by Roberto Tamborini (University of Trento, Italy)

The foundations and governance of the EMU have seriously been shaken by the first stress test of their history, the global economic and financial crisis exploded in 2008. A turmoil that Europe initially contemplated from a distance as an American affair, but which soon rained down on our continent with greater force and for longer time. Mostly thanks to a number of independent scholars, the view has taken hold that the misconception and misconduct of political-economic governance has played a key role in the "Europeanisation" of the crisis. This view has eventually conquered the institutional and political verteces of the Union.

Where will the reform process be heading to?

First of all, a political engine will be necessary. This is expected to come from a renewed French-German partnership. If Macron's disposition is clear at least in words (see the famous Sorbonne speech in last november), Merkel's true attitude is still to be assessed together with the Socialdemocrats' pro-Europe boost. In december, the Italian Finance Minister Padoan handed out to his peers a position paper which actually lines up Italy with France (Reforming the European Monetary Union in a stronger European Union). Italy, and possibly Spain, might be part of the leading group, but political uncertainties may keep them out.

European institutional reforms, however, are not just ready for head of governments' signature. The debate has been growing for years. An entire library can be filled with accurate and detailed proposals elaborated by authoritative scholars, think thanks, policy advisors. The top EU officials and institutions themselves have contributed: examples are the so-called Five Presidents Report (2015) and the latest Roadmap released by the Commission in December. The leit motiv is the plea for further (and faster) integration epitomised by three pillars to be erected in support of the Monetary Union: Banking Union, Fiscal Union, and Political Union.

The state of the art

The Banking Union is under way with two main offsprings: the single supervision on major banks, and the banking resolution mechanism (BRM). Negotiations are instead at a stalemate on a third key element, the common deposit insurance. The Fiscal Union, i.e. authorities and rules of fiscal policy in the EMU, is a political enigma, but the general feeling is that "something has to be done" so that most likely it will become the core of negotiations (and controversies). The Political Union remains the ideal end, but it is miles away from the stage of a political agenda.

Let me then concentrate on the Fiscal Union. It is natural to wonder how is it that so far no one of the many proposals on the table has got political support. The answer is simple. There is general dissatisfaction with the status quo, but diagnoses and cures (and national interests) differ at the political level, hence reform agendas differ too. Therefore, Europe will be the field not only of the battle between pro-Europe and anti-Europe forces, but at the same time of the confrontation between different views of the future of Europe. The latter will be more gentle and polite, but no less hard and probably more fundamental. If anything because a bad reform, or no reform, will also, sooner or later, pave the way to anti-Europe forces.

The reform strategies on the ground are generally represented by two alternative models.

The Maastricht 2.0 model

In this view, prevailing in Germany, the European crisis originates from the political failure of the fiscal regulation system that governments undersigned with the Maastricht Treaty and subsequent modifications up to the Fiscal Compact of 2012. It was not the compliance with, but the violation of, these rules that generated the European crisis, whereas these rules remain a fundamental pillar of a sound EMU. The culprit is the “politicisation” of the rules, which means that the Commission has deviated from its mandate of impartial and rigorous guardian of the rules to become the interpreter of the rules in the negotiations with governments. Consequently, when the followers of this view talk about “more Europe” they mean further devolution of sovereignty towards supranational agencies essentially technocratic in nature (like e.g. the Fiscal Boards) with clear mandate and power to enforce the rules vis-à-vis the governments.

The confederal model

Another view moves from a number of flaws that are present in the original regulatory framework that have become critical in the mismanagement of the crisis: (i) neglect of interdependencies across countries, (ii) insufficient coordination of national fiscal policies, and in the aggregate with the common monetary policy, (iii) lack of common instruments of macro-stabilisation, (iv) enforcement of austerity too large, too early, uncoordinated.

In the crucial policy decisions a sharp conflict has emerged between the “community method” (law and decision making are reserved matter of the community bodies) and the “intergovernmental method” (the law of the strongest?). The democratic deficit of Europe has widened in a crisis of both input and output legitimacy. In this view, reforms point to the opposite direction of Maastricht 2.0. The confederal inspiration should be understood in a broad sense, meaning that the aim is the creation of bits of genuine supranational government (not just governance) with clear institutional legitimacy with respect to both the EU order and the national constitutional orders.

