Article Type : Research Article
Authors : Acocella N
Keywords : EMU; Institutions; Asymmetries; Imbalances; Democracy
The design of the Union stood on
theoretical foundations predicating for a wide role of markets and policy
rules. It has proved to be conducive to divergence of the countries’ strategies
of growth as well as financial speculation, crisis and deflation. The
Maastricht regime was indeed built in a way to foster instability itself, as it
featured powerful built-in destabilizers nourishing divergences and fragility.
The paper deals first with the structure of EMU institutions, the asymmetries
existing in the Union and the imbalances that descended from the institutional
set-up. It also investigates the theoretical inspiration and the practical
interests underlying this set-up. The theoretical progress intervened in the
last couple of decades and the need for new goals and a new contract are also
sketched. A solution to the democratic deficit would require not only a change
in the orientation and the modes of current decisions, but also and mainly a
radical change in the institutional setting of the EMU starting from a process
of re-envisioning the goals of the EU. A democratic state must respect the will
of its citizens, but also be efficient. From this point of view, a number of
reforms of the Euro Area are in order.
The design of the Union stood on theoretical
foundations predicating for a wide role of markets and policy rules. It has
proved to be conducive to divergence of the countries’ strategies of growth as
well as financial speculation, crisis and deflation. The Maastricht regime was
indeed built in a way to foster instability itself, as it featured – and still
does so - powerful built-in destabilizers nourishing divergences and fragility.
The paper deals first with the structure of EMU institutions, the asymmetries
existing in the Union and the imbalances that descended from the institutional
set-up. It also investigates both on the theoretical foundations on which it
stood, predicating for a wide role of markets and policy rules, and the
practical interests underlying this set-up. The theoretical progress intervened
in the last couple of decades and the need for a new goals and a new contract
are also sketched. After designing the desirable goals of a new EMU, we
indicate the need for a more democratic Union and a possible articulation of
the new common institutions. A solution to the democratic deficit would require
not only a change in the orientation and the modes of current decisions, but
also and mainly a radical change in the institutional setting of the EMU. This
would be difficult to implement in the absence of a process of re-envisioning
the goals of the EU and its socio-economic policies. The paper is organized as
follow. In the next section, we deal with the structure of EMU institutions,
the asymmetries existing in the Union and the imbalances that descended from
the institutional set-up. Section 3 investigates the theoretical inspirations
and the practical interests underlying this set-up. In Section 4 the
theoretical progress that have emerged in the last couple of decades and the
need for new goals and a new contract are sketched. Section 5 designs the
desirable goals of a new EMU. Section 6 concludes by indicating the need for a
more democratic Union, which can be obtained by tending to overcome country and
sectional interests, the influence of the different sizes of countries and the
asymmetry of power between ‘creditor’ and ‘debtor’ countries as well as to
increase the power of citizens against that of markets and unelected
institutions.
This section presents the EA institutions,
synthetically in the first sub-section and the nature of existing asymmetries
in sub-section 2.2. The resulting imbalances are discussed in the final
sub-section.
The institutions
As is well known, the European Monetary Union (EMU) is
a currency union. As such it has a common currency. Monetary policy is decided
by the European Central Bank (ECB). Until recently, European institutions have
been characterized by the existence of only one common public institution, the
ECB, and absence or weakness, of other common institutions in fields such as
financial regulation, regional and industrial policy, wage policy, fiscal
policy. Markets and the single currency played the dominant role. In fact, the
basic rule that the Union relied on was that of the markets. Their working was
intended as to offer the basic mechanism for regulating economic activity
within the Union. Other rules aimed at constraining the action of both the only
common public institution and the countries’ governments. The former consisted
in the choice of a model of independent and conservative central bank. The
latter were expressed by the Stability and Growth Pact (SGP). This was dictated
by many considerations, and possibly by the implicit view in the Treaty
(inherited from the Delors Report) that 'the constraints imposed by market
forces might either be too slow and weak or too sudden and disruptive'.
These rules, together with markets, seemed to be central to the EMU construction. They derived from:
The asymmetries
The situation in Europe after adoption of the euro was
marked by the pre-existing imbalances that had not been eliminated in the
process preceding admission to the third stage of the monetary union. Contrary
to the previous opinions, the structural and behavioural changes that were
expected as a consequence of implementing the Union’s institutional design and
should eliminate the residual differences between the various countries did not
take place or were only partial, at least in some countries, i.e. in peripheral
countries. Neither the action of agents of change nor formal and informal
institutions acted, at least in a way to avoid the formation or permanence of
large imbalances. In the EA over the period 1960-2017 there has been no
synchronization of economic and financial variables as well as of their
underlying macroeconomic fundamentals in business cycles. The monetary union
has even further increased macroeconomic divergences. Our analysis will try to
explain the role played by the EA monetary institutions and policies. The
asymmetries, which in some cases became stronger in the early 2000s, consisted
in inefficiencies in the private and public sector, especially of higher
inflation countries, and with the microeconomic policies of lower-inflation
countries. In fact, facing the inefficiencies and high costs of peripheral
countries, Germany cut its wages both before and after the establishment of the
EMU. The monetary union has not got rid of the asymmetries and has possibly
even enlarged them. Neither the action of agents nor formal and informal
institutions have acted, at least in a way to avoid the formation or permanence
of large macroeconomic imbalances. Our analysis will try to explain the role
played by the Euro Area institutions and policies.
The macroeconomics of
imbalances and mistakes in constraining a part of them alone
National accounts establish some fundamental
identities that must be taken into account for understanding the relevant
issues and implementing appropriate solutions. For any open economy an identity
links the private financing imbalance to the external and the government’s
fiscal imbalances. It shows how external imbalances, even in the absence of
fiscal irresponsibility, can lead to accumulating public debt, capital
outflows, and a financial sector liquidity crisis in which private debt must be
replaced by public debt. Fiscal irresponsibility, as in the case of Greece,
simply adds to this underlying imbalance. In fact, excess of investment over
private savings can be associated to either a government budget deficit or a
current-account deficits or both. Thus, attention has to be given to all, and
the factors that each one depends upon, because if one goes further out of
balance then the others will go further out of balance too. One imbalance can
easily turn into another imbalance and the causality can, and does, flow either
way. Then, there are three potential imbalances to control in a static context,
and thus policymakers need three independent policies. Financial regulation can
address private-financing imbalances; fiscal controls can ensure public
accounts balances; structural measures (and when possible, monetary or currency
policy) should ensure competitiveness and current account balances. However,
all three policies must be carefully coordinated together, since each policy,
while being mainly directed to one target, has also an influence on the others.
In presence of macroeconomic imbalances as basic as these, in fact, it is no
longer feasible or sensible to pretend that they do not interact or materially
affect each other—as much of the literature has tended to do in the past.
