The Economic and Monetary Union (EMU) is the umbrella term used to define the group of policies aimed at converging the economies of member states of the European Union at three stage, each of them consisting of progressively closer economic integration. It was launched in 1992 and involves the coordination of economic and fiscal policies, a common monetary policy, and a common currency, the euro.
Once a state participates in the third stage, he is supposed to adopt the euro as its official currency, except for the UK and more importantly the remaining Denmark, who granted an exemption from this obligation in the form of a so-called “opt-out”.
Despite this specificity for Denmark, it means that the perimeter of EMU is the European Union as a whole. With a single currency at the end of the journey.
The promise of economic convergence is at the core of this project. And at the initial stage of these policies, countries with lower GDP per capita enjoyed faster growth than richer ones, with the logical consequence that the dispersion of GDP per capita across countries fell.
But since the crisis, the process of real convergence among the original Eurozone members stalled, and for newer members, convergence also slowed.
Furthermore, the financial crisis has been severe for European citizens, particularly the most vulnerable of them. The long-term rate of growth of the Euro area remains poor. And right-wing nationalistic and other centrifugal forces have never been so strong.
In this context, reasonable people can probably agree that further reforms of the monetary union are needed to enhance its resilience and sustainability. Much has been achieved so far on banking supervision and regulation, but less so in the area of crisis management and resolution.
It’s the meaning of what has come to be called the “Eurozone Macron Agenda”. With three main proposals : the creation of a Eurozone bank deposit guarantee scheme, the transformation of the European stability Mechanism to a more permanent European Monetary Fund and the creation of a fiscal union with a central Eurozone budget.
In its communication about the Multi-annual Financial Framework for 2021-2027, the European Commission is proposing two new budgetary instruments, supposed to complement other EU funds in supporting economic convergence :
- a Reform Support Programme, offering technical and financial support for reforms at national level with an overall budget of EUR 25 billion;
- a new European Investment Stabilisation Function, earmarked at a small EUR 30 billion, complementing existing instruments at national and European level to absorb large asymmetric macroeconomic shocks in the euro area.
The questions are quite technical, but at the end of the day, they can be summarized in a very simple way :
- how should we balance risk sharing and risk reduction in financial and banking markets ? Do we need to prioritize in the first instance risk reduction ?
- is the macroeconomic imbalance procedure (MIP) introduced in 2011 sufficient to deal with potentially harmful macroeconomic imbalances ? Do we need a fiscal capacity for the Eurozone to smooth business cycles while during the crisis, fiscal policies often ended up being pro-cyclical ?
- how to put Europe on a higher growth trajectory , thanks to an ambitious plan for investment in public goods ?
As of today Chancellor Merkel’s stance makes relatively unlikely that any meaningful structural reform of Eurozone institutions will be agreed at the In the context of European Council due to be held on June 28-29.
While there is no immediate sense of crisis, the risk trajectory is likely to increase gradually because of several headwinds : an unexpected decline in the economic activity of euro area, the threat of a trade war with the USA, the Brexit …
Let’s not add the lack of progress on structural reform to come as a new risk factor !
Iconography : Félix de Vigne, A fair in Ghent in the Middle Ages, 1862, oil on canvas, 168,3 x 100,5 cm. © Museum of Fine Arts, Museum voor Schone Kunsten, Gand, Belgium.