Achieving a United States of Europe requires greater levels of integration in terms of banking, fiscal policy, labor law and institutions. These ideas have found a strategic champion in the form of France’s new president, Macron.
As we approach the halfway point of this year we can say that the first few months have been rather bumpy – the uncertainty created by the Trump presidency, the French elections, terrorist attacks, migratory movements, major corruption cases in Spain and Brazil, etc. Added to these we have seen the appearance of new ideas to reform the EU, put forward by a range of presidents and prime ministers (including Emmanuel Macron and Spanish premier Mariano Rajoy), aimed at making the Union more solid and sustainable in the long term.
Rajoy suggested taking banking union forward with a common deposit guarantee fund for the Economic and Monetary Union (EMU), the creation of a joint unemployment insurance scheme, and the return of a previous proposal to create Eurobonds. Macron, with the same aim of building a stronger and more stable Europe, claims that public procurement should only be carried out by firms with at least half of their production in the EU, and calls for a finance minister for the entire Eurozone who oversees the work of the finance ministers of member countries, and greater unification of fiscal policies.
The main objective is to work toward a United States of Europe, by strengthening institutions in such a way that the way is paved for a more complete economic governance for the Eurozone.
However, all these proposals were not particularly well received by Germany’s politicians and citizens and those of other northern European countries. The accumulation of public debt in Southern countries (as a result of budget deficits), while northern and central countries applied greater fiscal rigor, made them reluctant to embrace the ideas.
Fiscal union needed
Nevertheless, the unification of budgets and the creation of a minister of finance for the EMU will make it possible to inject rationality into spending and revenues, which, in the long term, will reduce debt. And let’s not forget that some European countries debt levels are simply not sustainable in the medium and long term. Several governments owe a sum that is greater than their GDP, which, coupled with the low expectations for growth that abound in the EMU countries, make it very difficult sustain public debt.
This is why the implementation of common fiscal policies, which have hitherto been ignored, should be brought back to the table by EU heads of state and government, in order to facilitate the survival of the Euro. This is about starting a new phase of European unification that would help control fiscal imbalances, control the handling of public spending, encourage the application of far more homogenous policies, and bring about a reduction in the fiscal and political costs associated with the annual approval of budgets in each country.
Additionally, the proposal would bring more stability to the EMU economy, permitting gains in competitiveness and growth.
Eurobonds are a similar case. A proposal in which the 19 members of the eurozone would participate, whereby 60% of the debt of each country would be replaced with Eurobonds, while the remaining 40% would be backed up by the treasury of each respective state. The Eurobond proposal has divided EMU countries, given that several countries are in favor, while others are firmly opposed. However, the markets would receive the scheme with great enthusiasm, because the mutualization of debt by Eurobonds would reduce their risk. This would produce an increase in the qualification of ratings agencies, raising all mutualized debt to a triple A rating. Although the idea is a panacea for countries like France, Italy, Spain and Greece, for countries like Germany, Austria, Finland and Holland it is a different story, given that all EMU member countries would be made responsible for part of the high level of debt of the zone as a whole.
Toward a common labor policy
Like Eurobonds, the proposed unified unemployment insurance scheme is viewed differently depending on the level of unemployment in each country. While Spain (with 18% unemployed), Greece (23.5%), Italy (12%), France (10%) or Cyprus (14%) would all benefit, countries with low levels of unemployment like Germany (4%), Holland (6%), Ireland (6%) and Austria (6%), would lose out. The measure would, however, also mean unifying more than labor markets and would include sharing the active employment policies of all EMU member countries, which would drive consumption and investment in human resources, thus reducing unemployment and inequality, while driving the free movement of people. Hence, in order for this idea to be efficient the different EMU countries have to accept labor reforms of a structural nature which would strengthen the labor market on a long-term basis, resulting in lower costs and stronger and more integrated economies.
Meanwhile, the banking union would be a big help when it comes to controlling tax evasion, and, particularly, for regulating the entire banking sector using the same law. This would ensure that the banking sector would not be able to carry out high-risk transactions that it would subsequently be incapable of covering, and would therefore reduce the probability of another banking crisis. It would also render the European banking sector more solid and relevant on a global level.
In spite of the many differences that still exist among EMU countries, it is worth highlighting all the similarities that also exist, in order to keep moving toward a more promising future. It is about putting national interests to one side in order to achieve shared wellbeing and become stronger in external markets, by remembering that there is strength in unity.
Will this new strategy be viable for the sake of greater unity? Macron’s arrival to the French presidency could improve relations between France and Germany, which would in turn make it easier to work toward a United States of Europe. Merkel will surely end up giving in and reaching agreements that benefit the whole of the EU, and will show how a good balance between austerity and growth can contribute positively to a healthy European economy.
We have to remember that the United States of America is one country. Many of the regulations, supervisory bodies and fiscal policies are the same for all member states, which means that the US Treasury issues joint debt to cover the deficit of the Federal government. The EMU, if it wants to have a future, should start working towards this, by increasing labor and fiscal integration among its members, issuing joint debt (Eurobonds), driving the convergence of market regulations, and defining a European Deposit Insurance Scheme.
Rafael Pampillón. Professor. IE Business School