Change in each one of them has the capacity to undo the balances to which it has
not been assigned and thereby destroy the impact of other policies on the
balances assigned to them. One of the lessons of the recent financial crisis is
that the only way out is to use coordinated (jointly determined) packages of
policies rather than to design separate fiscal, monetary, and regulation
policies for each given situation. The picture is complicated in a monetary
union, since deep economic and financial integration makes changes swifter and
imbalances more difficult to control at a country’s level only. Some kind of
common coordination is called into action, especially in the financial sector,
but financial regulation as to capital flows can be problematic.
In the light of this discussion, we can try to trace
the main imbalances that arose in the EMU after its start. A view on the
European sovereign debt crisis emphasizes that countries in the South of the
Euro-area were fiscally irresponsible and failed to implement pro-competitive
supply side policies. This is the most common view of existing imbalances.
However, it can be challenged by analyzing the other macroeconomic imbalances,
which reveal other aspects and different responsibilities. In fact, the crisis
reflected a deep divide between the external (but also fiscal) surpluses of the
North and external deficits of the South, associated to external deficits in
some countries of the latter only.
The general picture of most EMU countries up to 2007 can be depicted as follows, by grouping them under three types (using the abbreviations of their name):
This shows that the drivers of growth in the EMU were
two, export and debt (both private and public). It also shows that not all the
governments of peripheral countries accumulated or increased public imbalances,
which is true for those of group 2 above, not for group 3. This negates the
view of the European sovereign debt crisis as due to countries in the
peripheral countries that were fiscally irresponsible and failed to implement
pro-competitive supply side policies. Such a view is absolutely partial. Our
analysis reveals that the crisis reflected a deep divide between the external
current account surpluses of the lower-inflation countries and external deficits
of the others as large as the divide between the fiscally profligate economies
and the fiscally thrifty economies. In fact, from some point of view one could
reverse the argument. The main common driving factor can be indicated in the
foreign account imbalances, to which fiscal profligacy added in some- but not
all - peripheral countries. As to the foreign imbalances, there was a deficit
everywhere in peripheral countries and a surplus in the core. (Figure 1) offers
a picture of some of the peripheral countries, on the one side, and Germany, on
the other. France was in between the two groups and tended to behave like the
periphery. Thriftiness of core countries added to the fiscal restraint of most
of them. As an example of this thriftiness, the situation of Germany should be
examined (Figure 2). This country had an excess of total demand over domestic
demand, which derived from its export-led strategy propelled by its wage
policy. This is in strong contrast with the opposite situation that emerged from
the expansionary domestic policy following the re-unification with the Eastern
lander. Find that a 1 per cent reduction in the wage share of GDP leads to a
0.2 per cent decrease of GDP [1]. German wage moderation can have had also this
effect of lowering domestic demand, while propelling export growth [2].
Consider that wage increases in Germany after 1999 and before 2007 have always
been below the 2 per cent level of the maximum medium-run inflation rate target
set by the ECB and in some years they have even been lower than 1 per cent – an
effect also of decentralization of wage bargaining and exploitation of
lower-paid (sometimes immigrant) workers [3].
The picture can be seen also from the symmetric point
of view of capital account balances. Accumulation of debt by the Greek
‘sinners’ does not have a pendant in terms of French and German ‘saints’.
Opposing a sin of those that borrowed is the sin of lenders, which
irresponsibly lent their money to unlikely solvent banks. Also from this point
of view, one can say that ‘it takes two to tango’. Looking at capital flows
directed from low- to high-inflation countries the most relevant aspect was the
huge increase in net capital flows and the accumulation of one-sided net
capital positions of some countries vis-à-vis others. This derived from the
equal nominal interest rate – the outcome of a single monetary policy and
disappearance of currency risks in the perception of investors – to which
corresponded different inflation rates, and thus different real interest rates,
in the various countries. This raised (lowered) investment and domestic demand
and stimulated capital outflows (inflows) in higher-(lower-) inflation
countries. The functioning of such a mechanism is illustrated by the two
specular dynamics of private indebtedness in deficit countries and banks’
exposure in surplus countries, helped by financial integration. Credit booms
and asset-price bubbles in the former provided banks in the latter with strong
incentives to increase their lending. Evidence has been found that, after the
introduction of the euro, banks in surplus countries increased their borrowing
from outside the EMU in order to increase their lending to the deficit
countries within the EMU. This increased the fragility of the whole banking sector.
By contrast, the role of competitiveness seems to have diminished. Before
commenting the situation further, one could ask whether there was some kind of
priority between the two aspects of foreign imbalances: current and capital
account. These should be symmetric, but the question can be useful to put in
order to understand if there was a prevailing direction of causality that might
have shaped further development of imbalances.
One of the common factors stimulating both current and
capital account imbalances is inflation divergence between the EMU countries,
but significant divergences in inflation trends could have been more a
consequence than a cause of current account imbalances [4]. These would have
been triggered by capital flows, reacting to inflation differentials. The
increase in net capital flows acted as an internal system of transfers,
operating through the private sector via financial markets rather than through
a common fiscal capacity, but the effects were quite similar. The transfers
allowed a reduction in unemployment in peripheral countries and contributed to
higher inflation and to asset bubbles there, thus avoiding a deflationary
environment. This had a kind of multiplier effect on itself, as behind
inflation there were not only – or mainly - inefficiencies, but also the asset
bubbles created by capital inflows. (To both fiscal profligacy in some
countries is to add.). One of the lessons is that there had been policy
failures that could (or should) not be rectified by fiscal consolidations
alone; policies to enhance competitiveness, financial regulation and activist
monetary policies would have been just as important or more. Another lesson has
to do with the unbalanced view about imbalances. According to De Grauwe, ’what
is surprising is that the European Commission accepted to become the agent of
the creditor nations in the Euro-area – pushing austerity as the instrument to
safeguard the interest of these nations’ [5]. As a result of the prevailing
line, the debtor nations have borne ‘the full brunt of the adjustment’, by
reducing wages and prices relative to the creditor countries (an ‘internal
devaluation’) as well as internal demand, without compensating internal
revaluations and demand stimulus by Northern countries. Reduction in output and
employment in the Southern countries thus followed.
