David RINALDI

Director of Studies and Policy

In these last few months, there has a lack of discussion about the long-term objectives of the European Monetary Union. These objectives need to be agreed first. Monetary arrangements are tools that have to serve broader social and political objectives, like prosperity and balanced growth within the community. It is essential to understand that the EMU cannot narrowly aim at macroeconomic stability only.

It cannot replicate the 19th century Gold Standard that purely focused on the restriction of the money supply and led to many undesirable social consequences and international conflicts. Broadening the notion of stability to account for the role of socio-economic and political stability would be a first step. Social and political stability are key elements for macroeconomic and financial stability.

In line with the rationale of the EU’s Stability and Growth Pact, con- vergence ought to remain an intrinsic objective of EMU governance. Convergence is a means to stability as well and financial support for stabilisation, investment and reform in member states substantially lowers the likelihood of the emergence of instabilities and defaults.

Upward economic and social convergence (i.e. ensuring that the poorer people in EU countries improve their wellbeing) is a key aim for the progressive political family. Ultimately, the success of the EMU project will be measured by the convergence and wellbeing it delivers. Convergence is not a matter of constraining the pub- lic sector, but rather enabling it, with investment tools and fiscal capacity, so that citizens can be supported in the transitions and changes that they will face.

To complete the EMU, a first necessary step is to fulfill the 2013 agreement on the Banking Union by introducing some risk sharing arrangements severing the sovereign-bank nexus and protecting small bank accounts. Secondly, to rebalance the EMU, a major priority is linked to the establishment of a sounder social dimension. Social and labour market objectives should be given equal footing to macroeconomic ones, as they also determine imbalances that can undermine the stability and unity of the euro area. The Social Scoreboard, which provides statistics on education and employment to feed the European Semester process, and the whole European Pillar of Social Rights are a step in the right direction but more should be done to reconcile macroeconomic and social objectives.

On Setting up a European Monetary Fund

The completion of the second pillar of the Banking Union with a backstop to the European Resolution Fund would be a positive step. It would be the first risk-sharing element to be intro- duced of the package agreed in 2013. Nonetheless, the third pillar of the Banking Union, i.e. European protection for small bank accounts, is not addressed and the current proposal is less ambitious than the original plan. Turning the ESM into an EMF and moving it from an agreement between governments into EU law would lead to greater trans- parency and accountability. It is indeed positive to move from an intergovernmental setting with- out check and balances to the Community level, where demo- cratic legitimacy and control are ensured. We consider it positive that surveillance and moni- toring remain in the hands of a political body, i.e. the European Commission and European Parliament.

On introducing a EU Minister of Economy and Finance

There is general recognition that coordination should go beyond public finances and ensure economic policy coordination in an integrated manner; the task assigned to the European

Minister of Economy and Finance should respect this concern. This proposal could bring greater democratic legitimacy, thanks to the checks and balances of EU law and the direct accountablil- ity to the European Parliament; and enhanced coordination thanks to improved coordina- tion between national and EU economic policies. Whilst it looks reasoned to have a double hat, as Commissioner and President of the Eurogroup, it is unclear whether adding a third hat, as head of the European Monetary Fund, would represent a good governance model.

On incorporating the ‘Fiscal Compact’ into EU law

It fails to acknowledge that the current fiscal rules have excessively compressed aggregate demand. It is a missed opportunity to rebalance legitimate concerns about fiscal consolida- tion with the necessary long-term pro-growth & pro-convergence investments. It gives application to the commitments taken in 2012 and to the requests of the European Parliament and takes into account the flexibility instruments agreed in early 2015, but it fails to take up the opportunity to introduce technical reforms concerning: i) the multiannual dimension of public investment, ii) out-dated targets (60% of debt over GDP), iii) methodo- logical flaws for computing the potential GDP.

On introducing new budgetary instruments

It shows no willingness to find new financing in support of highly demanded reforms and for instruments ensuring a proper stabilisation in case of shocks. The focus on technical assistance is to be welcomed although there is not much evidence yet that the Structural Reform Support Service (SRSS) has been able to effectively deliver on improving public administration and effective reforms. It will remain an on-demand service, thus ensuring country ownership but it will likely fail to address the most in need.

The proposal about redefining the Performance Reserve and the establishment of a pre-accession instrument may have an impact on cohesion policy, which, although reformed, should not end up being weakened. In the stabilization function, focusing solely on protecting investment is rather controversial, and in the absence of concrete schemes, remains an unconvincing idea. Protecting aggregate demand, ideally linked to the sudden rise of unemployment, is closer to the scholarly consensus regard- ing existing and sustainable monetary unions. The debate on shock-absorption and counter-cyclical stabilization capacity has to keep consider- ing all options.