“We start from the premise that both the French and German positions have a point,” reads the introduction to a new set of proposals on how to reform the euro zone, published Wednesday by 14 French and German economists. The fact that this even needed to be said speaks volumes about how such debates have gone to date.
The six-point plan, introduced Wednesday, essentially tries to split the difference between both sides. It has the backing of economists across the ideological spectrum – those who wanted to go easy and those who wanted to be tough on countries like Greece during the euro zone’s debt crisis. Both sides say they are concerned about an ongoing “deadlock” in how the 19-nation currency zone can be made fit for the future.
Whether it succeeds in informing the political debate or not, the proposals come at a good time. Mario Centeno, the Eurogroup’s new chair who was in Berlin for talks on Wednesday, told Handelsblatt he wants a deal for reforming the euro zone in place by June. And there have been signals that a new grand coalition government in Germany, if it comes to pass, is prepared to compromise on Europe. That includes working with France’s Emmanuel Macron on broad reforms of the bloc.
France needs to accept greater market discipline and Germany should be prepared to go along with greater risk-sharing. Clemens Fuest, Ifo Institute
The deadlock, as these economists put it, is simple. France insists the only way to safeguard the euro zone is to spread the risks more broadly across the currency bloc (meaning richer nations should bail out poorer ones if a crisis develops). Germans insist that keeping government budgets in check and adhering to “market discipline” is the only way to avoid a crisis in future (or to put it plainly, don’t ask our taxpayers to fund your excessive spending habits).
The point that the 14 economists are trying to make is that these two positions aren’t irreconcilable. The challenge, essentially, is to provide a backstop for euro-zone countries in real crisis but encourage profligate spenders to discover the advantages of fiscal discipline. The goal, on all sides, is to finally make the euro zone a more stable monetary union. The euro zone's crisis may be over, but it remains vulnerable to another one down the road.
“France needs to accept greater market discipline and Germany should be prepared to go along with greater risk-sharing,” said Clemens Fuest of the Munich-based Ifo Institute, a conservative think tank. Marcel Fratzscher, head of Berlin’s DIW on the other side of the spectrum, said the point was to deliver “limited and realistic measures” that have a chance of passing.
The 33-page document is filled with proposals that try to marry the two opposing ideologies. For example, they call for a new euro-zone fund that could offer support to countries in times of economic crises, but want the most crisis-prone countries to pay the lion’s share of that fund in good times. They call for bailouts of governments in need, but an orderly debt restructuring procedure (and no bailout) for those who have spent well beyond their means.
Among the biggest reforms, the economists want to get rid of the Maastricht criteria that limit deficits in the European Union to 3 percent of GDP, replacing it with a simpler spending cap. They also call for an independent EU institution, rather than the European Commission, to monitor the rule, and a new set of “accountability bonds” for any government that wants to spend beyond the limit.
All of this is designed to end what Messrs. Fratscher and Fuest termed a “cold war” of competing euro-zone ideologies. And some politicians are listening, at least. German Economics Minister Brigitte Zypries told Handelsblatt the proposals offer a "valuable contribution to an urgently-needed debate about how the euro zone can be developed further."
The one area that probably needs the most work: a common bank deposit insurance. France says it's necessary to stabilize the banking sector, while Germany fears its taxpayers will have to bail out Italian banks, and is demanding more progress on non-performing loans first. The 14 economists try to split the difference here, too. They propose a common deposit insurance pot, but with a higher share paid from banks whose balance sheets are dominated by a single creditor (think Italy).
That might still be too much German politicians and bankers. Eurogroup chief Mr. Centeno, who has said he hopes deposit insurance will be part of his June plan for euro zone reform, dodged questions on the issue after a meeting on Wednesday with German Finance Minister Peter Altmaier – a sign that there is little common ground. If there's one thing all sides can agree on, it's that more work is needed to safeguard the currency bloc.
Below a summary of the six-point plan proposed by the 14 economists, courtesy of Ifo economics institute:
1) The completion of banking and capital market union, via measures including the introduction of common deposit insurance, a concept that has been discussed for a long time. We also propose the introduction of a sovereign concentration charge. This would require banks to post more capital if debt issued by a single creditor – such as the home-country sovereign - exceeds a certain proportion of their balance sheet. This would cut through the “doom loop” that makes banks and sovereigns interdependent.
2) A new expenditure rule to replace Maastricht deficit criteria. The Maastricht rule, whereby the budget deficit of a member state should not exceed three percent of its gross domestic product, needs to be reformed. In bad times it lacks flexibility and in good times it lacks teeth. It should be replaced by a new, simpler rule on expenditure. Monitoring compliance with the rule should be devolved to independent national fiscal watchdogs, supervised by an independent euro area-level institution. Governments that violate the rule would be required to finance excess spending using junior bonds (accountability bonds).
3) Laying the foundation for orderly debt restructuring for countries whose solvency cannot be restored with conditional bail-out funds. The policies and conditions of the ESM fund must ensure that countries with unsustainable debt levels do not receive any bail-out credit.
4) A new joint fund to support individual countries experiencing a large-scale crisis. Member countries would pay into a fund, with countries particularly prone to major economic disturbances paying disproportionate contributions. If employment plunges and/or unemployment rises above a high, fixed threshold, the country in question can draw on the fund.
5) A synthetic euro-area safe asset that would offer investors an alternative to sovereign bonds. Diversification and dividing the asset into a senior and subordinated tranche would make the senior tranche of this new financial product - explicitly not Eurobond - a particularly safe investment product. Member states would not be liable in any way.
6) Reform of institutions: assigning the Eurogroup presidency role to the Commission. The Eurogroup currently acts as both a political decision-maker (“judge”) and as a watchdog (“prosecutor”). We suggest a separation of both of these functions with the creation of a new independent fiscal watchdog. The Eurogroup presidency role could be assigned to the Commission, following the template of the High Representative of the Union for Foreign Affairs.
Donata Riedel and Jan Hildebrand are senior politicial correspondents for Handelsblatt, based in Berlin. Christopher Cermak is an editor for Handelsblatt Global in Berlin. To contact the authors: [email protected], [email protected], [email protected]