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.

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.

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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