INGREDIENTS OF A EUROPEAN POLITICAL UNION / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

Ingredients of a European political union

By Wolfgang Münchau

Published: June 5 2011 23:25


The European Council will probably step back from the brink at its meeting on June 23-24, with national leaders agreeing a new loan for Greece. The alternative is a messy, disorderly Greek default in July. The finance ministers agree that private investors should share the burden. They have no clue how, but I am sure they will think of something. And then they will have to do it again for Ireland, and for Portugal. By 2014, the vast majority of Greek, Irish and Portuguese debt will be guaranteed by the other member states.


What then?


If any of these countries were to default, the immediate consequence would be a large fiscal transfer from the creditor countries. I cannot see the Germans, the Dutch or the Finns simply handing over the cash and keeping on smiling. In return, they would demand that the recipients accept a partial loss of fiscal sovereignty. The recipient countries would call this colonialism and demand that everyone else accepted the same. And so, a new political union is born. Or not.


One has to be careful when using the expression “political union”. In some respects, the European Union is already a political union. Its treaties constitute elements of constitutional law. EU laws are also deeply embedded in national legislation. Non-European commentators tend to see the eurozone, for instance, as a voluntary club that you can enter and exit at will. But it is not possible for a member state to leave the eurozone, just as it is not possible for California to abandon the dollar and profit from a devaluation.


The existing political union may be too strong to blow up, but it is also too weak to function properly. For sustainability the EU will need to take further steps towards political integration. The problem will become acute when Greece actually defaults.


So what kind of political union will this be?


Sustainability requires three fundamental institutional changes. The first, and probably most important, would be the creation of the office of a eurozone treasury secretary – someone in charge, with the power to override national policies if those conflict with the community interest. The treasury secretary would have his or her own administration and would represent the eurozone in international institutions. Jean-Claude Trichet last week mooted the idea for the “day after tomorrow”. The European Central Bank president is right. Without such a figure, it will be hard to keep the eurozone together. When the next crisis comes, someone needs to be in charge of day-to-day management. Crisis management is where the European Council has failed. It wasted precious time devising irrelevant policy co-ordination pacts during the winter, while the house was burning. Somebody needs to be in charge to drive the agenda.


The second change is a minimally sufficient fiscal union. We are talking about something really small here. This would not necessarily involve an increase in the EU’s budget but centralising a small number of policy areas critical for the functioning of a monetary union. The single most important would be a eurozone-wide banking resolution fund, backed by a proper EU-level banking supervisory authority. I am not talking about co-ordination here. The crisis has taught us that banking cannot be a national activity in a monetary union.


In addition to a common banking resolution fund, it might also be useful to install economic shock absorbers. One idea might be a pan-eurozone contributory unemployment benefit scheme. No longer will Germany be paying for Greece, but those in work will be paying for those out of work.


You can pile much other stuff on top of that. Labour market policies are a natural candidate. At the very least, the eurozone should have co-ordinated wage bargaining systems. The test for each measure should be: does it contribute to reducing macroeconomic imbalances? If not, you can leave it in the national capitals.

Third, the counterpart of a mini-fiscal union would be a eurozone bond. For countries to guarantee each other’s debt is politically and economically irresponsible. If Greece, Portugal and Ireland were to default, Spain might come under pressure too. If Spain got into trouble, Italy would not be in a position to make good on its guarantees to the system. This would constitute default. By that time, Germany and France would no longer be capable of bankrolling the system. A eurozone bond is the best way to insure against such a contagious default risk. It would need to be large enough to act as a stabiliser in a crisis. Once you have it, you can easily revive the “no bail-out” principle in respect of the remaining national sub-sovereign debt.


These three elements of a political union would, I believe, be sufficient. Such a union would still leave the member states sovereign, albeit with a joint responsibility over each other’s fiscal policies.

It would be hard to implement, of course. What would be its legal basis? Would you set it up inside the EU, with all the treaty changes this would require? Do you go outside the treaty? Are there other options?


These are important questions that anybody who proposes further political union will need to answer. I hope to do so next week.
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Copyright The Financial Times Limited 2011