"reasons for an economic and monetary union"

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www.progressiveeconomy.eu

The Road(s) Ahead

PittellaAndorBianco

Jongerius

Kollatz-AhnenMoscaRodrigues

Unger Vandenbrouckevon Weizscker

04 - DECEMBER 2014

Key Issues for the New Parliamentary Term


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Seven years have passed since thebeginning of the financial crisis in theUS. Almost four since Europe fell intoits very own (partly self-made) crisis.

The causes were not onlycountry-specific problems andmismanagements that needed deep

and strong national reforms. The crisisalso stemmed from the incompletedesign of the Economic and MonetaryUnion.

In the last three years a set ofimportant reforms has beenundertaken in many peripheralcountries. More is still to be doneto regain competitiveness, restoregrowth and provide efficientprotection for vulnerable workers.

Many steps have also been takenat EU level to better regulate andsupervise the financial sector. Twotemporary funds, the EuropeanFinancial Stabilisation Mechanism

(EFSM) and the European FinancialStability Facility (EFSF) were set upto help finance those countriesexperiencing severe problems andwere replaced in 2012 by a new andpermanent financial backstop theEuropean Stability Mechanism (ESM).The Maastricht criteria have been

changed in the Fiscal Compact totake into account the dynamics of anadjustment process and the effect ofthe cycle.

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by Alessia Mosca

REASONS for an

and

ECONOMICMONETARY UNION


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However, every student in economicslearns that economic policy is

composed of two pillars: fiscal policyin the hands of Governments andmonetary policy in those of thecentral bank. The Euro has still onlyone pillar, monetary policy. Fiscalpolicies are decentralised in the 18Eurozone capitals and only a generalframework is established. Howeversurveillance is not enough to govern acommon currency area.

This huge burden and its resolutioncannot be put only on Mario Draghisshoulders and his actions on monetarypolicy.

As the ECB Governor said himself,a new kind of fiscal policy is crucial

to support monetary actions: wecannot have a single currency and 18

different fiscal policies. Seven yearsafter the beginning of the crisis inEurope, and almost 23 years after theMaastricht Treaty, the EU still lackseven a minimal form of fiscal capacity.

In a true and completed EMU, all themain choices of economic and fiscalpolicies should be better coordinatedand controlled at a central level andthe European Union must count onits own fiscal capacity. That wouldclose the circle of the real project ofEconomic and Monetary Union: to justhave the Euro without a common toolfor economic and fiscal policies wouldeventually make the system implode.

A

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ALESSIAMOSCA

Member of theEuropean Parliament

lessia Mosca is a memberof the European Parliament,elected in May 2014.

Previously she was a member of theItalian Parliament, elected in 2008and re-elected in the 2013 for thePartito democratico.

She earned a Ph.D. in PoliticalSciences from the University ofFlorence, she holds a Bachelor inPhilosophy from Cattolica University(Milan), a Master degree inDiplomacy from the ISPI (Milan) anda diploma in International Relationsfrom SAIS Johns Hopkins.

Her activity focuses mainly on genderissues, welfare and employment,European affairs, technologicalinnovation and start-ups. She

signed the Golfo-Mosca law thatintroduces gender quotas in boardsof listed companies in Italy, and sheis also one of the main sponsorsof the law Controesodo thatfacilitates the circulation of talentsto and from Italy.

In a true and completedEMU, all the main choices

of economic and scalpolicies should be bettercoordinated and controlledat a central level.


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The project of Economic and MonetaryUnion (EMU) has deep roots. It tracesback to 1988, when the EuropeanCouncil appointed a Committee led byJacques Delors to create a substantialprogramme for its realization.

The Delors dossier proposed tostructure the fullment of EMU in threedifferent stages. The aim of the rstone was to abolish the restrictions tocapital circulation between MemberStates. The Committee of Governorsof the national central banks of theEuropean Economic Community (EEC)was given new responsibilities, such asconducting consultations on MemberStates monetary policies and promotingcoordination in order to reach a stabilityof prices.

