The positive effects of the introduction of the European Monetary Union (EMU) are often overshadowed by discussions between its member countries. The aftermath of the Eurozone crisis has divided the European monetary power block, with both parties slinging mud at each other. The North (lead by ordoliberal Germany) lampoons the South, where especially Italy is on the verge of getting into trouble considering their high debt-to-GDP level, for being profligate. The South criticizes the North for being cold-hearted and rule-driven.
Illustrative of this sentiment is the comment former Eurogroup president, Jeroen Dijsselbloem, made in March 2017 while being interviewed by a German newspaper. The Dutch policymaker, when asked about fiscal discipline, said that he would not expect to ask for financial support if he were spending all his money on ‘booze and women’. This was aimed at several southern European countries who remarked the statement as ‘racist, xenophobic and sexist’.
The advantages of a Eurozone power block should not be underestimated, polarization must be prevented and crises should be seen as unforeseen structural failings of the system which can be repaired. One of these reparations include the proposed plans of introducing ‘Eurobonds’. Most of these proposals emerged after the euro crisis when policymakers started thinking how such a crisis could be prevented in the future. The main idea is as follows:
Instead of issuing national bonds to finance expenditure, participating Eurozone countries will be able to issue Eurobonds and thus all borrow at the same rate. The interest rate will depict then the Eurozone’s risk of default and not the national risk of default. This will mean that during crises struggling countries can borrow against a more secure rate to get themselves out of trouble and they will be less dependent on cruel bailout packages such as the ones imposed on Greece during the last crisis.
Eurobonds are a cross-border risk sharing device which, accompanied by structural productivity reforms and credible and enforceable rules, could improve fiscal and financial stability and ultimately bring Europe closer together again. However, the North keeps rebuffing the notion of jointly issued debt.
Smaller countries would be able to borrow based on market confidence in more economically developed states. Critics justly state that this is unfair for countries that have survived the crisis because of their fiscal responsibility. This is why Eurobonds are politically unpopular in economically dominant countries like Germany. It would mean their interest rates will rise, because of the introduction of riskier countries. Additionally, there is a danger of moral hazard. Countries have less incentive to cut abundant spending and borrowing with such rates, because their debt will be more secure.
The consequent increased fiscal interdependence of member states will thus call for a centralized fiscal regulator aimed at preventing these moral hazard issues. This institution will have to introduce credible rules. A situation like during the euro crisis where the Stability and Growth Pact (SGP) was lacking credibility and enforceability should be prevented by maintaining strict and consistent in enforcing the rules. An institution like this would pave the way to further fiscal integration in related areas such as taxation and expenditure. The centralized fiscal regulation would give the Eurozone more power to contain unsustainable expenditure and thus keep its member states in check.
In the case of Italy, for the last twenty years it has struggled with structural productivity problems. Productivity has moved only at 0.2% a year since 1998. Hence, economic reforms are desperately needed. Italy should see the proposed help not as a punishment, but as a way to become stronger as a whole. In the case of Germany’s worries, as soon as the market perceives the Eurozone as stable, interest rates will lower again. The new rate will likely not be at their original level, but this is a payment they will have to accept as necessary for economic stabilization.
The hardest part thus remains that a sentiment of unity should conquer the current sentiment of distrust. The question is whether such a sentiment will follow after measures are taken or measures will have to be a result of this sentiment.
If, in the current global power ensemble, the European Union wants to keep competing with the other power blocks it will have to harmonize. The US is getting less influential globally, because of Trump’s America First policy. Russia is economically struggling and Putin’s popularity is diminishing. China is economically growing and expanding its reach, both economically and politically. In this dynamic environment economic- and political stability in the European Union is crucial. Fiscal and financial unity will greatly encourage this.