A new deal for the eurozone

Thomas Klau has co-authored a report on the euro crisis titled 'Beyond Maastricht: a new deal for the eurozone' (click for the pdf). For more articles and podcasts on the crisis by ECFR experts and Council Members, click here.

Twenty years ago, EU leaders convened in Maastricht to sign a major European treaty clearing the way for the launch of the most ambitious undertaking in the history of Europe’s post-war integration: the creation of a single European currency. Few at the time believed that less than eight years later, ancient national currencies such as the Deutschmark, the French Franc, the Dutch Gulden, the Spanish Peseta or the Italian Lira would be merged into one. But while the prospect of managing the leap into monetary integration seemed unreal to many in Maastricht, fierce battles were fought over the economic and political architecture that would accompany Europe’s currency in the event of its creation.

At German insistence, a commitment was made to establish Europe’s future common central bank as one of the most politically independent public financial institutions in the world.

Far less clear was the shape of the “economic union” that was to underpin the monetary union of much of Europe. The compromise, developed and refined in the stability pact negotiations in Dublin five years later, gave Europe a model of governance relying on a system of coordination and rules-based sanctions to steer Europe’s national budgetary and economic policies towards fiscal rectitude and a sufficient degree of economic harmony.

For well over a decade the system seemed to work. In the run up to the euro, it was the political pressure to converge around the Maastricht criteria which generated a dynamic drawing EU member states towards an increasing harmonisation of their approach to budgetary and economic management – or so it seemed when the euro was launched in 1999. The following years, although not free from conflict, seemed to allay the fears of those who had predicted that monetary union in the long run was unsustainable without a much fuller political and budgetary integration. Whilst the Maastricht ceilings of a deficit of 3% of GDP and a public debt of 60% of GDP were breached in more countries and more frequently than the architects of the Stability Pact would have liked, the overall thrust of the eurozone’s fiscal and economic policies seemed in keeping with the spirit of the agreement. Perfection was obviously far from achieved, but the improvement seemed substantial.

The conceit that the Maastricht-based governance worked has now collapsed under the impact of the global financial crisis. The need to spend billions of taxpayer’s money to save the financial system and the economy from collapse has driven up public deficits and debts and suddenly exposed the manifold weaknesses in the Maastricht system: an inability to address and reduce widening economic disparities within the eurozone; a failure to see that cross border financial sector supervision was even more important than cross-border deficit control; the lack of provisions or political bodies to steer the eurozone efficiently and safely through a major crisis at minimum cost to tax payers and public treasuries; the absence of symbols and practical instruments delivering cohesion in a time of need.

The euro’s annus horribilis 2010 has destroyed the illusion that the Maastricht foundation was so solid as to make crisis management institutions and mechanisms in the eurozone superfluous. It has bolstered the case of those who have always believed that a common currency needs a common polity, strong institutions and very likely a common budget. EU national leaders, at their last Council meeting in Brussels in late October, acknowledged the need for an overhaul of eurozone governance.  But worryingly, they pre-emptively chose to base the thrust of their main reform on the same Maastricht framework that has already failed twice to give Europe and its currency the economic policy cohesion which it needs. In 2003, Germany and France rebelled against the Stability Pact when they found its straightjacket too tight.  Half a decade later, the global financial crisis unmasked the reformed Pact as an instrument of weakness rather than collective strength. Now, EU leaders, backed by the European Commission, have asked the European Parliament to join them in a third attempt to secure the euro’s long-term survival through a system of sanctions, rules and coordination for the budgetary policies of 17 and more national democracies.

It is astounding that the third attempt to make Maastricht work is being launched without any serious debate about the possibility of orchestrating national budgetary processes through a European rules-based system without far deeper changes in the way member states manage their own budgetary affairs and national governance than those currently envisaged. An honest answer would be to say that European policy coordination cannot work unless national budgetary and macroeconomic policy practices are harmonised and clearly subject to the directions flowing from European institutions. It is evident that such an intrusive system of command and control would be deeply unpalatable to virtually all national polities. At the same time, the alternative of delegating more economic and budgetary power to the European level is an even more fantastic prospect in the eyes of the majority of current reformers.

Europe faces an impasse. The plain reality is that the appetite for European budgetary federalism is as underdeveloped as the readiness to submit to binding controls of national policies. But in a currency union, these are the two options; there is no third way. As long as this remains unacknowledged, eurozone leaders must know that the Stability Pact framework they now wish to overhaul has as little chance to succeed in its third incarnation as it did in its previous two variants.

What the eurozone needs instead is a new deal whereby its most powerful member, Germany, would accept sharing economic sovereignty in exchange for other eurozone member states buying into a new model of European governance largely devised in Berlin. Germany has shown itself more adept than others at managing its own economic affairs.  It now needs the wisdom to sit down with its eurozone partners and work out a political and economic framework for monetary union as intelligent and dynamic as that which has guided modern Germany through the travails of re-unification towards its present day economic strength.