EU reflection paper on monetary union: strengthen the Eurozone

© Flickr/Alvaro_20Millan

At the end of May 2017, the European Commission published its reflection paper on deepening of the European Economic and Monetary Union (EMU) in which it gave more concrete form and assigned priorities to the proposals in the 2015 Five Presidents’ Report. For German business, a strong and crisis-resistant Eurozone is essential for continuing growth and the creation of secure jobs.

The paper pushes in the right direction. However, national structural reforms as well as a responsible and growth-oriented budget policy must not fall by the wayside.

Some things have already been achieved, much remains to be done

The EU and Member States have already implemented important measures since the start of the crisis. Economic and fiscal policy coordination has been improved with the European Semester, risks in the financial system have been reduced with the Banking Union and Member States have decreased their budget deficits. But we are still only halfway there.  Further steps must follow in order to complete EMU and make it fit for the future. This will involve national and European reforms in equal measure.

Risk reduction and national structural reforms play an important role

BDI and BDA support the European Commission’s proposal for further risk reduction in the financial system. What that means first of all at national level is a reduction of non-performing loans in banks’ balance sheets and a consistent set of rules for banks at European level. Similarly, the Capital Market Union offers potential to place corporate finance on a broader basis and at the same time to make the financial system less vulnerable to crisis. Employers and industry welcome the approach of improving economic policy coordination. A stronger link between structural reforms and European investment and funding programmes would give important incentives for urgently needed structural reforms. A reordering of the numerous institutions (Eurogroup, ECOFIN Council, European Commission, European Stability Mechanism, etc.) is also a sensible idea in order to enhance coherence and reduce the complexity of economic policy governance.

Further integration steps must be discussed openly and examined with a critical eye

The European Commission rightly points out that there is no area-wide safe asset in the Eurozone on a par with US Treasuries. In combination with fewer sovereign bonds in the Member States’ bank, such a liquid and safe asset would have great advantages for the stability of the financial system. However, it must be ensured at the same time that such a European asset does not lead to incentives for a responsible national budget policy being lost from sight. This applies equally for a macroeconomic stabilisation function to cushion asymmetric shocks in Member States. The approach is a good idea first and foremost with regard to the proposed investment protection instrument. Obviously, numerous open and critical points such as financing, conditionality and governance still have to be clarified. It is particularly important here to avoid additional tax burdens for citizens and companies since these would have a negative impact on growth. Moreover, there is the risk of a heightened discrepancy between European financial competence and the responsibility for implementing reforms at national level. The proposal for a common European unemployment insurance scheme should be rejected. This would undermine the objective of sustainable macroeconomic stabilisation by creating considerable disincentives at national level.

Rapid implementation is needed

For industry and employers, it is important that the reflection paper blows new life into the debate on the future of EMU. A crisis-proof and prosperous Eurozone will strengthen growth and stability, also in Germany. To this end, the necessary reforms must be implemented rapidly.