Securing the euro area’s future
by Kalin Anev Janse
In talks with investors about the future of the euro area, the most common topics of conversation include the need for greater market integration, a more competitive financial sector and deeper economic collaboration. Fortunately for them, Europe’s political agenda is already heading in that direction. There are five ideas that may help secure Europe’s future.
First, Europe must complete banking union. Much work has already been completed, including the establishment of the Single Supervisory Mechanism and the Single Resolution Fund to wind down banks. The SRF is slowly filling its coffers, but should be supported by a backstop to make it more credible in the eyes of the markets. The European Stability Mechanism is considered as a probable candidate to play this role.
The second element that political leaders must add to banking union is a common deposit insurance scheme. If all Europe’s banks would guarantee deposits together, it would reduce the risk of bank runs in any country. Legacy problems in certain countries need to be rectified but, in general, cross-border European banks are positive about the move to complete banking union.
Third, Europe needs to harmonise its financial markets, so it becomes easier to invest across borders. This is a wide-ranging project referred to as capital markets union. Corporate, tax and bankruptcy laws vary massively between European countries. Making it easier to decipher other countries’ laws would increase cross-border investment and benefit Europe’s venture capital and private equity markets.
Building new models
The fourth factor relates to Europe’s fiscal tools and the possibility of establishing a ‘rainy day fund’. Presently, poorer European countries can already receive support from the European Union budget, which is around 1% of the size of the EU economy. For recipients, European countries, the transfers can be large, worth up to 4% of their GDP.
There is a further set of measures to meet a severe euro area downturn. In that case, countries can spend more taxpayer money. Normally there is a cap on budget deficits of 3% of GDP. But during the euro debt crisis, countries agreed to exceed the limit. This helped stimulate the economy at a crucial time.
But if a single country is hit by a crisis, and its neighbours are not, there is no fiscal leeway. It would be beneficial to have a facility to address such asymmetric shocks. The ESM can address problems in individual countries, but only when it is too late and when they have already lost access to markets. A new facility could be developed to avert such problems and hopefully to prevent the ESM from having to act.
Different models are being discussed. One strict condition is that countries always need to repay funds they receive. There will be no permanent transfers between countries, and there will be no jointly-issued debt.
Some people are worried that these changes will mean ‘a lot more Europe’ and a weakening of national sovereignty. That is not the case. Europe does not need a full fiscal union, with additional transfers between countries, nor a full political union.
The fifth idea on the future of the region concerns the establishment of a European Monetary Fund. The role of the International Monetary Fund in Europe has diminished. When the European debt crisis started, the euro area had neither the expertise nor funds to assist. But over time, the ESM’s financial capacity and expertise have grown and the role of the IMF has become less prominent. There appears to be a consensus that in any future European crisis, the IMF will probably not be involved in the region’s programmes.
These are not vague concepts; they are concrete steps that are firmly part of the political agenda. They all aim to make markets stronger, to support the recovery of the financial sector, to make monetary union more robust and the economy more resilient.
Kalin Anev Janse is Secretary General of the European Stability Mechanism. Back