The Maastricht Treaty, which established the principles of the economic governance of the EU and the euro, was the result of a compromise between different views on policy and institutions. Until the financial crisis of 2007–2012, that compromise had delivered macroeconomic stability. This consolidated consensus was based on a number of principles, and in particular on the idea that macroeconomic stability could be assured in any circumstance by the combination of an independent central bank with a narrow mandate in terms of price stability and centrally defined fiscal rules setting public deficit and public debt limits at the national level. The consensus also extended to the principle of subsidiarity, which was based on a narrow definition of European public goods and therefore attributed minimal responsibilities at the federal level and a high degree of decentralisation of economic decisions.
The financial crisis of 2007–2012 was the first wake up call to the inadequacy of this architecture when facing a large systemic crisis. A wave of reforms, foremost of which was the establishment of the banking union, followed. Although many considered that the reform process was unfinished business, they doubted the feasibility of treaty change. Thus, the debate at the time remained relatively narrow and few questioned the pillars of the Maastricht consensus.
The pandemic crisis has transformed the EU
The Covid-19 pandemic crisis will leave a deeper impact on the European policy system, for six major reasons.
1. Long-standing European taboos have been broken. Monetary union was built on the premise that a fiscal pillar at the EU level would not be needed. The issue resurfaced on the occasion of the euro crisis, but to no immediate avail. However, the pandemic crisis has given birth to the Recovery and Resilience initiative, a major experiment whose outcome and as yet unknown long-term consequences – for stabilisation, redistribution, and the financing of the EU budget through new own resources – will determine the future of the European policy system.
2. The macroeconomic policy consensus that provided the backbone of the Maastricht system has been shattered. In response to emergencies, the ECB has taken on a new role of market-maker and, through its bond purchase programmes, has assumed risks on its balance sheet which could, in principle, have fiscal consequences. Moreover, in in a world of structurally low equilibrium interest rates, it has become clear that some degree of monetary and fiscal coordination is needed and that debt and deficit limits can lead to procyclicality. Finally, with high public debt, the fiscal imprint of monetary policy is large whether or not there is fiscal dominance. For all these reasons, the wisdom of keeping a Chinese wall between monetary and fiscal policy is being questioned.
3. Policy priorities have changed. Efficiency and stability are imperatives, but environmental sustainability has risen to the top of the policy agenda and so has the idea that this is a European public good. The consequences of this reordering have not yet been defined, though. The transition to a net zero economy will have a major macroeconomic impact in the medium term. The intertemporal burden-sharing questions it raises have not yet been addressed. The Covid crisis has also shown that research and innovation in Europe are public goods that should become policy priorities.
4. New risks have emerged. Public debt levels are expected to increase by about 20 percentage points, and possibly more in the event of a persistent Covid scenario. Although markets so far do not seem to care, risks may emerge in the medium and long run with the consequence that debt restructuring and fiscal dominance may become a reality. The design of a reformed policy framework should aim at broadening the policy space while containing these risks.
5. The EU must connect to a greater extent the internal and external dimensions of its policy agenda. The external environment is being transformed radically, especially by the rise of China and its growing confrontation with the US. The focus on internal integration and the benign neglect of external dimensions of the last decades are no longer viable. This applies especially to the international role of the euro, towards which the traditionally neutral stance of the EU cannot be maintained.
6. A variable-geometry Europe is no longer on the table, but faultlines remain. The possibility of a two-speed Europe was long considered and in some cases advocated. Brexit and the choice of an EU rather than a euro area vehicle for providing support to member states in trouble has widened the range of options. This long-standing issue may be settled, but new faultlines may open up. At the same time, the old faultlines in the monetary union remain and anti-European populists will continue to challenge the democratic legitimacy of the European project in years to come.
At the same time, critical elements of the post-euro crisis reform vision hit a roadblock even before the pandemic. The plan to decouple bank stability from home state solvency, thereby containing systemic risk at the EU level, has not been implemented to date. After the global financial crisis, the creation of a new insolvency law for banks, the BRRD, accompanied by a novel European institutions dedicated to supervision and resolution – the SSM, SRB and SRF – was supposed to allow weak banks to exit a crowded market, without stirring a crisis. But it was never tried. Instead, national policies have regained influence and, as a result, European monetary policy has become interconnected with solvency concerns at the national level.
