Banking on a European revamp

Europe’s economic strength has been compromised in recent years. For the EU to thrive again, things need to change, writes Jean-Claude Trichet

THE creation of Europe’s economic and monetary union is unique in the history of sovereign states. The eurozone constitutes a “society of states” of a completely new type, one that transcends the traditional Westphalian concept of sovereignty.

Like individuals in a society, eurozone countries are both independent and interdependent. They can affect each other both positively and negatively. Good governance requires that individual member states and the EU’s institutions fulfil their responsibilities. Above all, economic and monetary union means just that: Two unions, monetary and economic.

The euro per se thus does not explain why the eurozone has become the sick man of the global economy. To understand that, one has to consider the weakness of Europe’s economic union.

For starters, the stability and growth pact, intended to ensure sound fiscal policies in the eurozone, was never correctly implemented.

On the contrary, in 2003 and 2004, France, Italy, and Germany, sought to weaken it. The European Commission, ECB, and the small and medium-sized eurozone countries prevented the pact from being dismantled, but its spirit was gravely compromised.

Moreover, eurozone governance did not include monitoring and surveillance of competitiveness indicators — trends in nominal prices and costs in member states, and countries’ external imbalances within the eurozone.

A third source of weakness is that no crisis-management tools were envisaged at the euro’s launch.

Finally, the high correlation between the creditworthiness of a particular country’s commercial banks and that of its government creates an additional source of vulnerability.

Fortunately, much progress has been made, including significant improvements to the pact and the introduction of surveillance of competitiveness indicators and national imbalances. New crisis-management tools have been put in place, too.

But none of this is enough. Instead of imposing fines on countries that transgress rules and ignore recommendations, the commission, European Council, and — this is essential — the European Parliament should decide directly on measures to be immediately implemented in the country concerned. Fiscal and certain other economic policies should be subject to activation of a eurozone “federation by exception”.

PERHAPS the most important element of the “federation by exception” would be its strong democratic anchor. Its activation would be subject to a fully democratic decision-making process, with clear political accountability.

More precisely, decisions to implement measures proposed by the commission and already approved by the council would require a majority vote by the European Parliament.

In the past, I have suggested establishing a eurozone finance ministry which would be responsible for activating economic and fiscal federation when and where necessary, and for managing new crisis-management tools like the ESM. It would also be responsible for overseeing the banking union, and it would represent the eurozone in all international financial institutions and informal groupings.

But, most important, “federation by exception” would ultimately cease to be an exception. The finance minister would be a member of the EU’s future executive branch, together with the other ministers responsible for other federal departments.

From this perspective, the commission presages a future European democratic government. The council appears to anticipate the European Parliament’s future upper house, with the lower house already elected by all EU citizens.

Europeans must learn the lessons of the recent past. We must clarify the nature of what must be done to secure governance that is both democratic and as effective as circumstances require.

* Jean-Claude Trichet was president of the ECB from 2003-2011. Copyright: Project Syndicate, 2012