ChapterPDF Available

The divided Eurozone. Mapping Conflicting Interests on the Reform of the Monetary Union

January 2017

In book: Politik für Europa #2017

Authors:

Björn Hacker

HTW Berlin - University of Applied Sciences

Cedric Koch

WZB Berlin Social Science Center

Content uploaded by Björn Hacker

Content may be subject to copyright.

Björn Hacker, Cédric M. Koch

The divided Eurozone

Mapping Conﬂ icting Interests on the Reform

of the Monetary Union

Björn Hacker, Cédric M. Koch

The divided Eurozone

Mapping Conﬂ icting Interests on the Reform

of the Monetary Union

FRIEDRICH-EBERT-STIFTUNG

Europe needs social democracy!

Why do we really want Europe? Can we demonstrate to European citizens the opportunities offered by

social politics and a strong social democracy in Europe? This is the aim of the new Friedrich-Ebert-Stif-

tung project “Politics for Europe”. It shows that European integration can be done in a democratic,

economic and socially balanced way and with a reliable foreign policy.

The following issues will be particularly important:

– Democratic Europe

– Economic and social policy in Europe

– Foreign and security policy in Europe

The FES will devote itself to these issues in publications and events throughout 2015–2017: we start

from citizens’ concerns, identify new positions with decision-makers and lay out alternative policy

approaches. We want a debate with you about “Politics for Europe”!

Further information on the project can be found here:

www.fes.de/de/politik-fuer-europa-2017plus

Friedrich-Ebert-Stiftung

The Friedrich-Ebert-Stiftung (FES) is the oldest political foundation in Germany with a rich tradition dating

back to its foundation in 1925. Today, it remains loyal to the legacy of its namesake and campaigns for

the core ideas and values of social democracy: freedom, justice and solidarity. It has a close connection

to social democracy and free trade unions.

FES promotes the advancement of social democracy, in particular by:

– Political educational work to strengthen civil society

– Think tanks

– International cooperation with our international network of ofﬁ ces in more than 100 countries

– Support for talented young people

– Maintaining the collective memory of social democracy with archives, libraries and more.

About the authors

Dr. Björn Hacker is Professor of Economic Policy at the Hochschule für Technik und Wirtschaft (HTW) Ber

lin.

Cédric M. Koch is a research assistant in the Faculty of Economics and Law at the Hochschule für

Tec h

nik und Wirtschaft (HTW) Berlin.

Person responsible in the FES for this publication

Dr. Uwe Optenhoegel, Director EU-Ofﬁ ce Friedrich-Ebert-Stiftung Brussels

Friedrich-Ebert-Stiftung Brussels*

* This study was first published by the German Macroeconomic Policy Institute (IMK) within the Hans Böckler Foundation in

November 2016.

A PROJECT OF THE

FRIEDRICH-EBERT-STIFTUNG

2015 – 2017

ABSTRACT

SUMMARY

1 INTRODUCTION: THE CONFLICT OVER THE FUTURE OF THE ECONOMIC AND

MONETARY UNION

2 THE EMU REFORM DEBATE SINCE THE OUTBREAK OF THE EURO CRISIS

2.1 Reform initiatives 2011–2014

2.2 The preparation process of the 2015 Five Presidents’ Report

3 TWO CONCEPTS FOR THE FUTURE OF THE EUROZONE: STABILITY UNION

VS. FISCAL UNION

3.1 The EMU as a stability union

3.2 The EMU as a ﬁscal union

3.3 Interim summary: Instruments for two concepts of a Monetary Union

4 STABILITY UNION AND FISCAL UNION IN THE CREATION OF THE FIVE

PRESIDENTS’ REPORT

4.1 The starting point: The Commission’s Analytical Note

4.2 The stability union camp

4.3 Interim summary on the stability union

4.4 The ﬁscal union camp

4.5 Interim summary on the ﬁscal union

4.6 The role of the European Parliament

4.7 The ﬁnal Five Presidents’ Report

5 THE EU IN THE CONFLICT BETWEEN FISCAL UNION AND STABILITY UNION

6 CONCLUSIONS AND OUTLOOK

List of Figures and Tabels

References

References for Sherpa contributions

FRIEDRICH-EBERT-STIFTUNG

Björn Hacker, Cédric M. Koch

The divided Eurozone

Mapping Conﬂicting Interests on the Reform

of the Monetary Union

FRIEDRICH-EBERT-STIFTUNG

The euro crisis showed how incomplete and vulnerable the

architecture of the Monetary Union is. Institutional reforms

are slow or stalling due to divergent development perspec-

tives for the Eurozone. This study analyses the conﬂicting in-

terests among member states involved in the recent reform

process. Based on economic theory, a disagreement can be

identiﬁed between a minority around Finland and Germany,

which advocate a “stability union”, and a majority around

Italy and France striving for a “ﬁscal union”. But a far-reaching

fiscal and political integration of the Eurozone cannot be

achieved against the defenders of the status quo, as the “ﬁs-

cal union” representatives lack coherence and unity and are

struggling with economic problems. The intergovernmental

preparation process for the Five Presidents’ Report of 2015,

which is examined here, reveals a deeply divided Europe and

a European Commission desperately seeking consensus. As

the recent Commission White Paper on the Future of Europe

aimed to restart the reform debate on the Eurozone, the con-

ﬂicts identiﬁed here are likely to be central to reform negoti-

ations and outcomes.

ABSTRACT

THE DIVIDED EUROZONE

SUMMARY

This study investigates the conflicting interests and power

struggles among the EU member states and the role of the

European institutions in the debates over reforming the Euro-

zone, following seven years of crisis.

Efforts to institute fundamental reforms of the Eurozone

in response to its crisis have been under way since 2011 and

have already led to individual institutional changes, such as

the European Banking Union. But member states have failed

to achieve consensus over further-reaching reforms, such that

the proposals under discussion encompass a wide range of

different objectives and scales. After the failure of the first

reform initiative in 2012, the reform process was to be re-

launched from early 2015 onwards through the Five Presi-

dents’ Report based on contributions from all the EU mem-

ber states. Eventually the European Commission, which leads

the process, published a White Paper on the Future of Europe

in March 2017 and announced the publication of a Reﬂection

Paper on deepening Monetary Union for May 2017, which is

to be based on the Five Presidents’ Report.

The disagreements over the reforms needed for the

Eurozone are rooted in fundamentally different economic

paradigms, which already shaped the founding phase of to-

day’s Monetary Union. One camp argues for the vision of

the Monetary Union as a stability union, based on principles

of internal and external price stability and prioritising rule-

based self-regulation of the forces of the free market in or-

der to minimise political risks. The opposing camp pursues

the vision of the Monetary Union as a ﬁscal union, based on

the conviction that the inevitability of market failure means

that transnational economic governance must address more

than mere price stability. The two visions represent diametri-

cally opposed conceptions of a complete and functioning

Monetary Union and consequently diverge widely in their

interpretations of the causes of the crisis and the necessary

reform steps.

The stability union/ﬁscal union divide is also reﬂected in

the process analysed here, the creation of the Five Presidents’

Report. While the Commission’s document initiating the new

reform process remains deliberately vague on the two posi-

tions, the member states’ contributions subsequently com-

municated to Brussels can be classiﬁed on the basis of their

demands into three camps in relation to the two diverging re-

form perspectives:

– Proponents of a stability union (Finland, Estonia, Lithuania,

Germany, Malta, the Netherlands, Denmark, Romania, Hun-

gary) reject both expansion of economic governance and

deeper ﬁscal integration.

– Proponents of a ﬁscal union (Italy, Spain, Portugal, Belgium,

Luxembourg, Slovenia, Latvia, France) argue for an expan-

sion of both economic governance and ﬁscal integration.

– Proponents of a ﬁscal union with restrictions (Cyprus, Slova-

kia, Croatia, Poland, Ireland, Austria, Czech Republic) call

in principle for development of the Monetary Union, but

favour movement on only one of the two fronts: either

more economic governance or steps towards ﬁscal inte-

gration.

The composition of the three camps reveals the proponents

of a ﬁscal union, led by Italy, to be the largest group in terms

of both population and GDP, holding a narrow majority with-

in the Eurozone even without including the supporters of a

restricted fiscal union. Proponents of a stability union – led

by Finland – represent a minority position, being the smaller

group under both criteria. The camps also tend to reﬂect the

different economic contexts of the member states, with states

with higher unemployment dominating the ﬁscal union group

while states with low levels of debt make up the stability un-

ion camp.

The proponents of a stability union are considerably more

consistent in their demands than the ﬁscal union group, which

exhibits great variation in the details. This is partly a function

of the clearer position of the stability camp, which wants to

strengthen existing instruments but rejects steps going beyond

the status quo of the existing Eurozone architecture. The sup-

porters of a ﬁscal union, on the other hand, are calling for far-

reaching reforms in a range of different areas, but share only

a small common denominator. As a result of the diversity with-

in the ﬁscal union camp (in contrast to the unity of the stabil-

ity union group) and the equivocal stances of the European

Parliament and the Commission, the minority position is most

strongly reﬂected in the ﬁnal Five Presidents’ Report.

FRIEDRICH-EBERT-STIFTUNG

This study shows how the euro crisis has reopened a funda-

mental conflict over the right mix between rule-based free

market and policy intervention. At its heart is the disagree-

ment between member states over reforming the Eurozone

towards a stability union or a fiscal union. A determined and

economically relatively successful group led by Finland and

Germany wants to permit only tinkering with the status quo

of the Monetary Union, while a disunited group struggling

with economic difficulties, led by Italy and France, is calling

for far-reaching fiscal and political integration. In the ab-

sence of a decision between the two perspectives, the re-

form debate drags on and creates unsustainable compro-

mises, as in the case of the Banking Union. Alongside other

important national elections and leadership changes in Italy

and the Netherlands, as well in Germany later this year, the

often vacillating position of France will be decisive. Presidential

elections there take place only two months after the publica-

tion of the White Paper on the Future of Europe and around

the time of the announced dissemination of the Commission

Reﬂection Paper on deepening Monetary Union in May 2017

and will be crucial for the future balance of power in the “map

of reform conﬂict” (see Figure 1).

Figure 1

Divide d Europe. Identiﬁed reform camps on the future of the Eurozone, 2015

Note: Stability Union: FIN, EST, LIT, GER, MLT, NED, DEN, ROM, HUN. Fiscal Union: ITA, ESP, POR, BEL, LUX, SVN, LAT, FRA.

Fiscal Union with restrictions: CYP, SVK, CRO, POL, IRE, AUT, CZE. No data available for UK, SWE, GRE, BUL.

Source: authors, Mapchart.net.

towards a stability union

towards a fiscal union

towards a fiscal union with restrictions

These states favour reform of the Eurozone…

THE DIVIDED EUROZONE

In the shadow of the challenges faced by the EU over migra-

tion, refugees, integration and Brexit, the dominant European

issue of recent years has been rather ignored: the future of

the Economic and Monetary Union (EMU). After seven years

of permanent crisis, all-night summits and a permanent state

of emergency culminating in the clashes over Greece’s future

in the Eurozone in July 2015, Europe’s leaders in 2015 – at the

Initiative of the European Commission – wanted to initiate the

process leading to the next set of fundamental reforms of the

Eurozone architecture. At the June summit of the European

Council, the Commission presented the so-called Five Presi-

dents’ Report (Juncker 2015b), which is still awaiting discus-

sion by the heads of states and governments.

READING OPTIONS:

– For a rapid overview of the analysis as a whole, we

recommend reading Chapters 3.3 (p. 17), 4.3 (p. 24),

4.5 (p. 32), 5 (p. 36), and 6 (p. 40).

– For the positions of individual countries and power

relations within the “map of reform conﬂict”, we rec-

ommend reading Chapters 4 (p. 19) and 5 (p. 36).

– For the theoretical background to the conflicting re-

form interests and a summary of reform initiatives

to date, we recommend reading Chapters 2 (p. 7)

and 3 (p. 10).

The question of how the Eurozone needs to be modified

cannot be postponed indefinitely, however, especially as

there is already a concrete timetable for the next far-reach-

ing initiatives to complete the EMU. In March 2017, Commis-

sion President Juncker presented a White Paper on the Fu-

ture of Europe, including a roadmap for a Reflection Paper

on the deepening of Monetary Union in May 2017, intended

to re-start discussion on the future course ahead of the De-

cember 2017 European Council. Moreover a new round of

acute euro crisis was only narrowly averted in the summer

of 2016, through yet another agreement between Greece

and its creditors. On 24 May 2016 the Eurogroup released

another instalment from the third bailout package. At the

same time, under pressure from the International Monetary

Fund (IWF), debt relief is now being controversially debated

between the country’s creditors in the Eurozone and the IMF,

with an easing of Greece’s debt ratio of almost 180 percent

of GDP under discussion for 2018 (Eurogroup 2016). But with

Euro ﬁnance ministers insisting on strict austerity measures to

achieve a primary surplus of 3.5 percent of GDP in the medium

term, many observers expect only a brief lull (Neuerer 2016;

Schieritz 2016). The potentially explosive consequences of half-

hearted decisions on EMU reform became apparent in 2016,

when the bail-in of investors at four troubled Italian regional

banks – under the Single Resolution Mechanism (SRM), which

came into force in January – caused bewilderment among in-

vestors and lenders and undermined the liquidity of Italy’s

third-largest bank, Monte dei Paschi di Siena, threatening its

solvency and stirring discussion on a public bailout. The rea-

son: to date there is neither agreement among the member

states on the planned European deposit guarantee scheme

nor a functioning fund to protect against defaults and ﬁnance

wind-downs (Münchau 2016).

The question of the euro will thus inevitably continue to

play a major role, and the Five Presidents’ Report already in-

dicates where the political battles will lie. This study traces

the fundamental debate that has played out since 2015 in

the background of European politics. It divides Europe politi-

cally: on the one side are proponents of a “stability union”

based on rules and control of national policy-making, on the

other the advocates of a “fiscal union” who believe further-

reaching integration steps to be necessary.

The object of this study is to identify the conflicting in-

terests between the relevant member states and institutional

EU actors over the future shape of the Monetary Union. The

classification of the contributions to the latest Eurozone re-

form process – of which this study represents the first thor-

ough review – permits us to reconstruct the reform discourse.

The resulting “map of reform conﬂict” yields insights into both

the substantive differences and the majorities within the Un-

ion. The study also questions widely held assumptions about

the positions of individual member states and their role in

the negotiations. The “map of reform conflict” identifies the

ideological and power-political possibilities and limits of a

INTRODUCTION: THE CONFLICT OVER

THE FUTURE OF THE ECONOMIC AND

MONETARY UNION

FRIEDRICH-EBERT-STIFTUNG

Monetary Union emerging from years of crisis. It explains –

aside from new political conﬂicts at the European level – the

persistence of the crisis phenomena in the Eurozone and the

slow nature of progress on developing and implementing

an improved institutional architecture for the single currency.

In the following we supply first of all an overview of the

historical origins of the debate over a fundamental reform of

the EMU, from the outbreak of the euro crisis in 2010 through

to the publication of the Commission’s latest reform propos-

al (Chapter 2). Next, we trace the theoretical roots of today’s

division into the two camps, proponents of stability union

and of fiscal union (Chapter 3). The resulting overview of in-

struments and institutions is used in a qualitative analysis of

member states’ contributions submitted to the Commission

in the process of preparing the Five Presidents’ Report, in

order to create a classification of national preferences and

to establish a ranking of the intensity of their demands (Chap-

ter 4). The ﬁndings are contextualised with the concrete pro-

posals of the published report and discussed with regards

the real power relations in the reform discussion within the

EU, including a quantitative classification (Chapter 5). The

study concludes with a summary and outlook (Chapter 6).

THE DIVIDED EUROZONE

This section describes the first initiative to fundamentally re-

form the EMU in 2011/12 and outlines the process employed

by the European Commission for preparing the Five Presidents’

Report. This second attempt to achieve comprehensive re-

forms is also the context of member states’ contributions in

2015. These are analysed in chapter 4 as the central focus of

this study.

SUMMARY:

– Efforts to fundamentally reform the Eurozone in re-

sponse to its crisis have been under way since 2011

and have already led to individual institutional chang-

es, such as the European Banking Union.

–

But there is no consensus among the member states

over further-reaching reforms. So the reform propos-

als to date fluctuate widely between different objec-

tives and dimensions.

– The Five Presidents’ Report of early 2015 was de-

signed to relaunch the reform process, with contri-

butions from all EU member states. The next step

was a Commission White Paper on the Future of

Europe in March 2017 which also announced an

upcoming Reflection Paper on deepening the Euro-

zone due in May 2017.