The reform agenda generally includes:

  • completing the Banking Union
  • transforming the European Stability Mechanism (ESM) into a "European Monetary Fund", enlarging its mandate and capacity in order to support countries that lose access to capital markets, and to provide adequate capital for the BRM
  • creating a genuine "Finance Minister of Europe", with clear political mandate and capacity within the EU framework in order to:
  • define the aggregate fiscal stance of the Union vis-à-vis the ECB
  • monitor national public finances, also in view of coordination, after rewriting the national fiscal rules in a simpler and more transparent way, removing procyclical mechanisms, and with a shift of focus from year deficits to medium-long term evolution and sustainability of debt
  • manage a few common resources in support of macro-stabilisation and growth policies

The latest Roadmap of the Commission

Also the document issued by the Commission in December 2012 is unlikely to have significant impact; however, it is useful to review its main points because it gives an account of the relative strength of the different views.

The European Monetary Fund

There seems to be wide agreement to transform the ESM into a stronger EMF, but some critical points should be discussed in order for the EMF operations to be prompt and effective. High risk exists that it is designed in a way that makes it unusable. The most controversial points are:

− governance: how the EMF can overcome the intergovernmental and unanimity governance of the ESM

− conditionality: how it can be calibrated accurately, case by case, and with all means necessary to obtain ownership and compliance by governments (no Troika- style diktat)

− whether there should or should not be automatic debt restructuring (since this may actually trigger a crisis)

− whether the EMF should or should not be attributed the function of surveillance of national public finances

The European Finance Minister

Evocative but ambiguous idea, quite different in the Maastricht 2.0 or confederal model. A lot of issues stand in the way

− How is the Minister appointed? The Commission proposes that he/she is the president elect of the Eurogroup and Vice-president of the Commission. This proposal seems to be bending towards a political profile of the Minister. But the legitimacy problem is far from being solved. The Eurogroup itself is a problematic entity, that many regard as too intergovernmental and ill placed within the EU order

− What mandate and powers? A true quality leap in the EMU fiscal policies requires the elements envisaged in the confederal agenda, which however are not deemed as a priority, if not opposed, by the supporters of Maastricht 2.0, who would rather assign more competences to the EMF.

− Minister of what finances? The key issue of the dimension and destination of the European budget remains vague, with a well entrenched resistance line. Some aggregate stabilisation tools or lines of investment may find their way, whereas full-fledged instruments of debt sharing, risk sharing or fiscal transfers will have no chance.

The Fiscal Compact

The issue of the reform of fiscal governance will revolve around the Fiscal Compact, and in the first place whether it should become integral part of the EU legislation (at the moment it is "only" an international treaty). The Commission and the supporters of Maastricht 2.0 are strongly in favour. France's position is unclear, though it may bend towards a softer version as a compromise. Italy has already said no. Main arguments of critics are that

− the FC does not resolve (it possibly worsens) the problems created by the fiscal rules during the crisis

− federal systems show that if national budgets are to be constrained significantly, then they should be smaller than they are in the EMU members; more competences should be moved to the supranational level (you cannot have both the FC and no EMU budget)

− more deeply, the FC presents foundational problems inherent in the ideology of rules vs. discretion of governments on which the US Neo-liberalism and the German Ordoliberalism have converged.

The substantial point is that the destiny of the Fiscal Compact cannot be decided independently of the model of Union that we want to have.

Addressing the fundamental issues

At the end of the day, the whole matter under discussion is about contracts among governments (high-rank contracts of quasi-constitutional level). These involve mutual trust and credibility. "Credibility" has two meanings: one is whether commitments will be respected; the other is whether they can be respected.

History matters, of course. But the problem eventually lies in the fundamental issue of uncertainty and contract incompleteness. Since the ideal conditions of complete contracting (a complete specification of "if … then" clauses in all possible states of the world) seldom occur in reality, the clear-cut solutions to be found in the "rules, not discretion" prescription can hardly be applied. Let me quote a thinker regarded as the pole star of liberalism:

"If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields were essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible" (von Hayek, "The Pretence of Knowledge", American Economic Review, 1974, p. 7).

What we do observe (except in the EMU?) is that the higher the legal rank of the contract, the more the contract contains general and abstract principles (or the less it contains specific and state-contingent mandatory rules). "Discretion" is the necessary evil, as it were, of incomplete contracts, and the true task of high-rank charts is how to discipline, not suppress, discretion. This is generally accomplished under two dimensions. First, define who is legitimised to exert discretionary decision-making – in liberal democracies these are elected representatives. Second, strike a balance between tying the hands of the decision-maker (minimise the abuse of authority) and its scope of effective discretion in the face of unforeseen contingencies (remembering that the electors do expect the elected to exert their powers in such contingencies).

At the root of the problems that cripple the EMU and its further progress, I think, lies an obdurate illusion to circumvent these fundamental questions of viable, credible, long-lasting legal charts. We may offer a good service if we make an effort to bring this challenge to the forefront.