The imbalances were of a kind that could not be
overcome easily. There was indeed no mechanism embedded in the EMU – of the
kind at work in a fixed (possibly, adjustable) exchange rate standard – to do
that. In the gold standard an inflow of currency in the country experiencing a
current account surplus would lead to higher prices there, which – in turn –
would have reduced the surplus. From another point of view, referring to
international capital movements, imbalances did not tend to disappear, possibly
generating the changes that would eventually rebalance the situation, in terms
of capital endowment and growth. This was in particular due to the destination
of capital in peripheral countries, where it was mainly directed to
non-productive or less productive sectors and generated bubbles. Imbalances
left the deficit countries vulnerable to a sudden capital stop or reversal of
capital flows. In fact, investors from surplus countries decided that supplying
finance to deficit countries had become too risky when the financial crisis hit
the EA and governments had to save ailing banks. At that point, both the public
and private debt had become high enough to threaten non-repayment and possible
default. Thus, currency zones rather than solving the problem of international
(or regional) payments imbalances make even harder to solve it, in the absence
of other common institutions. Increased competition may reduce inflation, but
does not guarantee growth convergence. Therefore, a common currency does not
eliminate the need for internal adjustments. The point is that the situation
described above is fragile and any financial stress can disrupt the precarious
equilibrium, putting pressure on the high-inflation countries that have
attracted international capital flows to balance their trade deficits. Official
documents by the European Commission and analytical contributions by some
economists, e.g. Blanchard, Giavazzi, claimed that policymakers could feel safe
to ignore any current account imbalances, as capital movements would always
equalize the balance of payments, which will no longer be a constraint to
policy [6]. Once the imbalances manifested themselves, EMU policymakers adopted
a position of benign neglect and did not remove their roots.
At most, some countries thought they should try to
resolve these imbalances on their own, as in the case of Germany, but the
strategy they implemented aggravated other countries’ problems. Some countries
did not carry out policies of reform, either because the signals asking for
them were feeble or as they preferred higher employment in the short run, and
introduced only short-run labour market reforms to restrain appreciation in
their real exchange rate. This was done in some higher-inflation EMU countries
like Ireland, Spain and Italy. However, these policies did not significantly
reduce inflation differentials until recently, possibly because they were not
far-reaching and ambitious or, more likely, because supply-side reforms do more
harm than good in a situation of low aggregate demand. Greece neither shrank
its budget deficit, as required by the SGP, nor enacted labour market reforms,
which might help to explain its misleading growth and the strength of the
tensions accumulated there. Indeed, there are several reasons that can explain
the failure of the policies undertaken by peripheral countries. First, often
reforms were not effective or properly implemented in some countries. In
addition, as the divergence has two sides, catching up with Germany was
difficult, since the dynamics of unit labour costs and non-wage costs in this
country was trimmed well below the EMU average. This began as early as in 1999,
to cope with the stagnation that inevitably followed the reconstruction of this
country after unification and the ensuing monetary contraction. This of course
meant beggar-thy-neighbour policies with respect to the rest of the Euro-area.
Finally and most importantly, to be effective, such reforms should have been
designed as complements to proper (i.e., not so restrictive) monetary
institutions and labour market and industrial policies (such as: coordination
and common guidelines on wage bargaining; policies to foster innovation and
industrial restructuring). These either were out of reach of each country (as
for monetary policy) or were not featured in the EMU design and peripheral
countries did not enact the policies they still controlled. The potential
crisis became reality also due to the absence of any common financial supervisor,
regulator or rescue body. This absence made it possible for the bubble to grow
and burst following a financial crisis largely imported from the US: saving
financial intermediaries required intervention of national governments and an
increase in public deficits, thus threatening the entire European financial
system. The booms or, at least, growth-sustaining bubbles in higher-inflation
countries can at least partially explain why policymakers did not implement
long-term policies for addressing imbalances in these countries. The ‘system of
signals’ at the European level that would trigger action from local
policymakers was imperfect. Either it did not make the signals of a possible
crisis apparent to the agents involved, or the circumstances did not allow them
(or persuade them) to implement appropriate reforms. Proper institutions should
instead contain signals for guiding private and public agents towards the
elimination of imbalances. Optimistic predictions made it more difficult to
detect the need to do so, not only for ordinary people, but also for most
analysts, as the ‘doctrine’ about the EMU tended to justify absence of
correcting interventions by national governments. Optimistic assessment of an
ongoing trend towards integration and convergence between the member countries
pervaded financial markets.
Behind the institutional set-up of the EMU there are
some original ‘biases’ that derive from two roots. One has to do with the
theoretical orientation that had developed before the Maastricht Treaty since
the end of the 1960s. The essence of the credo it inspired was based on the
virtues of free markets and policy rules, contrasting with the ineffectiveness
and inefficiency of discretionary government action. This credo was channelled
to the European public and the governments through experts and political
élites, in particular the monetary and financial élites and central bankers.
These ‘were keen to limit the discussion about EMU to the narrow focus of
monetary and financial affairs’, promoting consensus over the merits of
macro-economic discipline, price stability and central bank independence from
politicians [7]. The treaties designing its institutions, in fact, embed the principles
of the neo-liberal doctrine. Depict EU institutions as the fruit of a true
Berlin-Washington Consensus, reproducing – and in some cases anticipating the
Washington Consensus [8]. Such principles have been shown later to be
theoretically flawed, as we will see below. In fact, in prescribing structural
and deflationary policies, they do not consider, e.g., the link between current
output and potential output, thus condemning the Euro-area to lasting low
growth. Suffice it to say here that the pre-dominant theoretical influence were
those of monetarism and the rational expectations theory, not of the theory of
optimal currency areas. However, the institutional design was inconsistent with
respect to the monetarist credo. Remember, in fact, that Friedman himself and
many other economists had manifested their reserves and critiques in particular
vis-a-vis adoption of fixed exchange rates and the EMU. The other bias of the
EMU design derives from the sectional and country interests that promoted its
implementation or benefitted from it, also when the various elements of the
theoretical setting were criticized or became obsolete. In fact, this appears
to be largely unfounded now, in the light of the analytical developments of the
following decades. Obviously, the two biases are linked one to another.
Nevertheless, one can clearly trace the predominant vision that led to adoption
of an institutional set up based on rules, rigor, and market (rather than
flexibility and adaptability), on the one hand, and the interests at play both
in the institutional set up and policy actions especially after the emergence
of the financial crisis, on the other hand. The next sub-section deals with the
arguments sustaining a large role of markets, whereas sub-section 3.2 analyses those
against government action.
The virtues of markets
in a currency union
A growing consensus emerged among economists since the
end of the 1960s on the failure of Keynesian policies as well as on the virtues
of neo-liberal policies and ‘sound’ money for reducing inflation and
unemployment, while raising growth rates. The institutional design of the EMU
fully reflected this exaggerated confidence in the operation of markets within
a single currency and negative preconceptions about the action of government.
