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Economic and monetary challenges - Prospects of the EU economy and the Eurozone

Deepening EMU: an indispensable objective in the face of global challenges

By Schäuble Wolfgang - Federal Minister of Finance, Germany


The European Union and its Member States continue to face a host of challenges. The threat of terrorism, massive increases in migration flows and increasing risks to the world economy all directly influence the European economies and citizens. These challenges are essentially global in nature and require a strong and common European reaction.

During the economic and financial crisis, the Eurozone has shown what is possible when its Member States act together decisively. We strengthened our economic and financial ruleset, we created the firewalls EFSF and ESM and we established the banking union. Most importantly, Member States that were subject to economic adjustment programs undertook tremendous efforts to reestablish competitiveness and fiscal sustainability, supported by European solidarity. These measures were successful overall. The Eurozone has returned to growth; confidence has returned.

But our work is not done. The legacy of the crisis still weighs heavy. Unemployment is still too high, growth potential is subdued and high public and private debt levels make Member States vulnerable. Risks in the financial sector remain. Institutionally, we had to make some necessary compromises during the crisis. We attached the SSM to the ECB and established the fiscal compact outside the treaty framework. These can only be temporary solutions, which we will have to address with treaty changes someday.
Discussing treaty changes however should not dilute our focus on what needs to be done in the Member States today. Too much effort is spent on discussing possible future instruments of risk sharing. It is difficult to shake the impression that some are comfortable with shifting the attention towards the Eurozone level rather than on using existing instruments and going ahead with necessary reforms at home.

If we want to deepen EMU, we have to do so on a solid foundation. We have to implement what we agreed to in the past. It is Member States themselves who have to ensure stable public finances. They have to create the right framework for employment, investment and growth. This can only be achieved with structural reforms at home. Hopes for easy solutions from expansionary fiscal or monetary policy are misled. These policies cannot foster medium-run growth, and high debt levels and demographic pressure leave no room for short term fiscal impulses.

If we want to deepen EMU, we have to do so on a solid foundation.

We need to think more profoundly about where we need to foster convergence by moving towards the best performers, be it in economic structures or institutional set-up, e.g. through benchmarking. We have to answer the question where we might need additional transfers of sovereignty or maybe more harmonization.

I am aware that the willingness to engage in treaty changes is low at the moment. That is why we have to focus on what we can achieve within the current framework. There is a lot of potential. The EU-budget could better reflect European added value and support necessary reforms in Member States. The European Semester as a core instrument of economic governance should be further strengthened. The common market is still not complete and the capital markets union needs to be driven forward. The link between sovereigns and banks has to be reduced by tackling regulatory exemptions for sovereign debt in bank balance sheets. Overall risk in bank balance sheets has to be reduced, as has the vulnerability of Member States through high public debt levels. Fiscal surveillance needs to be applied more independently and the no-bailout clause needs to be strengthened.

There are no quick fixes when it comes to deepening EMU. But I am confident that through many small steps we can create the basis for a stable and prosperous EMU in the face of global challenges. To meet these challenges, deepening EMU is not only a credible objective, it’s an indispensable objective.