10. Beyond banking union ?

1. 10. Beyond bankingunion? According to the functionalistview of integration, eachsteptowardsdeeperintegrationwillnecessitatefurthersteps for the system to functionsatisfactorily. Thiswillendonlywhen a federalstate with significantpowers, the United States of Europe, hascome into being. Thisviewwasrather common among the ”foundingfathers” (e.g. Jean Monnet), itwasonereasonwhy the Bundesbank wasagainssettingup the euro (theythoughtpoliticalunionshouldprecedemonetaryunion), ithasbeen the hope of numerous ”federalist” idealists, it is popularamongcitizens and politicians in the South (lessso in the North), and it is one of the reasons for the stronglynegativeattitudes of British conservatives. It is the BIG question: Canyouhave a common currencywithout a common fiscalpolicy, taxpolicy, social policy and politicallegitimacybased on democraticinstitutions at the euro arealevel? If the answer is yes, thenweface the problemthatsuchdeepintegrationwouldneed the backing of solidarityacrossborders. However, itseemsthatcitizens’ identity and solidaritystillhas a strongly national focus. Thus, it is difficult to provide a federalconstruction with the neededlegitimacy in the eyes of citizens. Proposing to set up a fiscalorpoliticalunion to resolve the currrentcrisismayseemlogicalbut is politicallyunrealistic and couldbackfire, as citizenswouldfeelthattemprarycircumstancesareused as a pretext for long-termsinstitutionalsolutionsthatshouldbeevaluated on theirown (permanent) merits.

2. Rodrik’strilemma (adapted) National autonomy (fiscalpolicy) (presentconundrum) (as itused to be) Deep integration(EMU) (PoliticalDemocracy union) NB: generalizedcofinancingrisksunderminingdemocraticlegitimacy

3. ”The federalist vision of the trilemma” National budgetarysovereignty Common currencyEconomic (EMU)stability Comment: It is claimethat a ”currencywithout a state” is impossible, thatyoucannotcombinemonetaryunion with national budgetarysovereignty and national democracy. Ifso, then EMU is doomed, because the politicalpreconditions for a federation with significantcentralpowersdonotexist in Europe.

4. The trilemma and the Banking Union National ”bankingpolicy” Common currency Financial and economic (EMU) stability Comment: A common currencygoeshand in hand with integratedbanking and requires a common frameworkor ”bankingpolicy”, a bankingunion. There is also a need for a ”minimumfiscalbackstop”, the size and signficance of whichcanbemodest – ifregulation and supervision is tight and there is effective PSI (”bail in”).

5. Fiscalunion Bankingunionwillpresumablyneed the support of somesort of a minimumfiscalbackstopat the euro arealevel (given the legal and otherrestrictions on activityby the ECB). However, thisbackstopcanconceivably (orhopefully) be of rathermodestsize, therebylimiting the amount of debtmutualization. Also, thisbackstopwouldbe for a specific and restrictedpurpose. The idea of the fiscalunion is thatmutualizationshouldbeaccepted in a broader and quantitativelymuchmoresignificantsense. Whileit is notfullyclearwhatattributesproponents of a fiscalunionattribute to it, thesewouldseem to include at least the following: Eurobonds (debtmutualization) Thiswould in itsmostsimpleformmeanthatall euro areamemberstateswouldborrow with a common debtinstrument, a eurobond, for whichallmemberstatesgovernmentswouldgive a ”joint and several” guarantee, meaningthat, in extremis, Finland couldberesponsible for the wholedebt of the euro area (ifallotherstateswereunable to pay). The joint and severaltype of guaranteethusgoesmuchfurtherthanguaranteessofarused, whichare on a pro rata basis (the maximumresponsibility of Finland is a bitlessthan 2 % of the total). In itssimplestform, the eurobondwouldseem to implyconsiderableimplicittransfersformwell-behavedcountries to countries with difficulties in debtmarkets: allborrowingwouldbe at the sameinterestrate, implying an increase in the interestrate for governmentbonds for countrieslike Finland and a decrease for countrieslikeGreece.

