Towards a Euro Union
by Glienicker Gruppe
If public sentiment in Germany is anything to go by, there is little reason to worry about Europe. The period when it was feared that the euro might collapse seems a long time ago. Financial markets have calmed down. The design flaws of the monetary union seem to have been papered over, and European Council President Herman van Rompuy was able to claim, unchallenged, before the UN General Assembly in New York that the “existential threat to the euro” is over.
We think this is fundamentally wrong. There is no reason to relax the guard. On the contrary, the complacency of large sections of the German public with regard to the euro crisis is not only unfounded: it is dangerous. None of the fundamental problems underlying the euro crisis have been solved – not the banking crisis, nor the sovereign debt crisis, nor the competitiveness crisis. National debt problems continue to escalate. Banks are overloaded with bad loans, crippling the private sector. In the crisis countries, a generation is being deprived of its livelihoods and opportunities. The margins of the political spectrum in these countries are becoming increasingly radicalized. And willingness to find common solutions for the euro area appears to be rapidly on the wane.
We – eleven German economists, lawyers and political scientists – cannot accept the prospect of further playing for time and betting – with ever-larger wagers – that the crisis will eventually pass. Europe has structural problems that require structural solutions. Even though this is not a popular view at the moment, we are convinced that the monetary union needs deeper integration. More particularly, it needs a sufficiently powerful European economic government.
We speak as German but also as EU citizens who are connected with other EU citizens in a community. This is no contradiction: it is in Germany’s self-interest to overcome fears about a transfer union and to stop dismissing any constructive proposal as an attempt to pull the money out of German pockets.
The no-bailout principle, which states that no state is allowed to save another from bankruptcy, was right. But if its enforcement causes incalculable damage, neither debtors nor creditors will believe the assertion that states must take direct responsibility for themselves. The architecture of the euro area can only be sound and stable if it prevents such collateral damage. That requires deeper integration, in four areas.
–> Responsible debtors need responsible creditors
The Maastricht Treaty assumed that common debt rules would solve the problem of the irresponsible building up of debt. Greece showed this to be a delusion. Therefore, it was right to toughen sovereign debt rules with the fiscal pact. But it is also true that the crisis would not have been prevented by the fiscal pact itself in countries like Spain and Ireland. The fiscal risks that piled up in those countries were ultimately caused by excessive private sector debt.
Whether the indebtedness is public or private, it becomes a problem for the monetary union only if private creditors do not write off their losses on their own account, but socialise them. But that is exactly what happened: the debts of financial institutions, and of banks in particular, were socialised. The banks were able to do so because they knew that their systemic importance would give the European taxpayer no choice but to save them.
To put a stop to this game once and for all, the euro area needs a robust banking union. The single banking superviser must ensure that the banking sector has a solid capital base. The common bank restructuring mechanism must make creditors accountable: if banks suffer large losses, first shareholders must fill the gap, then subordinated bondholders, thereafter senior creditors and lastly the bank funds financed by the banks themselves. Only when these options have been exhausted, should there be resort to the European taxpayer.