2.1 REFORM INITIATIVES 2011–2014

Along with the acute bailout packages – which have general-

ly been created under great time pressure – and their various

institutional accompaniments (European Stability Mechanism,

Troika etc.), different plans, ideas and suggestions concerning

the long-term institutional arrangements for the Monetary

Union have been circulating within the EU (see Hacker 2013).

In December 2012, the then-President of the European Coun-

cil, Herman van Rompuy, published a report on developing

“a deep and genuine Economic and Monetary Union” pre-

pared together with the presidents of the Eurogroup, the

European Commission and the European Central Bank (ECB)

(the “Four Presidents’” or “Quadriga” report). In the same

year independent proposals for reform timetables also came

from the European Parliament (“Thyssen Report”) and the

Commission (“Blueprint”), and were discussed together with

the Four Presidents’ Report at the December 2012 summit.

Although the Four Presidents’ Report called for relatively

far-reaching integration steps and supplied a clear political

timetable, the political response of the heads of state and

government in the summit conclusions were reserved and

largely restricted to declarations of intent. The only excep-

tion in this respect was the Banking Union, which has in the

meantime been implemented (albeit incompletely in certain

important respects). Otherwise the European Council em-

phasised above all the need for strict budgetary discipline.

Additional fields of activity were also agreed, namely ex-

ante coordination of national economic policies, direct “mutu-

ally agreed contracts” between each member state and the

EU including a “solidarity mechanism” to create stronger in-

centives and controls in the implementation of national re-

form policies, as well as progress on the social dimension of

the EMU (European Council 2012).

However, more notable than these (largely vague) plans

were the aspects that are absent here, even though most of

them were included in the various preparatory reports: there

is no longer any talk of a medium-term fiscal union in the

sense of joint debt management, a ﬁscal capacity or steps to-

wards a political union with greater democratic powers at

the supranational level. So by the end of 2012 there were al-

ready clear signs of a reinterpretation of these instruments

and aspects according to the vision of a stability union, where

the fiscal integration steps function only as incentives for

implementing coordinated stability and competition policy

(Hacker 2013). The member states failed to achieve a con-

sensus over the newly identified fields of activity during the

following months. Commission communications in 2013 on

the

Convergence and Competitiveness Instrument, on ex-ante-

coordination of economic policies and on the social dimen-

sion of the EMU were stripped of all controversial aspects be-

fore publication and remained irrelevant. The joint Franco-

German declaration of 30 May 2013, in which all reform pro-

posals that have not yet been set in motion are postponed

THE EMU REFORM DEBATE SINCE THE

OUTBREAK OF THE EURO CRISIS

FRIEDRICH-EBERT-STIFTUNG

to the distant future in favour of moves to “establish a com-

mon assessment” of indicators and policy areas, is symptomatic

(Bundesregierung 2013: 9). Even this did not occur and impor-

tant election dates for the German Bundestag in autumn 2013

and the European Parliament in spring 2014 ensured – along-

side the lack of unity among the member states – that further

discussion of the reform plans was continually postponed.

In the period since early 2013 debate in the European con-

text has been largely over the exact details of the Banking

Union. Whereas most European states were interested in

rapid implementation, the German government in particular

dragged its feet over the establishment of the Single Super-

visory Mechanism, the Single Resolution Mechanism and the

implementation of a European deposit insurance (Speyer 2012).

Beyond this, the debate over ﬁscal austerity escalated after

the election of the left-wing government of Alexis Tsipras in

Greece in January 2015, coming to an ignominious conclu-

sion in July 2015 when controls on capital movements had

to be imposed to prevent a collapse of the Greek financial

sector and the Greek government ultimately ignored its own

referendum result to reach an agreement with the creditor

“institutions” (as the troika is now called) that essentially rep-

resents a continuation of previous policies (Legrain 2015).

The Five Presidents’ Report thus represents the first at-

tempt since the new EU-Commission under President Jean-

Claude Juncker took office in 2014 to revitalise the debate

over the need for further reforms of the Monetary Union. But

because the Report has to date been pushed down the politi-

cal agenda of the European Council summits by the acute

challenge of open disagreements between member states

over migration and refugee policy, responses to terrorist at-

tacks and Brexit, a profound discussion and evaluation by the

heads of state and government has yet to occur. Nonetheless,

the Five Presidents’ Report will represent the basis for discus-

sions about the future shape of the Monetary Union. In tan-

dem with the joint Franco-German proposals initially an-

nounced for the end of 2016 but not delivered to date, the

Report represents the precursor for the Commission’s Re-

ﬂection Paper on deepening the Eurozone due in May 2017,

which was announced by Juncker in the White Paper on the

Future of Europe in March 2017 (see Figure 2). In the follow-

ing, the process of creating the report is described and the

context of the Sherpa contributions explained.

2.2 THE PREPARATION PROCESS OF THE

2015 FIVE PRESIDENTS’ REPORT

To revive discussion about the future of the EMU, the Com-

mission circulated an Analytical Note in February 2015 lay-

ing out an analysis of the crisis and formulating a ﬁrst set of

eleven questions to member states (see Chapter 4.1). Com-

mission President Jean-Claude Juncker invited member

states to launch a discussion process that “could” address

these very fundamental questions (Juncker 2015a: 8), re-

volving around the economic governance of the Eurozone.

The document employs a multi-level categorisation: First it

addresses political governance capacities in the existing

framework, asking how implementation could be improved.

In a second step the document turns to the institutions and

instruments required for sanctioning violations of the exist-

ing agreed governance framework. Thirdly, it asks whether

November 2012:

Thyssen Report

by European

Parliament with

recommendations

on Four-Presidents-

Report

November 2012:

Blueprint by

European

Commission for a

deep and

genuine economic

and monetary

union

December 2012:

Final Four-

Presidents-

Report (Quadriga-

Report)

December 2012:

European Council

curtails reform

plans

Ma y 2013:

Joint Franco-

German decla-

ration postpones

reform plans until

further notice

Ju ne 2015:

Five-Presidents-

Report restarts

the reform

process

March 2017:

European

Commission

White Paper on

the Future of

Europe

Ma y 2017:

Commission

Reflection

Paper on the

deepening of

the Economic

and Monetary

Union

Figure 2

The Five Presidents' Repor t in the context of Eurozone reform plans since 2012

Source: authors.

Announced

THE DIVIDED EUROZONE

today’s Eurozone is in fact now equipped to face the chal-

lenges observed in the euro crisis since 2010, before in a

final step concretely posing the question of greater trans-

fers of sovereignty, more risk-sharing and increased conver-

gence.

Following a discussion about the ﬁrst round of written con-

tributions received from the EU capitals and the European

Parliament between the member states’ negotiators (Sherpas)

and the Commission on 11 March 2015, a second document

of 21 April 2015 supplied a summary of the responses to date

and seven sets of more detailed questions (European Com-

mission 2015a; 2015b). These address individual aspects from

the member states’ contributions and explore how par

ticular

demands could be implemented concretely. In response,

fif-

teen member states and the European Parliament submitted

second contributions to the Commission, whereby Germany

and France prepared a joint response. In some cases, the

member states’ governments responded concretely to the

questions posed to them in the second document, in others

they expanded and enlarged on the views communicated in

the first round. In many cases, the second-round contribu-

tions are more comprehensive than the initial responses to

the Analytical Note. This suggests that the Commission has

succeeded in heightening the member states’ interest in feed-

ing their national stances on the future of the EMU into the

process.

So the Juncker Commission was very quickly able to re-

vive a debate over the EMU that had fallen into abeyance in

2013 and 2014 (see Figure 2). At the same time, it succeed-

ed in structuring the process: most of the member states

answered the questions in order. However, certain govern-

ments only commented on particular aspects, while others

delivered comprehensive disputations. The quality varies con-

siderably, ranging between purely subjective assessments

and semi-scientific focus.

In terms of substance, considering the process as a whole,

a fundamental conﬂict becomes apparent. It runs throughout

the debate and is also mentioned by the Commission in its

documents. The Commission summarises the national contribu-

tions received thus far in a discussion paper of 21 April 2015:

“There is a general recognition of the significant progress

made over the last few years to strengthen economic gov

ern-

ance and the EMU architecture. Some contributions would

consider this progress broadly sufﬁcient and not see the

need

for significant further steps. On the other hand, other con-

tributions consider that, given the experience so far, the

mini-

mum requirements for a stable EMU are still not in place”

(European Commission 2015a: 1). So the opinions of the mem-

ber states span the range from consolidation of the existing

governance framework and ﬁne-tuning of the European Se-

mester on the one side through to the proposal to establish

new joint institutions and mechanisms on the other, as also

reflected in the Draft Outline of 22 May 2015 for the final

Five Presidents’ Report (European Commission 2015c).

These fundamentally diverging perspectives can be ex-

plained in terms of the different visions of a stability union on

the one hand and a fiscal union on the other. In the follow-

ing, this analytical framework is ﬂeshed out to subsequently

serve as the basis for the analysis of the Sherpa contributions.

Febru ary 2015:

Analytical note

by European

Commission

inviting contribu-

tions by member

states

Ma rc h 2015:

Discussion of

analytical note

by Sherpas,

based on

member state

contributions

Ap ril 2015:

Summary of

contributions by

European Com-

mission and

second question-

naire to member

states

May 2015:

Second Sherpa

discussion

based on mem-

ber state contri-

butions and

draft outline by

European

Commission

June 2015:

Final Five

Presidents'

Report

March 2017:

European Com-

mission White

Paper on the

Fut ure of

Europe

May 2017:

Commission

Reflection Paper

on deepening

monetary

union

Figure 3

The preparation process for the 2015 Five Presidents' Report

Source: authors.

Announced

FRIEDRICH-EBERT-STIFTUNG

After the turmoil and crises of recent years everyone agrees

that the Eurozone needs to be reformed. But that is where

the consensus ends and prescriptions for the Monetary Un-

ion diverge enormously. In fact, disagreement over the right

architecture and governance for the Monetary Union is noth-

ing new. The latest crisis re-ignited the heated debate that

academics and politicians were already conducting in the run-

up to the founding of the EMU. Its origins lie above all in the

question of how a Monetary Union should be constructed.

SUMMARY:

– Disagreement over necessary reforms for the Eurozone

is rooted in fundamentally different economic para-

digms, which shaped the founding phase of today’s

Monetary Union.

– One camp argues for the Monetary Union to be a sta-

bility union based on principles of internal and exter-

nal price stability and prioritising rule-based self-

regulation of free-market forces to minimise political

risks.

– The other camp argues for the Monetary Union to

be a ﬁscal union based on their belief in the need for

transnational economic governance to extend be-

yond the aspect of price stability, in order to address

inevitable market failures.

– The two visions represent diametrically opposed con-

ceptions of a complete and functioning Monetary

Union and arrive at widely diverging interpretations

of the origins of the crisis and the necessary reform

steps.

When, following World War II, it became clear that Europe

would be striving to grow together economically in order to

overcome the shock and destruction of military confronta-

tion, the desired degree of economic integration was an ob-

vious question. Initially only selected strategic sectors like

coal and steel were integrated, and a gradual timetable was

pursued for mutualising other areas of national economies.

Unlike certain other political proposals for creating a Euro-

pean Federation out of the résistance,1 the question of cur-

rency relations within Europe was initially marginal, despite

growing economic exchange. Although the six founding

members of the European Coal and Steel Community (ECSC)

and the European Economic Community (EEC) sought inte-

grated trade during the 1950s and 1960s, hopes for mone-

tary cooperation were placed in the global Bretton Woods

system of fixed exchange rates. At the same time, the 1957

Treaties of Rome proposed the establishment of a “Mone-

tary Committee with consultative status” comprising the

European Commission and representatives of the member

states, “[i]n order to promote the co-ordination of the poli-

cies of Member States in monetary matters to the full ex-

tent necessary for the functioning of the Common Market”

(Article 105, EEC Treaty).

Monetary integration did not return to the agenda until

1968, following completion of the Customs Union between

Germany, France, Italy and the Benelux states, which repre-

sented a decisive step towards the Common Market. At the

summit in The Hague in December 1969, the heads of state

and government of the six member states called for the

preparation of a plan for the establishment of an economic

and monetary union. However, the plan to introduce a single

currency within ten years presented the next year by Luxem-

bourg Prime Minister Pierre Werner was overtaken by the

1970s oil shock, the collapse of Bretton Woods and national

concerns for sovereignty. One important milestone came in

1979 with the conversion of the European Monetary Coop-

eration Fund (EMCF; founded in 1973) into the European

Monetary System (EMS) with a shared basket currency and

coordinated central bank interventions to keep rates within

agreed bands. The EMS lasted until the early 1990s, when it

succumbed to diverging economic developments and corre-

spondingly orientated central bank policies of the participat-

ing states following German reunification and speculative

attacks.

1 For example in the Union of European Federalists’s 1942 Draft Consti-

tution of the United States of Europe, which declares currency and bank-

ing to be federal matters and calls for a new European currency (Europa-

Union 1942 in: Lipgens (1986): 101).

TWO CONCEPTS FOR THE FUTURE

OF THE EUROZONE: STABILITY UNION

VS. FISCAL UNION

THE DIVIDED EUROZONE

After the various models of fixed exchange rates, floating

rates, currency “snakes” and intervention-backed ﬂuctuation

bands all failed to satisfactorily resolve the problem of periodic

currency turbulence, the option of adopting a single currency

(and thus completely abolishing exchange rate risks) appeared

with increasing gravity on the agenda. But could a single cur-

rency function? And if so, under what preconditions?

In the following we examine the theoretical foundations

of the two central – and opposing – concepts for the Mone-

tary Union, before spotlighting the central lines of disagree-

ment in the present discussion in the context of the euro cri-

sis and laying out the two visions: a stability union on one

side and a ﬁscal union on the other.

3.1 THE EMU AS A STABILITY UNION

On one side of the political debate over the question of wheth-

er and how a Monetary Union in Europe could be successful,

we have the advocates of a stability union.

The stability union idea has been especially predominant

in Germany. Its roots in the emerging debate over a possible

common currency lie in the overriding signiﬁcance of econom-

ic stability (price and monetary stability) as the precondition

for any successful currency. Against the historical backdrop

of two periods of extreme inﬂation (most recently 1945–48),

price stability attained great signiﬁcance in post-war Germa-

ny. Accordingly, the Bundesbank was established as an insti-

tution independent of political influence, with the primary

objective of fighting inflation. This, it was hoped, would pre-

vent governments from opportunistically increasing the mon-

ey supply – which had in the past had such disastrous effects

and ultimately twice led to complete devaluation of the cur-

rency. Price stability, it was believed, would also ensure the sta-

bility of the value of the currency and thus function as a strong

and reliable platform for export-driven German industry. This

concern for monetary stability became the bedrock of German

economic policy and formed the foundation of the economic

school of ordoliberalism that remained domi

nant in Germany

– with few exceptions – for most of the

post-war era (Dyson

and Featherstone 1999). The German Bundesbank in particu-

lar has fulﬁlled its mission extremely successfully, with the

deutschmark standing for consistently low inﬂation. Indeed,

it was the only European currency never to be devalued.

Deeply committed to the free market, this school of

thought sees as the central task of a strong state an eco-

nomic policy ensuring fair and stable conditions for maxi-

mally-efficient free-market competition (Stark 2015). This

begins with the central public good of a currency that is sta-

ble both internally (inflation) and externally (exchange rate),

but also applies to a strong legal and institutional frame-

work enabling markets to function as efﬁciently as possible.2

All other aspects of the economic order are secured through

the disciplining efficiency of market mechanisms. In this

model, the state is not an economic actor in the dirigiste or

2 Meaning effective property and insolvency laws, stability-promoting

regulation, competition-promoting institutions such as a monopolies com-

mission, and institutions promoting market entry, such as the German

Kreditanstalt für Wiederaufbau (KfW).

Keynesian tradition, but a source of risk – especially in fiscal

policy – of political interventionism creating budget deficits,

leading to inflation and devaluation and thus undermining

its central function as provider of the public goods required

for efficient market processes (Brüderle 2010).

Here there are major overlaps with the school of mone-

tarism, which has dominated internationally at least since the

1980s. In the debate over the founding of a Monetary Union,

its proponents also argued positions supporting a stability

union (De Grauwe 2013: 157ff.; Young 2014). In the ﬁrst place,

as a response to the experience of stagflation in the 1970s,

this economic discourse argued that central banks should re-

strict themselves as far as possible to the goal of fighting in-

flation and not explicitly pursue other policy objectives such

as employment or economic growth. In this line of thought,

achieving low inﬂation represents the most important contri-

bution to macroeconomic and ﬁnancial stability. Pursuing oth-

er goals is thought to lead to inflationary tendencies and is

therefore rejected (Barro and Gordon 1983).

