France and Germany agree on eurozone reform
PARIS — Governments talk a lot about eurozone reform but cant get their act together. So its time for academics to step in.
That impatience seems to be at the core of an unprecedented initiative by French and German economists, who published Wednesday a detailed plan on how to make the monetary union shock-resistant and a better guarantor of long-term prosperity.
Fourteen influential scholars, who in September published a joint op-ed in Le Monde and the Frankfurter Allgemeine Zeitung to urge their respective governments to be bold on reforming the monetary union, have taken a step further to detail what they think should be done — and the sooner the better.
The basic idea underlining their plan — which came in the form of a “policy insight” jointly published in Paris and Berlin — is that France and Germany may well be separated by historical and cultural differences in their approach to monetary union, but both make strong arguments. The plan is given extra weight because the German authors are more varied than the usual center-left academics traditionally sympathetic to French arguments.
There is no time to waste, the economists argue, because no one knows when the next financial crisis will hit.
In a nutshell, the eurozone needs both financial discipline — as the Germans argue — and risk-sharing — as the French insist on. But both need to be credible, and must stop relying solely on either strict rules that cant be enforced, or government promises that cant be kept.
Furthermore, there is no time to waste, the economists argue, because no one knows when the next financial crisis will hit, and even though the economy is recovering at a brisk pace, the eurozone remains vulnerable.
The report seems to make a point to skirt around the terms in which the eurozone debate has been framed in the last few months, notably by French President Emmanuel Macron who has pushed for grand reforms including the creation of a eurozone finance minister who would manage a “common budget.”
Neither a finance minister nor a joint budget are mentioned in the paper because, according to one of the authors, Agnès Bénassy-Quéré, “that is not a crucial question” for the monetary union. Another of the headline reforms for the single currency bloc — the German idea of transforming the bailout fund known as European Stability Mechanism (ESM) into a full-fledged and strictly independent “European Monetary Fund” — is similarly discarded.
Instead of highly charged words that may encounter political obstacles, the 14 economists suggest six major economic reforms that they argue should be undertaken simultaneously and without waiting — although the actual debates, votes and implementation of the package would have to be spread over several years.
First, the banking systems residual weaknesses need to be taken care of. That means limiting the amount of sovereign debt of their own countries that banks can keep on their balance sheets, shrinking their stock of bad loans, and completing the deposit guarantee scheme, which would help avoid possible bank runs in times of crisis.
Second, the EUs deficit rules need to be reformed, and made both simpler and more credible. “Im unable to explain the current system to my own students,” said Philippe Martin, an economics professor at Sciences Po and one of the reports authors. And the current system of fines and penalties for countries violating the Stability and Growth Pact, he added, “arent credible because they are never enforced.”
Instead of focusing on budget deficits, the authors suggest that governments abide by a strict goal on spending — which should not increase faster than GDP, and even at a lower pace for over-indebted countries. That should be controlled by independent bodies and the penalty would come in the form of issuing so-called junior debt (i.e., with higher interest rates) that would be automatically restructured if the country later needed assistance from the ESM.
The third reform, which may prove the most controversial, would be to implement an overt legal mechanism for insolvent countries to restructure their debt — to avoid a repeat of the wasted time and improvisation that have marked successive episodes of the Greek debt drama since 2010.
The other three reforms suggested by the Franco-German economists are the creation of a fund that would help member countries deal with the most severe crises; the definition of a class of “safe assets” to allow banks to replace sovereign debt in their balance sheets; and a reform of eurozone institutions, to better delineate the responsibility of monitoring economic policies and that of sanctioning wayward governments.
The report comes at a time when talk about eurozone reform appears to have stalled, with two immobile governments in Paris and Berlin.
The report will likely be read with interest in French and German government circles, if only because of its signatories identities. On the French side they include Jean Pisani-Ferry, who was the main architect of Macrons presidential platform, and Martin, another former adviser to the current French president.
On the German side, the authors include Clement Fuest, the head of the IFO Institute for Economic Research, and Beatrice Weder di Mauro, a professor at the University of Mainz and a former member of the governments Council of Economic Experts.
The report comes at a time when talk about eurozone reform appears to have stalled, with two immobile governments in Paris and Berlin. The French government has been long on speeches but short on specific ideas, contributions or policy papers since Macron unveiled his European grand plan at the Sorbonne in Paris last September. On the other side, German parties are still talking about forming a government, although a significant step was made last week with the signing of a preliminary deal between Angela Merkels Christian Democrats and her would-be Social Democrat partners.
Into the void jump the economists, with a report predicated on the optimistic vision that governments and other European institutions can find the time and energy to implement a complex and detailed reform that would need the support of 17 other countries, on top of France and Germany.