By looking at the report ‘One market, one money’ (and the background studies
prepared for it), which evaluated the benefits and costs (indeed, the former
more than the latter, in the perspective of the report) to be derived from the
EMU, one can see how profoundly this assessment and the track suggested for
monetary unification were influenced by the then dominant theories (European
Commission, 1990). But explicitly recognizes the importance of the debate in
the 1970s and 1980s and of the theories then prevailing on the EMU
construction, in addition to the decisive influence of the national central
banks, in particular the Bundesbank [9]. The theoretical foundations of EMU
institutions can thus be traced back, apart from the theory of the OCA, to a
number of analytical contributions introduced, mostly, since the second half of
the 1960s up to mid-1980s. However, tracing the theoretical roots of EMU
institutions can be done only in an approximate way, as they have to do with an
array of rules that were agreed upon in a rather long period, partially as a
result of compromises and bargaining. Thus, there may be several possible
rationales for this institutional set up and more than one theoretical approach
can often be linked to the real institutional architecture that has been
devised. The basic idea of the European construction was that benefits could be
derived from implementation of free markets, not only of goods, but also of
capital in order to ensure efficiency and proper policy action. The many static
and dynamic failures plaguing these markets were disregarded. Still in 2007, it
was firmly believed that markets ‘normally lead more immediate benefits with
much less uncertainty’ [10]. The process of liberalization of these markets –
in particular of the market for capital – was rapidly accomplished, being
completed by the end of the 1990s. By simply adding a single money to a unitary
market could solve most problems deriving from the (possibly) diverging conduct
of private agents in each sub-market, keeping also undisciplined public agents
in line. However, given the power of command of the latter, together with
scarce effectiveness of their instruments as well as the potential dangers that
could result from their use, adding constraints on their conduct was necessary.
Summarizes the rebalancing institutions or channels that should work in a
currency union to ensure efficient allocation of resources and avoid the costs
deriving from asymmetric shocks as follows: (1) domestic wage and price
adjustments; (2) interregional migration; (3) interregional flows of private
and public capital, ensuring operation of risk-sharing, a softer requirement
for rebalancing than (1) and (2); and (4) interregional fiscal transfers [11].
However, each channel has its limits, which are either
political or economic. As to the first channel, from a practical point of view,
it operates, and operated in our case, only to some extent. Since labour
markets tend to remain sticky, working of this channel becomes a policy target
rather than a condition. With reference to flexibility in the product markets,
competition and intervention by EMU authorities to restore it may be needed.
Competition policy is a cornerstone of the EU design since the very beginning
of the Common Market. The initial inspiration is clearly liberal, but this
policy should have pursued more than one target at a time, which charged it
with too much weight. Its implementation has drawn at times from the conception
of the Freiburg School and in other cases from that of the Chicago School, as
there is scarcely a single coherent goal of EU competition. Certainly, pursuit
of allocative efficiency is one such goal, at times the prevailing one. Then,
price flexibility too in not ensured. Channel (2) did not operate between countries,
for economic, cultural and linguistic barriers and conveys mixed blessing. In
fact, it can cause deprivation of the countries hit by shocks of their best
human capital, if outflows of migrants are not temporary. In addition,
according to some sources it can raise problems of equity deriving from access
of immigrants to welfare state provisions paid by presumably higher-skilled
native workers. As to capital movements and international risk sharing (channel
3), the experience at a world level accumulated in the 1990s (and the ensuing
evolution of the literature), as well as the financial crisis begun in 2007
showed that this rebalancing channel was subject to theoretical objections and
practical failures. We will refer to the former below. Channel (4) does not
refer to markets properly, but was not implemented for political reasons
(opposition of some countries to devolving the fiscal lever to common
institutions) and the operation of markets was deemed to be a good substitute
for it. Thus, the conditions for rebalancing did not operate or found obstacles
to their operation. Government is the beast: finding the appropriate setting
for the central bank. In the vision of the EMU architects, problems do not come
from markets, which should indeed be freed of any obstacle (at least of most
regulations and obstacles deriving from government action), a position that
received public support and consensus without much scrutiny [12,13].
Problems come from discretionary action of public
agents, as in each period these tend to pursue targets that are unattainable in
the presence of private agents having either backward- or forward-looking
expectations. If expectations are backward, some targets can be met only in the
short run [14,15]. With forward-looking expectations, governments are
immediately fooled by the private sector and a suboptimal outcome results also
in the short run: discretionary monetary and fiscal policies are ineffective
with respect to real variables and the first best desired by public agents can never
be obtained [16,17]. Time inconsistency then arises. However, complying with
some kind of rules can at least ensure a second-best outcome. An alternative is
for the constituency or government to delegate monetary policy to a
conservative central banker, i.e. to a banker assigning employment a lower
weight than the societies or the governments. Rogoff shows that this banker
would be able to attain a lower level of inflation without reducing employment
[18]. Thus, rules are a way to cope with a more general problem faced by
governments, that of their credibility. Once price stability is not in question
– since a rule has been introduced prescribing its pursuit, setting a cap on
the inflation rate - stabilization policies are possible. This is exactly the
description of the status of the ECB, which has to guarantee a certain
inflation rate in the medium run as its pre-eminent target, but can also pursue
other objectives, provided that these do not compromise the attainment of its
predominant one. The rules for fiscal policy set by the EMU have numerous theoretical roots, apart from
the need for commitment to avoid time inconsistency, an argument that can be
applied not only to monetary policy, but also to any other public action and,
thus, also to fiscal policy. These roots range from political economy
contributions to the ineffectiveness of fiscal policy due to the low values of
multipliers and the negative effects on the price level of fiscal action
coordination between countries.
Political economy contributions can first offer an
analytical justification for the assumption underlying Barro, Gordon’s model,
according to which the government’s desired unemployment rate is lower than the
natural one [19]. In this way, one goes to the roots of time inconsistency.
These theories can explain the populist or egoistic tendencies of politicians
who aim at maintaining or gaining power or exploiting it to their personal
interests or in favour of other people and the need to limit such tendencies.
This visual angle is useful both for understanding the theoretical bases of the
EMU monetary policy and for explaining introduction of fiscal policy rules in
the institutional set up. Moreover, this literature can explain the tendency of
discretionary fiscal action towards accumulation of public deficit and debt,
which offers an additional specific justification for constraints imposed on
it. Ineffectiveness of this action due to low values of multipliers and the
high value of debt goes in the same direction. In addition, the negative
spillovers on the real interest rates in other member countries deriving from
fiscal deficits in one country should be considered. Finally, the possible
negative influence of fiscal action coordinated between countries, the
worsening of the strategic position of the central bank, due to the elimination
of the disciplinary effect of its action or (alternatively) the capacity of
monetary counter-action justify absence of fiscal coordination and application
of the principle of subsidiarity to this matter. Then, in the years preceding
the constitution of the EMU the economic rationales are laid in favour of
limits to national fiscal policy against its coordination within the Union. The
SGP was only the legal transposition of these statements, reflecting the idea
that the true problems of the EMU set up were not only that of designing an
independent and conservative central bank but also of ensuring that no harm
could derive from fiscal policy.
