The euro crisis continues to deepen, as EZ leaders continue with their ‘too little too late’ policy reforms. This column argues that fixing the Eurozone problems requires a strong direction of fiscal and banking policy, but that this in turn requires deeper political integration including an elected president of the European Commission, and a two chamber parliament representing EU citizens and EU member states.

The euro has a supranational monetary policy framework, while the fiscal side is still national/intergovernmental. We have a central bank president for the Eurozone, but no finance minister. But how could countries possibly cede sovereignty over some aspects of fiscal policy without democratic legitimacy?

We need to fix the political dimension, before we can finally solve the financial side of the sovereign and banking crisis. It is not sufficient to elevate the current Commissioner for Economic and Monetary Affairs to Finance Minister status. A full democratic setting – including an elected president of the European Commission – is necessary to complete political union.

Political legitimacy for the Commission president is needed for two reasons:

  • To enforce budget discipline on participating members, to restrict the impact of fiscal spending on the wider Eurozone.
  • To oversee Eurozone banking supervision and resolution, to foster the stability of the Eurozone banking system.

Political union

The Treaty of Lisbon has created a union of democratic states. The EU itself also forms a democracy, albeit an incomplete one with the European Parliament as its main democratic element. The question is how the EU democracy can be further advanced with an elected executive.

The political framework starts with a much-needed Eurozone (EZ) Minister of Finance, as suggested by Trichet (2011). There have been suggestions about the powers that such a position would involve (e.g. Marzinotto, Sapir and Wolff 2011). But a strong, technocratic, finance minister is not sufficient in itself. Proper mechanisms for election and accountability are needed to have the EZ Finance Minister work in a democratic setting. This position would rest inside the European Commission.

National experience shows that the success of any finance minister crucially depends on strong support from the prime minister (and vice versa). Thinking about a democratic political union therefore starts with a President of the European Commission, elected by the citizens of the EU (Goodhart, 2011).

Angela Merkel has now made preparations for such a political endgame. At the recent Christian Democratic party conference (Parteitag, see CDU 2011), a resolution was endorsed proposing an elected President of the European Commission. After election, the President can then form a team, including his or her Commissioner for Economic and Monetary Affairs (i.e. the EZ Finance Minister). The Commissioners will need to be approved in hearings by the European Parliament.

The CDU resolution also suggests reforms to the parliamentary side of political union. It proposes a two chamber system. The current European Parliament would continue to be chosen by European citizens, and form the equivalent of the Bundestag, House of Commons, Tweede Kamer, or House of Representatives in the respective national countries.

A new chamber – comprising the Council of Ministers – would be created and form the equivalent of the Bundesrat, House of Lords, Eerste Kamer or Senate. The central idea of such a two chamber system is that the political discussion would be initially held in the main chamber representing the full electorate, and that a separate “chambre de réflexion” would then represent the interests of the separate member countries.

Powers of the EZ Minister of Finance

The idea of an EZ Minister of Finance has its raison d’etre in the need for enforcement of the Stability and Growth Pact (Trichet 2011). The intergovernmental approach has clearly failed, as EcoFin ministers followed the principle of non-intervention – ministers would not interfere with each other on the understanding that each of them would not be touched when they ran into problems. The EZ Minister of Finance would have full supranational powers to impose sanctions if a country transgresses the fiscal deficit rules.

Nevertheless, the concept of sanctions needs much further thought. Imposing pecuniary fines on a country already in fiscal difficulties does not make much sense. An alternative is to give the EZ Minister of Finance supranational powers to block budgetary expenditures, or to require his or her prior approval of expenditures by transgressing countries.

The EZ Minister of Finance would thus be the counterpart for the ECB president. In any country, the minister of finance and the central bank president are de facto choosing the appropriate monetary-fiscal policy mix. When the central bank is operating on an independent basis, the appropriate mix can emerge tacitly.

Banking

A second power is in the area of European banking. The Internal Market legislation enables banking on a European scale, while supervision and resolution is primarily done at national level, with some loose coordination.

The home country principle of the Internal Market does not suffice for the current large cross-border banks in Europe. During the 2008-9 financial crisis, it was clear that all authorities (both home and host) followed a national rather than a European agenda. To get out of the current setting dominated by national interests, banking supervision and resolution should be put on a European footing (Schoenmaker 2011; Veron 2011). While the chairs of the European banking and resolution authorities can be accountable to the European Parliament, these chairs need a political counterpart in the setting of banking policies and overall accountability. Moreover, the EZ Minister of Finance needs to decide, if needed, on taxpayers’ money for bank resolution.

Two-speed Europe

The EZ Minister of Finance will need budgetary oversight powers only for the Eurozone members. It is therefore likely to start overseeing Eurozone banking supervision. But the ultimate goal should be to operate at the EU level, since the Internal Market for Banking operates EU-wide.

The statement by the EZ Heads of State or Government at their 9 December 2011 meeting provides for a variable geometry (European Council 2011). The new legal framework will encompass the 17 Eurozone members and up to 9 non-Eurozone members. The UK prime minister has exercised its veto and decided not to join.

Nevertheless, financial services policy is as important for the UK (with the City as the premier financial centre for Europe and beyond) as agricultural policy for France. France has informal leadership on agricultural policy. It is difficult to outvote France on agricultural matters. Such a political arrangement could only work for financial services if the UK would be prepared to play the collaborative game (and not to demand unanimity in particular financial services domains, as it did at the December Summit).

The aim of our proposal is to keep the Internal Market on financial services. The financial system can then continue to support the real economy in an efficient way and thus foster economic growth. By contrast, an Alleingang of the Eurozone in financial services would force a split in the EU’s financial system. This may end up in an internationally competitive financial centre outside the “European” framework, and a more traditional financial system inside the “European” framework. This is clearly a lose-lose situation

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