THE EUROZONE´S TECTONIC PLATES ARE SHIFTING / THE FINANCIAL TIMES OP EDITORIAL

The eurozone’s tectonic plates are shifting

Debate on the future of monetary union has come out into the open — that is a game-changer

Martin Sandbu


© Anastasia Beltyukova


Does mere survival count as an achievement?

It rather depends on whether your continued existence is in doubt or taken for granted. By that standard, the 2010s were a greater success for Europe’s monetary union than the preceding decade. And that has implications for what to expect for the euro in 2020.

The eurozone sovereign debt crisis caused an enormous shift in European politics. Leaders were forced not just to patch together emergency institutional reforms, but also to accept that further ones were required. The “incompleteness” of monetary union has become commonplace. A legacy of the crisis is a shared understanding that tools are needed to stabilise banking systems against macroeconomic shocks and capital flight.

The past year should have been a year of progress. Contrary to the stereotype that eurozone reform is doomed to hopeless deadlock, a lot was under way. An upgraded treaty for the European Stability Mechanism, the sovereign rescue fund, was more or less ready by the summer. On banking union, finance ministers were optimistic they could put together a “road map” for the heads of government to endorse at the December euro summit. An extra boost was German finance minister Olaf Scholz’s public acceptance that common European deposit insurance could be part of a completed banking union.

But by December, it all seemed to fall apart. The ESM treaty was not finalised. Attempts at putting a deadline on completing banking union within the new European Commission’s five-year mandate were jettisoned.

It would be easy to see this as further proof that Europeans will never agree to make their union fit for purpose. Too easy. Instead, what should strike us about the eurozone talks in 2019 is not that they fell short, but how close they came to a leap forward.

The debate on the future shape of the monetary union has come out into the open. And that is a game-changer, for two important reasons.

First, it makes clear how much compromise has actually emerged through years of talks between officials. There is, for example, no common (and obstructive) front on ESM or banking union by the “new Hanseatic league” of northern countries. The bargain to be struck is reasonably clear. In the new ESM, a more efficient mechanism for agreeing debt restructuring with creditors in a crisis has been matched with firm budgetary support for the Single Resolution Fund set up to handle failed systemic banks. On banking union, it is now universally admitted that the endpoint will involve a pan-European deposit insurance arrangement, in return for tougher treatment of banks’ bad loans and more consistent handling of insolvent banks. The most important function of Mr Scholz’s proposals was to say aloud from within the German finance ministry what has long been the common understanding inside negotiating rooms across the eurozone.

Second, stating things openly is a crucial step for further progress. A full-fledged banking union can only be achieved if all countries “jump together”, which in turn requires the politics of each country to absorb what the grand bargain involves.

That is precisely what the current hold-up involves. Italy, in particular, is going through a political rough patch, with League leader Matteo Salvini suddenly claiming the done-and-dusted ESM revision will force Rome to default on its debt to small savers (it will not). The officials in charge know better.

There are hints of an openness to a grand bargain on banking union in which Italian banks are discouraged from buying too much Italian debt if other eurozone banks are encouraged to buy more. The big question is how Italy’s leaders will prepare their voters for the compromises to come.

Less noted but just as important is a similar domestic political process taking place in Germany. Sceptics make much of the fact that Mr Scholz’s coalition partners, the Christian Democrats, have not endorsed his initiative. But that, too, is something that naturally comes after, not before, the plans are put on the table. Democracies operate on the public working out of differences. How this proceeds in Germany now in part depends on what responses from other countries Mr Scholz will be able to point to.

There is no guarantee, of course, that the politics will allow compromise. But there are incentives for moving forward. Leaders of big countries find it politically difficult to “return time and again to summits with nothing to show for it”, says one high-ranking official involved in the talks. “We’re still on,” concludes another.

Above all, it is a mistake to confuse stasis on the surface for immobility below. We are ill-served by the most common metaphor for the euro as an edifice whose construction must be finished.

A better metaphor is geological. In politics, pressures can build up slowly before causing rapid change.

Listen carefully, and you can hear the creaking sound of the eurozone’s tectonic plates tensing against one another.

When such tensions are released, they can cause destruction.

But they can also move mountains and reshape continents.