On November 16 Yves Mersch, Member of the Executive Board of the European Central Bank, delivered a persuasive speech about the euro and the concept of sovereignty. The title of the ECB press release is “A currency beyond the nation state: The euro and its institutional challenges ahead”.
In the present article I comment on some of Mr. Mersch’s most important remarks, while noting that much of what he refers to has been examined in the present author’s free ebook: A Handbook on the European Union.
The euro needs a state
In particular, the euro area has shown that like-minded people and their governments can introduce, manage and safeguard a single currency without having to merge into one overarching federal state. The “currency beyond the state” has revealed as false the widespread belief that a monetary union without a state is not viable.
What we may suggest as a counterpoint to Mr. Mersch’s claim is that the policy response to the euro crisis has been one of effective state building at the supranational level. Unless we are willing to delude ourselves, the reinforcement of economic governance, the formation of a banking union, the introduction of policy instruments for micro- and macro- prudential policy at the ECB, are all instances of supporting a currency with state structures.
Besides, the proposal for a fiscal capacity for the euro area, and the inevitable creation of a European Finance Ministry as the political head of a supranational economic government, suggest that the Economic and Monetary Union is becoming a state. To these we may add the willingness of the European Commission to provide for a unified representation of the euro area at the International Monetary Fund, which, if universalised for all international fora, will make the euro area a single personality in terms of its international standing (as is every other internationally-recognised state).
At this stage in the European integration process, there is no practical reason for defending the original idea underpinning the Maastricht architecture for the single currency. The euro will not answer the question whether fiat money without a state is viable, for it no longer is completely stateless. That system partially belongs to history courtesy of the far-reaching reforms that have been introduced since the beginning of the euro crisis. The changes to be proposed within the near-to-medium-term as per the Five Presidents’ report are in line with the vision of making the supranational level even more state-like.
Supranational fiscal capacity
One of the ideas currently being discussed is a euro area-wide fiscal stabilisation function. This function could help to better cushion the economy against large macroeconomic shocks that cannot be dealt with at the national level alone. For such euro area stabilisation to work, however, we first need a significant degree of economic convergence and financial integration according to the Five Presidents’ Report.
This idea is interesting and worth exploring. It is the first step towards a fully fledged supranational fiscal policy. A fiscal capacity for the system at-large, apart from refuting Mr. Mersch’s previous point on the viability of the euro’s statelessness, suggests that policy-makers have recognised the systemic aspect of the financial shock.
The original design of the euro was that monetary policy would be uniformly determined at the supranational level by the ECB, while fiscal policy and bank supervision would remain confined to national borders. In such an arrangement, any economic shock would be perceived as the sole responsibility of the national government of the local economy experiencing the downturn.
The euro’s architects erroneously emphasised the viability of a singularly rules-based formation, centred on the Stability and Growth Pact; a framework that had no scope for supranational policy instruments for addressing systemic challenges (e.g. asymmetric shocks, financial contagion).
The euro crisis has illustrated how a national government can have a good record in meeting its public debt and budget deficit targets (such as Spain or Cyprus), yet still be subject to severe market pressures stemming from broader economic phenomena. It may then be encouraging that the European Semester has at least widened the scope of rules on economic governance to encompass indicators that relate to macroeconomic imbalances. This is known as the Macroeconomic Imbalance Procedure Scoreboard. It now is clear that market factors as well as cross-border externalities do matter.
What is currently being suggested in the Five Presidents’ report is a European Fiscal Board (EFB). This will be an advisory body that will provide technical expertise to policy-makers on the recommended fiscal stance of the system as a whole. While the specifics remain to be determined via legislation soon to be introduced, the very idea of a macroeconomic view of the whole area constitutes a radical departure from the original Maastricht design. It also anticipates the introduction of a supranational fiscal capacity meant to act on the EFB’s advice.
The European Finance Ministry
Such a euro area treasury or finance ministry would clearly need a high degree of democratic legitimacy and strong parliamentary control. Any college with powers delegated from intergovernmental forums would hardly satisfy these requirements. In my view, the European Parliament convening in euro area composition would be the right body to undertake this task. It would ensure that the actions of a European finance minister are legitimised at the same level at which decisions are taken.
