On 17 January, a manifesto signed by 14 leading German and French economists was published. The document contains—as the title indicates—a “constructive proposal for the reform of the euro area,” and its most important points refer to the stabilisation of the banking sector, public finances, and crisis prevention. This is another important voice in an increasingly intense discussion about the future of European integration.
The authors say they believe that despite the economic recovery in the euro area, it is not prepared for future crises, mainly because of incomplete institutional reforms, blocked by the dispute between supporters of market discipline (fiscal in particular) and those who support mutualisation of financial risk. The dispute has divided Germany and France, which for years have been pushing slightly different visions of European economic integration. The manifesto is an attempt to end that or at least mitigate it. The political motivation is behind it is the conviction that ordering the eurozone requires Franco-German cooperation, and that President Macron and the next German government are fated to compromise.
The authors encourage banks to more carefully purchase government bonds, not to treat them as risk-free investments, and to avoid holding debt securities from only one country or a just a few of them. More diversified holdings should reduce the risk of a crisis sloshing back and forth between public finances and the financial sector. Diversification is to be facilitated by the introduction of the so-called Esbies (European Safe Bond Assets) financial instrument, a type of security comprised of bonds of all members of the euro area, which banks can then purchase. The reform is would be complete with the introduction of joint deposit insurance in the euro area.
They suggest replacing the criterion of structural budget deficit with the principle that public expenditures cannot grow faster than nominal GDP. This is a simplification of the rules, not relaxation and is to be interpreted much more restrictively with respect to excessively indebted countries. In addition, rescue credit from the European Stability Mechanism (ESM) will not be granted to countries that do not show an improvement in their financial situation. In their case, their debt will need to be restructured, which means that its cost will be borne by their creditors. This reform component, in line with Germany’s preferences, is balanced with a proposal for a fund supporting member countries in the event of economic collapse. It is to be financed from Member State contributions, i.e., transfers.
The authors did not develop high-profile ideas for the creation of a joint minister of finance for the euro area or a common budget for its member states. Instead, they propose the creation of an independent body that would oversee compliance with fiscal discipline rules in the euro area and declare violations. This entity could be established within or outside the European Commission, but in any case, it would be separate from the political process, and whether and how to sanction a state in violation of the rules. A similar technocratic idea guided the idea that granting emergency loans would be the prerogative of the ESM (or its successor, the European Monetary Fund) without the interference or need of political bodies to agree to actions.
Among EU members not belonging to the single currency zone, ideas to deepen integration through separate political bodies and budgets has raised anxiety, since it would result in a so-called “multi-speed” Europe—a vision presented, for example, by President Emmanuel Macron. The manifesto, however, focuses on relatively limited corrections and improvements that can be implemented without treaty changes. It is possible that all Member States, including those outside the monetary union, could be included in the implementation of ideas regarding the banking sector, capital markets, or crisis prevention. This would probably ease political tensions associated with deepening the eurozone.