Eurozone: The huge reform bag - ING
"The European Commission just released its latest Eurozone reform proposals. A first browsing of the documents allows us to conclude that hardly anything will change," argue economists at ING.
In short, the European Commission proposes several cornerstones to further reform the Eurozone. Here is a short summary of how we read the European Commission’s proposals and what we don’t read in them:
1. Transform the ESM into a European Monetary Fund (EMF), anchored within the EU's legal framework. The EMF would be a more institutionalised bailout fund, which should also provide the common backstop to the Single Resolution Fund and act as a last resort lender to facilitate the orderly resolution of distressed banks. In our view, not a lot would change. The European Commission would integrate the ESM in the European structure, preventing the ESM/EMF from becoming an independent body. Debt restructuring in future bailout programmes was not addressed, neither would the still political role of the decision-making process change.
2. Integrate Two Pact, Fiscal Compact and other Fiscal surveillance agreements into EU law. A purely legal aspect which will hardly change how fiscal surveillance in the Eurozone is carried out and will also not avoid horse trading when it comes to fiscal policy monitoring. Remember that in the past, decisions by the European Commission on fiscal policies and compliance of Eurozone countries with the fiscal rules could still be undermined by ministers. With the last reforms, the Commission was supposed to get more power but eventually, the political horse-trading basically only shifted to inside the Commission.
3. Fiscal capacity. The European Commission did not propose anything like a Eurozone budget or a fiscal capacity. Instead, the Commission announced its plan to set out a vision of how certain budgetary functions essential for the euro area and the EU as a whole can be developed within the framework of the EU's public finances. In short, this means that parts of the EU budget could be dedicated to Eurozone countries either as a reform delivery tool or stabilization function. This part of the proposals remains vague. The biggest disadvantage of integrating budgetary instruments into the EU budget would be that it takes away almost any flexibility. Funds under the EU budget are often strictly scheduled, leaving little room for emergency situations.
4. European Minister of Economy and Finance. This well-known hobby horse of the European Commission would make the Vice-President of the Commission responsible for Economic and Financial affairs also the president of the Eurogroup. Such a position could improve democratic accountability, but it is hard to see what the added-value of this function (without a change in responsibilities and shift in powers) would really be.
Admittedly, this is only a brief instant comment on the proposals. We will walk through all the legal documents to find interesting details in the coming days. Nevertheless, at first glance, today’s proposals go in the right direction but are not new and clearly not a game changer, not the least due to the almost impossible mission for the European Commission to balance between many diverging national interests. On the substance, the proposals fall short of creating a really depoliticised ESM and a more independent, almost technocratic, fiscal authority. The proposals almost look like an attempt to increase the institutional power of the European Commission rather than aiming at the big breakthrough for the entire Eurozone. Don’t blame the European Commission for it, the lack of ambitions is rather due to Realpolitik and different interests in main capitals, but the huge bag of St Nicholas was much bigger than its content today.