair the influential Eurogroup of eurozone finance ministers, breaking the convention that this plum position is filled by one of them.
If there is a driving—as well as a braking—force in today’s EU, however, it lies neither in France even under the vigorous leadership of Macron nor with the Commission in Brussels but in Germany. During the euro crisis all roads led to Berlin as Germany became the European hegemon thanks to its strong economy and robust public finances. They still do.
Buttressed by German power Europe made some crucial institutional reforms during the euro crisis. However, these were defensive measures designed to shore up the ill-designed monetary union while avoiding it mutating into the “transfer union” that Germans dread. A permanent bail-out fund was established but on an intergovernmental basis that allowed Germany if necessary to exercise a national veto on releasing financial support. The euro area moved towards becoming a banking union through the creation of a single supervisor overseeing banks in the 19 member states, a job handed to the ECB in Frankfurt. But risk-sharing through a common deposit insurance scheme was postponed even though it is a vital component of the banking union.
“Strange though it may seem to the British, European leaders meeting this week in Brussels had plenty on their plate other than Brexit”
Over the summer Germany looked set to embrace at least some of Macron’s integrationist agenda. German politicians could hardly rebuff a French president who had just slain their worst fear, that of an anti-Europe populist insurrection in France. But the German election in September called into question this scenario since Angela Merkel’s ruling CDU/CSU group haemorrhaged support while the far-right, Eurosceptic Alternative for Germany party entered the Bundestag.
Since then Merkel has been preoccupied with trying to assemble a new governing coalition. After a failed attempt to create one with two smallish parties, a renewed coalition with the larger SPD, Merkel’s partner over the past four years, is being explored. That might appear positive for the cause of further European reform since its leader, Martin Schulz, former president of the European Parliament, has recently called for the creation of a United States of Europe by 2025. However, his very euro-zeal might make it harder to agree upon a coalition since leading CDU politicians have dismissed the suggestion with a mixture of horror and scorn.
Continuing uncertainties over German politics, which could also include a minority administration or a fresh election, are one reason why swift progress on European reform is unlikely. Another is an impending election in Italy, most likely in March and no later than May 2018. The priority in the EU until then will be to avoid unpopular proposals that could bolster the position of the opposition populist parties—the Five Star Movement and Northern League.
Even assuming eventual political outcomes in both Germany and Italy that are broadly positive for Europe, the obstacles to further reforms remain formidable. Whatever governments are formed in these two countries they will not see eye to eye for example on how to complete the banking union, the most feasible and concrete advance that could be made in the immediate future. Germans insist that there can be no common deposit insurance as long as there are high non-performing loans in parts of the euro area, a third of which are in Italy. But Italian politicians and officials resist measures to hasten the eradication of their bad loans, fearing that they could lead to fire sales that will damage their banks.
This disagreement between Germany and Italy forms part of a broader divide between northern and southern European countries about how best to reform the monetary union. On the even more intractable issue of migration, the divide is with the eastern countries of the EU that reject mandatory quotas of asylum-seekers entering the EU from the south. These deep rifts are not readily bridged. Concerns about migration in particular continue to drive populist antipathy to the European project. And though the EU has shown remarkable unity in the first stage of negotiations with Britain that was helped by the fact that all had a common interest in securing the biggest possible divorce settlement, the unity of the EU may fray once talks move on to trade. Some countries such as the Netherlands have a much bigger stake in a deep relationship with Britain than others.
Arguably, however, the biggest enemy of reforms of the monetary union is the very return of health to the European economy. Although in principle this makes now a propitious moment to push through difficult changes, in practice it takes away the pressure to do so. In which case, the ECB’s extreme easing policies that were supposedly to buy time for structural reforms have done so only for national politicians to waste it.