Temporary Relief – the Big Tasks are still Ahead

by Daniela Schwarzer

The euro area is going through a moment of relief. After the ECB’s announcement of its new bond-purchasing programme (the OMT) and the German Constitutional court’s green light for the European Stability Mechanism (ESM), the bond and stock markets have recovered. Yet, the crisis probably only pauses – it has by far not been solved yet. The ECB alone cannot ensure the survival of the euro area, which can only be achieved by determined political action. This is why there is so much pressure on the member governments to hammer out a consensus around the question how a fiscal and a banking union can be introduced – steps of deepening which require a strong democratic legitimisation on the EU level.

As long as investors are not convinced of the irrevocability of the European Monetary Union, there will not be a lasting relief from the crisis. Investors still have to assume that a self-fulfilling prophecy materialises and the euro breaks apart – because they try to protect themselves from exactly this scenario. It is this risk of EMU dissolution that is priced-in when Spain, Italy, Portugal and Ireland have to pay high risk premiums when the refinance themselves on the market. Also the real economy suffers from these negative expectations: investment stagnates in some member states. When, as in the case of Greece, there is a risk that investment may lose 50 to 70 % of its value due to a currency depreciation, then no money will flow in. Consequently, the economic situation does not improve or deteriorates further, which then makes an EMU exit more likely. Also, the credit crunch that many companies in southern Europe suffer has to do with scepticism and attempts to avoid risks, in this case on the side of the banks.

The resolution of this crisis of trust requires measures that make the irreversibility of the single currency credible. What the euro area needs is a banking union that is based on three pillars: a powerful supervisory authority, a common deposit guarantee scheme and a bank resolution fund. In the fiscal field, in addition to closer coordination of national policies, the issuance of euro bonds which would make member states less vulnerable to self-fulfilling financial crises like the one we are witnessing since 2010. Also, a serious debate is needed in how far automatic stabilisers would help the eurozone prevent future cyclical imbalances. This is why the emerging debate on a European unemployment scheme and a serious debate on a re-design of the EU budget including EU taxes are so important.

But more mutualisation and risk sharing in the field of banking and public finances, further integration towards more coordinated fiscal and economic policies and possibly the creation of European transfer mechanisms will be politically unsustainable if these steps of integration are not accompanied by democratic decision making on the EU level.

This is where the current debate on political union comes in that is developing in some member states. The big challenge of the European Council meetings up to the end of 2012 will be to create a common understanding that technical solutions to the banking and debt crises and to the governance deficits of the euro area require a far-reaching re-think of the legitimisation of European policy decisions. While the involvement of national parliaments is useful in some regards, the European Parliament is a key actor to bring into the future governance set-up of the euro area.

Dr.  Daniela Schwarzer is Senior Associate at the Research Division European Integration at the German Institute for International and Security Affairs, Stiftung Wissenschaft und Politik (SWP) in Berlin. From September 2012 till August 2013 she is Fritz Thyssen Fellow at the Weatherhead Centre of the University of Harvard.