Speakers of the session
Completing Europe’s Economic and Monetary Union
The Minister of Finance, Lithuania
Vice-President for Euro and Social Dialogue, European Commission
Minister of Finance, Slovak Republic
François Villeroy de Galhau
Governor, Banque de France
Objectives of the sessionThe objective of the session is to define the priority actions for making the euro area viable and avoiding the situation where the risk of an exit country becomes real.
Speakers will be invited to discuss how to encourage Member States to meet their fiscal and structural commitments. This plenary session will also be devoted to discussing the conditions required to move toward a Fiscal Union.
Points of discussion
How to organize an efficient dialogue at the Eurogroup level regarding the way structural reforms are defined and implemented by Member States?
- How to explain the lack of structural reforms in some Eurozone Member States?
- How to ensure that sufficient economic convergence is achieved at the Eurozone level and that structural reforms are appropriately defined and implemented by Member States when needed?
- How can Member States of the euro area be encouraged to meet their fiscal commitments? How can the awareness of EU citizens be increased regarding the priorities for improving domestic competiveness and thus strengthening the consensus among EU citizens concerning this question?
- Would one way forward involve a form of contractual commitment by Member States and EU Institutions to structural reforms and competitiveness? What would be the best approach to implementing this (e.g. examining the respective role of the Eurogroup and the EU Commission, and any essential incentives etc.?
- Are additional transfers of sovereignty (e.g. creation of a Finance Minister for the Euro area) the most appropriate way to ensure that fiscal policies are appropriately monitored?
Is deepening the EMU a credible and achievable objective? What are the key priorities and conditions for making effective progress in this direction?
- What are the possible benefits of strengthening the EMU and how important is this for the cohesion of the Eurozone?
- What is preventing a move towards a Fiscal Union? What benefits could be expected from such a Fiscal Union? What are the economic and political prerequisites for setting up a Fiscal Union at the Eurozone level?
Background of the sessionThe Euro zone is a specific currency area composed of heterogeneous countries. Heterogeneity concerns capital income levels, per capita productivity levels, the productive specialisation of the economies, labour force, skills and demographic settings. At the same time the zone is characterised by a weak degree of federalism.
In such a context, the convergence of living standards cannot happen faster than the increase of per capital productivity. When tensions are manifest, it is necessary to correct the imbalances leading to internal devaluation. This is something that has been applied systematically by the Baltic countries, Spain, Ireland and Portugal with some success.
There are different ways of reducing structural divergences and competitiveness gaps in a monetary Union:
One line of action is to create a federal fiscal incentive for countries that really embark on credible structural reforms: the more fiscal transfers with the more conditionality would be the idea.
A second line of thought, which is not exclusive of the first, is to rely on more financial markets to help the equalizing function. This is what happens in the United States for example when regions are sagging with low productivity investors can step in to improve production conditions. More risk-sharing would reduce the vulnerability of Member States of the Monetary Union to external shocks.
However in Europe things are less obvious because of the differences between countries: languages, legal and tax frameworks, conditions to entry into the markets etc. vary in the euro area and equalizing is more difficult to achieve.
Therefore, certain elements of inter-state transfers are probably indispensable to make the EMU work politically. This raises difficult economic and political issues.
A Fiscal Union can only be considered between States that are compliant with or are putting in place reforms to comply with the Stability and Growth Pact rules and that are achieving economic convergence (comparable levels for ratio of public spending to national GDP, corporate margin ratios, job market flexibility, etc.). In sum, this can only be achieved with a high degree of acceptance of domestic structural reforms and trust among members of the Union.
In addition, a pooling of fiscal resources, whatever their nature and size might be goes hand in hand with shared responsibility. In other words, this would mean yielding a great deal of national sovereignty in fiscal policy matters since a significantly stronger element of centralised intervention regarding the definition of national budgets would be required.
Once these economic and political conditions are in place or moving forward, it can be considered, for instance, that if the “new national budgets” are accepted by a central authority as adequate, the new debt would be the object of a mutualised treatment. Another possibility would be to pool the “sustainable” debt (i.e. less than 60% of GDP) of states that are compliant with the Growth and Stability Pact rules and are introducing structural reforms to ensure genuine economic convergence with the best-performing states.
To move forward in these areas, the confidence of the citizens is therefore vital implying that democratic accountability must also be strengthened.
In sum, politically the idea of creating a federal fiscal capacity is difficult as long as the core countries of the Monetary Union remain in very different positions in terms of competitiveness. But to the extent that structural reforms and fiscal disciplines may take place, some form of mutualisation of certain expenditures of the system must not be discarded systematically.