The fullment of the Second and ThirdStages required an adjustment to theTreaty that established the EEC (Treaty ofRome); an adjustment needed to createthe institutional infrastructure. Then theTreaty on European Union (Maastricht,1992) was introduced, modifying the

Treaty that founded the EuropeanEconomic Community.The creation of the European MonetaryInstitute (EMI) on January 1, 1994marked the beginning of Stage Two ofthe EMU and the end of the Committeeof Governors. The temporary natureof the EMI was a reection of thestate of the development of monetaryintegration throughout the Community.Its tasks consisted of strengtheningcooperation between central banks,coordinating different monetary policies,and setting up the processes needed tocreate the European system of centralbanks (ESCB.) Moreover it was meantto steer the single monetary policy, andwas responsible for the introduction of acommon currency in the Third Stage.

Stage Three began on January 1, 1999,xing irrevocably the exchange rates ofthe currencies of the rst 11 MemberStates involved in the monetary union.It also started guiding a commonmonetary policy under the responsibilityof the European Central Bank (ECB.)

The achievement of the EMU gavefurther momentum to the processof European economic integrationstarted in 1957 and structured in sixconsecutive steps, of which the first 4have already been accomplished:

1. Preferential exchange zone(lowered customs tariffs betweencertain countries);

2. Free exchange zone; 3. Customs Union; 4. Common market; 5. Economic and Monetary Union 6. Full Economic Integration.

Economic integration carries theadvantages offered by larger scales,increased efficiency and internaleconomic strength both for the EU ingeneral and for the Member States.The sixth step, not yet fulfilled, isthe most important. It represents theframework in which all the others findtheir place, starting from the creationof a common currency.


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These are the reasons why I strongly

believe that it is possible to get outof this crisis only with more Europe,not less. The serious and persistentmacroeconomic disparities built upover time are considered one of theprofound causes of the economiccrisis. Some people think that theperipheral countries that have notcomplied with the rules caused thecrisis; that they rigged the accountsand all of a sudden they were notable to withstand the bubble they hadcreated.

It is understandable that States whohave made difficult reforms in thelast ten years, and have only recentlystarted seeing the results, can see itthis way.

But the crisisgoes further thanthis. For yearsCalifornia hasbeen experiencing

a deficit thatwould exceedall Europeanstandards,yet it has notexperiencedGreecesdownturn.The bad habits of some Europeancountries have gone hand in handwith poor governance at Europeanlevel. A lack of Europe has not only

put in a very difficult situation thosecountries in which these habitswere formed, but it has also haddetrimental effects on the stability ofthe entire Euro-area and of the EU ingeneral. This experience has clearlyshown how closely interdependentthe Euro-economies are and the EU ingeneral.

Despite the fact that the crisisoriginated there, reaching Europe bypropagating through the financialsector, the United States managednot only to recover sooner from thecrisis but also better than us. That

is because on the other side of the

Atlantic the federal government is areality, meaning that the central bankand the government work together.Instead, we only have one centralbank and 18 different governments.Even if we assume that we couldreach an agreement on how toresolve critical situations, it is clearthat the timing would not be quickenough, and therefore ineffective.The crisis has shown how Europeandecisions can be described as alwaystoo little and too late. This weaknesshas scared the markets because ithas shown that the current economicgovernance is proving to be unableto react to a crisis. It appears to be agovernance designed only to work ingood times.

We have a single currency but we donot centralize tax decisions and donot have a single budget of the Union

(amounting today to 1% of totalGDP) as such. This situation leads toa lack of instruments that can act tobalance the internal differences ofthe countries in the Eurozone. TheStructural Funds represent perhapsthe one and only component ofeconomic policy, but they cannot helpto face macroeconomic shocks likethose we experienced.

In the US, when a State experiencesserious financial issues, or simplyruns into a trade imbalance, thefederal government redistributes theresources (often automatically, by

lowering taxes and raising aid) among

the States. Moreover, since there isno restriction in the flow betweenStates, there is a further mechanismto restore a balance which is the highmobility of workers. Note that thiseffect of redistribution is not charity,but rather a mechanism which aimsto prevent the economic difficultiesof one region from escalating andimpacting on the rest of the territory.This is an example of the effectivemanagement of emergencies throughtools that imply a solid economicand political union of the federatedStates.