Differently from the US, neither the theoretical
progress of the 1990s and the following decades nor the depth of the crisis
that has hit the EMU countries have produced a substantial change in the
institutional architecture of EMU and current policy attitudes. The
deflationary bias of the former has even been stressed by the fiscal compact.
There are four reasons at least why the role of theories in the EMU
construction and the revision of its institutions should not be emphasised. The
first has to do with the fact that some of the skeptics at the time when the
EMU was devised and then started its existence became convinced of its design
after the ‘successes of the first ten years of existence. On the opposite side,
the progress of the theories does not appear to have been the main reason why
more recently some analysts (only a few, really) moved to doubt about the
soundness of the European construction, even if it is difficult to disentangle
theoretical orientations from other determinants of political attitudes.
McNamara is rather drastic on this. In the absence of any ‘theoretical
alternative or national template’, it were some practical failures, such as the
feeble growth and the inability of institutions to cope with current problems,
their distributional effects, the disarray of the SGP, etc. that originated
skepticism in the most acute observers, elites and some political parties.
Others find that not macroeconomic variables, but other factors, affected
support for the EU before accession. Citizens attributed responsibility to the
EU and not to their country for the state of the economy in terms of
unemployment and inflation after 2004, thus reallocating responsibility to the
new ruler when this was really in charge of power. The waves of Euroskepticism
and Europhoria both among and within EU member states are instead the object of
Olsson [20]. This author suggests that the support for the EU can derive (to a
variable extent) from minority nationalist, or regions with strong identity
that seek to bypass their central states in order to achieve their policy goals
at the EU level. Results by Olsson and others support at least in part our idea
that people were in favour of the EMU before its institution and in peripheral
countries they had an incentive to comply with the admission requirements.
The second reason for downgrading the role of theories
derives from the observation that not only the theories developed since the end
of the 1960s were known also in Continental Europe at the time when European
institutions were devised (especially on the occasion of the Maastricht
Treaty). Also the OCA theory was well known. Prescriptions of this theory – right
or wrong they were - were neglected, which justifies why authoritative
commentators of the recent performance of the EMU have spoken of a kind of
‘vindication’ of the OCA theory [21]. Then, adoption of the specific
institutions of EMU – free markets and a single currency centered on an
independent and conservative central bank, to the exclusion of other common
institutions – appears somewhat strange and contradictory, if we look at the
EMU as a heritage of the economic theories of the time only. The third reason
is that it is well known that policy actions only partly depend on (changes in)
economic theory. There are a number of other factors explaining why theoretical
innovations may not translate into adopted policies: among them, the role of
inertial factors. In addition, the evolution of real phenomena can have an
impact on policy action. Similarly to the empirical foundations of the Bretton
Woods agreements and their rejection in the in 1970s, adoption of a currency
area can be seen as the product of the ‘impossible trinity’, deriving from the
increase in capital mobility. Finally, vested interests and some autonomy in
the dynamics of political orientations can explain policy actions, even if it
is quite a difficult task to separate their role from that of theoretical
orientations and say anything about the specific role of interests when
assessing the success of some ideas. Keeping them separate from theoretical
arguments can only be done as a first approximation, as interests and ideas are
not mutually exclusive and often interact simultaneously or sequentially [22].
Considerations of political economy on the possible influence of vested
interests and the different bargaining power of the various countries,
especially those having a strong currency, as well as reflections of a
non-strictly economic nature, would be in order. These are largely outside the
realm of the present paper, but we deal here with some of them briefly. With
this proviso, one could accept at least the plausibility of some positions
according to which the preference for a deflationary environment featuring the
EMU was the outcome of rational choice of the export-oriented members and their
bargaining power in the Eurozone, not of an irrational rejection of
Keynesianism. The truth may be that both these explanations could be right: on
the one side, the interests of German producers could favour a deflationary
attitude; on the other, widely diffuse anti-Keynesian doctrines in Germany (and
a neo-mercantilistic attitude, well rooted in the history of economic ideas and
actions) could have favoured acceptance of producers’ interests. Some authors
represent the interaction and clash of ideology and structural features and
interests in the EU Council of ministers. By examining the position taken over
years in the Council by each country, they conclude that rich countries do not
usually oppose suggested policies in favour of integration, as they are more
interested in facilitating it, whereas minor countries tend to show their
opposition under the influence of some domestic lobby, by abstaining or voting
against proposals arriving at the Council. In our opinion, while this is
indicative of opposing interests, there may be a bias, as rich countries have
the power to facilitate the path to have their proposals discussed in it.
The antecedents of the Delors Report and the Single
Act are well represented by Gros and Thygesen: a French and an Italian
memorandum had criticized the bias of the EMS against ‘deficit’ countries as
well absence in this system of mechanisms designed to achieve structural change
and growth. The German answer was of a monetarist kind, in asking for monetary
unification and the establishment of a central bank having price stability as
its preeminent target and capable of acting as ‘catalysts in the efforts to
achieve the necessary convergence of economic policies in the member states’
[23,24]. The German reply, anticipating real developments in the European
institutional architecture, was thus closely linked to the theoretical innovations
since the end of the 1960s as well as to the traditional stance of the
Bundesbank as independent from political bodies since its start and pursuing
the priority target of low inflation. The effectiveness of the German position
was heavily influenced by some practical circumstances that had matured in the
previous two decades. Notable was the rising weight and bargaining power of
Germany among European countries, due to its rapid growth and – after 1989 -
unification with Eastern Lander. This country was thus able to pursue its low
interest in implementing appropriate policies to close long-run divergences in
economic performance between countries, while relying on markets and
institutions that tended primarily to price stability and adjustment by peripheral
countries. German dominance – or, at least, its leadership - in the EMS,
expressed by its ability to implement an independent monetary policy, as well
as the conduct of the other countries that followed it, is well documented.
Karl Otto Pohl, the Bundesbank president from 1979 to 1991, said: ‘The
Bundesbank turned the original concept [of the EMS] on its head by making the
strongest currency the yardstick for the system’ [25]. However, there were
different positions as between the different German institutions. In fact, some
authors underline the conflict of the Government with the Bundesbank in the
implementation of the EMS. For this reason one must be careful in attributing
positions of specific Germany institutions to the country as a whole. According
to some authors Sadeh, Verdun, Germany did not act as a leader, except during
crises [26]. Monetary authorities neither sought to ‘lead’ nor is there
evidence that they purposely tried to influence other monetary authorities,
except perhaps for crisis episodes. In fact, the Bundesbank objected to the EMS
from the outset, and obtained the ‘infamous’ ‘Emminger letter’, which allowed
it to renege on its commitments if it deemed price stability in Germany to be
in danger. In securing their commitment to the EMS other monetary authorities
simply followed (or paid close attention to) German monetary policies. The
Bundesbank was from the outset similarly cautious about EMU, if not critical of
it. It was not alone in this stance; a considerable part of the German public,
both laymen and experts, were skeptical of EMU when it was being created. In
December 1991, after the negotiations of the Maastricht Treaty had been
completed, the Bild Zeitung ran a front-page header explaining that the end of
the Deutschmark was near, which caused great distress among the population.
