EU Reform Four steps to save Europe

If the European Union is to survive, we must tackle four important reforms, economist Hans-Werner Sinn argues. We need new rules for the euro – and countries that don’t adhere might just have to leave.
Quelle: dpa
Welfare benefits must not be a draw for migration, the author argues.
(Source: dpa)

There is no question that the Treaty of Rome signed on March 25, 1957 brought Europe decades of peace and prosperity. But then politicians got carried away. The 1992 Maastricht Treaty and the Lisbon Treaty in 2007 – which dealt with the euro, freedom of movement and social integration – literally invited abuse. They created an imbalance that could destroy the European Union. The Brexit and Southern Europe’s industrial demise are consequences of this carelessness. EU treaties must be changed quickly. These four reforms would put the union back on stable footing.

Stop immigrants accessing social services

Freedom of movement, the welfare state and its inclusion of immigrants present an unsolvable trilemma. The social welfare system acts like a magnet that will devastate the system if politicians do not limit freedom of movement and inclusion. This is the lesser evil. It would make sense to separate “acquired” social services provided by host countries, and “inherited” social services for which each EU country is responsible. “Acquired” services would include things like unemployment insurance and the state pension fund. Those social services financed by taxes, on the other hand – like housing allowances, welfare and child benefits – would be the “inherited” services. This separation would prevent a run on better-developed social welfare systems by immigrants, it would secure funds to care for the needy, and preserve freedom of movement within Europe.

Allow temporary withdrawal from the euro

Some countries in the euro zone have problems with the euro because they are not allowed to devalue it. They have suffered for years from massive unemployment and the decline of their industries. These countries should have the option of an orderly withdrawal from the euro and devaluation – combined with the right to return to the monetary union at a later date, once their economy recovers.

Bankruptcy regulations for countries

Purchasers of government securities should not be able to depend on the taxpayers of other nations to save them in a crisis. Essentially, this is the obvious implication of the EU treaty's no-bailout rule, which excludes a country from being liable for the bad budget policies of another country. Had these kinds of bankruptcy regulations been in place, investors would have loaned far less to today’s crisis countries in the euro zone than they did. Interest would have been higher, preventing the inflationary credit bubble that burst in 2008, leaving behind the bloated bodies of once-competitive national economies.

My second and third points are connected, in that state bankruptcy is a requirement for withdrawing from the euro, and afterwards restores the country’s competitiveness through devaluation.

Annual settlement of Target accounts

Target accounts within the central bank systems are growing and growing. The German Central Bank alone has had to credit unfunded monetary transfers of €814 billion ($862 billion) across all countries in the Eurosystem, the collection of central banks within the euro zone. This represents about half Germany’s net foreign assets. Target loans finance other countries’ current and past budget deficits. They have turned Germany into a land-of-plenty shop, where you can get a loan any time you want and the owner can never call it in. Debtor countries have even pushed through a zero percent interest rate on Target debts. The Germans haven’t protested this because they are yet to feel the impact of this loss of assets. But this will happen as soon as they want their money back.

This is a ticking time-bomb that must be quickly defused. The Soviet system for transferring ruble payments collapsed precisely because there was no settlement mechanism or limit on the balances of these transactions. We should look towards the United States’ twelve-district Federal Reserve System, and create a system that requires annual settlement of Target balances. This settlement could be made using gold reserves – as was the case in the US until 1975.

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