If the central bank, following this school of thought, con-

centrates on ﬁghting inﬂation, there is no need for an expan-

sive ﬁscal policy as a governance instrument either, because

its stimulating effects would automatically be negated by

the central bank – through rising interest rates – in pursuit of

its inflation target. So in monetarism, like in ordoliberalism,

economic policy is seen above all as a guarantor of stability

in the sense of low inflation, and bears absolutely no wider

responsibility for economic developments because these can

only be influenced at the price of harmful inflation (Alesina

and Barro 2002). This rests on a strongly supply-side perspec-

tive on the economy, in the sense of the Real Business Cycle

Theory, which proposes that ﬂuctuations in economic activity

always have real causes. Because these lie on the supply side,

recessions and unemployment potentially represent efﬁcient

adjustment processes rather than inadequacies of the market

that need to be addressed through active policy intervention

(Kydland and Prescott 1977).

From this perspective, growth and economic dynamism

are achieved above all through productivity-expanding com-

petition in the markets, and certainly not through expansive

fiscal or monetary policy or the “artificial” and competition-

distorting effects of currency devaluation – which makes do-

mestic products cheaper in relative terms on world markets

but in the longer run is always associated with harmful inﬂa-

tion. If growth fails to occur, the reasons are to be found – in

macro-economic terms – in weaknesses on the supply side,

such as inadequate ﬂexibility of product and labour markets

to allow necessary structural change to produce market efﬁ-

ciency or excessive wage, social or energy costs undermining

international competitiveness.

It is also within this theoretical understanding that the

currency policy reality of post-war Europe arose: Germany

had finally succeeded in banishing the demons of inflation

and devaluation, in a painful process driven by a disciplined

Bundesbank and economic policy. But many other countries

where the influence of political actors on the central banks

was (at least periodically) considerably greater, subordinated

economic stability to other shorter-term goals and accepted

the price of higher inflation and regular devaluations. Olaf

Sievert, long-serving member of the German Council of Eco-

FRIEDRICH-EBERT-STIFTUNG

nomic Experts, writing in the Frankfurter Allgemeine Zeitung

on the occasion of the Maastricht Treaty of 1992, summarises

this perspective well: “The history of money is above all an

eventful history of the abuse of the right to create money.

Over the centuries, the attraction of state sovereignty over

the monetary system has been defined by the acquisition

and exploitation of undeserved possibilities and beneﬁts by

spending money one does not possess, but can create, by al-

lowing the creation of income and wealth for which there is

no real basis, which thus – if at all – can only be gained at

the expense of others and – not least – by devaluing the debts

one has promised to pay in good money. In short, through

lies and deception in the guise of state sovereignty.” (trans-

lated from Sievert 1992, 14).

For a long time, therefore, a Monetary Union was incon-

ceivable for many representatives of this school, because

the culture of stability required for a successful currency did

not exist in all the participating countries. But without a cul-

ture of stability individual countries would be tempted – and

able – to conduct an excessively expansive fiscal policy in

order to substitute the stimuli previously supplied by devalu-

ations. And this would lead to higher inflation, loss of com-

petitiveness and ultimately undermine the stability of the

currency. This renewed loss of the hard-won economic sta-

bility that was regarded as the foundation of the German

economic miracle of the post-war era was inconceivable and

had to be prevented at any cost.

In this understanding, monetary integration is only possi-

ble as the “coronation” of a much broader political integration

process, in which all members’ national policies must meld

into a “stability union” as the real structures of the economies

converge. This affects aspects as far-reaching as the national

wage and collective bargaining systems, the relative strength

of different economic sectors, and ﬁnancial relations between

businesses, the financial markets and the public sector. In its

pure form, the coronation theory is hard to reconcile with

the perspective of a Monetary Union in the foreseeable fu-

ture, given that the necessary convergence would demand

incisive political interventions and harmonisations that would

for example contradict an understanding of legitimate dif-

ferences in types of capitalism (Hall and Soskice 2001) and

democratic legitimacy (Scharpf 1997). At least a strict nomi-

nal convergence of the participating economies through sta-

bility-orientated economic policy was therefore demanded

as an alternative minimum criterion that would make the

single currency possible. The real and structural discrepan-

cies, it was argued, are not an absolute reason to reject a

monetary union as impossible, as long as all the states pur-

sue the same economic policy, with the objective of internal

and external price stability.

Over time other arguments accumulated, making a single

currency more attractive and ultimately ensuring that the

question was now “how” rather than “whether” a monetary

union would come into being (Dyson and Featherstone 1999).

The most important factors that turned the economic and

political tables specifically in Germany were:

– the problem of imported inﬂation from neighbouring

countries now increasingly closely interlinked with Ger-

many through trade and investment;

– fear of the costs and responsibilities associated with func-

tioning as an anchor currency, arising out of the experi-

ence of the Bretton Woods system (Helleiner 2005);

– the striving for European integration and reconciliation with

France as the central goal of German post-war foreign

policy (Dyson and Featherstone 1999);

– the ever-growing importance of monetary stability vis-à-

vis European trade partners, generated by increasing eco-

nomic integration (Rose and Van Wincorp 2001);

– the inherent conﬂict between economic policy goals of

national monetary autonomy, monetary stability and lib-

eralised capital markets (Padoa-Schioppa 1982).

In order to resolve the “problem” of a Monetary Union with

partners that fail to commit properly to a culture of stability,

the ordoliberal tradition required members’ economic poli-

cies to be strictly tied to the required course (Stark 2015),

meaning in the first place that nominal convergence with

clearly defined economic stability criteria had to be achieved

(Sievert 1992). This was reflected in the Maastricht criteria

laid down before the introduction of the euro, under which

all potential members had to achieve low inflation and inter-

est rates, small exchange rate fluctuations, state budget defi-

cits not exceeding 3 percent annually, and state debt capped

at 60 percent of GDP. The vision of stability also implied that

future monetary policy – including the Bundesbank’s – would

be isolated from policies (also) pursuing other goals, and

would be mandated with the absolute priority of price sta-

bility. As the last necessary condition, ﬁnally, it had to be en-

sured that even after the introduction of the new currency

no member state would be in a position to undermine the

internal or external stability of the currency through exces-

sively expansive fiscal policy (and in the worst case to en-

danger it existentially by risking insolvency). Logically there-

fore, the Treaty of Maastricht included a no-bailout clause,

and the budgetary convergence criteria were expanded and

formalised as ﬁrm ﬁscal rules with the possibility of sanctions

in the Stability and Growth Pact. This was designed to ensure

that no state could rely on the assistance of the other mem-

bers to pursue a stability-threatening debt policy.

Going one step further, some observers even explicitly

supported such a construction as a means of disciplining

national fiscal and price policies: members of a Monetary

Union with an inflation-fighting independent central bank

would thus (in theory) be committed to a restrictive fiscal

policy because otherwise in the long term rising inflation

and state refinancing costs would make it impossible to

maintain exchange rate parity implied by the common cur-

rency. Some even regarded any kind of coordination of ﬁscal

policy as problematic, as this could undermine the disciplin-

ing effect (Beetsma and Bovenberg 1998). These arguments

reflect the positions of supporters of the international gold

standard system of fixed exchange rates as a means of low-

ering inflation, which are central for example in the Austrian

School (De Soto 2012) and have been termed the “golden

straitjacket” of globalisation by Thomas Friedman (1999).

In summary, we note that the stability vision of a Mone-

tary Union is based on fundamental concepts about success-

ful economic policy, especially in post-war Germany, and is

heavily represented in the design of the euro. The central el-

THE DIVIDED EUROZONE

ements of this vision are ﬁrstly the overriding importance of

internal (inﬂation) and external (exchange rate) monetary sta-

bility as the state-guaranteed basis of efficient markets to

generate growth and prosperity. In order to safeguard these,

there must, secondly, be clear limits to ﬁscal policy in a mon-

etary union, especially if it is unclear whether it is stability-

orientated or has a tendency towards politicisation of eco-

nomic policy with tolerance of inﬂation and devaluation, and

thus operates in contradiction to monetary stability. Finally,

as the third component of central importance, the incentives

for “poor” national policy must be reduced as effectively as

possible in order to minimise moral hazard (the incentive to

enter into risks created by externalisation of potential costs).

The mechanism is described by the majority of the German

Council of Economic Experts as a principle of the unity of lia-

bility and control: liability for possible consequences must be

located at the same level as decision-making and control,

because harmful incentive structures are otherwise unavoid-

able (Feld et al. 2016). This also explains the explicit rejection

of conceivable models that include (even temporary) trans-

fers or transnational liability without equivalent control of the

policies of the countries for which such mechanisms would

potentially be expected to assume liability (Stark 2015).

This understanding of the functioning of the Monetary

Union carries through into the analysis of the euro crisis. The

proponents of a stability union emphasise the lack of obser-

vance of the rules of the Maastricht Treaty (deficit and debt

limits) and the negligent policies of the crisis states in the

lead-up to the financial crisis, where competitiveness was

lost (measured as unit labour costs), credit-driven consumer

spending and property bubbles were allowed to form, and

structural reforms of the labour market and the long-term

sustainability of state ﬁnances (for example through pension

reforms) were neglected. Fundamentally here, poor national

policies within the institutional framework of the Monetary

Union are defined as the cause of the crisis. Violation of sta-

bility rules necessarily leads to economic crisis (which is there-

fore the country’s own fault) (Franz et al. 2010).

Here we can again cite an example from the majority of

members of the German Council of Economic Experts, who

describe the “two fundamental weaknesses of the Eurozone

prior to the crisis” as follows: “Firstly, there was a lack of eco-

nomic and fiscal policy discipline, accompanied by dysfunc-

tional sanctioning mechanisms as well as flawed financial

regulation, leading to the build-up of huge public and pri-

vate debt levels and a loss of competitiveness; [s]econdly,

there was no credible mechanism for crisis response regard-

ing bank and sovereign debt problems that would have

been able to reign in moral hazard problems and establish

market discipline” (Feld et al. 2016).

In its interpretation of the crisis, the stability camp points

to the good economic performance of countries like Germa-

ny, which it attributes to budget restraint, wage restraint and

ﬂexibility-focused structural reforms, while asserting that the

crisis countries had lived beyond their means, permitted ex-

cessive pay increases, and failed to carry out painful but nec-

essary reforms. Former ECB Executive Board member Jürgen

Stark (2015) described this explicitly as deep-seated “cultural

differences”: “The truth is that, in contrast to many eurozone

countries, Germany has reliably pursued a prudent economic

policy. While others were living beyond their means, Ger-

many avoided excess. These are deep cultural differences

and the currency union brings them to light once again.”

Assuming an efficient Monetary Union in free-market

terms, with free movement of capital since the early 1990s

but restricted movement of the production factor labour,

the only remaining option to restore competitiveness is to

reduce national price levels by cutting wages. The indicator

of trade imbalances, which was central in the euro crisis, is

also interpreted in this light: deficit countries that import

more goods than they export have for years neglected their

competitiveness by tolerating higher wages and rising infla-

tion, and were only able to fund their unsustainable, exces-

sive consumption and economic living standard by borrow-

ing abroad.

Proponents of a stability union therefore demand stricter

monitoring of the Maastricht criteria, and their tightening for

example through national debt brakes and the Fiscal Com-

pact, as well as broader and more direct possibilities for the

supranational level to intervene and impose national struc-

tural reforms: “After the experience of recent years the [poor

policies in the crisis states] can only be counteracted by a new

stability pact that enforces iron discipline on debt. We need

modiﬁed debt rules, heavy punishments and above all new

procedural rules that make these punishments automatic

and withdraw them from the realm of political influence”

(translated from Sinn 2010). All conceivable mechanisms by

which these adjustments could either be cushioned by nom-

inal price changes (inﬂation) or eased by temporary transfers

are therefore consistently rejected, as they would once again

introduce moral hazard (Stark 2015): states might rely on the

internalised option of assistance from other members and

therefore neglect to do their national ‘homework’ (Feld et

al. 2016).

If, despite strengthened rules and more direct interven-

tion instruments, individual member states do get into diffi-

culties, the ESM and the troika now supply adequate instru-

ments to prevent insolvency and if necessary force the re-

quired reforms and cuts through credit conditions. As Sinn

puts it, it is time to accept the bitter truth: “The only option

left is to insist on a phase of credit discipline and to end the

phase of loose budgetary restrictions. […] It is time for Europe

to face up to the realities and begin with the painful adjust-

ment processes in the real economy that are necessary to

restore equilibrium to the euro area” (translated from Sinn

2010). Here some proponents go a step further and regard

state insolvency arrangements as a necessity in particular to

restore the credibility of the no-bailout rule and close one of

the central loopholes for moral hazard (Feld et al. 2016).

From this perspective, macroeconomic imbalances can

only be corrected by reducing wages and prices and deregu-

lating product and service markets in the crisis states, in order

to accelerate the implementation of necessary market-driven

adjustment processes. Adjustments on the part of the surplus

countries would not be helpful, as they would ultimately

amount to a voluntary reduction in competitiveness (vis-à-vis

the rest of the world), a punishment of the stability-orientat-

ed states and an easing of the adjustment for deﬁcit countries,

which would create a set of disincentives for competition-

driven economic policy (Bundesbank 2010).

FRIEDRICH-EBERT-STIFTUNG

3.2 THE EMU AS A FISCAL UNION

The second camp in the debate over the ideal design and

governance of the Monetary Union is made up of support-

ers of a fiscal union.

As with the stability union, the origins of the fiscal union

concept for a single currency lie in the analysis of economic

events in the national framework. The starting point is John

Maynard Keynes’s critique of classical economic theory, after

the latter’s failure in the Great Depression following the crash

of 1929. His General Theory of Employment, Interest and

Money of 1936 revolutionised ideas about the equilibrium

assumptions of classical economics, which had hitherto domi-

nated the discussion, and established modern macroeconom-

ics. Keynes (2009 [1936]) shows how an economy in crisis

can remain trapped in underemployment and disproves the

classical assumption that lower wages would increase sup-

ply and thus boost demand. On the contrary, he argues, the

market alone is incapable of returning to full-employment

equilibrium following cyclical unemployment; the central

reason for this, he argues, is the rationing of employment

through the shortfall of aggregate demand in the markets

for goods and products. Keynes argues that in the event of

crisis, the markets require a stabilisation of aggregate de-

mand. Consumer spending and investment cannot be re-

generated by economic “laissez-faire”; instead government

must take measures to (re)instate full employment.

The central actors in the demand stabilisation recom-

mended by Keynes are in practice national governments

and central banks. This is how, abandoning the classical par-

adigm of a market economy liberating itself from crisis, fis-

cal and monetary policies ushered in the post-war “golden

age of capitalism” (Marglin/Schor 1992). And in contrast to

the theories of the ordoliberal school (see Chapter 3.1), the

social market economy as actually practiced in Western Europe

until into the 1970s was strongly orientated on balancing

the spheres of state and market (Schulmeister 2013: 121).

Thus if interest- and exchange rate adjustments are required

to stabilise the economy in the event of market failure, there

would be little reason to abandon these instruments in a Mon-

etary Union.

Within the realm of monetary integration theory, Robert

Mundell’s Theory of Optimum Currency Areas (1961) inves-

tigates whether the renunciation of independent national

monetary policy would be a sensible step, by weighing up

the costs and beneﬁts of joining a monetary union. Mundell

analyses the options for ﬁghting asymmetric demand shocks

affecting specific countries, because within a currency un-

ion, monetary policy interventions to stabilise cyclical and

price fluctuations only function against shocks that affect

all members symmetrically. He concludes that the existence

of asym

metric shocks means that successful shock absorp-

tion is only

conceivable in a world divided into currency ar-

eas that permit monetary and exchange rate policies corre-

sponding to regional conditions: “The optimum currency

area is not the world. [...] The optimum currency area is the

region” (ibid.: 659f.).

The loss of monetary independence is compounded af-

ter accession to a monetary union by the renunciation of in-

dependent funding of state deﬁcits. Members of a monetary

union can no longer borrow in their own currency, and in

the event of liquidity crises must rely on the understanding

and patience of the common central bank and/or foreign cred-

itors. Under these circumstances, liquidity crises can quickly

lead to solvency problems, as was seen in the euro crisis. They

are driven by asymmetric shocks, when financial markets –

doubting the affected state’s ability to service its loans – sell

its bonds and thus drive up interest rates for new borrowing.

Higher interest rates in turn cause the state debt to grow and

curtail the affected state’s ﬁscal leeway (De Grauwe 2016: 8ff.).

The fact that – despite this dangerous renunciation of

national stabilisation policy – a monetary union also became

a plausible project for proponents of the Keynesian world-

view has to do with the supplanting of the “real-side capi-

talist” “navigation map” by the financial capitalist framework

(Schulmeister 2013: 123) since the end of the 1970s. The eco-

nomic worldview now returned to individual economic ration-

ality and flexible markets, and brought about the end of the

Bretton Woods system of fixed exchange rates and a gradu-

al deregulation of financial markets. However, the resulting

large movements of capital produced major currency crises,

not only in Latin America and Asia, but also in Europe, where

the EMS with its limited ﬂexibility of exchange rates collapsed

at the beginning of the 1990s in part through currency spec-

ulation.