According to McNamara, independently of whether German decision makers had or
did not have a desire to dominate monetary policy in Europe, Germany never
possessed the formal power to actually coerce EU member states into accepting
its rules, or to punish those who break the rules. The only (formal) sanction
available to Germany at the outset was not to agree to the establishment of EMU
or to stay outside. In McNamara’s terms, German influence did not translate
into monetary dominance, as it was not a hegemonic leader in the traditional
sense either during the EMS period or afterwards. In a similar way, there are
claims that the European integration process was certainly the product of the
will and positions of the central actors involved, but this was shaped only as
a set of interlinked bargaining relations, interacting with some key rules of the game, accounting
for the `fundamentals’ of each country. In any case, in his opinion there was
no hegemonic actor in the EA design.
This position has scarce foundation, for numerous
reasons. More than exercising leadership, the position of Germany tended to
affirm its authority or even dominance over regional agreements like the EMS
and, later, the Union. As said, Kaelberer underlines the bargaining power of
Germany over the rules of monetary cooperation due to its strong currency and,
thus, absence of a reserve constraint [27]. Other authors recognize that,
during the EMS, the Bundesbank had imposed its monetary discipline, which
caused two effects: a positive one, as it ensured disinflation in Europe; a
negative one tied to the double digit unemployment rate experienced by other
European countries and the low growth rate of the whole area. There are many reasons
to say that it, together with other creditor nations, has called the shots in
European economic policy. Rejection of the Werner Plan and acceptance of the
typical German pretense of having economic convergence before monetary
unification (instead of conceiving this as the first step towards a more
complete union) argue in favour of some kind of hegemonic position of Germany.
In addition, one should also consider that in progress this role of Germany
strengthened, in parallel with the stronger bargaining power acquired after
re-unification. And this country made use of its position to be granted
privileges when asking for exemptions for the violation of the SGP rules in
2003-2004, setting new institutional rules and deciding current policies. ‘By
breaking the rules of the SGP, France and Germany left the impression that they
are free of sharing the adjustment burden, and that EMU was wanting in
leadership and solidarity’. Really, the hegemonic position of Germany remained
hidden, as this country preferred to remain backstage. According to Paterson,
‘it was argued that an exposed leadership position would be unacceptable to
other members given the history of the past century’ [28]. The hegemonic role
of Germany had to become manifest only after the eruption of the crisis, which
‘touched on (its) elemental material interests’. Germany’s transition to a
‘reluctant hegemon’ position thus reached the tipping point. In the most
indulgent interpretation of the German ‘vision’ underlying the EMU
construction, a common currency could integrate European economies and make
them converge in due time: monetary unification could ensure the structural
changes necessary for creating a stable macroeconomic context (in particular,
uniform wage and price dynamics), while ensuring a looser monetary regime and
allowing for German reflation. Other, less favourable, interpretations are,
however, possible. One of them could simply be that Germany intended to
establish an institutional architecture that should have permitted it to pursue
the goals of a mercantilist monetarism and to further the interests of its
savers and the banking industry or, at least, that it did at some point
actually exploit the agreed institutional set up to pursue such a strategy
[29]. As to institutions, in order to preserve its veto power for key future
decisions, in facing new problems of common interests, Germany tended to prefer
intergovernmental agreements to higher supranational powers for the EMU. In any
case, its export-led model of growth made it unaffected – or little affected -
by the deflationary bias of the EMU. At the same time, the specular image of
its export surplus, i.e. its nature of a creditor country, empowered it with
deciding the solutions for the crisis more suitable to pursue its interests.
Germany must certainly be credited to have been able
to create a system powerful enough not to suffer from the deflationary bias of
the EMU institutions, due to the real devaluation it operated since the 1990s,
in particular in the early 2000s, and for its ability to build a successful
system to compete in Europe (and outside the area) through the quality of its
products [30]. However, these very credits constitute acts of distrust towards
the construction of a true common institution. Germany might have some
justifications for that in the inactivity of peripheral economies, but not
before 2003-4. Apart from Germany, the attitudes of other countries were
influenced, at least to some extent, by the assessment and the positions taken
by important interest groups. According to Talani, in the UK the financial
sector was against participating to the EMU, as a way to keep its supremacy
unaffected, whereas in Italy both the financial and the industry sector were
interested in the long-term benefits, even if the latter feared that in the
medium term it would lose the benefits of periodically devaluing the exchange
rate [31]. Peripheral countries (most of the GIIPS) still think that they may
draw some profit from the external constraint of fixed exchange rates and other
EMU institutions. They might like reforming some of these institutions, but are
not powerful enough to counter German opposition. This helps explain why they
have accepted a number of institutional changes, among which the incredibly
asymmetric provisions of the Macroeconomic Imbalance Procedure (MIP), which has
been tailored to the German and Dutch interests. Fragmentation between the
different European countries is thus rising, even if it appears to be
repressed, until now. In emphasising the role of Germany and the interest of
other surplus countries to create an asymmetric MIP one should not forget the
many shortcomings in the conduct of peripheral countries. These tolerated
inefficiencies in the public and private sectors, which have not been overcome
either before the crisis or – in many cases - later, as well as the interests
of the financial and construction sectors in fostering a financial-led growth
with soaring asset prices. Obviously, policymakers in these countries did play
an important role, in tolerating inefficiencies and the specific interests of
the sectors involved, to the detriment of the interests of the whole system.
This is clear, on the one hand, if one reflects on the role of self-interested
politicians in being elected on the basis of a program of soft budget
constraint. On the other hand, even not self-interested politicians could act
in a way that ‘economically’ maximizes welfare, if the promise of a hard budget
constraint was only a way to gain reputation and be admitted as members of a
European club, thus accepting the prospect of a lower level of income for the
area as a whole. As a consequence, Featherstone is right when he says that the
vincolo esterno and EMU only encouraged a reform direction, but did not
determine ‘the choice of content’ [32]. However, in our opinion he misses the
point when adding that the external constraint was a means to try to
internalize the norms and values of EU policies, at least in most peripheral
countries. This might have been, or really was, the case before admission to
EMU, when élites encouraged reforms in public administration and the private
sector, as they – and the general public – expected gains from participation to
the currency union. However, this does not appear to have been the case after
admission, least in some of the peripheral countries cited by Featherstone,
also because the vincolo esterno was not much of a constraint. As to core
countries, one can also have doubts about the realism of Featherstone’s idea
that they were closer to the demands of EMU, if this is to be intended as
adherence to its norms and values. Otherwise, it would be difficult to
reconcile this statement with pursuit by some of these countries of an
export-led strategy by means of true beggar-thy-neighbour policies and their
violation of agreed norms (the SGP).