A high degree of democratic legitimacy also implies that a European finance minister cannot be an unelected technocrat. Under the current institutional framework, he or she certainly cannot be a delegate from the Eurogroup. In an integrated Union, this informal, intergovernmental body lacks its raison d’être.
It always is interesting to witness representatives of the ECB comment on political issues, especially when they criticise intergovernmentalism. Mr. Mersch is correct in asserting that a genuine Union would have no need for the Eurogroup (or any similar rule forming entity for that matter—see the ebook for more on that).
Having already written at length on the proposal for a European Finance Minister, the European Parliament convening in euro area composition cannot be the right body for scrutinising the supranational minister. We need to bear in mind that over the foreseeable future such an institution would be incorporated in the existing framework of economic governance.
The main feature of the present order is that instead of a vertically-separated federal system, we have supranational control over national fiscal and economic policy. This is a more centralised, top-down approach. In this context, the European Finance Minister would not be conducting a federal economic policy. They would instead act as a “back seat driver” for each and every national economic policy. The competences of this office would therefore not be purely supranational. They would rather stand at the intersection between the national and the European level.
Instead of an ad hoc “Euro area European Parliament”, a new entity should be introduced that would bring together delegates from the European Parliament and the national parliaments. This new institution would be purpose-specific in holding accountable the European Finance Ministry as well as being the legislative function for all things pertaining to economic governance.
It is important to note that such an arrangement is only considered plausible under the assumption that European economic policy will not conform to a typical federal model. Should the supranational level be thoroughly reformed to make the EU a federal republic, then of course a European Congress (European Parliament and Council of the European Union) would be the institution dealing with the European Finance Ministry.
Subsidiarity and statehood
[Constitutional identity] should not be used as an excuse to opt for intergovernmental arrangements where supranational solutions would be more conducive to achieving a genuine Economic and Monetary Union. The European integration process has demonstrated that democratic states can share sovereignty in a number of policy areas without losing statehood.
Mr. Mersch is referring to subsidiarity in that decisions should be taken at the appropriate level of government. He is however trying to obfuscate his message by arguing that shared sovereignty does not entail any loss to statehood, i.e. national sovereignty.
To discern the tension in that argument one need only use Mr. Mersch’s institution as a case in point. Member States have transferred their monetary sovereignty to the supranational level, where it is handled by the ECB. While the ECB conducts its operations for the whole system, the fact is that any given national government cannot maintain its own monetary policy, nor can any national central bank act as a lender of last resort for its domestic banking system, without approval from the supranational level. It is this constraint that forced the Cypriot government and, more recently, the Greek government to introduce capital controls and to have their banks rely on liquidity provisions from the Emergency Liquidity Assistance mechanism (a penalty of sorts).
The gist is that European integration entails the diminution of the scope of national sovereignty. The normative claim for continuing along such a path is that the de facto European sovereignty over the areas of policy that have—and are being—integrated has to conform with the kind of republican norms, values, and practices that would otherwise apply to the national level. The sort of expectation citizens have from their nation state should be satisfied by the EU as such. Sovereignty in a democratic sense is about the qualitative features of the polity, not just what level of government gets to decide over a given set of policies. Member States are not losing their statehood. National borders are not being redrawn, constitutions rewritten, citizenship reformulated. What is undergoing change is the level at which decisions are formed and adopted. For the time being, this level, the supranational stratum, is sub-par in terms of fully incorporating the virtuous cycle of legitimation and accountability that democratic sovereignty entails.
Yves Mersch has raised some very interesting points concerning the euro as a currency beyond the nation state. He is however hesitant in admitting the initial design flaws of the single currency, namely, the statelessness of the euro. Fortunately such thinking is no longer the main driver of the European integration process. One may now hope for—indeed be adamant about—the incorporation of normative objectives in the eventual reform of the European Union. Every measure that improves the democratic quality of the system has to be examined in a positive light.