OPINION: Europe’s still not ready to mend the Monetary Union

OPINION: Europe’s still not ready to mend the Monetary Union

Not long ago, EU leaders were talking about a grand bargain
to reform their currency union. It isn’t happening. Europe’s finance ministers
have just approved a package of reforms to strengthen the monetary union. Their
plan falls far short of what’s needed.

The new proposals aren’t worthless — any steps to better equip
the euro zone to deal with the next financial crisis are welcome. But they
conspicuously fail to address the system’s most important weaknesses: deposit
insurance and fiscal policy.

Most economists agree that the euro zone needs joint deposit
insurance, covering balances up to say €100 000 (about R1.6m). This would
complete Europe’s banking union, and help to break the so-called doom-loop
connecting national-government finances and failing banks.

But the ministers, yet again, came up with no plan. A working
group will think about it and report next June. Europe has been thinking about
this for six years.

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The currency union also needs a small euro-zone budget to
help to stabilise countries suffering from isolated shocks.

The European Central Bank sets monetary policy for the zone
as a whole, so it can’t support an individual country in recession, makings
some such fiscal mechanism necessary. France and Germany seemed to have reached
agreement on the idea, but opposition from others seems to have blocked it.

The ministers did agree to change the European Stability
Mechanism (ESM), the euro zone’s rescue fund. Here too, though, the reforms aren’t
bold.

Finance ministers wanted to make it easier for countries
with basically sound fiscal positions to draw on a line of credit when
conditions demand it — but the changes leave the rules attached to these loans
unduly strict. In practice, the credit lines are likely to be available only to
countries that don’t need them.

READ: Euro-area inflation eases as ECB approaches end of
bond buying

Was there any progress at all? A little. The European
Commission and the ESM have agreed to a clearer division of labour. The
ministers finalised an agreement to strengthen the common fund that handles
banks in trouble. And they agreed to encourage the use of collective-action
clauses in new bonds; these make debt-restructuring easier, should it prove
necessary. 

That’s something — but the grand bargain on euro-zone reform
is nowhere to be seen. When the next recession comes around, the EU might very
well pay the price.

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