Many economists and observers warned about the fragility or the limits of the EMU project. Their number decreased as the Union proceeded and seemed to gain success. However, its theoretical bases soon revealed their weakness. Almost a decade ago, Alan Blinder claimed that ‘a sharp revision of the naively optimistic views (about the capacity of economic policy to control the economy) held by some economists circa 1966 was called for. But … the pendulum may have swung just a bit too far‘, producing similar naively optimistic views about the virtues of markets and the need for restraining government action [33]. Blinder’s words are even more actual nowadays as economic theory has further questioned the system of analytical conclusions and beliefs that had emerged in the twenty years or so after 1966, even if it still retains some assumptions that led to the propositions featuring that credo. Three decades later, faith in the mainstream credo would again be crowded out by the analytical developments (and some empirical findings) intervened in these years. Think of:
The first sub-section deals with some possible new
goals to be considered in a reform of EMU institutions and their possible
design. The second sub-section complements discussion of new goals by
discussing the choice of a new growth strategy.
A new design for the EMU
The Euro-area’s institutional architecture needs to be
designed anew, taking account of its failures as well as the novelties in the
theoretical and empirical achievements of economic analysis in the last
decades. Mostly, a new contract among the member countries should be drafted,
as new goals – or a redefinition of the previous goals and rebalance of their
relative weights – must be agreed upon. If these new targets are accepted, with
a reduction in the relevance of monetary stability, a higher weight on
employment, growth, financial stability and fairness, reasoning on the most
appropriate reforms and instruments is easier. In order to complete the
indication of macroeconomic goals, let us consider the case where different -
and possibly opposing - strategies are independently pursued by each country.
Recalling their essential traits could be useful. We refer in particular to the
case of decentralized decisions on wage dynamics. Keeping nominal wage growth
below productivity (as Germany has done for decades) tends to raise profits and
lower the wage share, thus reducing domestic demand (because of the negative
effects on consumption), if there is no corresponding increase in investment.
If exports increase – and such strategy of wage dynamics undoubtedly tends to
give an incentive to that - the problem of a lack of aggregate demand and
growth can be solved, but demand abroad in the rest of the EA will be reduced.
In addition, this strategy can be pursued by one big country only in a closed
economy like the EMU’s. In a similar way, and as a consequence of following
this strategy, if another country, running a current account deficit, borrows
capital from the country with an export-led strategy, in the short run it can
enjoy growth or, at least partially, counteract the negative effects of the
strategy pursued by the country adopting a beggar-my-neighbour attitude.
However, in the longer run it can suffer from the asymmetric shocks that arise,
as these, in turn, to some extent negatively affect also the export-led
country. The benefit should then be clear not only of reducing permitted
current account imbalances and of making them symmetric (which completes the
tetralogy of macroeconomic targets to pursue), but also of searching for a
common strategy.
More generally, a complete and satisfying re-design would require:
Redesign of the EA along these lines would not be an
easy task. Political objections would be numerous to both their basic tenets
and their specific structure and features. They would be raised by governments
and other public institutions of many countries – such as the Bundesbank - and
political parties. Recently, however, timid openings for a change of the
current structure have emerged. These are contained in the documents, speeches
and declarations of the representatives of the ECB and the new European
Commission (Juncker Plan) as well as in the practical implementation of
innovative policies, as in the case of unconventional monetary policies and a
banking union. Most likely, the necessity of the reforms outlined above could
be more widely recognized if reforms were diluted through time and a rather long
path to their final realization were devised. This implies that their main body
would be implemented only with the next generation or two. However, it would be
important to realize their need and agree on a timetable right now.
A common growth strategy
instead of competitive countries’ strategies
Possibly, one of the main implications of the analysis
in the previous section is the need to reverse the previous trend of member
countries, with their different and often conflicting strategies, by adopting a
common strategy of growth. The various types of imbalances within the Union
derive precisely from the adoption of different strategies of growth as between
the member countries, i.e. an export-led growth by Germany and a credit-led
growth, fruit of a kind of short-sighted, misguiding strategy of domestic
growth based on the expansion of less efficient and productive tertiary
sectors, notably credit, constructions and, sometimes, public sector deficits.
This dual strategy had a negative influence on imbalances and implied low
growth and the possibility of crises in the Union as a whole. To avoid these
negative effects a strategy of reconstruction and redesign of the EA
institutions should be devised from a short-term, a medium-term and a long-term
perspective. A common strategy would require that in the medium term, internal
imbalances in both the current account and the public sector should be reduced.
As to the current account, the MIB should be amended, by making imbalances
symmetric and reducing their size. Rebalancing can take place through either
inflation and expansion of demand in the former or deflation and contraction in
the latter or both. The common growth strategy could be supported by Eurobonds,
an initiative usually ascribed to Jacques Delors - i.e., issuance of ‘Union
Bonds’ to finance infrastructure investment. They could be issued not only in
order to mutualise part of the outstanding debt and stabilize financial
markets, but also to complement expansionary fiscal policy. All new Euro Area
sovereign borrowing could be in the form of jointly guaranteed Eurobonds. Some
authors propose limiting the EU guarantee, in order to induce the government to
reduce debt, and make it conditional on the implementation of sufficient
structural reformism, privatisations, opening up of product markets, more
flexible labour markets and increased efficiency for public good provision. New
financial instruments especially dedicated to social infrastructure, such as
social bonds, could also be issued in order to finance EU-wide social
investments. In practice, in November 2012 a framework for the issuance of
‘Project bonds’ has been approved. These are a financial instrument launched by
the European Commission and the European Investment Bank as an innovative
response to the needs for investment in large EU infrastructure projects, as a
part of the Europe 2020 Project. Also the EU Commission has also suggested some
guidelines for the introduction of ‘Stability Eurobonds’ that could reduce and
share the default risk.