Answering the questions raised by these transformations is certainly not an easy endeavour. The agenda is large and touches on many issues: monetary-fiscal complementarity, providing public goods to ensure resilience while preserving national strategic autonomy, risk-sharing and insurance via an integrated banking system and the development of the capital market union but also redistribution via fiscal mechanisms, to name just a few.
Policy concepts that have emerged are often still fuzzy. Trade-offs between objectives – resilience versus efficiency, sustainability versus growth, environmental versus financial sustainability, openness versus autonomy, economics versus geopolitics, treaty change versus national sovereignity – have hardly been explored. As exemplified by the Next Generation EU initiative, hard questions lie ahead regarding the distribution of policy roles, short-term and long-term, between the EU and its member states, and disagreements abound.
The reform agenda has to be revived in the context of a still fragile and uncertain economic and health situation. As Europe emerges from the pandemic, strategies for macroeconomic policy synchronisation and the sequencing of stimulus withdrawal will remain crucial for a number of years.
The EU cannot shy away from the conceptual retooling it needs. Whatever the difficulty of reaching agreement on reformed policy principles, it must not succumb to the temptation to return to the compromises of the past. But in a context where citizens have been bewildered by a series of shocks and policy reversals, this will be a challenging discussion to have. A possible holding back of the Next Generation EU by national courts may only accelerate the need to find sustainable answers to the institutional challenges we are facing today. Policy research should play a major role in structuring this.
At CEPR, contributing to research and policies on European integration, policy choices and reform strategies has always been key. For three decades, CEPR has promoted and published such work in its series of reports on Monitoring European Integration, Monitoring the European Central Bank and Monitoring the Eurozone (Corsetti et al. 2015, 2016).
More recently, CEPR opened a debate forum to discuss a relatively narrow question: how to strike the optimal balance between risk sharing and good incentives in reforming the architecture of the euro area. We received many good contributions, initially in response to the “7+7” proposal of French and German economists that kicked off the debate (Bénassy-Quéré et al. 2018).
Part of this debate remains relevant, but in the wake of Covid-19, it must be broadened, reflecting the broad agenda covered by CEPR’s Research and Policy Network on European Economic Architecture, established in late 2018, and in particular the transformations that we have witnessed over the last 12 months.
With this in mind, we would welcome research-based contributions of the usual VoxEU length (1,000-1,500 words, and never above 2,000) in the following areas:
1. Reform of the fiscal framework (both NGEU and the SGP)
2. Monetary-fiscal interactions
3. Banking and capital markets union
4. Macroeconomics and finance of the green transition
5. Divergence and convergence in the euro area
6. The euro in a changing global environment
7. European public good
8. Macro policies emerging from the pandemic, strategies and sequencing
Please send your submissions to Jean Pisani Ferry ([email protected]) and Jeromin Zettelmeyer ([email protected]), copying Kirsty McNeill ([email protected]).
Bénassy-Quéré, A, M Brunnermeier, H Enderlein, E Farhi, M Fratzscher, C Fuest, P-O Gourinchas, P Martin, J Pisani-Ferry, H Rey, I Schnabel,N Véron, B Weder di Mauro, J Zettelmeyer (2018), “Reconciling risk sharing with market discipline: A constructive approach to euro area reform”, CEPR Policy Insight No 91.
Corsetti, G, L Feld, P Lane, L Reichlin, H Rey, D Vayanos and B Weder di Mauro (2015), A New Start for the Eurozone: Dealing with Debt, Monitoring the Eurozone 1, CEPR Press.
Giancarlo Corsetti, G, L Feld, R Koijen, L Reichlin, R Reis, H Rey and B Weder di Mauro (2016), Reinforcing the Eurozone and Protecting an Open Society, Monitoring the Eurozone 2, CEPR Press.