Book review: The Future of the Eurozone

Another year, another book on the eurozone crisis. That could be the cynical introduction to this volume co-edited by Alexander Schellinger, former economic and social policy advisor at the Friedrich-Ebert Foundation, and Philip Steinberg, director general for economic policy at the German Ministry for Economic Affairs. After all, this is not the first attaque en règle against German complacency towards the eurozone status quo by German progressive thinkers and advisers. A few years ago, the Glienicker Gruppe put forward a compelling vision for EU and euro reform. Think tanks such as the Jacques-Delors Institute, the SWP and the DGAP have repeatedly taken on the political and media mainstream, with little success.

Perhaps the main difference here is that when the book came out a year ago, it was praised by the then SPD leader Sigmar Gabriel and it seems to have influenced the SPD campaign platform for the September 2017 federal elections. Proposals such as the introduction of a eurozone finance minister, a euro sub-committee in the European parliament, and an investment budget to smooth over cyclical fluctuations, can all be found here, on page 98 of the manifesto. Yet, in the wake of Martin Schulz’s historical defeat, it is clear that these ideas were not central to the campaign. The irony is that they are today championed by Emmanuel Macron – and Angela Merkel is open to a discussion

The starting point of the book, as laid out in the introduction and the first chapters by Christian Beck, Henrik Enderlein and Michael Dauderstädt, is not particularly controversial. Eurozone governance makes everyone unhappy. The single monetary policy is procyclical in many instances. Rule-based fiscal and macroeconomic surveillance does not really work, but is enough to prevent member states from supporting their economies when they need to. Structural convergence is not happening, and the shock treatments imposed on debtor countries in exchange for financial assistance has negatively impacted social outcomes.

The emergency measures and long-term correctives adopted by the EU since 2010 have been met with fierce German political and legal resistance, and heightened political tensions. Yet, as Enderlein argues, the German default position is no longer tenable. Eurozone governance, rather than the behaviour of (some) member states, is the problem. The lack of an effective shock-absorption capacity is a major design flaw.

Beyond this consensual diagnosis, the book has two significant merits.

One is to explain German hurdles to reform, and how policy-makers can find a way around these constraints. Björn Hacker and Cédric M. Koch provide a pessimistic take on the political landscape, stressing the increasingly vocal champions of a euro roll-back, although they are divided between the right (AfD) and the left (Wolfgang Streeck, die Linke).

The legal constraints examined in detail by Franz C. Mayer provide further cause for worry. Since the 1993 establishment of the ultra vires doctrine, the German constitutional court has been checking whether specific EU measures exceed the competence perimeter assigned by the EU treaties ratified by the Bundestag. As Mayer puts it, “the Federal Constitutional Court asserts that it has the last word in matters regarding the legality of Union law”. Moreover, if EU treaties are amended, the court might deem democratic guarantees insufficient. Reviewing the German Fundamental Law to let EU integration move forward would require a significant political consensus. All of this is not impossible, but the hurdle is high.

In a more upbeat chapter, Mark Schieritz comments on ordo-liberalism and the German aversion to risk-sharing. For the author, there is space for state intervention and redistribution from a German perspective, as long as this is firmly embedded in a rule-based, predictable framework. Germans fear discretionary solidarity, but are open to measures that do not tweak long-term incentives for fiscal responsibility. As an illustration, the author usefully reminds us of the 2011 German council of economic experts’ proposal of a European Redemption Pact that would consist of pooling a portion of member states’ old debt in exchange for implementing robust consolidation plans.

The volume’s second merit lies in the detailed practical solutions it puts forward. In a convincing chapter, Jeromin Zettlemeyer argues that the challenge is to “create a well-functioning stabilisation function for the euro area and its members that can be implemented within the existing political system of the euro area – i.e. without presupposing a political union”.

Permanent transfers should be avoided. The best solution would be a euro area budget worth 1.5% to 2% of GDP, which would balance out the economic cycle across the whole area regardless of member states’ positions. It would be funded by a share of corporate tax or VAT, and would be spent through joint cross-border investments and blanket transfers to member states. Borrowing capacity should be allowed, but strictly capped.

These are of course not entirely new proposals (see Enderlein’s 2013 research paper on a cyclical shock insurance), and even such a timid move towards fiscal union is likely to run into political resistance. Daniela Schwarzer sketches out the democratic institutions of such a fiscal union. She makes it clear, nonetheless, that treaty reform would be required, with all the political and legal implications this would have.

For all the book’s merits and the credibility of its contributors, though, it leaves any reader familiar with eurozone debates with a sense of deja vu. This, after all, is a policy contribution by convinced pro-EU economists and political scientists. Alternative scenarios such as Grexit and a return to national currencies are dismissed as too risky, not seriously envisaged as a long-term option.

Perhaps the most disappointing aspect is that Schellinger and Steinberg do not confront more recent proposals for eurozone reforms that shift the focus from fiscal union to a less politically sensitive set up. Philippe Legrain, Martin Sandbu, Christian Odendahl have all advocated decentralising fiscal policy to some extent, while reinforcing the banking union and introducing a debt restructuring mechanism. Waltraud Schelkle’s approach, likewise, invites policymakers to focus on the eurozone’s risk-sharing capacity from a strictly functional perspective. Rather than creating a politically divisive eurozone budget, she makes the case for focusing on less salient monetary tools. An illustration of this could be the European Safe Bonds (ESBies) proposal, which was floated in 2011 and resurfaced recently.

Of course, these takes can be dismissed as too technocratic and apolitical. Rather than functional improvements, progressives place value in constructing a firm European democracy and in unequivocal commitments to EU solidarity. The Future of the Eurozone should be read as a serious intellectual effort to conceptualise some of the key elements of an ambitious long-term vision for the eurozone. If Emmanuel Macron’s teams are looking to put some flesh on the French president’s reform proposals for the euro area, taking into account German expectations, they should take a serious look at it.

The outcome of recent elections in Germany, Austria and the Czech Republic confirm how difficult it has become for European elites to ‘sell’ the EU project to a sceptical public. A hard truth for Europhile progressives is that the concept of EU solidarity does not provoke enthusiasm but polite indifference, in the best case, and angry rebuttals in the worst. Until a time when a majority of Europeans approve of the creation of a eurozone budget – however small – and the democratic institutions that come with it, convinced pro-Europeans must not lose sign of the need to make the currency union more viable for the here and now.

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