European Commission President Jean-Claude Juncker and UK Secretary of State for Foreign Affairs Boris Johnson traded barbs over how far the EU intends to push its integration agenda. In a speech Wednesday, the UK foreign secretary accused the EU of seeking to create an “overarching European state.” Not true, Juncker responded: “I am strictly against a European superstate. We are not the United States of America.”
This exchange of views looks baffling to an economist. The question is not what level of integration Europe intends to reach, but how much cohesion is needed to support the existing institutional framework, including monetary union. The risk is that the eurozone remains a halfway house, vulnerable to a repeat of the sovereign debt crisis which took place at the start of this decade.
George Osborne -- a former Conservative chancellor of the exchequer -- called it “the inexorable logic of a currency union.” In order to thrive, the eurozone needs a common budget, to support countries that are facing economic shocks. There is also a need to complete the banking union, so that individual governments are not left alone in addressing a financial crisis. In other words, the euro area needs to become more like the US not because it wants to, but because it has to.
These calls, however, forget how much the eurozone has achieved in the less than two decades from its inception. As a new report, edited by Jacob F. Kirkegaard and Adam S. Posen for the Peterson Institute of International Economics, shows, the speed of integration in the currency area has been remarkable. The authors argue that future progress will inevitably be slow and may, in fact, be accelerated by crises. The key will be resisting pushes for disintegration, which are bound to happen especially in bad times.
In many ways, the eurozone is in a much better place than the US was at the same stage of institutional development. The Federal Reserve System was established only after two failed attempts in the 19th century.
The European Central Bank, by contrast, has quickly established itself as one of the world‘s leading monetary policy institutions. True, the ECB has been less flexible than some of its peers, including the US Federal Reserve, in reacting to the crisis. But under the stewardship of Mario Draghi, it has finally embraced a wide range of new monetary policy instruments. And over the last couple of years, the ECB has also taken responsibility for the supervision of the eurozone’s largest banks. While many investors believe there is still room for improvement, few doubt that the “Single Supervisory Mechanism” is here to stay.
The banking union is, in fact, another example. Restrictions on interstate bank expansion in the US were only lifted in 1994, more than two centuries after the signing of its constitution. Not only does the euro area have no such restrictions, but it is also making good progress toward the creation of a single mechanism to deal with banks in a crisis. Of course, Europe‘s banking union lacks a common deposit insurance scheme, such as the one the US introduced in 1933. However, the eurozone has already set up a body in charge of winding down large failing banks and has agreed to a common set of rules to handle such banking troubles.
The biggest difference between the US and euro area relates to fiscal matters. Europe’s monetary union still hasn‘t matched the efforts of the first US secretary of the treasury, Alexander Hamilton, who succeeded in consolidating the debts of all American states into the new federal government. The idea of a common fiscal capacity, which for some should include “eurobonds,” raises hackles in fiscally prudent countries such as Germany, who fear they would have to pay for their more profligate partners.
However, as Posen and Kirkegaard argue, fiscal integration in the US took some time.
“From the beginning the US had the power to issue its own debt, but for the first more than 130 years of American history it did so sparingly and only to finance the nation’s wars,” they write. Only the New Deal program of expanded spending during the 1930s made the US federal debt significantly larger than today‘s EU budget. The eurozone may be very far away from having a fiscal union -- but for decades the US had a very incomplete one too.
The study offers some useful suggestions on how the eurozone should progress. The US experience shows that, as French diplomat Jean Monnet once said, “Europe will be forged in crises.”
Governments will only really have an incentive to act during an emergency, as happened during the reform spurt which accompanied the sovereign debt crisis. Brexit seems also to have concentrated minds, creating the current push for a strengthening of EU institutions. When times are good, one useful idea which the US can lend is to identify areas which are best handled collectively and then ask member states to pool resources, rather than the other way round. Earmarking a particular source of revenue to fund these projects could also be a promising avenue.
Juncker may not be seeking to create a superstate. But there is little doubt that for the eurozone to thrive, it will have to borrow a little more from the US still.
Ferdinando Giugliano
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View. -- Ed.
(Bloomberg)
