Carsten Brzeski's blog

Eurozone: First test for Mercron

The European Commission provided more food for thought on how to deepen monetary and economic integration.

Yesterday, the European Commission proved that the Eurozone is more than just one out of many possible policy areas for more integration in Europe. The Commission presented another attempt to further deepen monetary and economic integration. The Eurozone should not wait for another crisis to deepen integration, according to the European Commission.

The proposals are not new. In fact, the European Commission only refined earlier proposals, which were last presented in the so-called report of the five presidents. In the paper, the Commission presents many ideas, both for the short- and long-term.

For the short-term, ie, the next two years, it proposes completing areas, in which reforms and institutional changes had already started, such as the banking union, a fiscal backstop for the bank resolution fund, an agreement on a European deposit insurance scheme, new financial instruments to diversify banks’ balance sheets and a strengthening of policy coordination, known as the European semester. The (absence of) implementation of structural reforms could be closer linked to access to EU funds.

As longer-term efforts, from 2020 and 2025, the Commission sees bolder steps, including the creation of a “European safe asset” – a financial instrument for the common issuance of debt – formerly known as Eurobond, a macroeconomic stabilization function (formerly known as fiscal capacity or simply Eurozone budget or Eurozone unemployment insurance). Also, in the longer term, the European Commission proposed institutional changes like the introduction of a Eurozone finance minister, a Eurozone parliament (or Eurozone grouping within the European Parliament) and earlier proposals like a single Eurozone seat at the IMF or an upgrade of the ESM to a European Monetary Fund.

All in all, the European Commission has presented a very detailed set of proposals and ideas for a further deepening of integration in the Eurozone. The plans are not new but much more detailed than in earlier reports. It is a menu card and clear start for discussions, not an instructional paper. In the past, many of these reports and ideas eventually evaporated in thin air and were dissembled in endless European meetings. The progress made in the first years since the peak of the euro crisis has almost come to a halt in recent years. Due to different reasons, the appetite for further Eurozone reforms faded away. Now, after populist threats in the Eurozone, the Brexit vote and the recent revival of the Franco-German axis, the window of opportunity for the next steps has opened again. It is up to Eurozone leaders to use it. The European Commission has now at least revived the discussion. The proposals are also a first test case for the Eurozone’s new dream couple, Angela Merkel and Emmanuel Macron. They are now forced to show their cards and prove that pro-Eurozone sounds were not only lip service, but the start for new steps to further strengthen the monetary union.