Fernando Fernández. Professor. IE Business School
29 July 2015
Regardless of how much we talk about it, Greece is only the tip of the iceberg, under which lurks a massive ice mountain made up of the real problem – a European Union that is only half built.
We have been talking about Greece for months now, when the real problem is the Eurozone. The Greek spectacle would not have made the news headlines if the Monetary Union were consolidated, because it would have been the equivalent of being able to afford to have a Free Associated State of Puerto Rico go bankrupt without investors and analysts doubting the viability and durability of the North American Monetary Union. The IMF would certainly not have expressed concern for the impact on world growth, and the Americans would not have insisted on the geostrategic nature of the country. Preventing Greece from becoming a failed state is not an exclusively European aim, and the answer does not have to be purely monetary. And if President Obama is so worried he could do the same thing Clinton did in the Mexican crisis in the nineties and head an international rescue which included bilateral aid from his government and from the Federal Reserve, while the IMF and World Bank also played key roles.
If the relevant question were why did a relatively minor problem in the eurozone turn into a question of survival, the answer should be clear. There is a glaring political reason, namely that there is no such thing as a European citizen because Europe does not have a political demos, and the economic crisis, with its inevitable cutbacks, has weakened the sense of belonging to a common populace. This has happened both in the countries funding the debt, tired of paying in the face of such obvious disaffection, and the debtor countries, which seek refuge in their wounded sense of dignity. This is why nationalist parties have started to emerge in so many countries and wherever there is an ideological gap waiting to be filled. Europe needs to build its own identity.
There is also an institutional reason. Despite some advances being made with the European Stability, Coordination and Governance Treaty, the Eurozone finds itself in legal limbo. Officially it is no more than a transitory state, which explains why all the organisms with decisionmaking capacities are institutions of the EU as a whole, such as the EU parliament, commission, the European stability mechanism, or ECOFIN. The only exception is the ECB, whose pivotal role in the crisis is not only due to being a monetary authority, but also because it is the only Eurozone institution that is involved in the treaties, the only one that has democratic legitimacy to talk and decide on behalf of eurozone members and for them.
Institutional reality created two additional problems that require a response. First the mere possibility that a hypothetical sovereign decision to leave the eurozone raises doubts about the legality of membership of the European Union, converting a national problem into a European problem and weakening the credibility of any sanction resulting from the fiscal governance of the euro. But at the same time, the consolidation of the Monetary Union as an economic and political construct cannot be done by breaking the EU up into two opposing groups, thereby mimicking the division of Western Europe into two parallel units, the European Economic Community and the European Association of Free Trade, as was the case until the eighties. That is why the Greek and UK referendums have quite a lot in common. Both suggest the need for a two-speed Europe in terms of institutions and laws, both make it necessary to have a new European Treaty to replace that of Maastricht, and both oblige Spain to revisit a major political consensus that places our country squarely in the lower speed. That is why the amendment that enshrined budgetary stability as an objective and a constitutional obligation was so important, and why subsequent rectifications were so dangerous.
And there is obviously a third reason, which is economic. The eurozone is not an optimum monetary space and although it has been taking major steps towards becoming one since 2010, particularly where banking union is concerned, there is still room for friction and opportunities for self-inflicted rupture. There is, however, still a long way to go toward fiscal union. Nobody denies that politically speaking it is the most difficult challenge. Fiscal union does not mean bringing all taxes and social services into line across the Eurozone, because the principle of subsidiarity has to be respected. Each country has to retain its sovereignty in order to attain the fiscal objectives of deficit and debt jointly agreed by the member states using the combination of public revenue and spending deemed by each to be the most appropriate way to address their interests. The purpose of fiscal union is not reparation or justice, but nor is it about ratifying social rights and public spending. The ultimate aim is simply to limit externalities and prevent the cost of domestic decisions from falling on non-national taxpayers of Europe.
Monetary union leads inexorably to the creation of a European treasury with fixed competences as a mechanism needed for the sustainability of the eurozone. But building a European treasury is far more complex than putting in circulation a safe European asset that is free from risk, namely the famous Eurobonds, that are doubtlessly necessary to prevent complexities and susceptibilities for the single currency policy. A decision will have to be taken on how to finance this European asset, and it does not seem appropriate to think about the creation of a new European tax, but rather the automatic transfer of one of those already in existence. It will also be necessary to agree on the use that will be given to funds using this system, it being obvious that creating a macroeconomic stability fund for the whole of the eurozone is the priority, although there is also a need to fund a European section for unemployment insurance. And last but not least, there will have to be agreement on which European institution it is created under, and, for reasons I have stated in previous articles, that institution is the Eurogroup.
Monetary union requires greater levels of ex ante fiscal coordination because fiscal discipline cannot be imposed ex post using sanctions, because no matter how automatic they are supposed to be they will never be credible unless they include the ultimate sanction, potential expulsion from the eurozone for systematic and recalcitrant offenders. But even this possibility is an unknown, as we have seen recently. The Union needs preventative rules to avoid the accumulation of public deficits before they reach breaking point. These rules will have to serve as a kind of European guarantee for national budgets before they are approved by respective national parliaments, and will have to be subject to periodic monitoring to ensure they are being implemented.
Complying with fiscal rules is the unavoidable flipside of enjoying joint protection and mutualization of European debt issued in accordance with fiscal objectives ratified by the Union. Only thus will it be possible to make shared sovereignty legitimate and democratically acceptable. But non compliance should also mean automatic loss of fiscal autonomy and de facto intervention of the country’s tax authorities by European administrators, in a process that should not be very different to that provided for in this legislature by the Spanish government. Shared discipline has to be a pre-requisite for enjoying a guarantee from Europe for national debt, which in the monetary union means that the ECB would no longer accept sovereign paper of the government in question as a counterpart, resulting in inevitable insolvency and an eventual exit of the euro. Doing the opposite would create a perfect system of perverse incentive - a text book example of what economists call moral risk.