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Is it time for a European ministry of finance?

Published on , , Sofia

A deeper European integration, especially in the Economic and Monetary Union (the eurozone) is being discussed more and more often in terms of being the only solution to the debt crisis. What is interesting is that the debt crisis has created a big paradox - on the one hand it causes discussions about a return to national sovereignty and individual defining of economic and fiscal policies, and on the other - for tightening of integration and a more central definition of the guidelines in the economic and fiscal policies of the euro area. For now the second part of the paradox is prevailing, which has led to a comprehensive reform of the Union's economic governance, the approval of which is expected this autumn and of which euinside wrote in details and held two discussions on the issue.

Against the backdrop of the proposed measures in the so called Six Pack, in the beginning of June outgoing President of the European Central Bank Jean-Claude Trichet recommended the creation of a European ministry of finance. In a speech in the German city of Aachen he specified that it he did not meant a classic European institution with a huge federal budget but a body that would be able to veto certain national economic decisions - most of all related to big expenses and to competitiveness. The idea was endorsed by most of the MEPs in the temporary Committee on the Financial, Economic and Social Crisis in the European Parliament.

Separately from the idea for such a body, more and more speed gains the debate about the creation of common European bonds (eurobonds), of which euinside wrote in details. In general the biggest proponents of the idea are the countries that suffered the most from the debt crisis like Italy, Ireland and Portugal. According to the political and economic motor of the EU however, France and Germany, eurobonds should be the end not the beginning of integration.

The proponents of eurobonds and a European ministry of finance were joined by George Soros, a financier and a philanthropist. In an article for The Financial Times of Agust 14th he points out that a comprehensive solution to the euro crisis must have three major components: reform and recapitalisation of the banking system; a eurobond regime; and an exit mechanism. According to him, the banks in the euro area are too leveraged, as the Maastricht treaty [the treaty that established the single currency] was designed to deal only with imbalances in the public sector. As the crisis has shown, however, the excesses in the banking sector were much worse. Mr Soros explains that the introduction of the euro led to housing booms in countries such as Spain and Ireland.

He thinks that the creation of the euro area rescue fund (the European Financial Stability Facility) was a first and right step. Now, he says, banks’ equity capital levels need to be greatly increased as well as an agency to be created to guarantee banks’ solvency and to oversee them. "A powerful European banking agency could end the incestuous relationship between banks and regulators, while interfering much less with nations’ sovereignty than dictating their fiscal policies".

George Soros believes that Europe needs eurobonds because the idea of the euro was to enhance convergence but instead exactly the opposite happened - it created divergences, with widely differing levels of indebtedness and competitiveness. "If heavily indebted countries have to pay heavy risk premiums, their debt becomes unsustainable. That is now happening. The solution is obvious: deficit countries must be allowed to refinance their debt on the same terms as surplus countries".

The financier heavily criticises Germany of which he says is holding Europe's fate in its hands. Eurobonds will put Germany’s credit rating at risk, which is why the country has to be put on the driver's seat. Regretfully though, Soros goes on, Germany has no good ideas for macroeconomic policy. It only insists Europe to follow its example. But what works for Germany cannot work for the rest of Europe. He proposes eurobonds to constitute a larger share of eurozone members’ outstanding external debt than the Brussels based think-tank Bruegel proposes, i.e. more than 60%.

He speaks out loud about what has been discussed silently for a long time - how to do so that failing countries to be let to leave the eurozone without causing powerful concussions. This is why, he says, an exit mechanism must be created. And it is here that the idea for a ministry of finance comes to play. "Greece constitutes a cautionary example, and much depends on how its crisis plays out. It might be possible to devise an orderly exit for a small country like Greece that would not be applicable to a large one like Italy. In the absence of an orderly exit, the regime would have to carry sanctions from which there is no escape – something like a European finance ministry that has political as well as financial legitimacy. That could emerge only from a profound rethinking of the euro that is so badly needed (particularly in Germany)", the financier deems.

In a joint commentary former EU Commissioner Emma Bonino and Macro De Andreis, a Director of Economic Research at Italy's customs agency and a former EU official, agree with George Soros's proposals by emphasising that if these ideas were to be realised the EU would turn not just into a strange animal but even into a monster. "Through the issuing of the Eurobonds, for example, the EU would be an entity with no real function of government outside the economic sphere, no treasury, and a miniscule budget of one percent of Europe’s GDP – but with a currency that rivals the dollar, a Central Bank and some sort of “agency” in charge of a gigantic public debt in the range of 70-80 percent of Europe’s GDP".

This is why both propose in an article for the Italian daily Il Sole 24 Ore things to be turned the other way round and instead economic and fiscal policy to be driving the political process, the opposite to be done. "Eventually, the EU too should work in the logical way: taxing and spending to provide some functions of government and on this basis having a treasury to accompany its Central Bank. To use Soros’ own words: 'something like a European finance ministry that has political as well as financial legitimacy'".

"This is the gist of our idea of a Federation Lite. Which is not at all incompatible with Soros’ proposals, only a step further", Emma Bonino and Marco De Andreis conclude. The idea for a Federation Lite has been launched by the two authors earlier this year in an article for The Project Syndicate. According to them, the federation should have a limited budget of around 5 per cent of EU's GDP (compared with almost half of GDP in most EU member countries), which would enable a realistic political union. These resources, they write (around 600-700bn euros), would replace and not add to national budgets, since they would accompany the transfer of some governmental functions.

They give as an example defence by stating that a single standing EU army in lieu of Europe's largely irrelevant and inefficient national armed forces would be much better. This small army can have a budget of around one per cent of EU GDP - some €130 billion. It is not clear, however, from their proposal how this idea would go along with the commitments some EU member states have to NATO. Aside from defence and security, Mrs Bonino and Mr De Andreis say that other competences can also be transferred to a federal level like, for example, diplomacy and foreign policy, immigration, border control, some infrastructural projects with a European dimension, large-scale research and development projects, and regional re-distribution.

"The term 'transfer union' is now used, especially in Germany, as a pejorative synonym for federation. We agree that moving resources from one place to another cannot be the raison d'etre of a political entity. Only specific governmental functions can. But when some of these functions are assigned to a federal level of government, one has the additional tool of being able to transfer resources to pay for these tasks. When this is necessary, states experiencing a boom should be taxed more than states experiencing a bust", the two Italian politicians propose.

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6 September 2011 15:10
it's time
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