In this situation, the costs of joining a monetary union ap-

peared smaller than initially assumed. This applied in particu-

lar to smaller states that did not actually face the posited

choice between joining a monetary union or maintaining

their monetary autonomy, because their central banks were

at the mercy of international currency markets anyway (Flass-

beck/Lapavitsas 2015: 20f.). Moreover, under the impression

of advancing internal market integration in the EU, the rele-

vance of asymmetric shocks was regarded as increasingly

small. Mundell (1961) concluded – quite in line with the sup-

porters of a stability union – that the costs of loss of the op-

tion of national exchange rate adjustments after an asym-

metric demand shock are smaller the more flexibly the pro-

duction factors of labour and capital are able to move across

the borders of the affected countries. Thus, he argued, ade-

quate wage and price flexibility and the movement of work-

ers from a country in economic recession to an economically

prospering neighbour can make the use of monetary stabili-

sation instruments superfluous. Developments suggesting

that a higher degree of economic openness while a country

retains monetary sovereignty is associated with smaller costs

of accession (McKinnon 1963) and the benefits of a diversi-

ﬁed production structure (Kenen 1969), which ensures that in

the event of shocks only a part of the domestic economy is

affected, caused a monetary union to appear increasingly at-

tractive to the already highly integrated European economies.

But this Keynesian perspective neither assumed the ex-

istence of an optimal currency area in Europe, nor did it share

the positive view of the microeconomic benefits of a mone-

tary union held by the proponents of a stability union (Kösters

et al. 2001: 60ff.). Instead, Keynesians took the macroeconom-

ic costs of monetary integration seriously and weighed them

against the banishment of currency speculation in Europe.

With respect to the incremental implementation of the Euro-

pean Economic and Monetary Union agreed in 1992 in Maas-

THE DIVIDED EUROZONE

tricht, the proponents of a fiscal union warned against re-

garding the emerging Eurozone of initially twelve states as

an optimal currency area. Too great, they said, was its sus-

ceptibility to asymmetric shocks, and too weak the transna-

tional factor mobility and trade integration within the Single

Market (Eichengreen 1991).

Politically, however, the founding of the EMU in Europe

was, from this perspective, not only a potential instrument

for containing currency market speculation. Instead the ex-

perience of the EMS had also demonstrated that in the mod-

el of ﬂoating currencies within agreed exchange rate bands,

the deutschmark as anchor currency had given the German

Bundesbank a dominant position over monetary policy that

many other states wanted to shake off. France especially felt

its sovereignty was impaired, but repeatedly found itself forced

to execute ordoliberal policies in order to keep the French

franc within the agreed band. Especially in France the EMU

therefore appeared to many as an opportunity to clip the

wings of the German currency hegemon. To that end, the

French were also willing to relinquish their monetary sover-

eignty in favour of a collective central bank (Jabko 2015: 73;

Lierse 2011: 161ff.).

But apart from the political criterion of monetary contain-

ment of Germany – which should not be neglected and re-

appeared on the agenda with heightened relevance in the

course of reuniﬁcation (McNamara 2015) – the identiﬁed defi-

cits of the Eurozone as an optimal currency area were used

to justify new instruments for minimising possible risks. The

widely differing paradigmatic positions of the central actors

– as already mentioned in Chapter 3.1 – led the supporters

of a stability union to strike a course designed to develop

the EMU into an optimal currency area using market compe-

tition mechanisms but largely dispensing with monetary and

fiscal instruments. By contrast, the supporters of a fiscal un-

ion saw the European states’ lack of the characteristics of an

optimal currency area as a clear sign of the necessity for fis-

cal instruments to meet the challenge of regional shocks.

They remained sceptical about the beneﬁcial effect of the Sin-

gle Market project for reducing asymmetric shock potential

and resisted the necessity of price and wage flexibility pos-

tulated by the opposing side. Shocks were localised not only

on the supply side, but in the ﬁrst place on the demand side.

The active role of the state in reviving the economic cycle

against the phenomenon of hoarding described by Keynes

was now seen to be necessary at the transnational level (De

Grauwe 2006: 726f.).

In the founding phase of the EMU, the United States in

particular was often cited as a model demonstrating that

budgetary transfers in the sense of ﬁscal federalism would be

required in order to successfully address asymmetric shocks

within a monetary union: “The extent of regional problems

within existing currency and customs unions like the United

States underscores the need for regional shock absorbers,

such as fiscal federalism, to accomodate asymmetrical dis-

turbances” (Eichengreen 1991: 24). If independent national

monetary policy can no longer be pursued, the focus turns

to fiscal policy. A system of fiscal transfers from member

states with healthy growth to those affected by a negative

demand shock would contribute to stabilisation. Above and

beyond this, joint and/or coordinated policies in the areas of

taxation, public spending, social and wage policy could pre-

vent individual states pursuing unilateral decisions and thus

reduce the susceptibility of the currency area to asymmetric

shocks (De Grauwe 2006: 721).

The Keynesian option of stabilising policies at the Com-

munity level of a monetary union appeared in the Werner

Plan of 1970, which provided for synchronisation of national

budget procedures, fiscal harmonisation, and coordination

of stabilisation policies through a Community-level decision-

making organ.3 The McDougall Report (European Commis-

sion 1977: 70) went a step further, proposing that a single

currency be given a central budget of at least 5 percent of

the total GDP of the participating states. While in the 1970s

one could still assume a Keynesian consensus, this had

changed considerably by the time an initiative for a Europe-

an Monetary Union was next launched at the end of the

1980s. Although the Report on Economic and Monetary Un-

ion in the European Community published by Commission

President Jacques Delors in 1989 also speaks of the necessi-

ty of a macroeconomic framework and Community policies,

the monetarist/ordoliberal argument of budgetary disciplin-

ing of national fiscal policies also moves to the fore: [...A]n

agreed macroeconomic framework and [...] binding proce-

dures and rules [...] would permit the determination of an

overall policy stance for the Community as a whole, avoid

unsustainable differences between individual member coun-

tries in public-sector borrowing requirements and place bind-

ing constraints on the size and the ﬁnancing of budget deﬁ-

cits” (Committee for the Study of Economic and Monetary

Union 1989: 14).

In the negotiations for the Treaty of Maastricht the stabil-

ity

orientated zeitgeist came out largely on top, which suited

Germany in particular with its interest in price stability and

deficit avoidance. France on the other hand argued for an

economic government of the Monetary Union. Institutional-

ly, this produced the Council’s regular recommendations on

guidelines for economic policy (Article 121, TFEU) and the

Eurogroup as an initially informal organ. Faced with the hard

criteria for accession to the EMU – the deficit rule and its

tightening in 1997 in the Stability and Growth Pact – and

the ECB’s prioritisation of price stability, the French perspec-

tive of an explicit economic coordination pillar of the Euro-

zone was ultimately reflected only in the form of soft poli-

cies (Pisani-Ferry 2006).

This understanding of the functioning of the EMU as an

economic as well as monetary project experienced a renais-

sance among the proponents of a fiscal union during the

euro crisis. Now it became clear that the asymmetric shocks

highlighted by Mundell could test the Eurozone to breaking

point. On account of the heterogeneous economic develop-

ments since the launch of the euro, the ECB had never been

in a position to conduct a monetary policy that made sense

3 The Werner Plan leaves no doubt as to the necessity for monetary co-

operation to be accompanied by political: “In particular the development

of monetary unification mus t be based on suff icient progress in the field

of convergence and then in that of the unification of economic policies.”

Without a progressive development towards political cooperation with the

objective of political union, it argues, a monetary union will not survive (trans-

lated from Werner 1970, quoted from Lipgens 1986: 533).

FRIEDRICH-EBERT-STIFTUNG

for all the participating countries with regard to their differ-

ent business cycle positions. At the same time, the collective

economic policy coordination instruments agreed in Maas-

tricht and thereafter – the Economic Policy Guidelines, the

Macroeconomic Dialogue, the ten-year Lisbon and Europe

2020 Strategies – turned out to be toothless, and the joint

institutions ECOFIN Council and Eurogroup (and even more

so the European Commission and Parliament) to be too weak

or unwilling to be able to do anything effective about the

regularly occurring asymmetries. The only relevant economic

policy coordination of the Eurozone relates to member states’

deficits and debts. But if independent monetary policy can

no longer be conducted and anti-cyclical tools of national

ﬁscal policy are severely restricted, budgetary surveillance wors-

ens the situation and is useless as an instrument of transna-

tional coordination (Buiter 2006: 698). Adjustment to asym-

metric shocks is thus left to wage policy in the nation states

(Busch 1994); but once inﬂation differentials have arisen they

can easily expand pro-cyclically through the ECB’s “one-size-

fits-none” interest rate policy (Enderlein 2005) and unregu-

lated international capital flows (Merler 2015).

As far as the ﬁscal union camp is concerned, the euro crisis

proves their case that the architecture of the EMU is incom-

plete. Accordingly, all proposals originating from this camp as-

sume the necessity for closer harmonisation of economic poli-

cy. The decisive goal here is not the establishment of real con-

vergence between the member states, but to ensure nominal

convergence, for instance of current account balances, inﬂa-

tion rates and unit labour costs (Auf dem Brincke et al. 2015).

The reasons for the euro crisis are sought not only in the mis-

takes of individual states, but in institutional “design failures”

(De Grauwe 2015) of the EMU. The proponents of a fiscal

union therefore respond with incredulity to the asymmetry

of crisis management, which suggests that states with large

budget deﬁcits and public debt and negative current account

balances bear a speciﬁc responsibility for the crisis. In the eyes

of the advocates of a fiscal union, a crisis management poli-

cy that prioritises austerity and consciously accepts defla-

tionary developments has failed to learn the lessons of the

Great Depression of the 1930s (Heise 2015). In the view of

the fiscal union camp, the following points represent the

only positive aspects of the crisis response to date, and only

with caveats:

– The de facto abandonment of the no-bailout rule through

the establishment of a permanent ESM, because this an-

chors the principle of shared liability. The strict conditions

placed on assistance from the ESM (precluding cyclical

adjustment programmes) are classed as counterproduc-

tive (Busch et al. 2012).

– The introduction of a regulated Macroeconomic Imbal-

ance Procedure, (MIP), which supplements one-sided con-

trol of budget policies with numerous additional indica-

tors for identifying macroeconomic imbalances between

the states. Criticism is expressed of its asymmetry in treat-

ing current account surpluses as less relevant for economic

instability than current account deficits, and also the to

date weak application of the sanction instruments in case

of state mismanagement and the simultaneous tighten-

ing of budgetary controls (De Grauwe 2012).

– The unorthodox policy of the ECB as de facto “lender of

last resort”, which has over the course of the crisis devel-

oped into the guarantor of the EMU. The ECB’s crisis man-

agement instruments include a zero-interest policy, nega-

tive deposit rates and bond purchases on the secondary

market. Beyond this ECB President Mario Draghi regularly

points to the need for ﬁscal stimulus to overcome the euro

crisis, but at the same time underlines the necessity for

structural reforms and observance of budgetary rules:

“Fiscal policies should support the economic recovery,

while remaining in compliance with the fiscal rules of

the European Union. Full and consistent implementation

of the Stability and Growth Pact is crucial to maintain

conﬁdence in the ﬁscal framework. At the same time, all

countries should strive for a more growth-friendly com

po-

sition of ﬁscal policies” (Draghi 2016).

– The already initiated Banking Union with joint supervision,

resolution and liability instruments for establishing a uni-

form policy towards financial institutions. Criticism is ex-

pressed that the Single Resolution Fund for transnational li-

ability has been developed as a last resort, is too small and

will not be fully operational until 2024 (Lindner et al. 2014).

– The crisis-driven strengthening of the Eurogroup as an in-

dependent formation for decisions affecting the EMU and

integrating EU mechanisms for coordinating employment

and social policy into the enhanced European Semester

since 2010. The subordination under the objectives of bud-

getary surveillance created by the linkage is however criti-

cised (Armstrong 2012).

– The European Fund for Strategic Investments (EFSI) initi-

ated by the Juncker Commission as a central initiative for

economic intervention in the euro area and the associated

reinterpretation of the Stability and Growth Pact with re-

spect to expanded ﬂexibility over state investment spend-

ing in times of crisis. Criticism is expressed of the small

volume of the fund and its primary focus on activating

private investment (Horn et al. 2015: 8ff.).

The ﬁscal union supporters sharply criticise the “Berlin consen-

sus” (Boﬁnger 2012: 77) in European crisis management, un-

der which the euro crisis is understood primarily as a public

debt crisis. On the contrary, the concentration on stricter bud-

getary discipline, internal devaluation through spending cuts

and structural reforms, and trust in market discipline are un-

derstood as the recipe for a protracted crisis. The responsible

politicians, it is asserted, are heading wilfully into deflation,

which will exacerbate the crisis and contribute nothing to sta-

bilising the Monetary Union: “Deflation is the surest way to

wreck an economy. [...] Seeking a Monetary Union without

a political union is an illusion” (translated from Herr 2012: 3).

Peter Boﬁnger speaks of a “policy of muddling through”, whose

consequences have caused considerable economic and politi-

cal harm: “In other words, a fundamental change of course is

required. This change of course must be guided by the insight

that the architecture of the Monetary Union as adopted in

the

Treaty of Maastricht has lost its viability through the convul-

sions of the ﬁnancial crisis. If the monetary integration imple-

mented through the founding of the ECB and the introduc-

tion of the euro is to have a future, there will be no alternative

to closer ﬁscal integration” (translated from Boﬁnger 2012: 111).

THE DIVIDED EUROZONE

Concrete proposals for faster fiscal integration of the Euro-

zone range from ideas for joint debt management through

Eurobonds (Delpla/von Weizsäcker 2011) or a redemption

fund (Sachverständigenrat 2012) through the establishment

of a joint budget, stabilisation funds and/or fiscal capacity

(De Grauwe/Ji 2016; Pisani-Ferry et al. 2013) to the estab-

lishment of a joint insurance mechanism (Dullien 2014; En-

derlein et al. 2013). The central thought is firstly, to bring to-

gether liability for state debt at the European level, in order

to prevent the financial markets from exploiting differences

in the creditworthiness of the euro states. Secondly, the intro-

duction of an automatic cyclical stabiliser at European level

would compensate the inadequate adjustment to asymmet-

ric shocks caused by inadequate mobility of labour and re-

place internal devaluation through falling wages and prices,

which is regarded as counterproductive. In place of structural

supply-side reforms, demand in regions affected by a nega-

tive demand shock would be stimulated via a ﬁscal transfer

system using state spending or tax breaks: “The idea of

EMU-level automatic stabilisers is to be able to respond to

asymmetric shocks or endogenous pressures in the mone-

tary union and to uphold aggregate demand in the short

term, before factors of production can be reorganised in

the affected economy and recovery can resume. In other

words, the point is to maintain enough spending during a

downturn, before failed companies are turned around or

replaced by new ones and before workers who lost their

jobs can find new employment” (Andor 2014: 187).

Closer coordination of other policy areas is also sought

to avoid asymmetric shocks, for example in the area of wage

policy (Dufresne 2015; Pusch 2011) and social policies: “The

absence of any other adjustment mechanism is one reason

why the EMU is sometimes criticised for lacking a social di-

mension: unless countries undergoing an asymmetric shock

have low debt/GDP ratios and can thus afford individual ﬁs-

cal expansion (which will most likely not be the case in the

next few decades), the only possible adjustment in the EMU

is through cost-cutting and ever-greater ﬂexibility in the la-

bour market. [...A] social dimension cannot be achieved with-

out a mechanism for collectively monitoring and preventing

employment and social imbalances – and for collectively de-

tecting and tackling them when they arise” (Andor 2013: 2).

The demand for an explicit political union is raised at

least for the medium to long term. Here the single currency

is regarded as a shared public good requiring a parliament-

controlled government for the Eurozone with revenue and

spending rights (Collignon 2014; De Grauwe 2006): “It is well

known that public goods are not efﬁciently provided by the

markets, because with free access individuals could free-ride

on others who are willing to pay for them. [...] Democracy is

the mechanism that makes sure that the supply of public

goods coincides with the collective demand of the people

concerned. [...] I have called the limited government for Euro-

pean public goods the European Republic. The Euro-crisis

has revealed that the old ways of governing Europe no longer

work. The republican paradigm points in a new direction. It

focuses on public goods, Europe’s res publica, which affects

and concerns all European citizens” (Collignon 2014: 105f.).

In this connection there is frequent reference to a “European

economic government” to be legitimised by a “euro parlia

ment ”.

