The Government the Eurozone Deserves
Yannos Papantoniou
AUG 3, 2015
ATHENS – Will Greece’s troubles destroy Europe’s currency union, or reveal how it should be saved? The recent controversial bailout deal – likened by some to the 1919 Versailles Treaty, with Greece in the role of Germany – offers the latest twist in the eurozone’s existential saga.
The deal has caused a split in Syriza, Greece’s leftist governing party; opened a rift between Germany’s Chancellor Angela Merkel and her uncompromisingly tough finance minister, Wolfgang Schäuble; and spurred an effort by France to reassert itself within the Franco-German axis that has always been the “motor” of European integration.
Meanwhile, many of North America’s Keynesian economists, such as Nobel laureates Paul Krugman and Joseph Stiglitz, sympathize with Greece’s anti-austerity stance. Other economists, mainly in Europe, argue that Germany must assume a political role befitting its economic preeminence and must accept sovereignty-sharing (and burden-sharing) arrangements to ensure the monetary union’s cohesion and sustainability. Humiliating a small country and rendering it a virtual protectorate does not serve Europe’s long-term interest.
Yet this is what is at stake. Greece signed the deal after facing an explicit invitation from Schäuble to leave the eurozone – supposedly temporarily – and adopt a new currency.
Germany’s stance marked the first open challenge by a leading European power to the notion that the monetary union is irrevocable. As the French, instinctively sympathetic to the anti-austerity argument and conscious of their increasingly junior role in the Franco-German partnership, were quick to notice, the German stance also signaled a potential shift from a “European Germany” to a “German Europe.”
It hardly helped that the negotiations between Greece and its creditors produced a growing mistrust in the competence and intentions of Syriza. Devious and erratic negotiating tactics, coupled with secret schemes to prepare – as part of a “Plan B” – for an exit from the euro, undermined the government’s trustworthiness, leading even Paul Krugman to admit: “I may have overestimated the competence of the Greek government.”
Yet, however complicated the blame game, some lessons can be drawn to guide future policy. When fiscal misbehavior by Greece, a country representing no more than 2% of the eurozone’s GDP, poses serious dangers for the survival of the currency union, something is clearly amiss.
But does the remedy lie in tougher measures – such as heavier penalties or even eviction – to enforce the eurozone’s rules, or do the rules need to be adjusted to accommodate members’ varying circumstances?
So far, enforcement has failed, owing to flaws in the eurozone’s foundations. First, fiscal and external-account balances are to be kept in check in order to ensure financial stability and sustain the common currency. Second, removing imbalances is the responsibility of national governments within the context of a rescue regime arranged by supranational authorities – the European Commission and the European Central Bank – in cooperation with the European Council, which in turn represents national governments.
The Greek saga shows that this system cannot control destabilizing imbalances quickly enough to ward off major crises. Imbalances are not solely the result of irresponsible policies. They may reflect deeper weaknesses in economic structures, such as a lack of competitiveness or institutional shortcomings. If Germany insists on national responsibility, it may find that enforcing the rules will have to be ever harsher, eventually leading to such social and political upheaval that the entire euro-edifice collapses.
The alternative is to embrace a “transfer union” that ensures a better balance between solidarity and responsibility. The United States embodies such a solution, ensuring an integrated pattern of development throughout the country. The eurozone must strengthen its fiscal structures enough to respond to overall economic conditions while taking into account the differing circumstances of each member country. These stronger structures should permit limited resource transfers among eurozone countries, either to carry out countercyclical policy or to supplement investment spending, particularly in economic and social infrastructure.
But this must inevitably involve the creation of a separate eurozone budget, transferring competences from national to supranational authorities. Common taxation and Eurobonds should form part of the new fiscal structure, and the European Stability Mechanism should include a debt redemption fund large enough to resolve sovereign-debt crises. At the same time, the banking union, established by the EU in the wake of the 2007-2008 global financial crisis, should be strengthened by enlarging the capital base of the Single Resolution Fund and establishing a common deposit guarantee scheme.
All of this presupposes that the powers of the EU’s supranational institutions, the European Parliament and the European Commission, will be significantly augmented. The Commission should become a proper government, with a popularly elected president. A European finance ministry should be created, and its head should preside over the Eurogroup (which convenes the finance ministers of eurozone member states). A special Assembly of the European Parliament, comprising the eurozone members, should have powers – on the model of a national parliament – to legislate and control the executive.
These proposals will provoke plenty of criticism – and not just from Euroskeptics. But a move toward fiscal and political integration is the price that Europe – beginning with the eurozone – must pay to maintain its unity and global relevance. The alternative is inconsistent (if not arbitrary) enforcement of the current rules, inducing divisiveness among member states and eventual fragmentation.
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