Eurozone countries should share more economic risks, beyond what is implied by their banking union, to make the monetary union work better, the European Commission said in a quarterly report on the single currency area.
Under banking union, large banks in eurozone countries are all supervised by the European Central Bank and there is a joint fund to finance the resolution of failing institutions.
To complete the project, governments will have to agree on pan-European guarantees for bank deposits of up to 100,000 euros, that would be backed by money at the European level.
But Germany vehemently opposes such a scheme, saying the euro zone must act to reduce risks before it will agree to any further risk sharing.
The Commission, however, said that not only the banking union must be completed – which means setting up the deposit insurance scheme – but that the eurozone should move further. That could imply a fiscal union, as advocated by France and Spain but rejected by the bloc’s biggest economy, Germany.
“We also need to strengthen risk-sharing between member states beyond the banking union,” the Commission said in the report, which discussed ways to better handle economic shocks. “It is important to recognise that better risk prevention will not eliminate asymmetric shocks altogether.”
“Relative price adjustments within a monetary union will never occur as quickly as exchange rate adjustments. And we have seen that market pressures can deprive countries of their fiscal stabilisers in a deep crisis,” the Commission added.
During the sovereign debt crisis which peaked in 2012, five euro zone governments were cut off from market financing, forcing them to borrow from a joint euro zone bailout fund to avert the risk of bankruptcy.
It meant the governments had to dramatically consolidate their public finances just when their depressed economies needed a public spending boost the most.
“Some shocks cannot be absorbed internally only. So for all economies to be permanently better off inside the euro area, some risks will have to be shared within the Economic and Monetary Union, both through capital and credit markets (market risk sharing) and through fiscal means (public sector risk-sharing),” the Commission said in the report.
Among the ideas for further eurozone integration is a plan to create a special euro zone budget that could be used to help finance structural reforms or contribute to jobless benefits in countries that are making their economies more competitive.
While such ideas are offered for consideration in the long-term in a Commission road-map to further euro zone integration, the EU executive believes they are necessary.
“After all, even in a successful monetary union like the United States – which enjoys a full banking union, flexible labour and product markets, powerful financial market risk-sharing and effective private-sector debt resolution mechanisms – public risk sharing plays a role in the absorption of regional shocks,” it said.
In a report published in June, the heads of the EU bodies called for completing the economic and monetary union (EMU).
The so-called 'five presidents' report' foresees three stages in deepening integration:
- Stage 1 (1 July 2015 - 30 June 2017): A "deepening by doing" stage where small steps are taken towards fiscal convergence, using "existing instruments" and treaties.
- Stage 2 (30 June 2017 - 2025): A "more binding" completion stage, with "a set of commonly agreed benchmarks for convergence that could be given a legal nature, as well as a euro area treasury".
- Stage 3 (By 2025 at the latest): A final stage, where the vision would be complete.