Paolo GUERRIERI

Former Senator of the Italian Republic, Professor at the College of Europe and at the Sapienza University

The euro area has spent the best part of a decade fighting for survival. Significant institutional reforms have been introduced. More recently, the eurozone has been enjoying its strongest recovery since the financial crisis but complacency would be misplaced and the favourable economic expansion should be used as a unique window of opportunity for reforms. Economic Monetary Union (EMU) was left unfinished and is still a fragile construction. There is a broad consensus on the need to take further steps to strengthen it, but significant differences persist among EU countries and the European Commission. The eurozone needs ‘dynamic resilience’, explains Paulo Guerrieri.

‘Dynamic resilience’ presupposes strengthening both the monetary system’s resistance to shocks and crises and its pol- icy space. The package of reform proposals recently put forward by the Commission are interest- ing suggestions but can only be a good starting point for the next phase of negotiations. In this regard three sets of measures and reforms should be pursued in order to increase the stability, growth capability and social dimension of the euro area.

A key element here should be to bring the new EMF within the EU’s legal framework – as in the Commission’s plan – together with a reformulation of its governance.

Financial stability

The first set is those reforms to be launched and / or completed to increase the financial stability of the euro area. In the unfortunate scenario of a new and serious financial crisis – which is far from being ruled out – the euro area is not yet adequately equipped to deal with it and runs the risk of plunging into a deep crisis. In this respect completion of the bank- ing Union is essential through the so-called ‘second pillar’, the single resolution mechanism regulation (SRMR), and the third pillar, common bank deposit insurance.

A backstop for the single resolution fund should be created by expanding the role of the European Stabilisation Mechanism, transforming it into a type of European Monetary Fund (EMF), with a substantial increase in the resources at its disposal and greater powers over the design and implemen- tation of euro area bailouts. A key element here should be to bring the new EMF within the EU’s legal framework – as in the Commission’s plan – together with a reformulation of its governance.

Its main driving force is the unconventional monetary expansion of the European Central Bank (so-called ‘Quantitative Easing’) which is soon going to come to an end.

Growth capability

The second set of issues relate to growth and diverging performances in the euro area. Despite its recent acceleration, the recovery remains relatively modest by comparison with all the economic expansion in the last three decades. Its main driving force is the unconventional monetary expansion of the European Central Bank (so-called ‘Quantitative Easing’) which is soon going to come to an end.

Together with structural reforms and Single Market consolidation as main supply policies there is also the need for policies to support aggregate demand in the euro area. It would serve to have a common fiscal policy managed for the euro area as a whole based on more symmetrical adjustment mechanisms (the so-called ‘European fiscal stance’). In addition, the EU should give a strong priority to investment at the European level that has a high multiplier effect, going beyond the modest Juncker plan. In this perspective, the eurozone should have its own budget capacity – although initially modest – to boost investment, address future economic shocks and facilitate structural reforms. The introduction of a ‘golden rule’ in the fiscal pact that allows each country to finance additional national investments could offer a further contribution in this direction.

Social policy and inclusive growth

The third set of measures concerns social policies in Europe. What is needed today is ‘inclusive growth’, characterised by both more efficiency and equity. Inclusive growth means creating opportunities for all segments of the population of a country, so as to achieve a fair income distribution of the benefits of economic growth. It is the only effective way to respond to and to stop the rise of populist and anti-European movements. To this end, a series of social measures and policies (such as active policies against unemployment, reforming and reviving welfare, restoring social mobility) are needed at national and European level. A European Pillar of Social Rights has been recently proposed. The real challenge concerns the implementation and enforcement of these rights and standards.