3.3 INTERIM SUMMARY: INSTRUMENTS FOR

TWO CONCEPTS OF A MONETARY UNION

The historical summary outlined above reveals very clearly

how sharp the theoretical divide is between the supporters

of a stability union and a fiscal union. The roots of today’s

controversies over the future shape of the EMU’s architec-

ture are to be found in diametrically opposed economic par-

adigms. The belief in rule-based self-regulation of free-mar-

ket forces comes up against a conviction of the importance

of economic governance.4 In the founding phase of the EMU,

a debate that had hitherto been conducted at the national

level moved to the transnational. At the time, the conﬂict was

papered over with a compromise under which strict stability

rules for national budgets and a central bank dedicated pri-

marily to price stability would go hand in hand with a perma-

nent growth pact and economic policy coordination. Since the

advent of the euro crisis, we now know that none of that was

enough to secure lasting socio-economic convergence in the

Eurozone (Dauderstädt 2014). And there has certainly been

no coming together of the perspectives. In the ongoing cri-

sis, the arguments over the future course of the Monetary

Union are the same as during its founding period. Yet a dif-

ferentiated understanding of the reasons for the euro crisis

is a central precondition for demands for additional instru-

ments to crisis-proof the Monetary Union. As such, the causal

analyses of the euro crisis conducted in the scope of two very

different economic paradigms determine to a great extent the

concrete political proposals for reforms of the EMU.

Accordingly, the development of the EMU into a stability

union involves

– a strict regime of binding budgetary rules;

– ideally automatic sanctions in the event of non-fulﬁlment;

– reinstatement of the no-bailout rule through an insolvency

procedure for states;

– competition-driven structural reforms and internal devalua-

tions, also as a consequence of rule-breaking;

– greater Community-level control over national economic

policy to secure structural reforms and budgetary compli-

ance, through a ﬁnance minister for the Eurozone (without

a political mandate).

While the stability union camp believes the development of

the EMU should do no more than strengthen the reach and

strictness of the current Eurozone status quo ante and sharp-

en existing rules, expansion into a ﬁscal union would demand

signiﬁcantly broader reforms:

– a Banking Union to bring together the oversight, resolu-

tion and deposit protection at the European level;

– joint debt management for the euro states;

– an automatic stabiliser to enable cyclical ﬁnancial trans-

fers between member states;

4 In their analysis of reform proposals for the EMU, Katharina Gnath

and Jörg Haas (2015) find a similar dichotomy, and see the fiscal union

perspective as tied to an objective of risk-sharing, while the stability un-

ion perspective would be associated with the objective of sovereignty-

sharing.

FRIEDRICH-EBERT-STIFTUNG

– closer coordination of economic, employment and social

policies above and beyond state deﬁcits and debt levels;

– in the longer term a federal political union with an eco-

nomic government responsible for the Eurozone and hav-

ing parliamentary legitimacy.

In the following, we will examine the place of these afore-

mentioned instruments in the member states’ contributions

to the preparation of the Five Presidents’ Reports and classify

the arguments put forward by the individual governments

into the two central categories of stability union and fiscal

union.

THE DIVIDED EUROZONE

In order to assess the process leading to the final report and

give an outlook on the upcoming Commission Reflection Pa-

per and the political starting situation for further integration

steps, we present in the following a detailed analysis of the

Sherpa contributions submitted by the EU member states in

the process of preparing the Five Presidents’ Report. Given

that (almost) all the national contributions are publicly ac-

cessible, this represents a special opportunity – outside of

the unanimously agreed summit declarations – to gain in-

sights into national sensitivities, positions and plans for the

future shape of the EMU. As outlined in the following, this

analysis permits deep insights into the power relations of

the Eurozone, but also into the current state of the long-

running conflict between supporters of a stability union on

the one side and the advocates of a ﬁscal union on the other.

SUMMARY:

– The divide between the stability union and ﬁscal un-

ion perspectives for the Eurozone is also reﬂected in

the preparatory process for the Five Presidents’ Report.

– Both positions are included in deliberately vague

form in the Commission document initiating the new

reform process.

– The member states contributions can be classiﬁed

into three camps on the basis of their proposals on

the two diverging reform perspectives.

– Supporters of a stability union (Finland, Estonia, Lith-

uania, Germany, Malta, the Netherlands, Denmark,

Romania, Hungary) reject both an expansion of eco-

nomic governance and deeper ﬁscal integration.

– Supporters of a ﬁscal union (Italy, Spain, Portugal, Bel-

gium, Luxembourg, Slovenia, Latvia, France) argue for

an expansion of both economic governance and ﬁs-

cal integration.

– Supporters of a ﬁscal union with restrictions (Cyprus,

Slovakia, Croatia, Poland, Ireland, Austria, Czech Re-

public) argue in principle for further development of

the Monetary Union, seeking either more economic

governance or ﬁscal integration steps – but not both.

Our classification of the contributions into two central reform

camps – stability union and ﬁscal union – is based on qualita-

tive examination of the arguments they put forward. This in-

volved more than noting mere mention of the reform instru-

ments described in the previous chapter. It also took into account

the ways analyses of the functionality of the Eurozone differ-

entiated between systemic errors in the architecture of the EMU

and individual mistakes made by member states. The central

distinguishing characteristic is therefore the question whether

the current economic governance framework of the EMU is ad-

equate (given consistent application or tightening) or whether

it is regarded as insufﬁcient to prevent future crises and there-

fore needs to be deepened through adaptation of economic

governance and greater ﬁscal integration. States belonging to

the stability union camp reject changes in either of these two

areas, whereas the supporters of a ﬁscal union demand move-

ment in both. There is also a third group of countries that ar-

gues for neither a stability union nor a fiscal union, but can

imagine developments towards a ﬁscal union in at least one of

the two areas of reform (see Table 1).

The order in which the member states are discussed takes

into account their closeness to the two core theoretical issues

described in chapter 3. The country presented ﬁrst (in chapters

4.2 and 4.4 respectively) is the one with the furthest-reaching

STABILITY UNION AND FISCAL

UNION IN THE CREATION OF THE FIVE

PRESIDENTS’ REPORT

Table 1

Visions for the Eurozone and support/rejection

of central reforms

Source: authors.

Vision

for the future

Eurozone

Expansion

of economic

governance

Expansion

of fiscal inte-

gration

Stability union No No

Fiscal union Yes Ye s

Fiscal union with

restrictions Yes/ No No/ Ye s

FRIEDRICH-EBERT-STIFTUNG

position, with the intensity declining from country to country

in the course of the chapter.

For the sake of completeness, it is important to note that

certain states are not included in the study, either because

they chose not to submit any contribution, because they chose

not to publish it, or because they did not concretely address

the debate over reform of the EMU. This applies to the Greek

(unpublished) and Bulgarian (not submitted) positions and the

contributions of the United Kingdom and Sweden, both of

which chose not to address the debate on the future of the

Eurozone, and restricted themselves to procedural input. In

addition, two contributions from the European Parliament,

which also ﬂowed into the Sherpa process between member

states and Commission, are analysed (see Chapter 4.6).

4.1 THE STARTING POINT: THE COMMIS-

SION’S ANALYTICAL NOTE

Conceived as a technocratic document to initiate a political

debate among the member states, the Analytical Note pub-

lished by the Commission in February 2015 is by design open-

ended and avoids clearly rejecting various political positions

that might potentially be put forward by a member. None-

theless, at certain points we can observe tendencies that can

be classified on the spectrum between fiscal and stability

union.

The Analytical Note begins by presenting the crisis as

having various origins, with different channels contributing

to its outbreak and course. First of all, the outbreak of the

crisis in the financial sector is discussed, emphasising how

it ultimately resurfaced in public budgets: “A feature of par-

ticular relevance to the euro area was the negative feed-

back loop between bank and government sovereign debt.

[…] Thus, in these countries, a crisis of banks quickly became

a crisis of public finances, with a direct impact on the real

economy” (Juncker 2015a: 2).

So as far as the financial and fiscal aspect of the crisis is

concerned, the blame is placed not – as the stability camp

would have it – exclusively at the door of the states that are

highly indebted today. Instead, the Note points to its roots in

the ﬁnancial crisis and explicitly points out that this then “be-

came a crisis of public ﬁnances”. The nation states are by no

means let off the hook, however, as the document goes on

to point very clearly to the missed opportunities for greater

consolidation before the crisis and the way almost all the

member states ignored and deliberately weakened the Sta-

bility and Growth Pact. Nonetheless, it must be noted that on

this point, the document shares its (partially) systemic analy-

sis with the supporters of a ﬁscal union.

The second point that the Analytical Note addresses in

its causal analysis is that the Eurozone crisis “can also be

said to have been a competitiveness crisis”, where some of

the weaknesses predated its outbreak. In particular, certain

states failed to use the boom phase before the crisis to ad-

dress existing “rigidities in product and labour markets”.

These rigidities, defined in a figure as “average of employ-

ment protection legislation and product market regulator

OECD indicators”, led, it asserts, to inadequately efficient

and flexible allocation of resources before the crisis (ibid.: 4).

Also, it says, unit labour costs rose strongly in certain

coun-

tries up until 2008, leading to declining competitiveness

vis-à-vis other Eurozone states and larger external econom-

ic deficits. Together, these developments are said to have

led to higher unemployment in certain countries when the

crisis broke out.

In the area of real economy developments, the Analyti-

cal Note therefore adopts a stance tending towards the sta-

bility vision: The countries that have been worst affected by

the crisis are, it says, themselves to blame through their fail-

ure to reduce regulation of labour and product markets, as

well as excessive pay increases. Only in a subsequent, caus-

ally vague paragraph does it address the systemic flip side

of these developments (which supporters of a fiscal union

emphasise): “In addition, the relatively favourable financing

conditions in the first years of the euro led to a misalloca-

tion of sources of ﬁnancing towards less productive forms of

investment, such as real estate” (ibid.). The document also

mentions a so-called “crisis of markets”, where investors treat-

ed all euro countries similarly, with an excessive correction

of this assumption after the outbreak of crisis leaving some

countries forced to shoulder astronomical interest rates for

their borrowing. The common financial market and the origi-

nation of cheap credit in countries like France and Germany

is however not explicitly named as a factor contributing to

an accumulation of real economic imbalances and funding

rising real wages. Thus, here the Commission abides by the

stability perspective, although the systemic component of

the pre-crisis ﬁnancing conditions in the crisis-affected coun-

tries is at least mentioned. The possibility of ﬁnancial market

failure and its contribution to state debt is considered, but not

market failure in other problematic areas, which is attributed

to defective pre-crisis state policies.

In its analysis of the crisis, the Analytical Note thus os-

cil

lates between the fiscal and stability positions. The pro-

posed solutions are described in much less detail, which is

understandable in light of the document’s intended purpose.

The only concrete policies that are put forward relate to

strengthened implementation of “structural reforms” for re-

ducing the analysed rigidities in all member states and an

initiative to create a single capital market in Europe, which

would establish corporate bonds and other derivatives as al-

ternative funding sources to bank loans: “Tangible progress

on these two blocks – growth-enhancing structural reforms

and deepening the Single Market – will contribute to the

smooth functioning of Economic and Monetary Union in the

short term” (ibid.: 7). As far as the identiﬁed problem of en-

tanglement of state ﬁnances with ﬁnancial crises is concerned,

the document notes that this is addressed through the intro-

duction of the Banking Union in the form of the Single Su-

pervisory Mechanism, Single Resolution Mechanism and the

harmonised national deposit protection schemes.

However, in the longer term – with reference to the re-

form plans of the Commission and the President of the Eu-

ropean Council from 2012 (which are still regarded as valid)

– the Analytical Note also calls for the comprehensive devel-

opment of the EMU not to be neglected. It justifies this on

the grounds that the Eurozone in 2015 remains trapped in

crisis mode, while the United States is in much better shape

economically: “The euro area has not recovered from the

THE DIVIDED EUROZONE

crisis in the same way as the U.S., which might point to

the

fact that an incomplete monetary union adjusts much

slower than one with a more complete institutional setup

in place” (ibid.).

4.2 THE STABILITY UNION CAMP

In order to identify the stability union camp, we must ana-

lyse the states’ assessments and interpretations of the caus-

es of the crisis and the required reforms, in the two major

fields of economic governance and fiscal cooperation. The

supporters of a stability union reject greater fiscal integra-

tion, on account of the risk of creating a liability union and

delaying reforms. They also oppose changing economic

governance in the Eurozone, instead regarding implement-

ing pro-competitive “structural reforms” in the crisis states

as the central goal.

4.2.1 FINLAND

The positions of the Finnish negotiators clearly represent

this perspective. In relation to fiscal policy, for example, they

argue that the Commission should concentrate on those are-

as with “the most direct link to the stability of EMU”, mean-

ing “primarily the EDP” (excessive debt procedure) (Finland

2015a: 3). Here, they call for strict application of rules by the

EU level, and (where necessary) sanctions against states. This

contrasts to other policy areas prioritised in the systemic per-

spective of the ﬁscal union camp: The Macroeconomic Imbal-

ance Procedure for example, the Finnish contribution argues,

is a policy area “where the link with EMU stability is more

distant and where competence remains clearly at the nation-

al level” (ibid.). Accordingly, economic policy coordination in

this area should “rely mainly on peer pressure, best practices

and open exchange of views, rather than on sanctions” (ibid.).

From the perspective of a stability union, no further integra-

tion or firmer implementation is called for, because the im-

balances are regarded primarily as the consequence of poor

policies in individual states. Here, in fact, the procedure is

explicitly reinterpreted as another vehicle for structural re-

forms and alienated from its purpose of restricting current

account imbalances: “The MIP should not be about coercion

but primarily about building political support and ownership

for structural reform in Member States” (ibid.). Here again,

the observed imbalances are treated as the result of struc-

tural policy neglect and in no sense as the outcome of in-

complete integration of a currency area with free flows of

capital. In this context, the institutional changes to the ESM

that have already been implemented are regarded as a stop-

gap required after individual national governments ignored

the agreed rules on fiscal policy. The Finnish contribution

clearly demands: “In the medium and longer term, we should

return to the full respect of the no bail-out rule” (Finland

2015 b: 3).

Consistently, absolutely no common ﬁscal capacity is pro-

posed for the Eurozone. The contribution argues instead that

collective spending would be unnecessary if national fiscal

policy obeyed the rules. Instead, such a fiscal capacity is in-

terpreted as an instrument for transfers and joint liability be-

tween states with inadequate real and nominal convergence

– which the Finns reject: “As long as the Member States are

as heterogeneous as they are today, creation of a possible

ﬁscal capacity would in effect entail a transfer union and ex-

pand joint liability. Therefore considering a ﬁscal capacity is

not realistic before a much closer economic convergence

among the Member States has been achieved, including of

debt levels” (ibid.). As a mechanism for cushioning asymmet-

ric shocks, the Finnish contribution argues, a fully-functioning

Banking Union would anyway be “much more effective” (ibid.).

Nor does a fiscal capacity make sense as a mechanism for

incentivising structural reforms, as one does not require com-

pensation for reforms that are “beneﬁcial as such” (ibid.). While

the lack of implementation of recommended structural reforms

by the nation states is recognised as one of the “real prob-

lems”, it is attributed to lack of ownership on the part of the

governments and parliaments and thus potentially address-

able through better involvement of the national parliaments

in the European Semester (Finland 2015a: 2). So here too,

poor national policies – in the guise of inadequate implemen-

tation of painful but necessary austerity measures and struc-

tural reforms – are understood as the cause of the manifes-

tations of crisis.

According to the Finnish contribution, a closer political

union at EMU level is therefore not necessary either; given

that political responsibility for economic policy is sited at the

tional level, “political legitimacy and accountability of eco-

nomic policy-making is best secured at national level through

national parliaments” (Finland 2015b: 3). Finland pithily states

the declared goal of the stability union: “The aim should be

an EMU where market pressure works in a predictable man-

ner to support ﬁscal discipline and structural reform” (ibid.).

4.2.2 ESTONIA

The Estonian contribution is also clearly committed to a sta-

bility union and pursues a similar line of argument. Great

emphasis is placed on implementation and reinforcement of

existing rules, especially in the ﬁscal realm: “Most importantly

the Commission should use its full powers to assess the budg-

etary plans and to make recommendations proportional to

the imbalances and risks involved. Flexibility must stay ﬁrmly

within the agreed framework of the Stability and Growth

Pact” (Estonia 2015: 2). The Estonian contribution also identi-

fies poor national policies as problematic, and is therefore

open to the proposed “contractual agreements”. These repre-

sent binding agreements on structural reforms between the

Commission and individual member states and are intended

to accelerate the pace of implementation of reform recom-

mendations. Estonia argues that such agreements could lead

to greater ownership and better coordination of policy (ibid.).