An important preliminary clarification is needed about
the meaning of the term ‘democratic’ institution. Democracy can be seen from a
‘collective’ or an ‘egalitarian’ perspective. The former emphasizes the
possibility for a people – in this case, the EA constituency - to elect its
governing institutions. The latter is less demanding, as it preserves
self-government of countries, but also suggests integration of policies and
accountability of international institutions [35]. According to Eleftheriadis,
the EU is only a union of peoples, which can become more democratic, even if it
cannot become a democracy. If in the short run we can accept this position, it
must be said that the dream of the founding fathers of Europe tended certainly
more to the goal of a European people. This dream can require time, but it is
important to have in mind some kind of path that can lead to its
implementation. The EU Commission has introduced a system of contacts with
various stakeholders, trying to develop a method of consensus. However, this
has involved mainly the élites and has not ensured the necessary transparency.
Majone speaks of a kind of ‘democratic default’ in the Union, which arose over
time, starting with the failure of the CAP, continuing with that of the Lisbon
Strategy and ending with the misconduct in the prevention of, and response to,
the financial crisis [36]. Then the issue arises of how to combine democracy
with other requirements of a heterogeneous Europe and the different positions
and abilities of each country. Only from solutions respecting all these
requirements can a viable and democratic Europe spring [37]. It must be said
that responding to the demands of people and countries has become very
difficult in Europe after the crisis, as this has implied a return of the
primacy of narrow economic interests in the European governance, together with
a good dose of confusion. In the words of De Wilde, now ‘different “Europes”
are demanded by different people, in different settings, different countries
and even by the same people at different times’ [38]. In any case, democracy
would require less involvement in policy decisions and in the ability to punish
of unelected people, such as those governing the EU Commission and the ECB, and
markets [39]. De Grauwe says that ‘(n) either the European Commission or the
other members of the Council face political sanctions for the measures they
impose on one member country. The principle of “no taxation without representation”
lies at the heart of democracy. The SGP has been an attempt to short-circuit
this principle, by giving powers to individuals and institutions that do not
face the political consequences of their actions. Such an attempt has to fail
and happily so’. Also according to Schelkle, issues of democracy arise in the
EU [40]. In fact, against the position that has led to ‘keeping politicization
out’ there are good arguments in favour of ‘bringing politics back in’, as this
would ‘halt growing apathy or outright hostility towards the emerging European
polity’ or, at least, contribute to that [41]. Schelkle’s reasoning seems to be
even more relevant facing the growing populism in European countries. To
overcome apathy and populism also more transparency of the process leading to
decisions is needed.
Some kind of ‘deliberative supranationalism’ (at least
in the transitional phase before a federation or the goal of a European people
can be established) would be required also in order to face conflicts between
countries. In fact, both country and sectional (often conflicting) interests
play now a relevant role in EU governance. As to the latter, policymakers’
personal preferences or the sectoral interests influencing them fill in the
space between input participation by the people and output, in terms of policy
effects in favour of people. This can be hindered by people’s participation to
governance, which can ensure transparency, accountability and inclusiveness,
thus contributing to a better outcome [42]. However, in the words of Nicoli,
the EU misses the necessary ‘convergence of identities’ [43]. This generates a
number of problems of governance in the Euro Area, which are at the root of the
pains related to the crisis. In a nutshell, the missing ‘convergence of
identities’ makes it difficult to build a federal entity and, almost as a
reflection of this, in the Union a series of partial powers exist that are
often attributed to unelected institutions or are often blocked by veto powers.
As to country interests, one case may be of particular significance: ‘(w) hile
EMU’s domestic demand-led models are forced to pursue painful austerity
measures that have reduced inflation and increased unemployment, no attempt has
been made to correct the excessive levels of wage moderation in the EMU north,
specifically Germany, which undermined the periphery’s lack of competitiveness
in the euro’s first decade. The result of the EU’s policy response, which has
been shaped in the shadow of German hierarchy, has been to establish an
asymmetric low-growth equilibrium within Europe that exclusively penalizes its
southern rim’ [44]. The different size of countries and the asymmetry of power
between ‘creditor’ and ‘debtor’ countries in the management of the EA crisis
and the ongoing institutional reform process of EMU have brought the issue of
German dominance in Europe back to the forefront of scholarly debate. Germany
has pursued the interests of its savers by shifting the burden of adjustment
deriving from the financial crisis on debtor countries, as is clear from the
policies imposed on Greece. However, at least on this occasion, France and
Italy have shared the same attitude. Also in the case of the ECB policies to
relieve the EA from the ensuing recession, the Bundesbank and, to some extent,
the German government have pushed against unconventional policies, expansionary
fiscal policy and rising inflation, in order to protect the interests of German
savers. In this circumstance, the ECB has taken a firm position, favoured by
its independence. However, this situation is no longer tolerable and a more
balanced governance should be implemented. Creating a common finance minister
for the whole EA could to some extent increase the coordination of
macroeconomic policies, while raising other institutional issues.
Alternatively, a Fiscal Council could be charged with the task.
Some steps for pursuing economic and political goals
over the next years are indicated in the paper recently prepared by the EU
Commission [45]. It covers issues such as banking and capital markets
unification, economic and social convergence, preparation of the new
Multiannual financial framework, the fiscal stabilization function, in addition
to those of democratic accountability and effective governance. There are different
projects for the periods 2017-2019 and 2020-2025. The democratic deficit of the
EU should properly be fixed. The situation could be improved by implementing
some minimal rules, such as more transparency concerning the motivations and
effects of decisions, with specific reference to the categories of people that
would benefit and those that would be hit. A range of reforms oscillate between
a minimalist and a maximalist perspective. To exemplify, let us refer first to
governing bodies. The European Commission could be elected either indirectly
via the European Parliament or directly by the EU citizens. As to the ECB, in
confirming its independence one can think of subjecting it to oversight, either
by the EU Parliament and the EuroGroup and/or also by national parliaments of
member countries. Finally, bailout funds and austerity programs can be subject
to approval and scrutiny by national parliaments or referendums ratifying them.
A solution to the democratic deficit would require not only a change in the
orientation and the modes of current decisions, but also and mainly a radical
change in the institutional setting of the EMU. This would be difficult to
implement in the absence of a process of ‘re-envisioning of the EU’s
socio-economic policy, … in concert with the people, through pluralist
processes, and by the representatives of the people at both national and EU
level, through more politics … In addition to the political and economic
reforms, … the EU needs to re-envision its identity and change its decision
rules … [in particular] by eliminating the unanimity rule’ [46-62]. A
democratic state must respect the will of its citizens, but also be efficient.
From this point of view, a number of reforms of the Euro Area are in order.
From a methodologic point of view, a starting point is offered by existing
institutions, in the process to changing them in the directions we have traced.
Key elements can be reinvigorating the Broad Economic Policy Guidelines and the
framework that guides economic policy. Some authors suggest also to extend the
EU Macroeconomic Dialogue, in particular by setting up meetings at Euro Area
level, by involving the Eurogroup, the peak European social partner
organisations, and – at the level of Member States - the participation of national
central banks, fiscal authorities and national social partners.