In World Economy News 29/07/2015
Now that Italian Finance Minister Pier Carlo Padoan has joined calls to create a political union, parliament and budget for the euro zone, it’s clear that closer euro area integration is on the immediate agenda. And it’s no wonder: The Greek crisis has brought the issue to a head. Greece’s new status as a “colony” under tight outside control, much bemoaned by critics of the country’s third bailout, now looks as if it may be a precursor to what awaits all the other countries that use the euro.
Padoan’s proposals in an interview with the Financial Times — a common budget and a common unemployment insurance scheme, perhaps even an elected euro zone parliament alongside the existing European Parliament and a euro zone finance minister — are not particularly unexpected. As an economics professor, Padoan has long argued that a common monetary policy would result in convergence in other areas. “Once the shift is made from several national monetary policies to a single, supranational policy and institution, other policy areas and institutions are affected and face pressures to adjust,” he wrote in 2002. “Policy convergence in EMU is really another name for a more complex and ambitious goal: a new model of EU economic governance.”
Yet Padoan is not simply reiterating on behalf of Italy what he has long believed as an academic. He says euro area finance ministers, in their meetings on the Greek problem, have begun discussing closer integration. And he predicts the talks will be revived in September.
The Italian finance minister appears to be on the same page as French President Francois Hollande, who last week resumed his call for a euro zone government. Contending that “it’s not an excess of Europe but a shortage of it that threatens us,” Hollande, too, suggested electing a euro area legislature, forming a common budget and a common cabinet.
The German perspective on a political and fiscal union is a little more cautious. Last year, German Finance Minister Wolfgang Schaeuble and a fellow high-ranking member of the CDU party, Karl Lamers, called for a euro zone parliament (not elected, but comprising European Parliament members from euro area countries) and a budget commissioner with the power to reject national budgets if they contravene a certain set of rules agreed by euro members. That, they argued, would help strengthen Europe’s solid core, which would spearhead a move toward closer unity in the entire EU.
The German proposal is not exactly the same as the French and Italian ones. Former Greek finance minister Yanis Varoufakis, Schaeuble’s most eloquent hater, pointed out in a recent article for Germany’s Die Zeit that, in the Schaeuble-Lamers plan, the budget commissioner is endowed only with “negative” powers, while a true federation — like Germany itself — elects a parliament and a government to formulate positive policies. Varoufakis wrote that he had heard “echoes” of the plan at Eurogroup meetings where the Greek bailout was discussed, perhaps referring to the same discussions that Padoan mentioned.
Varoufakis accused Schaeuble of using the prospect of a Greek exit from the euro as a “stick” to induce euro members to back his idea of further integration:
On the one hand, the fate of the prodigal Greeks would act as a morality tale for governments toying with the idea of challenging the existing ‘rules’ (e.g. Italy), or of resisting the transfer of national sovereignty over budgets to the Eurogroup (e.g. France). On the other hand, the prospect of (limited) fiscal transfers (e.g. a closer banking union and a common unemployment benefit pool) would offer the requisite carrot (that smaller nations craved).
France and Italy, however, don’t need much prodding to go for more unity (although they’ll take the carrot, too, if they can get it). All that remains is for the biggest euro members’ governments to convince their voters — and also the smaller member nations, which fear their voices will be too feeble to matter in a political and fiscal union — that there’s no other way to deal with the euro’s “trilemma,” as described by Maurice Obstfeld, the International Monetary Fund’s new chief economist: You can’t have cross-border financial integration and financial stability without giving up national fiscal independence.
Given the rise of anti-European parties in a number of countries, this might seem an uphill task. But I doubt it. Support for the European Union has been on the rise lately. According to a June 2015 survey by Pew Research, in the past year, it’s increased by 18 percentage points in Italy (to 64 percent), by 13 percentage points in Spain (to 63 percent) and by 1 percentage point in France, to 55 percent. In Germany, support for the European project dropped by 8 percentage points, but it’s still at 58 percent.
More Europeans distrust the key EU institutions — the European Parliament, the European Commission and the European Central Bank — than trust them, according to the Eurobarometer, the regular survey of EU public sentiment. Yet confidence in all three has been on the rise.
Most European voters don’t read the English-language press, which has panned the EU for inept handling of the Greek crisis, and most of them don’t vote for Euroskeptic parties. A new thrust toward federalization wouldn’t be politically impossible, and that’s why politicians such as Padoan and Hollande have seen fit to come out in favor of it.