A fiscal capacity, on the other hand, is regarded consid-

erably more critically – neither to fund reforms nor to address

asymmetric shocks. In both cases the Estonian contribution

warns against “mechanisms of transfer” that involve “moral

hazard” (ibid.). For shock management, Estonia instead pro-

poses a national reserve fund system, through which each

member state could insure itself against crises. Estonia there-

fore consistently rejects any kind of joint debt management:

“Neither the current situation in the Member States nor

FRIEDRICH-EBERT-STIFTUNG

the level of integration provide for a stable environment for

common risk sharing, such as, but not limited to common

bond issuance” (ibid.: 3).

4.2.3 LITHUANIA

Lithuania’s positions also lie clearly within the stability union

camp. Its negotiators emphasise that the existing ﬁscal frame-

work is “properly designed”; the problem, they say, is “a lack

of political will” for implementation (Lithuania 2015: 2). On

economic policy coordination, the contribution also argues

that agreed reforms to “improve adjustment capacity” need

to be implemented more fully and possibly more closely moni-

tored by the Commission. This perspective is grounded in a

classical stability union analysis of the situation: “The current

situation showed that if Member States are not implement-

ing structural reforms and sound ﬁscal policy at national level,

monetary policy alone is not sufﬁcient for reviving the [Euro

Area] economy” (ibid.: 3).

As in the contributions already discussed, Lithuania rejects

a common fiscal capacity; one must “take into account that

tax policies belong to national competence” and that the re-

forms “are beneficial for Member States”, making financial

incentives superfluous (ibid.: 4). Here too, a coherent theory

of poor national policies leading to crisis clearly predominates.

If only the respective fiscal and structural policies were cor-

rected, the crisis could be overcome.

Correspondingly, no further reforms (such as establishing

a European deposit guarantee scheme) are proposed for the

Banking Union either. Instead implementation of the existing,

less collective arrangements is emphasised: “Therefore, prima-

ry focus now should be on ﬁnal implementation of the Bank-

ing Union. Only then it will be possible to make final evalu-

ation of the effectiveness of the reform and its input in re-

ducing the fiscal-financial nexus” (ibid.: 3).

Stronger democratic institutions at supranational level are

not proposed either; instead consultation of and coordina-

tion between national parliaments should be strengthened.

4.2.4 GERMANY

The speciﬁc analytical take of the stability camp is also clear-

ly reﬂected in the German contribution, although rather less

sweepingly. Particular weight is placed on the interpretation

of the crisis as a “‘competitiveness crisis’ because Euro area

Member States hadn’t sufﬁciently used the ‘boom period’ to

tackle existing structural weaknesses” (Germany 2015: 3). At

a more granular level, the contribution refers specifically to

the “very important” aspect of “‘nominal and real rigidities in

product and labour markets’ predating the crisis and pre-

venting the efﬁcient allocation of resources” (ibid.).

Even if there is otherwise less detailed discussion of the

opposing options, the stability union perspective dominates.

The lack of structural reforms to create “ﬂexibility” in product

and labour markets is regarded as the central cause of crisis

and the most important hurdle on the path to recovery in

the Eurozone.

But as a whole, Berlin takes a restrained approach in its

contribution to the Five Presidents’ Report and in fact tends

to constrain the process by emphasising that the Sherpa

process should not overstep its mandate: Efforts to deal with

the crisis at national and European level “cannot be the prime

concern of this Sherpa process. As for the relevant European

projects they can and should be left to the normal fora and

procedures” (ibid.). The German contribution questions the

Commission’s stated goal for the entire process and calls for

the process to concentrate “on the medium-term perspec-

tive of reinforcing EMU architecture, namely through stronger

economic policy coordination” (ibid.). Here it is conspicuous

that an attempt is being made to steer the discussion away

from exploration of potential new instruments and institu-

tions and instead to centre it on the sphere of reinforcing

implementation and coordination of national policies. This

can again be interpreted as an argument for the stability

ion, seeking to minimise supranational governance and

integration and restrict action to stronger control of nation

economic policy guided by a (largely implicit) stability par-

digm.

In addition to their individual contributions, Germany and

France later also published a joint paper laying out the policy

areas in which progress needs to be achieved. Although the

language here is less definite than in other contributions, it

points the way to a compromise that – like the German con-

tribution – leans more towards the stability camp.

In particular, it is noticeable that it does not call for sig-

niﬁcant institutional shifts towards a ﬁscal union. It addresses

at length the implementation and prioritisation of the country-

specific recommendations in the European Semester. This is

followed by a listing of possible measures “to promote the

real convergence of the economies and the resilience of the

Eurozone” (translated from Germany/France 2015: 3). But

these

are mostly aspects affecting the Single Market. Apart from

implementing the Banking Union and the Capital Markets

Union, a call for a common tax base in Europe, and the intro-

duction of nationally deﬁned minimum wages, no EMU-wide

initiatives are mentioned. Thus, for example, there is no place

for joint debt management or a fiscal capacity.

Only in the ﬁeld of democratic legitimation does the doc-

ument call for reforms at the Eurozone level, such as the pos-

sibility of a Eurozone chamber in the European Parliament

or strengthening the role of the President of the Eurogroup.

Nonetheless, the stability union remains the principal point of

reference, and national economic responsibility is writ large:

“At the same time, democratic control, legitimacy and re-

sponsibility must be ensured at the national level” (ibid.: 4).

4.2.5 MALTA

Malta also argues, in line with the stability vision, that the cri-

sis and its resolution do not originate in systemic causes as-

sociated with the incomplete nature of the Monetary Union.

Instead Malta also places the focus on “[s]tructural reforms

which increase the return on investment” (Malta 2015b: 2) in the

interests of improving national competitiveness. Consistently,

the Maltese contribution also concludes that “the positive re-

sults brought about by structural reforms should themselves

act as an incentive” (ibid.: 3), because for example competitive-

ness increases productivity. The Maltese negotiators note that

many reforms have already been initiated, and argue against

further changes in the governance framework, especially with

THE DIVIDED EUROZONE

respect to convergence: “[W]e do not see the need for the

introduction of new rules on economic and fiscal govern-

ance and certainly not of rules that would be prescriptive

in nature and ignore the inherent differences in Member

States which cannot be converged” (Malta 2015a: 1).

Nor does Malta see any need or treaty basis for further

fiscal integration within the Eurozone: “We are in principle

against any form of additional fiscal capacity for the Euro

Area other than that already provided by the EU budget”

(Malta 2015b: 3). Malta believes that the “existing instruments”

in the form of the ESM, together with the ECB’s motto to “do

whatever it takes”, are sufﬁcient to provide the shock-absorp-

tion that a Monetary Union needs (ibid.). And Malta explicitly

addresses its rejection of any form of reforms requiring joint

institutional solutions to the other camp: “At this juncture Mal-

ta does not subscribe to any proposals that would lead to a

ﬁscal union” (ibid.: 4).

4.2.6 NETHERLANDS

The Dutch contribution can also be assigned to the stability

camp. It argues very explicitly that the member states should

not wait for initiatives or policies from the European level, but

should instead “take responsibility and do their part now”

(Netherlands 2015a: 2). All the member states, it argues, should

modernise their economies, deepen the Single Market and

reform their administration along the lines of a proposed

“Better Governance Agenda”.

The Netherlands sees the main

remedy for overcoming the crisis in “modern economies”

that need to be “strong and flexible” in order to achieve

growth, real convergence and resilience to shocks (ibid.).

The problem, the contribution argues, is currently that: “Struc-

tural reforms are too often shunned and Member States’ track

record of implementing country-specific recommendations

is poor” (ibid.).

New rules and institutions for achieving the desired na-

tional policies are not necessary: “As long as the full capacity

of existing rules is not being used, new rules will not help

us. […] Proper implementation of recommendations and ex-

isting agreements is the solution to many of our problems”

(ibid.). Towards the end, the contribution becomes even clear-

er and clearly rejects any further integration steps for the fore-

seeable future: “Addressing questions in the realm of further

risk sharing, new competences or institutions in the Four

Presidents’ Report is premature” (ibid.: 4).

4.2.7 DENMARK

Among the group of EU countries with their own currency,

the focus on a stability union is especially strong in the Dan-

ish contribution:

“It is the view of Denmark that the current governance

framework, including the new rules – if fully implemented –

is sufficient to address the challenges mentioned in the

5 This “Better Governance Agenda” is described in greater detail in a

second Dutch contribution (Netherlands 2015b). As its content diverges

from the rest of the debate, we restrict the discussion here to the first

contribution.

analytical note. The long run prosperity of the euro area and

the EU depends on Member States’ structural reforms that

are in turn supported by the current governance framework”

(Denmark 2015: 3). Further steps towards a fiscal union are

neither proposed nor felt to be necessary, because Denmark

takes the view that “the EMU will be able to function well

within the framework of the new and improved rules, pro-

vided they are fully implemented and enforced” (ibid.: 5).

The analytical perspective of the stability union is clear

here: “rule compliance” is central to mastering the challenges

of the EMU. New instruments like joint debt management or

a ﬁscal capacity would not, it is argued, address the problem

of compliance and are therefore superﬂuous. Moreover, they

are positively undesirable for Denmark on account of moral

hazard in relation to structural reforms (ibid.: 4).

4.2.8 ROMANIA

Romania can also be considered as part of the stability camp,

although less explicitly than the countries discussed above.

The Romanian negotiators emphasise the importance of

implementing and to an extent simplifying the existing rules

and do not mention further institutional reforms. Like others,

the Romanian government underlines the responsibility of all

member states for structural reforms: “Sustained responsibili-

ty from all Member States it vital for ensuring a sound ﬁscal

and economic position which will lead to an increased level

of trust within EU Member States and to more resilience to

shocks in the EU economy” (Romania 2015: 1). Competitive-

ness, as a central goal of the EU, is defined as the desired

focus of the EMU institutions, without any necessity for fur-

ther institutional changes.

Romania emphasises: “While acknowledging that impor-

tant challenges remain with respect to the shock-resilience

of the Euro area, we deem more efﬁcient, at least on a short

and medium term, to focus on the full implementation, both

at EU and national level of the already consolidated mecha-

nisms within the governance framework” (ibid.: 3). The con-

tribution also notes that the EU as a whole possesses “suffi-

cient instruments” (ibid.).

4.2.9 HUNGARY

Finally Hungary, like Romania, can also be assigned to the

stability camp. The Hungarian government has repeatedly

underlined its commitment to the existing focus on pro-

competitive reforms in the member states: “The most im-

portant objective of structural reforms in my understand-

ing is to enhance competitiveness. The ultimate objective of

the structural reforms is to enhance competitiveness in glob-

al terms and that implies competition also within the EU”

(Hungary 2015b: 2). Budapest itself is “firmly committed to

continue the policy of growth enhancing structural reforms,

investment and fiscal discipline” (Hungary 2015a: 2).

Neither analysis of the crisis nor its attitude towards fur-

ther institutional steps feature in any great depth in the two

submitted Hungarian contributions, but the focus on national

competitiveness and on implementation and enforcement of

existing stability-driven reforms clearly illustrate its leanings

wards that camp.

FRIEDRICH-EBERT-STIFTUNG

4.3 INTERIM SUMMARY ON THE STABILITY

UNION

Summarising the contributions presented above, it can be

said that the Eurozone states Finland, Estonia, Lithuania, Ger-

many, Malta and the Netherlands clearly belong to the sta-

bility union camp. They all emphasise that the causes of the

euro crisis lie in what they see as poor policies of individual

states, and correspondingly demand reforms to correct these

errors. From this perspective, further-reaching integration

steps are not necessary (and frequently not desirable), apart

from demands in certain quarters for the Commission to

be given stronger powers to monitor and sanction national

economic decisions.

These six states represent the ideological base of the

stability union, and are united by their conviction that the

uppermost priority is to prevent the introduction of transfers

to poorer or less “reform-oriented” states. The latter applies

especially to Estonia and Lithuania, both of which have ex-

perienced painful austerity programmes under the existing

stability arrangements, and therefore may tend to see other

countries’ problems as resulting from inadequate implemen-

tation of reforms. One interpretation could be that in Finland,

the Netherlands and Germany right-wing populist parties

represent a direct threat to the established political spectrum,

which frequently finds itself accused of failing to pursue na-

tional interests sufficiently in the European context. This has

the effect of increasing the determination of these states to

defend their own domestic tax revenues.

The joint Franco-German paper hints at a compromise,

but is conspicuous for its absence of any further-reaching

steps towards a ﬁscal union. With its focus on the implemen-

tation of existing measures and the strengthening of struc-

tural reforms directed towards competitiveness, the contri-

bution must therefore also be assigned to the stability union

camp. The paper does play a special role in the debate be-

tween the two camps over the vision for the future of the

EMU, to the extent that the position expressed in Germany’s

own contribution is also the one represented in the joint

document with France: an exclusive focus on implementation

with only minimal changes to existing frameworks, and the

conspicuous absence of further integration steps or comple-

mentary reforms leading towards the systemic perspective

of a ﬁscal union. As the analysis of France’s own contribution

shows (see chapter 4.4), this represents a compromise in fa-

vour of the German position and omits aspects and propos-

als that France otherwise regards as important and that tend

more clearly towards a fiscal union.

Among the non-euro states, Denmark’s position in par-

ticular can be clearly assigned to the stability camp. Romania

and Hungary adopt less explicit and less detailed positions,

but also lean towards the stability vision. The explanations

for this second group of states are similar to those for the

core

group around Finland, although the non-euro status of Hun-

gary and Romania may mean that the debate is less urgent

there and the positions are less explicit.

Altogether, substantial similarities can be identiﬁed among

the nine states in the stability camp. Almost all of them de-

mand implementation of agreed structural reforms be given

priority or even be stepped up. Estonia proposes binding

contractual arrangements for these reforms to intensify im-

plementation and ownership. Beyond this, Finland, Estonia

and Lithuania call for strict application of the EMU’s deficit

and debt rules and demand that the associated sanctions

not be watered down.

It is noteworthy that – as was to be expected – this group

otherwise makes no central demands. The reformed Mone-

tary Union with its present focus on ﬁscal rules and rule-based,

more strictly controlled national structural policies is largely

welcomed and regarded as adequate to overcome the crisis

and prevent new fragilities. All the states in this group demand

full implementation of and compliance with the adopted re-

forms. If at all, criticism is directed at inadequate implemen-

tation of rules and recommended national reforms. Certain

member states wish to address this problem that through

stronger sanctions and stricter application of the rules.

Aside from these demands, which are largely restricted

to two aspects, this camp’s contributions are characterised

by dismissal of further integration in other areas. Rejection

of fiscal integration and a corresponding capacity at Euro-

pean or Eurozone level is a central point for almost all of them.

Lithuania, Malta, the Netherlands and – more obliquely – also

Denmark and Germany reject this absolutely. Finland regards

it as ineffective and unnecessary and sees a chance of it oc-

curring – if at all – only following signiﬁcant convergence of

the member states, while Estonia tends to argue for the alter-

native of national fiscal shock absorbers.

This camp also rejects any form of mutualisation of debt

management in the Monetary Union. Finland goes furthest,

demanding reinstatement of the no-bailout rule in the medium

term (which would mean dissolution of the ESM), whereas

Malta and the Netherlands are satisfied with the current

shape of the bailout fund but see absolutely no need to de-

velop or strengthen it. Eurobonds and similar instruments are

not discussed at all in some contributions, and are rejected

by Estonia, the Netherlands and – if only indirectly – by Den-

mark and Germany.

The stability union group also rejects any further transfer

of responsibilities through closer coordination of economic

policies or the inclusion of new areas of potential systemic

relevance. Finland, the Netherlands, Denmark are Germany

are happy with the present arrangements for the European

Semester and resist greater institutionalisation of the Macro-

economic Imbalance Procedure at supranational level (as al-

ready exists for the stability and convergence criteria of the

Stability and Growth Pact).

As far as the Banking Union is concerned, it is only men-

tioned at all in a handful of contributions; its present arrange-

ments are apparently taken as given and regarded as ade-

quate. Lithuania discusses the aspect of a European deposit

guarantee scheme as part of the Banking Union – but rejects

it entirely in line with a stability union vision.

Finally, and in a sense logically on the basis of their limit-

ed demands, almost none of these countries argues for any

form of supranational democratic legitimisation for the Mon-

etary Union. Finland, Lithuania and Germany emphasise the

national parliaments as the proper forums for reforms – which

they regard as national responsibilities. Closer integration of

the national parliaments, for example in the European Semes-

ter, would therefore be welcomed. The German and in par-

THE DIVIDED EUROZONE

ticular the Franco-German contribution go further in parts,

discussing stronger inclusion of the European Parliament (or

a conceivable Eurozone chamber within it) and an expansion

of the role of the Eurogroup President.