In a sense, it is true that the problemright now is the Euro, but onlybecause it serves as the only leg to

a four legged table -where the other threeare missing. We cannow decide either to cutthis one leg, and throwthe table away, or to

build the other three. Ibelieve the latter is theone to go for and not

just for purely economicreasons, since leavingthe Euro would meanthe end of the EU, andthe beginning of an

impossible competition between ourlittle States and giants such as theUS, China, India or Brazil. But Europeis, at the same time, a purpose and

something that already lives insideus, in our individual and collectivehistories. Europe means openness,integration, opportunity, innovation.Trust in a better society necessarilyinvolves building and strengtheningthis house for everybody. Weshould not fear to give up pieces ofsovereignty, since it is the only waywe have to count on a global level.

A WEAKNESS: NOT ENOUGH EUROPE

We should not fear togive up pieces ofsovereignty, since it isthe only way we have tocount on a global level.


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A SOLID PROPOSAL

How can we start building a path in

this direction, without triggering anew wave of public di scontent from apublic which today increasingly seesEurope as a threat rather than a help?The way is to follow the path first setout by the Euros founding fathers,then reiterated in the AmsterdamTreaty and, more recently, in the reportby the four presidents (Van Rompuy,Barroso, Draghi and Juncker), or in thecalls by the Glieniker and Eiffel groups:we need a shock-absorption tool atthe central level.

This instrument can a ssume differentforms; initially the idea of Eurobondsseemed to have gained momentum,but it quickly lost it due to national

resistance. The idea of an insurance

fund mimicking the European StabilityMechanism model, set up duringthe recession, was then introduced.Also, an ambitious proposal foreseesthe creation of an outright Europeanbudget, and not one determined justonce every seven years.

An additional solid proposal, whichhas been discussed for a while now,is to start from the most critical oftodays emergencies: unemployment.The proposal is to define a shock-absorption tool to fight unemploymentbased on a European insurance,leading to a transfer of resources fromricher countries to those that are atpresent experiencing some hardship.

More and more researchers have

been studying the differentpossibilities - inspired by formerCommissioner Andor, and the CEPSand Bruegel think-tanks, togetherwith the German economist Dullien- and submitted some simulations.The French Treasury Ministry hasalso presented its proposal. TheItalian Minister of Finance, Mr.Padoan, has brought the themetwice to the ECOFIN (the meetingof all the European Ministries ofFinance) table. But at present wehave reached just discussion level,and generally speaking the MemberStates are pretty cold in this respect,although the idea is moving forward.We must not forget that in 1986,


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at the very launch of the Erasmus

programme the biggest Europeansuccess scepticism was similarlyvery common, since education wasnot considered a European area ofcompetence.

But the devil hides in the detailsand we need to know in details thefunctioning of such a European grant,particularly to avoid accusations ofmoney transfers form northern tosouthern countries. I believe that aEuropean aid for the unemployedshould be activated only in theevent of a cyclic negative course foremployment, caused by economiccrisis; it must be temporary and,possibly, linked to some form of

further education and/or professional

training courses.

If well calibrated, among otherbenefits, such a tool could bringinstitutions and citizens closertogether, as citizens would, in timesof greatest need, receive assistanceform the same Europe that is socriticised. Europe could feel less faraway, more human. And this canbe the first of many steps forward,such as, for example, the introductionof a European contract, identicalin every Member State, that willallow the automatic portability ofseniority and contributions. Takingthe reasoning further, the taxation ofthis contract could represent one of

the first European own resources, and

maybe merge into a fund destined fortraining courses and to fight youthunemployment. There are many morepossibilities if there is the politicalwillingness to fulfil them. And I believethat it needs to be achieved in thepresent legislature or never.

The Euro is not the end, but thebeginning, in this respect, of anauthentic Economic and MonetaryEuropean Union. Sharing the samecurrency forces us to be a community,to find common solutions that helpeveryone equally without favouringone over another, and to keep thediscussion open and on-going.


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