The eurozone’s Five Presidents’ report, and what it means for Britain

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Between the lines, the new ‘five presidents’ report’ on the future of EMU tells an interesting story about how eurozone leaders see their future together. Britain should take note, writes Renaud Thillaye.

Renaud Thillaye is deputy director of Policy Network, an international think tank and research institute promoting the progressive thinking on the major social and economic challenges of the 21st century.

This week’s European council summit offers an extraordinary concentration of hot potatoes: an emergency deal for Greece, David Cameron’s demands for a renegotiated membership, the migration crisis. It might therefore sound far-fetched to also have on the agenda the report on ‘Completing Europe’s economic and monetary union’ by the presidents of five EU institutions: Jean-Claude Juncker (commission); Donald Tusk (council); Jeroen Dijsselbloem (Eurogroup); Mario Draghi (European Central Bank); and Martin Schulz (parliament). The report suggests advancing towards a more complete EMU in two stages: first, “deepening by doing” and enforcing non-legally binding standards, second, “completing EMU” by shifting towards binding standards and a “shock-absorption capacity”. 2025 is the new time horizon for the end of the transformation process, including a euro area treasury.

Comments on the report have so far stressed how much EU leaders have scaled down their ambitions compared to what they had in mind two or three years ago (see, for instance, Odendahl and Begg). At that time, debt mutualisation and transnational fiscal transfers were said to be a matter of years, and a precondition for the euro’s survival. In November 2012, José Manuel Barroso, then president of the European commission, suggested a five-year, three-step process to achieve a “deep and genuine” EMU including common insurance on short-term government debt (eurobills, an incipient for eurobonds) and a euro area budget capacity. A month later, Herman Van Rompuy, the former president of the European council, tabled a roadmap “towards a genuine economic and monetary union”. The third and final stage was meant to create a shock-absorption capacity and “common decision-making on national budgets” after 2014.

It is tempting to decry the leaders’ lack of ambition today, and to conclude that the eurozone will continue muddling through and is condemned to secular stagnation. A form of delusion has overtaken most commentators who saw the crisis as the momentum for further integration and the set-up of more centralised, federal institutions. Yet this is only one side of the story. Between the lines, the new roadmap includes at least three interesting developments: the commitment to continue with the ‘hard politics’ of coordination, the preference for common standards over one-size-fits-all reform prescriptions, and a suggested move towards ‘collective’ rather than ‘single’ or ‘common’ decision-making.

First, the roadmap’s first stage (“deepening by doing”) is not about ‘muddling through’ and kicking the can down the road. As the last few years have shown, policy coordination is hard politics, and we should expect more of it in the next few years. As the extreme case of Greece shows, but also France and Italy, tough adjustment decisions need to be made constantly, and national leaders feel pressure from their peers much more than they did before 2010. The European semester has opened the door to a very intense cycle of consultations and exchange that constrains, de facto, the space for national sovereign choices. At the same time, it has increased member states’ collective power: those who are tempted to free ride the eurozone’s benefits without taking responsibility are forced to change course. This has all happened without any spectacular transfer of power to ‘Brussels’, but it has greatly Europeanised national politics. The roadmap marks recognition of the depth of these changes, and the need for more time to digest them.

Second, the report establishes an interesting distinction between the objective of convergence and the means to achieve it. A currency area without large fiscal buffers and a high degree of flexibility cannot afford fiscal, competitiveness and social divergences. “Convergence” appears 28 times in the five presidents’ report, i.e. five times more than in Van Rompuy’s roadmap. By contrast the report mentions “(structural) reforms” slightly less. This might signal a new order of priority: the most important is to get to a final common destination, whatever means are used by national governments. Concretely, the five presidents suggest setting up common standards in the field of “labour markets, competitiveness, business environment and public administrations, as well as certain aspects of tax policy (e.g. corporate tax base)”. It is not hard to see the Franco-German impetus behind this idea, in particular the joint call by economy ministers Sigmar Gabriel and Emmanuel Macron for closer coordination and convergence in these areas a few weeks ago.

More stress is put on national differentiation, and on the “degree of freedom concerning the exact measures” that would achieve the commonly set objectives. This marks a shift from previous proposals, for instance Angela Merkel’s proposal of legally binding “contractual arrangements” to enforce structural reforms in member states. This idea did not go down particularly well, especially in supposedly like-minded member states such as Finland, the Netherlands and Austria. The new report mentions a transition, at some point, towards legally binding standards, but it shows some creativity on how to bridge the gap. Independent competitiveness authorities would be set up in each country and would coordinate at EU level to ensure, for instance, consistent wage developments. This is more subtle than tying national governments’ hands with direct reform prescriptions.

Finally, one should note the terms in which the euro area treasury is envisioned at the end of the journey. Indeed, the report sees it as a place for “joint” or “collective” decision-making (p.18). The report mentions common interests and common standards extensively, but departs from Van Rompuy’s formulation of “common decision-making on national budgets”. This reflects EU and national leaders’ entrenched reluctance to anything that would approximate shifting power and resources to a fiscal supranational authority. The ECB is the exception that confirms the rule: arguably, it was granted the responsibility for monetary policy and, more recently, supervision of the banks as these areas are less politically salient. As Jean Pisani-Ferry wrote two years ago, there is still huge ambiguity about the ultimate set-up of the euro area. It could remain a community of mutual (and conditional) assistance instead of becoming a proper fiscal union.

Hence the five presidents’ report marks a clarification about what the future of the euro area will look like, at least in the next 10 years. National governments in euro-in or ‘pre-in’ countries should embrace and explain this vision. Britain and other countries with no intention to join the euro should take note. A treaty change and a fiscal union are nowhere in sight in the eurozone, but policymakers will continue on a more intense course of coordination and mutual dialogue. Over time, socialisation will bring national visions and preferences closer, and increase the sense of common belonging. It might be right for Britain to seek a new settlement, and, in particular, to ask for safeguards in the single market. But Britain should not delude itself into thinking that a few legal tweaks will leave its position in the EU entirely untouched in the future, especially if it pushes itself deliberately to the side.

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