Completing The Economic And Monetary Union

Jo Caruana - 28th December 2018

Plans are in place to reform, streamline and create a deeper and fairer European Monetary Union – so what will happen next?

The Economic and Monetary Union (EMU) is an umbrella term for the group of policies aimed at converging the economies of member states of the European Union at three stages. First launched in 1990 when exchange controls were abolished and capital movements were completely liberalised in the European Economic Community, the euro became a real currency in 1999, with a further eight countries adopting it between then and 2015, when the most recent addition – Lithuania – signed up.

Since then, the EMU has brought so much to European business – and beyond. “There is no doubt that the introduction of the euro has brought huge benefits to businesses and citizens alike through reductions in exchange rate risks, greater price stability and transparency, more attractive financing conditions, and increased trade,” explains James Watson, Chief Economist at BusinessEurope, the Confederation of European Business. “The urgency businesses place on completing the EMU, strengthening trust in the euro and creating a more stable environment for business investment stems from businesses’ strong belief in the benefits of the Euro Area, not the fear or the cost of its abandonment.”

Progress in reforming the EMU in the past years has been extremely slow. Despite this, steps have recently been taken towards finally completing the Union, including the swift adoption of the first wave of measures proposed as part of the Capital Markets Union, and the acceleration of the delivery of the next set of actions, as part of the Five Presidents Report.

James Watson

James Watson

“Following the economic crisis, the EU made important progress in strengthening the EMU, including the development of the Banking Union and the strengthening of the Stability and Growth Pact,” continues Mr Watson. “But, since the publication of the 2015 Five Presidents Report on completing the EMU, progress has admittedly been too slow, with the lack of political guidance from leaders at summits this year on the future reform path for the EMU being particularly disappointing.”

“We need to act now to strengthen the EMU so we have the resilience to deal with the next crisis, whenever, and from whatever direction it comes,” he adds “For example, while average annual government lending in the Euro Area is now below one per cent of GDP, overall government debt levels remain above 80 per cent on average.”

Economist Gordon Cordina says that the EMU will only be as strong as the economic fundamentals of the countries within the eurozone will allow it to be. “In an ideal world, regions within the EU are globally competitive, able to flexibly attract highly-productive resources, generate substantial incomes for the people, and for governments to be able to efficiently provide public goods and services without incurring unsustainable debts,” he says. “In this ideal world, there would still be rules to follow for all to benefit from the use of a single currency, but such rules would not be onerous because economies would be generating sufficient wealth.”

“The realities of the EMU are, however, characterised by sets of economies running at two, or perhaps three, speeds, with significant concerns about the financial sustainability of a number of governments throwing the entire system into paralysis,” adds Dr Cordina. “Rational reforms to the rules of fiscal discipline and general standards of prudent banking behaviour are welcome, but they can never make up for fundamental problems in productivity and competitiveness. The EU seems to be expending far more effort on the former, rather than the latter.”

As a result, he thinks the EU project needs far larger budgets and efforts aimed at strengthening economies and societies from the root upwards. “Macroeconomic resilience can only be built through microeconomic competitiveness, which in turn calls for the full respect of the principle of subsidiarity, in that decisions will have to be taken at the levels where they are likely to yield the best results,” he says. “This would entail a territorial approach to policy-making, where supranational institutions would be there to monitor and guide rather than to decide.”

Asked about whether the eurozone is prepared to take on new members, and for his views on the Reform Support Programme being established under the new Multiannual Financial Framework, Mr Watson highlights that a deeper EMU underpinning strong growth, competitiveness, investment and prosperity for all its participants would be the best way of encouraging more member states to take the necessary steps to membership.

Gordon Cordina

Gordon Cordina

“We need to reinforce the EU role through the European Semester in increasing growth, competitiveness and convergence through ensuring that all member states implement agreed growth and employment enhancing reforms,” he says. “An annual survey of BusinessEurope’s members suggests that only 20 per cent of such reforms are satisfactorily implemented by member states. We therefore welcome the increased focus in the proposed EU Budget on supporting structural reforms and hope that the proposed structural reform delivery tool can be a further incentive for member states to implement such reforms.”

Mr Watson adds that he welcomes the European Commission’s proposal for an investment protection scheme – the European Investment Stabilisation Function. “We support strengthening the long-term stability of the EMU and its ability to handle asymmetric shocks through access to a  Euro Area stabilisation fund, fully conditional on member states implementing structural reforms and without increasing the overall tax burden. While it is clear that we will need to build up the capacity of this fund in future years, if it is to have a decisive role in increasing Euro Area stability, such a scheme can also play a role in improving the quality of public expenditure by increasing the emphasis on high-quality public investment,” he explains.

Finally, as we look at the challenges the EMU is likely to face in 2019, all eyes are on Italy and whether its populist government is able to keep its electoral promises while also respecting the EU’s fiscal rules. With this in mind, Dr Cordina says that economic management is like walking a tightrope – but questions whether higher spending to stimulate growth is the solution for the Italian economy, considering the alarming rate of public debt.

“Too little government spending produces a demand-side recession,” he says. “Too much spending paralyses a government’s ability to access capital markets and to continue to effectively function.  The obvious solution is to focus on quality productive spending capable of generating durable jobs and sustainable capital growth, shifting away from waste. But governments are rarely known to win elections on this type of political platform.”

“On the other hand, the European project must accomplish far more to meet the needs and requests of the societies it is serving, which once again leads to the importance of efforts based on the valorisation of the economic and social potentials offered by each and every territory within the Union, moving away from one-size-fits-all solutions which in reality would fit no one,” he concludes.

This article originally appeared in Business Agenda


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