6. (cont.) One advantage of the eurobondswouldbethattheywouldprovide the ECB with convenientmaterial for open marketoperations and as collateral for borrowingbybanks (doingaway with the need to usebondsissuesbymemberstategovernments). Budgetdiscipline Proponents of the fiscalunionsuggestthat the counterpart to the eurobondswouldbe a tightening of budgetdiscipline, notablybygiving the unionlevelauthorities (the Commissionand/or the Council) muchstrongerauthority to decideover national budgetary (and conceivablyother) policies. Therehavealreadybeensomemoves in thisdirectionthrough the tightening of fiscalrules and the new fiscal compact. However, legallyitwouldseemquitedifficult for memberstates to giveuptheir national sovereigntyover the budgetwithoutentering into conflict with the treatyand/or national constitutionallaws. Also, politicallyit is difficult to seehow the fiscalunioncouldoperate. The government of a particular country canalwayscommititself to any action decidedupon in Brussels, butthencitizensmaydecide to vote the government out of office. Whatdoyoudoifgovernmentsareunablepolitically to implement the ordersgivenbyunionlevelauthorities? (Sendtanks to Rome orAthens? Whosetanks?) Fiscalcapacity Anotherproposal, independently of the twoothers, is to provide the monetaryunionlevel with somefiscalcapacity in the sense of allowingdeficitspendingby the unionlevelauthoritieswuch as the Commission. (Deficitspending at the unin level is currentlynotpossible; the EU budgetmust in principlebe in balanceannually.) Alternatively, onemightintroduce an automaticorquasi-automaticmechanism for helpingmemberstates to meetcyclicalfluctuations. For instance, ithasbeenproposedthatunemploymentbenefitswouldbepartiallyfinanced at the unionlevel: thus, countriesexperiencingrisingunemploymentwouldreceivetransfersfromcountries with morefavourabledevelopmentys. In principlethiscouldfunction as a macroeconomicinsurancemechanism. In practice, however, itcouldamount to a semipermanenttransfermechanism to countries with dysfunctional labour markets. The Commissionhasrecentlyproposed to offerfinancialsupport to countriesundertakingstructuralreformsdeemed to bebeneficial in the long termbutdifficult in the shortterm. However, the proposedmagnitudesarequitemodest.

7. Politicalunion It is notclearwhat the concept of politicalunionwouldshouldmean. Presumablyitwouldincludeboth a bankingunion and a fiscalunion. Conceivably, itwouldalsomeanharmonizedtaxes, or a common taxsystem, and a common framework for social policies, perhaps a (partly) common policeforce and army. The main point is thatitwouldincludespecificmechanisms for creatingpoliticallegitimacy at the federallevel. Thus, the highestpoliticalauthoritywouldbe a unionlevelparliament with extensivepowers. Also, therewouldneed to be a unionlevelgovernmentpropsinglegislation and beingresponsible for executivedecisionmaking. Similarly, therewouldbe a need for someconsitutionalcourt for the federation. It is difficult to imagine a politicalunionwithout common parties on a cross-borderbasis and without a common area for politicaldebate (including media with cross-bordercoverage). However, suchdevelopmentsrun into barriersassociated with language and customsthatareconditional on idiosynraticconditions and historicaldevelopments. Given the national orientation of identity and solidarity, the dominatingrole of the nation statecannotbedenied (wetherconsideredgoodorbad). Therefore, ifpoliticalunion is indeed a precondition for the monetaryunion to function, then the conclusionwouldbethat EMU is doomed to fail.

8. What vision for the future of the euro? • No to mutualization of debt as a general principle(overarchingprinciple: make the NBR work!) - thoughexceptionsmaybecalled for in an acutecrisis - thoughlimitedexceptionsmaybeacceptable for specificpurposes • No to supranationaldecision-making on national budgets - wouldnotwork (sendtanks to Rome?) - wouldonlyundermine national responsibility • Yes to actionsthatallow/encouragemarketdiscipline(feedbacks fromfinancialmarkets) - financialmarketfeedbacksmaycometoolatebutarestillmorereliablethan the SGP - thus, governmentbondsshouldnotbetreated as riskfree in regulationor as collateralby the ECB and banksshouldbeencouraged to holddiversifiedportfolios of governmentbonds (less home bias) • Yes (conditional) to settingup the Banking Union - with crediblebail-ininstruments and rules for burdensharing of cross-borderbankresolutions - conceivablyeven common depositinsureanceif SSM and SRM sufficientlytough - BUT: will the Commissionpropose and memberstatesagree a crediblepackage? Implementation?