by Gustav Horn
In the latest in our ‘Europe2025’ series, Gustav Horn focuses on macroeconomic institutional reforms for crisis-proofing and a
After the European Parliament elections, it is time to decide how the European Union will meet the challenges of the near future. If the EU is to survive in the long term, it can only be via deepening European relations.
The priority to which member states and the European Parliament, in particular, should devote their efforts is to make the EU and monetary union crisis-proof. Some steps have been taken but they remain to be completed.
True, the need for a European Monetary Fund is no longer controversial, at least in the overwhelming majority of member states. But they oppose a monetary fund as a European, as against an intergovernmental, institution. Yet the latter would likely make decision-making more complicated, causing damaging delays especially in crisis situations. A rapid response to panic-driven imbalances in the financial markets would hardly be possible. Only a turnaround in the political debate—currently unlikely—can ensure Europe is ready for the next crisis.
Rendering the eurozone resilient to crisis fundamentally entails completing the remit of the European Central
All players in the financial markets need to be confident at all times that the ECB can rush to the aid of member states with liquidity, buying up their government bonds. This will nip some financial panic attacks in the bud. Central banks of all major economies have exactly this function.
The European currency area is distinct because of the national independence of its members.
The concern of many member states is that excessive borrowing by a single government could force the ECB to buy up massively that government’s bonds to keep the financial markets stable for all member states. In other words, the possible negative consequences of such an operation—such as inflation or a general loss of confidence in the currency—would be borne by all eurozone members. This leads to the fear that such a setting is an incentive to risk high public debt more easily and that, in the end, the entire monetary union would be heavily indebted.
This conflict between greater financial safety for the entire monetary union and increased incentives for risky
After all, the states of the monetary union must ultimately bear
One way out would be to give the ECB a graduated mandate. In the event of a crisis, the bank would have a free hand to buy up to 60 per cent of a country’s government bonds on the secondary market. To go beyond that would require an explicit resolution of the European Parliament. This would mean that the political responsibility for increased intervention would be assumed from a European perspective and the ECB would be relieved of this responsibility. Irrespective of the parliament’s decision, a European Monetary Fund could grant conditional loans at reduced prices to member states in distress, with the help of which they could more easily survive such a crisis.
Protection against crises is one urgent task and creating greater economic dynamism is another. The European economic area is still suffering in many regions from the after-effects of the financial-market crisis and, above all, the crisis in the eurozone. Investments are particularly weak. In some cases, public investment is lagging far behind demand and its usual dynamics, while in others private investment is also very subdued in view of the economic situation.
At the same time, there is a high need for investment, particularly from a European perspective, in view of the requirements of climate change, energy-system transformation
This can be achieved through an improved division of
Against this background, a European investment
These investments could be financed by merging the numerous investment funds, such as the European Fund for Strategic Investments (the Juncker funds), and additional funds could possibly be raised via a European financial-market transactions tax.
With this double step of improved crisis management and
(Gustav Horn is
The challenge ahead: a safer and more dynamic Europe
by Gustav Horn