It is also worth mentioning that many aspects and pro-

posals – some of which have been circulating for years – are

not discussed at all by the stability union group. Germany in

particular pursues this strategy and concentrates on procedur-

al aspects and generalities. More widely, for example joint

debt management is similarly only mentioned at all by three

of the countries, the Banking Union and social aspects are

found in only a handful of the contributions, and ﬁelds of pos-

sible economic policy coordination, such as wage policy, are

completely omitted. As already mentioned, this is partly a

consequence of the underlying theoretical and ideological

perspective. It remains unclear to what extent this is also em-

ployed as a tactic to prevent certain issues appearing on the

agenda in the first place.

It is notable that – behind this camp’s apparent unity – dis-

tinguishing between long-term and short-term reform options

rather alters the picture. Thus the joint Franco-German con-

tribution explicitly discusses only short-term measures, in as-

sociation with reference to a more comprehensive paper on

longer-term reforms that the two countries intended to pub-

lish at the end of 2016 (but have so far failed to do). So even

if the general thrust and priorities appear set, in the longer

term – depending on the orientation of this as yet unwritten

document and national elections in both countries in 2017 –

there might actually be greater openness to further integra-

tion steps.

4.4 THE FISCAL UNION CAMP

In the following we now move on to present the reform ideas

of the countries seeking a fiscal union. As already outlined,

can divide this camp into a main group and a sub-group:

supporters of an unrestricted fiscal union and supporters of

a restricted version. We begin by presenting the countries

with the most ambitious proposals for change, proposing

that both the present system of economic governance and

elements of fiscal integration need to be reformed in order

to overcome the Eurozone’s susceptibility to crisis. While the

countries supporting this position do not deny the validity of

prior reforms of the EMU with their focus on budgetary sur-

veillance and structural reforms, they leave no doubt that a

deepening of integration is now needed: one that also

pro-

vides transnational liability options and understands economic

policy coordination as a systemic responsibility for the pres-

ervation of the currency area, rather than merely using it

to enforce pro-competitive structural reforms in the crisis

states.

Countries in the sub-group, on the other hand, are only

partly committed to the goal of a ﬁscal union: they either ap-

prove of ﬁscal integration of the Eurozone but regard the pres-

ent economic governance as adequate or, conversely, are

dissatisﬁed with economic coordination based on budget rules

and pro-competitive structural reforms (and wish to see

change

there) but reject the fiscal perspective of shared liability op-

tions. In other words, the countries in the sub-group seek

change in just one of the two areas – even if the concrete

instruments and institutions they propose (and the associat-

ed timeframes and preconditions) certainly vary from state

to state.

4.4.1 SUPPORTERS OF A FISCAL UNION

WITHOUT RESTRICTIONS

4.4.1.1 I t a l y

In the Sherpa process Italy was the most determined advo-

cate of comprehensive fiscal union. It regards the steps al-

ready taken towards a Banking Union as inadequate to break

the vicious circle of bank and state debt, and believes it nec-

essary to complete it by establishing a common fiscal back-

stop mechanism and a European deposit protection. Although

Italy sees the Capital Markets Union project already offering

a possibility to distribute adjustment to economic shocks

better across the Eurozone, because an integrated capital

market would better distribute risks (Italy 2015b: 5), its con-

tributions make it clear that this is not regarded as sufficient.

In order to protect the Monetary Union against future crises,

the Italian government believes that much further-reaching

measures are vital: collective borrowing through Eurozone

bonds (Italy 2015a: 3f.) and a fiscal capacity. Gradual imple-

mentation is recommended. In the longer term a separate

Eurozone budget is proposed, to facilitate an anti-cyclical

buffer function. In this connection the question of new own

revenue sources for the EU and/or the EMU would then have

to be discussed. In the shorter term (and according to the

Italian government possible without a treaty revision) a Euro-

pean unemployment insurance scheme is proposed as an

automatic stabiliser to cushion asymmetric shocks affecting

Eurozone countries: “A European unemployment benefit

scheme would serve as a EU automatic stabilizer, help mod-

erate the economic cycle, tackle asymmetric shock, address

distributive issues” (ibid.: 2). In particular because the EMU

seeks (to intensify) an economic convergence process, Italy

would like to see the European unemployment insurance im-

plemented rapidly as the ﬁrst manifestation of a ﬁscal capac-

ity for supporting convergence efforts: “It would therefore

not be coherent to postpone risk-sharing at the conclusion

of the convergence process” (Italy 2015b: 4).

The Italian negotiators heavily criticise the asymmetry of

European economic governance and call for the European Se-

mester to be developed into a governance instrument with

an investment function to reduce imbalances: “Persisting wide

imbalances are incompatible with an economic union. The

governance structure should facilitate a cooperative rebalanc-

ing within the economic area, lacking which adjustment will

remain highly asymmetric” (ibid.: 3). The proposal is for the

European Semester to introduce a “policy mix” enabling a

dis-

tinction to be drawn between short-term needs and me

dium-

term shared political challenges. As well as the member

states,

demands for action should also be addressed to the EU itself

(ibid.: 4). In the longer term, the ESM should serve as a Euro-

pean Monetary Fund for funding investment projects.

Preserving the European social model is central to Italy’s

demands for a social dimension in the Monetary Union. Its con-

tributions warn of growing social stress caused by the crisis

FRIEDRICH-EBERT-STIFTUNG

management it criticises. Rome makes no bones that the trans-

formation of European policy from a subjective threat to so-

cial security into a bulwark of protection represents a key

precondition for all further integration steps. It calls for a focus

on the social costs of the Euro crisis and a social component

to Union citizenship. Here, Italy argues, the European unem-

ployment insurance scheme could serve as “concrete proof of

EU solidarity” (Italy 2015a: 2). The European Youth Guarantee

and the Employment Initiative also need to be strengthened,

it believes, in order to prevent the emergence of a “lost gen-

eration”. The member states’ tax systems also need to become

coherent in order to prevent a race to the bottom.

Italy believes that a political union is required in order to

lend democratic legitimacy to the already implemented gov-

ernance framework of the EMU. The call for better integra-

tion of the European Parliament and the national parliaments

in the European Semester is therefore central. The democrat-

responsibility for further-reaching proposals, such as ﬁscal

capacity and Eurobonds, should also be located at the Euro-

pean level (ibid.: 4). Italy argues for the Community method

to be used for further reforms and as such implicitly rejects

the intergovernmental agreements (outside the EU treaties)

that have sometimes been employed. Because at the same

time many of the proposed policies would not ﬁnd the agree-

ment or interest of all the EU member states, the Italian gov-

ernment calls for greater use of enhanced cooperation by the

nineteen Euro states, in order to advance coordination of

ﬁs-

cal policies (Italy 2015b: 8).

4.4.1.2 Spain

Spain is also a supporter of ﬁscal union and presented similar

arguments like Italy in the Sherpa process. It would like to see

the Banking Union rapidly completed with elements of trans-

national liability and the establishment of a limited fiscal ca-

pacity, initially funded through EU own resources. This would

promote the convergence process within the EMU: “[T]he lim-

ited ﬁscal capacity could be enhanced to create a true Fiscal

Union encompassing the three central elements (1) transfer

of sovereignty on revenue and expenditure policies to the

European level; (2) a common Eurozone budget; (3) common

debt instruments” (Spain 2015b: 8).

Like Italy, Spain is dissatisfied with the scope of the cur-

rent governance framework and its focus on budgetary as-

pects: “The paradox has been that fiscal criteria have been

monitored after the creation of the single currency through

the Stability and Growth Pact, while no similar treatment

has been given to nominal convergence in inflation criteria”

(ibid.: 4). Madrid

complains that identified imbalances are

inadequately ad

dressed and calls for a simplification of the

Macroeconomic Imbalance Procedure by concentrating on

current account bal

ances, real effective exchange rates, unit

labour costs and

inflation rates. Budgetary indicators, it says,

are already adequately covered by the Stability and Growth

Pact. In relation to surveillance of member states’ budgets,

Spain calls for the introduction of a golden rule for invest-

ment, to permit temporary deviations from the adjustment

path of the Stability and Growth Pact. The ESM should be

used to finance or guarantee such infrastructure projects

(Spain 2015a: 4). Internal spill

over effects of structural poli-

cies and impacts on the Euro

zone’s external current account

should also be taken into consideration. Spain’s most radical

demand – unique in the submitted reports – is to amend

the statute of the ECB to require

it to take account of differ-

ences in the real inflation rates of

the member states as well

as Eurozone price stability in its monetary policy (ibid.: 3f.).

The Spanish contributions also speak of preventing proﬁt-

shifting and tax avoidance. Furthermore, alongside the afore-

mentioned fiscal aspects, the European level should also be

granted additional powers in labour and employment policy:

“All competences related to labour mobility should be trans-

fered to the European level, including, for example, matters

related to social security, unemployment insurance, or pro-

fessional qualiﬁcations” (Spain 2015b: 8).

Spain also calls for better integration of the European Par

lia-

ment in the EU’s governance framework and argues for

deep-

er integration among the nineteen Eurozone members. In the

long term, Spain would like to see the creation of a finance

minister post for the Eurozone, who would be responsible for

a fiscal capacity and appointed jointly by the European Par-

liament and the national parliaments. Ultimately he or she

should receive the power to sanction nation states (ibid.: 7f.).

4.4.1.3 Portugal

Portugal’s contributions also put it clearly in the fiscal union

camp. On both the Banking Union and deeper fiscal integra-

tion, Portugal argues for transnational risk-sharing. Lisbon ar-

gues for the establishment of a ﬁscal capacity which is fund-

ed through EU own resources and financially neutral for the

member states. Portugal recommends the European Commis-

sion, when considering own resources and the burdens to be

borne by the member states, take into account “the different

degree to which different social/economic groups beneﬁt from

European integration and, particularly, the single currency”

(Portugal 2015b: 7). Portugal clearly rejects the belief that the

deﬁcits of the Eurozone architecture can be eliminated in the

medium term solely through structural reforms and deepen-

ing of the Single Market. Portugal’s contribution airs the idea

of turning the ESM into a European Monetary Fund (Portugal

2015a: 2f.), which could be expanded into a European “Mon-

etary and Fiscal Fund” by introducing a European unemploy-

ment insurance scheme (Portugal 2015b: 6). While critical of

the inadequate capacity of the EMU to absorb asymmetric

shocks, Portugal does not see a fiscal insurance mechanism

as the path to greater convergence, but conversely calls for

“a greater degree of harmonization between economic poli-

cies and institutions of the participating Member States” as

its precondition (ibid.).

Here Portugal departs from Italy’s and Spain’s ideas of

rapid implementation of a fiscal capacity. But in relation to

their criticisms of economic policy coordination and ideas for

reforming it, Lisbon remain on the side of Rome and Madrid.

Portugal also believes that coordination of economic policies

must not stop at ﬁxed rules for national budgets, but must

have as its objective an aggregated and proactive ﬁscal poli-

cy for the euro area: “[...S]ince we acknowledge that ﬁscal co-

ordination is a requirement to avoid negative spillovers from

bad national decisions, we must conclude that ﬁscal coordi-

nation is also required to explore positive

spillovers” (ibid.: 4).

THE DIVIDED EUROZONE

Characteristically for a proponent of fiscal union, Portugal

does not fear the prospect of transferring powers to the Euro-

pean level, but sees this as a necessary requirement of grow-

ing European responsibilities. The establishment of a fiscal

capacity is thus justiﬁed not exclusively in terms of economic

rationality for a smoother-functioning EMU, but also political-

ly, in order to avoid the kind of ad hoc transfers required in

the most recent crisis because these have always encouraged

intergovernmental negotiations operating outside the Com-

munity method (Portugal 2015a: 3). Like Italy and Spain, the

Portuguese government would like to massively strengthen

the Eurogroup through a European Monetary Fund with

ex-

panded fiscal capacity in order to create a united fiscal

coun-

terpole to the ECB’s monetary policy (Portugal 2015b: 7f.).

4.4.1.4 Belgium

Belgium supports the course of the three proponents of a fis-

cal union already outlined. In its contribution Belgium also

calls for completion of the Banking Union and argues for the

establishment of a fiscal capacity and an only vaguely de-

scribed European “treasury function”. On implementation,

Belgium concurs with Portugal and sees both instruments as

plausible objectives only after a real economic and social con-

vergence process of unstated magnitude: “When all Mem-

ber States are on a proven and determined path towards the

Pact for Stability and Growth’s debt reference value, and the

necessary degree of economic, social and ﬁscal convergence

has been achieved, a ﬁscal capacity and a treasury function

for the euro area could be envisaged” (Belgium 2015: 2).

Belgium also calls for sweeping changes in economic

governance, proposing a longer-term policy coordination

mechanism (as already mentioned as ex-ante-coordination in

Article 11 of the Fiscal Compact) (ibid.: 1). Belgium is the only

state in the ﬁscal union camp to call for the introduction of

the Common Consolidated Corporate Tax Base (CCCTB) – in

ﬁrst place under the keyword “tax convergence” – in order to

ﬁght tax erosion and proﬁt-shifting.

Belgium places high priority on the social dimension of

the EMU and calls for the objective of social convergence to

be promoted speciﬁcally by ﬁghting social dumping, through

measures including a “social impact assessment” of the struc-

tural reforms, higher common social standards and the mod-

ernisation of the national labour markets and social security

systems (ibid.: 2).

The Belgian contribution openly admits that the planned

integration steps to create a fully-ﬂedged banking, ﬁscal and

economic union naturally require parallel steps towards a po-

litical union, which means shared sovereignty (ibid.: 3). One

first step could be to improve the integration of the social

partners in the European Semester, for which concretely a

social

dialogue on the annual growth

survey is

proposed.

Belgium criticises the intergovernmental agreements that have

become common

practice in crisis

management (2015: 3).

ESM, Fiscal Compact and the Single Resolution Fund (SRF), it

argues, need to be quickly integrated into EU law; intergov-

ernmental agreements can only be temporary stopgaps. In-

stead Belgium calls for the powers of the Interparliamentary

Conference under Article 13 of the Fiscal Compact to be ex-

panded beyond the fiscal policy aspects laid out there.

4.4.1.5 Luxembourg

Luxembourg is also clearly among the supporters of a fiscal

union. On the question of the Banking Union it goes even fur-

ther than the demands outlined above and calls for expedit-

ed establishment of the SRF for banks, which is not currently

planned to be fully functional until 2024. Luxembourg is also

the only country to share Italy’s euphoria over the benefits

of the Capital Markets Union, asserting that it is the central

instrument for improving EMU’s capacity to absorb shocks:

“To improve the shock absorption capacity in the euro area

and beyond, the creation of the Capital markets union must

be a priority” (Luxembourg 2015: 7). Nonetheless, in the long

term Luxembourg sees the necessity for a real fiscal capaci-

ty with European own resources, and also for joint debt man-

agement.

Luxembourg largely shares the criticisms of the European

Semester, but focuses its reform proposals less on the Euro-

pean level, calling instead for implementation at national lev-

el. Thus in future the Commission should report regularly on

progress implementing the Country-specific Recommenda-

tions (CSRs). Here Luxembourg borrows from the stability un-

ion camp, reminding them of the contractual arrangements

that Germany introduced into the reform debate in 2012/13:

“To further incentivize structural reforms, the use of contrac-

tual arrangements as discussed in the recent past could be

an option” (ibid.: 8). At the same time, however, unlike the

proponents of the stability union, Luxembourg emphasises

that the Stability and Growth Pact alone cannot form the basis

for reform recommendations. It is as important, it argues, to

make full use of the MIP, whose corrective arm has not to

date

been applied – to the detriment of the credibility of the gov-

ernance architecture.

This perspective is also clearly visible in Luxembourg’s

position on the social dimension as a ﬁrm component of EMU

governance: “Member states could eventually be asked to

make adjustments to their national policies to mitigate to

the extent possible negative social consequences without

jeopardizing fiscal consolidation and growth-friendly struc-

tural reforms” (ibid.). Like Belgium, Luxembourg also calls for

stronger integration of the social partners in the European Se-

mester, and also argues for the European Parliament to be

granted a greater say there.

4.4.1.6 Slovenia

Among the Central and Eastern European states, Slovenia is

the most vociferous advocate of ﬁscal integration for the EMU.

Its contribution argues for the longer-term development of

a transnational risk-sharing mechanism as a central feature

moving towards a fiscal union (Slovenia 2015: 2). It argues

that a ﬁscal capacity is required to absorb asymmetric shocks,

even if this would open up as yet unclarified questions con-

cerning own resources for the EU and shared debt manage-

ment (ibid.: 4).

That said, the Slovenian position on reforms of the EMU’s

economic governance structure is considerably more moder-

ate than those of the countries already discussed. Slovenia is

happy with the existing European economic governance

frame-

work and believes it to be capable of identifying macroeco-

FRIEDRICH-EBERT-STIFTUNG

nomic imbalances in good time. Progress is more needed in

the field of closer fiscal cooperation, and new incentives for

implementing competitiveness reforms could also be consid-

ered. In this connection the new more ﬂexible application of

the Stability Pact is explicitly mentioned (ibid.: 2, 5).

