Conversations for the Future of Europe: 3. The Future of European Monetary Union

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In the latest Conversation for the Future of Europe, we welcomed Waltraud Schelkle (Professor of political economy at the LSE) and Eloïse Stéclebout-Orseau (European Fiscal Board). The topic of each of their contributions was the timely issue of Eurozone reform: what realistic policy proposal could ensure the monetary union’s stability and proper functioning as well as promote solidarity amongst its members?

Drawing on historical episodes of public debt de-leveraging and the possibility for risk sharing through a common currency, Schelkle advanced three proposals: First, a public debt restructuring procedure for Eurozone members. Second, the coordinated action amongst European sovereigns to introduce growth-linked sovereign bonds that act as automatic stabilizers on member state budgets. Third, Schelkle floated the idea of perpetual GDP-linked bonds that would enshrine a pay-as-you-go principle for debt-servicing. Close cooperation for the introduction of these novelties would be needed, Schelkle argued, in order to overcome stigmatization of first-movers. But if successful, these innovations in the sovereign debt market could partly address the existing power asymmetry between debtor and creditors inherent in current sovereign debt system.

In her contribution, Stéclebout-Orseau stressed the need to overhaul the fiscal framework in ways that more effectively use “both sticks and carrots”. Specifically she urged, first, the introduction of a more comprehensive central stabilization function to protect national budgets against serious asymmetric shocks. Yet concomitantly, she envisaged reform of the SGP in the direction of simpler, more effective and more transparent budgetary rules regarding deficit and overall debt level. One of the core benefits of the latter project would be the explicit untangling of technical and political decisions regarding the fiscal rules, which, together with heightened transparency of the process would strengthen the public trust in Eurozone governance institutions.

Our commentator, Emmanuel Mourlon-Druol (Glasgow University), underlined the partial complementarity of their proposals but wondered about the feasibility of each of the suggestions put forward. Specifically, he raised the concern that Stéclebout-Orseau’s proposal for more central stabilization would meet with fierce resistance from member states unwilling to transfer further control and funds to Brussels. In relation to Schelkle’s proposals, he considered it to be a laudable “counter-narrative to the disciplinarians”, yet worried that its focus on sovereign-debt practices might stir more antagonism than she anticipated.

There followed a lively discussion between speakers and the audience, touching on such crucial issues as the minimum level of harmonization and debt-conditionality required for a monetary union to function, the degree to which these proposals would still require fiscal coordination amongst member states, the advantages and drawbacks of a common debt instrument for Eurozone members, and whether fiscal federalism and extensive fiscal solidarity should be considered an ultimate aim for states sharing a currency.

Our Conversation Series continues on April 30, when Chiara Saraceno (University of Turin) and Anton Hemerijck (European University Institute) debate the future of Social Policy in the European Union.


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