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Much can be said about Wednesday’s, May 23, EU summit. Reporters will be busy in analyzing the diverging views between the French President Mr Hollande and the German Chancellor Mrs Merkel over the issue of eurobonds. Economists will be divided over the additional capital that needs to be given to the European Investment Bank and the actual leverage it can afford, to carry out massive investment projects across the area’s most hardly-hit regions.
As important as these issues undoubtedly are, they fail to strike at the heart of the matter; at the real issue that is at stake here and at the actual target every well-meaning individual should always keep in clear sight. That is the vital need for the reformation and redesign of the EU, in order to address all structural flaws that do not allow for the proper functioning of the monetary union; and to combat its single most important weakness, its democratic deficit.
These crucial issues were wrapped up in a succinct and brilliant statement by the member of the European Central Bank’s executive board, Mr Jörg Asmussen. As reported by EurActiv, he said that the eurozone needs to be supported by “a fiscal union and banking union as well as a democratic legitimised political union”. If we strip away all the superficialities of the last summit, Mr Asmussen managed to cut into the nub of issue, avoiding all the siren calls that distract political talk from the core objective.
It is well known both by theory and practice that a monetary union, the eurozone in this case, is not sustainable without the support of a fiscal union. In other words if there is no common treasury in place, with jurisdiction over the exact same area as the ECB, with powers to raise revenue, transfer resources and issue bonds on its own accord, so as to rebalance the structural asymmetries; then the monetary union is going to experience internal divergencies, centrifugal powers, which will undermine its coherence and integrity. This is in short what is currently happening in the eurozone and there can be no better proof of that, than the wide interest rate spreads between Germany, the region’s largest economy and Italy or Spain, the eurozone’ third and fourth largest economies (and in general between core and peripheral countries).
Without a mechanism of addressing these asymmetric shocks, capital will inevitably flow into the presumably safest destination, Germany, depriving the rest from access to affordable credit, while pushing down interest rates in Germany – yields on German bonds are at record lows. It must be stressed that this one-way capital flow is detrimental both for Germany and for countries like Italy and Spain from whence money flees from. In the former it will lead to significant inflationary pressures (among others), while in the latter it leads to a self-fulfilling sovereign debt crisis.
The underlying axiom of the eurozone, when it was first conceived in the early 1990’s, was that states will agree to unify their monetary policy, but will retain their fiscal sovereignty. Within this framework the banking sector remained under the supervision of national authorities, despite the fact that the currency and the payment mechanism through which all financial transactions were to be carried out, would be the same throughout the area.
As such the eurozone lacked a central agency that would have the power to supervise and if necessary, recapitalize banks. In contrast the crisis saw many banks being bailed out by their respective states, even though this could and would shift the burdens onto the state thus reallocating the problem, without solving it. The case of Ireland is a case study for that. Another more recent example is the bailout of Bankia, by the Spanish government, even though it is known to everyone that currently Spain is short of cash and bailing out a bank can only make its position worse. Same case for Cyprus, the EU member-state that will soon take over the rotating presidency of the European Council. The Cypriot government will eventually be forced to bail out Laiki Bank, even though this will lead the state itself towards a bailout mechanism.
Whether recapitalizations are the appropriate policy, or whether the actions of governments were correct or not, timely or belated, is another issue. The point is that if you are going to implement such measures, you want to make sure that they will address the problem and not just shift it elsewhere, which is currently the case. Towards that end, a euro-wide authority that will supervise a unified banking sector, will be much more efficient and effective than the current regime of ad hoc measures that strengthen the negative feedback loop between bankrupt banks and cash-strapped states.
Apart from the economic sphere and the institutions/mechanisms that will allow for the optimal operations of the monetary union, one cannot possibly neglect all other issues of political life. As such one cannot overlook the structural flaws of the EU, when it comes to its governance, decision-making and division of powers.
A fundamental flaw of the EU, is its democratic deficit. For instance the European Commission, the region’s executive arm, is not democratically legitimized. The European Parliament does not have genuine legislative powers, nor does it enjoy the power of scrutinizing the various European agencies, bodies and quangos that exist all over the place; with inadequate parliamentary scrutiny of Europol being but one example. Citizens are distanced from European institutions. They feel alienated and justly so from the bureaucratic palaver of people like Mr Barroso or Mr Van Rompuy, whom we must never forget that no citizen voted in office.
These and many other related issues are undesirable and cannot possibly be tolerated if the EU is to have any meaningful future. To solve these problems, a political union will have to be established, since only a genuine state can operate along democratic lines and be effective in meeting the needs of modern day society. The EU has to become a genuine federation. On one hand European institutions must always be legitimized through democratic processes, while on the other, power must be diversified and decentralized, not be conferred to a central omnipotent bureaucracy in Brussels that will effectively decide over all of the bloc’s issues, as is currently the trend.
All these are major challenges for the months and years ahead, yet there really is no other way to ensure stability and sustainability over the longer term. It is of paramount importance to establish a fiscal union in the eurozone and to finally unify the region’s banking sector, in order to ensure the integrity, stability and viability of the single currency and to guarantee a decent life for all citizens who are now called to pay the costs of earlier political errors.
In addition it is of cardinal importance to make all the necessary steps towards the formation of a political union; one that will strengthen democracy, guarantee diversity and delegate power as close as possible to the citizen.
This is the gist of the entire debate: fiscal union – banking union – political union. As such the aforementioned statement of Mr Asmussen comes as a breath of fresh air in the broader political discussion. There really is no other way forward than deeper integration, but there certainly are many ways to go backward.