Slovenia speaks of a transfer of national powers to the

European level not only in connection with a fiscal capacity,

but points to potential spill-over processes in other policy

fields resulting from strengthened budgetary surveillance:

“Similarly, a strengthened coordination of economic policies

and stronger surveillance over national budgets could raise

questions regarding the competences in the areas of em-

ployment, social policy, taxation, education or health system”

(ibid.: 4). With every step associated with transferring sover-

eignty to the European level, Slovenia argues, the role of the

national parliaments should be explicitly strengthened to safe-

guard democratic legitimacy (ibid.: 5).

4.4.1.7 Latvia

Latvia also belongs to the fiscal union camp. It remains cau-

tious over a European deposit guarantee scheme under the

Banking Union, but does not reject it (Latvia 2015b: 3). Pro-

posals for joint debt management in the Commission Blue-

print of 2012 also need to be treated “with extreme caution”

(ibid.: 2).

But in the longer perspective the Latvian government clear-

ly calls for the establishment of a fiscal union with its own

fiscal capacity, as already spelled out in the Four Presidents’

Report of 2012, because the EMU is otherwise powerless in

the face of shocks. But the contribution does emphasise the

requirement for “strong preconditions and conditionalit[ies],

including a closer coordination of the national budgets at EU

level” (Latvia 2015a: 2). For Latvia, the EFSI and the Commis-

sion’s flexible interpretation of the Stability Pact already rep-

resent the first steps on the road to fiscal capacity (Latvia

2015b: 2). Like Portugal and Belgium, Latvia sees closer socio-

economic convergence as a precondition for establishing a

fiscal capacity. As well as a strengthening of the European

and national parliaments, Latvia too would like to see the

social partners integrated more closely into the European

Semester.

4.4.1.8 France

France stands recognisably in the camp of supporters of a fis-

cal union, but not as whole-heartedly as those already de-

scribed. What they share in common is first of all their atten-

tion to macroeconomic imbalances and the inadequacy of

European coordination and governance powers as an initial

cause of the crisis, and the stance that reforms to date repre-

sent only a ﬁrst and insufﬁcient step: “Nevertheless, while the

emphasis on ﬁscal consolidation in recent years has restored

conﬁdence, it has also resulted in weaker growth. Similarly,

policy coordination has been strengthened, but remains in-

complete and has not led to sufﬁcient growth or economic

and social ‘reconvergence’ within the euro area” (translated

from France 2015: 2).

With respect to the Banking Union, France points out that

the already adopted Single Resolution Mechanism has yet to

enter into force and lists it under the keyword of transnational

“solidarité” (ibid.: 3). All that the later joint Franco-German con-

tribution has to say on this question is that the Banking Union

should be completed “as planned” (translated from Germany/

France 2015: 2).

Paris states very directly that a EMU orientated on faster

and sustainable growth, dynamic investment and employ-

ment cannot function without a convergence process of the

integrated economies. This rests explicitly on social as well

as fiscal policies and represents for the French an indispen-

sable tool for dealing with asymmetric shocks: “This con-

ver

gence is a prerequisite for better resilience to shocks and

preservation of the European social model” (translated from

France 2015: 3). The joint Franco-German contribution also

understands a “real convergence of the Eurozone economies”

to mean “establishing a convergence framework for the as-

sessment bases, in particular for corporate taxation”, as well

as greater transparency and action to combat tax avoidance

(translated from Germany/France 2015: 2). Unlike Italy and

Spain, the French contribution to the Sherpa process remains

very reserved concerning the details of what it regards as

necessary processes of convergence and transnational soli-

darity and merely notes the necessity of examining possible

instruments (France 2015: 3). The French approach is even

more cautious in its second contribution, submitted jointly

with Germany. Here the longer-term reform perspective of the

EMU is bracketed out entirely. The fundamental choice be-

tween stability union and ﬁscal union is postponed. Thus the

brief joint contribution ends with a call for closer investiga-

tion of “the future needs of the Eurozone” (translated from

Germany/France 2015: 3): “Such an investigation should ex-

amine in particular the political and institutional framework,

the joint instruments and the legal framework that could be

relevant in the longer term” (ibid.). The two governments

promised another joint contribution by the end of 2016 which

however has not been forthcoming to date.

France positions itself more clearly in relation to the exist-

ing economic governance framework. Here Paris joins Rome,

Madrid and Lisbon in calling for further development of the

European Semester, to lead it away from a one-sided focus on

budgetary and competition policies in the individual states. In

future, it argues, the need for public investment should be

identiﬁed and – alongside coordination of national policies –

there should also be a response in aggregated form. In its con-

tribution France makes it clear that this means mobilising Eu-

ropean instruments and funding (France 2015: 2).

Even if the French negotiators underline the necessity of

social convergence, their reference to the “European social

model” is not ﬂeshed out. The goal thus remains very gener-

al, and can be shared by Germany, which commits to it in

their joint contribution. So as the complement to greater

competitiveness, both governments emphasise “strengthen-

ing the social basis of the Economic and Monetary Union”.

But in detail the proposals remain unspectacular: supporting

mobility of labour, promoting the introduction of minimum

wages, and intensifying cooperation in active labour market

policy and in the other social security systems (Germany/France

2015: 2). What does, however, become clear is France’s inter-

est in the institutionalisation of a sectoral Eurogroup forma-

tion of the labour and social ministers (2015: 3). This propos-

THE DIVIDED EUROZONE

al is also mentioned as an option in the joint contribution

with the German government (Germany/France 2015: 3).

Like Italy, Spain and Latvia, France also calls for better inte-

gration of the European Parliament and the national parlia-

ments in the governance of the Eurozone; as already men-

tioned by Belgium, Luxembourg and Latvia, the social partners

should also be more closely integrated into the European Se-

mester. Only very cautiously does France (2015: 3) float the

idea of improving the efficiency and outcomes of decision-

making processes by holding regular Eurozone summits and

strengthening

the

chair

and external

representation of

the

Eurogroup. In the joint contribution with Germany, France ar-

gues for the establishment of separate Euro structures in the

European Parliament (Germany/France 2015: 3).

4.4.2 SUPPORTERS OF A FISCAL UNION WITH

RESTRICTIONS

4.4.2.1 Cyprus

Cyprus argues only half-heartedly for a fiscal union, because

its government believes that the current governance frame-

work with ESM, Banking Union and budget rules ensures

that

the Eurozone is able to resist economic shocks. But at

the

same time aspects for the future of the Eurozone were

identified “which were related to the problems of the crisis

that still remain to be addressed” (Cyprus 2015: 2). For the

Cypriot government these include for example closer coordi-

nation of economic policies and the deposit protection in the

Banking Union for deposits under €100,000. The establish-

ment of a ﬁscal union is seen as a possible chance to give the

member states incentives to improve their fulfilment of eco-

nomic policy goals and at the same time to resolve the moral

hazard problem: “Further risk sharing is not warranted at this

stage. [...A] further risk sharing in the fiscal realm between

member states if examined, should of course be viewed in the

context of an appropriate conditionality to address moral haz-

ard problems“ (ibid.: 3).

Cyprus, like Portugal, Belgium and Latvia, demands great-

er socio-economic convergence as a precondition for estab-

lishing a fiscal capacity, understanding this in the first place

as the fulfilment of the targets laid out in the European Se-

mester. But Cyprus is open to new institutional arrangements

for improving democratic legitimation, for example through

better inclusion of the European Parliament and the national

parliaments in the European Semester.

4.4.2.2 Slovakia

Like Cyprus, Slovakia also argues for the EMU to be expand-

ed into a fiscal union, but without initially altering the exist-

ing policy coordination framework. On the one side, the Slovak

government’s contributions read as an urgent call to action

on fiscal integration: “It is our view that the economic and

monetary union cannot continue to exist in the long term

unless fiscal instruments to address asymmetric and pan-

European Shocks become part of the EMU framework”

(Slovakia

2015a: 2). As a concrete instrument against asym-

metric

shocks, Slovakia – like Italy and Portugal – favours a

European unemployment

insurance

scheme. Shocks

affect-

ing

Europe as

a whole should be addressed through a com-

mon investment mechanism – not described in any greater

detail

– whose orientation bears similarities to proposals from

France, Italy, Spain and Portugal for greater European bundling

of investment support (ibid.: 3).

On the other side the EMU’s current governance frame-

work is regarded as adequate. So any broader transnational

liability in the Banking Union extending beyond the compro-

mise already reached is rejected, and full application of all in-

struments available in the European Semester called for. Like

Latvia and Cyprus, Slovakia believes that fulﬁlment of the ex-

isting rules in the Eurozone must be a precondition for fiscal

capacity. This is also regarded as an opportunity to create a

clear incentive for obeying the rules: “From the point of view

of Slovakia, ﬁscal and economic discipline, including equal and

transparent application of SGP and MIP, is a necessary condi-

tion for the further deepening of fiscal integration. Conse-

quently, adherence to existing rules [...] could be a criterion

for entry into a fiscal union” (Slovakia 2015b: 2). Alongside

stronger action on macroeconomic imbalances, Slovakia ar-

gues for better integration of the Europe 2020 strategy in the

European Semester.

True to its line on economic questions, however, the Slovak

government supports no speciﬁc social policies for the Euro-

zone, because it regards achieving greater economic conver-

gence, potentially also by means of a shock absorber like the

European unemployment insurance scheme, as the best way

to prevent social hardship. Projects like a common minimum

wage or binding social indicators, on the other hand, it be-

lieves, can undermine economic convergence targets (ibid.).

Clear deviations from the positions of the majority of coun-

tries in the camp of supporters of a fiscal union are found in

connection with ideas on political governance. Slovakia de-

cisively opposes separate Euro formats for strengthening fis-

cal integration and insists that all EU states participate in the

decisions. Slovakia also warns against greater involvement of

the European Parliament at the expense of the Council and

the

national

parliaments:

“We

are

cautious

about

further

strengthening the involvement of the European Parliament

as it could come at the expense of the Council or the national

parliaments” (ibid.: 3).

4.4.2.3 Croatia

As a non-euro state among the restricted ﬁscal union camp,

Croatia criticises what it sees as the still inadequate functionali-

ty of the Banking Union. It is unclear, Croatia asserts, whether

the new collective rules will be capable of breaking the vicious

circle of ﬁnancial crisis and ﬁscal instability. It will depend on

the concrete details of the bail-in rules, Croatia argues, whether

they will make a positive contribution or in fact exacerbate the

problem: “However, the question is whether the system will,

due to some of the new elements, become more prone to

crisis” (Croatia 2015: 2). Croatia criticises the EU’s current bud-

get as insufﬁcient to actively counteract asymmetric shocks. In

an ideal world the member states would have to completely

communitise their economic policies, in order to complete the

EMU (ibid.). On the other hand, economic policy coordination

supports the existing strict regulatory approach, but must not be

allowed to ignore national needs for speciﬁc ﬂexibilities. Like

FRIEDRICH-EBERT-STIFTUNG

many in the stability union camp, however, the Croatian gov-

ernment emphasises the importance of national politics re-

specting the current governance frameworks. Here strength-

ened national “ownership” is required, along with “continuous

rigorous surveillance through the European semester” (ibid.).

4.4.2.4 Poland

Overall, Poland can also be placed in the fiscal union camp,

even though it rejects further integration steps at this junc-

ture: “In Poland’s view it is not necessary to further Europe-

anise ﬁscal policy ahead of 2019” (Poland 2015a: 6). Instead

Poland argues in the short and medium term for steps that

would generally be associated with the stability union side,

and proposes explicitly voluntary but binding agreements to

implement priority structural reforms between member states

and Commission, of the kind already discussed in 2013 as the

Convergence and Competitiveness Instrument (CCI): “In the

short term in order to strengthen the EU economic govern-

ance, Poland proposes to improve the functioning of the Eu-

ropean Semester and supplement it with a capacity to enter

into the voluntary contracts on the structural reforms be-

tween the Member States and the European Commission”

(ibid.: 3.; the proposals for modiﬁcations to the European Se-

mester are discussed in detail in Poland 2015b). As an incen-

tive mechanism, Poland proposes a “a possibility to fully deduct

direct and indirect costs [...] of the agreed reforms when calcu-

lating the deﬁcit” under the Stability and Growth Pact (2015b: 4).

But in contradiction to those stances, Poland proposes

rapid completion of the Banking Union, including “measures

to strengthen ﬁscal backstop“ (2015a: 5). Thus in contrast to

the stability union camp, Poland does not reject such a ﬁscal

safety net per se as a transfer and liability union, but regards

it as a necessary component of the Banking Union.

It is also conspicuous that Poland – despite its blunt re-

jection of imminent acute integration leaps – is not only open

to a long-term fiscal integration and regards it as desirable,

but also sees it preceded by a deeper political integration:

“In the long run such an action [Europeanising ﬁscal policy]

would be desirable provided that […] the level of political in-

tegration is increased and some competences in the area of

economic and ﬁscal policy are transferred to the European

level” (ibid.: 6). The function of fiscal integration as a shock

absorber is also explicitly emphasised, even if the need for

prior political integration is underlined: “In the long term, the

ﬁscal integration would also increase the effectiveness of ad-

justment mechanisms to asymmetric shocks in the Eurozone.

However it would require an appropriate deepening of politi-

cal integration” (ibid.). In other words, Poland currently sees

no basis for a ﬁscal union, but would support it in the longer

term as long as it is accompanied by integration in the politi-

cal and economic realms.

Above and beyond these fundamental views, the Polish

contributions also demonstrate a willingness to discuss con-

crete reform options for a fiscal union and in the longer run

propose a fiscal capacity in the form of a “pan-European in-

vestment programme” (ibid.) as a further development of

the European Fund for Strategic Investments. As the Poles

propose, contributions to this would come from the mem-

ber states and not be included in the ﬁscal limits of the Fiscal

Compact and the Stability and Growth Pact. The new fund

would be explicitly positioned as an instrument against asym-

metric demand shocks and should be subject to conditionality

in the form of structural reforms: “This programme, primar-

ily addressed to the countries with the largest output gap,

would require that its beneficiaries commit themselves to

implementing structural reforms (conditionality)” (ibid.: 3).

Alongside a ﬁscal capacity, Poland also regards a new cri-

sis management institution as a longer-term necessity:

“More-

over in the medium term Poland suggests initiating a debate

on the need to establish a crisis management mechanism in

the Eurozone – resembling the Single Resolution Mechanism.

This

mechanism could set up an efﬁcient decision-making

process

for adjustment measures to be implemented by the

troubled

Member State. This would prevent uncontrolled

tensions in

ﬁnancial markets and limit the spill-over effects”

(ibid.: 4). Here the contribution explicitly addresses the system-

ic level of asymmetric crises in the Eurozone and the collec-

tive necessity to minimise this spill-over.

4.4.2.5 Ireland

Despite its less unequivocal positioning, Ireland basically also

argues for deeper fiscal integration of the Eurozone. Its sub-

mitted contributions point out that the EMU is not an optimal

currency area, for which further Community institutions would

be required (Ireland 2015a: 3). Like many other proponents

of a fiscal union, Ireland would also like to see the Banking

Union completed as quickly as possible. And in the long term

it is correspondingly positive towards a ﬁscal capacity, al

though

this, it argues, would need to be ﬁscally neutral over the eco-

nomic cycle, organised through an automatic insurance mech-

anism, strictly conditional, and sufficiently generous if it is to

achieve an economic Impact. However, Ireland rejects tying

successful implementation of structural reforms to access to

the means of a reduced version of a ﬁscal capacity, in the

way

discussed for example with the Convergence and Competitive-

ness Instrument (CCI) in 2012/13 and now reintroduced into

the debate by Estonia, Luxembourg and Poland. A meaning-

ful fiscal capacity will need to be financially generous, Dub-

lin argues. Ireland also rejects calls for far-reaching automa-

tisation of reform rules through intergovernmental agreements

heard from the stability union side and instead proposes in-

dividual and political scrutiny of structural reforms: “Defining

reform objectives, assessing their likely overall impact, and

measuring progress towards them all require considerable

scope for political judgement and case by case assessment”

(Ireland 2015b: 3).

More clearly than any other state, Ireland addresses the

unequal treatment of current account surpluses and deﬁcits:

“The MIP needs to be implemented in a way which recognis-

es that excessive current account surpluses and deﬁcits both

need to be tackled” (Ireland 2015a: 2). As such it positions it-

self in the field of supporters of a fiscal union. Like Belgium,

Ireland calls for the powers of the interparliamentary confer-

ence under Article 13 of the Fiscal Compact to be expanded,

and for the establishment of separate euro structures in the

European Parliament.