Menelaos Markakis, DPhil student at University of Oxford, Academy of Athens scholar

In June 2015, the leaders of the EU and Euro area institutions released a report outlining a plan for strengthening and finalizing the Economic and Monetary Union (EMU). This report, based on crisis-combatting measures, offers numerous suggestions for improving the EMU’s governance and deepening economic integration within the Euro area. The EU Presidents suggest advancing towards a unified economic, financial, fiscal, and political system.

Proposed Reforms

The proposed reforms would be implemented in two phases. The first phase (July 2015 – June 2017) involves EU institutions and Member States utilizing existing tools and treaties effectively. The second phase (mid-2017 to 2025) involves agreeing on more substantial measures to finalize the EMU’s economic and institutional structure. A general overview of the report’s content is provided below.

(i) A Unified Economic System

Regarding the economic aspect of the EMU, the report suggests that each Euro area Member State establish a Competitiveness Authority to monitor economic performance and policies related to competitiveness. This proposal aims to prevent economic disparities and encourage ownership of necessary reforms at the national level.

These Authorities are expected to promote economic convergence within the Euro area, particularly in areas outside the EU’s jurisdiction. They would assess wage evolution in relation to productivity, compare it to other Euro area countries and trading partners, and evaluate the progress of economic reforms aimed at enhancing competitiveness. The report also recommends establishing a Euro area system to coordinate these Authorities’ actions annually.

The report aims to connect this proposed policy coordination with existing rules-based governance in the Euro area. The Commission is expected to consider this coordination, especially when making decisions under the Macroeconomic Imbalance Procedure (MIP), including whether to recommend activating the Excessive Imbalance Procedure. Euro area Member States would generally remain free to choose whether to follow recommended practices. However, diverging from these practices might lead to the Commission and Council subjecting those Member States to the Excessive Imbalance Procedure. The institutional presidents suggest utilizing the corrective aspect of the MIP to encourage structural reforms. They also suggest that social partners should consider the Authorities’ opinions during wage negotiations.

Later, binding benchmarks for convergence would be legally established to make the convergence process more stringent. These standards would be set by EU law, leading to further harmonization in some areas and country-specific solutions in others. Significant progress towards and adherence to these standards would be a condition for Euro area Member States to participate in a shock absorption mechanism.

The legal basis for adopting such instruments remains unclear. The report may assume that the EU Treaties will be amended before or during the second stage. Alternatively, EU institutions may plan to fully utilize existing Treaty articles and provisions on enhanced cooperation.

The European Parliament’s Committee on Constitutional Affairs has proposed adopting binding economic guidelines for Euro area countries based on Article 136 TFEU. They have also called for removing restrictions and upgrading this article to allow for legal acts concerning the coordination and establishment of binding minimum standards for economic, employment, and social policies. This would give the European Parliament more influence over Country-Specific Recommendations.

Notably, Country-Specific Recommendations would still be used. The report suggests utilizing the MIP as a tool to promote reforms and monitor the progress of each Euro area Member State towards these common standards. This approach would combine rules-based and coordination-based governance techniques.

(ii) Towards a Financial Union

For the proposed Financial Union, the report recommends completing the Banking Union and launching the Capital Markets Union. It calls for the full implementation of the Bank Resolution and Recovery Directive into national law, noting that 11 Member States have not yet done so. The report also suggests creating an interim financing mechanism for banks needing orderly unwinding before the Single Resolution Fund (SRF) is adequately funded. Additionally, a common backstop to the SRF should be established, potentially through a credit line from the European Stability Mechanism (ESM). The report recommends reviewing the ESM’s direct bank recapitalization instrument, particularly its restrictive eligibility criteria. Furthermore, it proposes launching a European Deposit Insurance Scheme and strengthening macroprudential supervision at the EU level, including reviewing the treatment of bank exposures to sovereign debt.

Building on the Commission’s Green Paper on Capital Markets Union, the report proposes establishing a Capital Markets Union for all 28 EU Member States. This aims to diversify financing sources and strengthen private sector risk-sharing among countries. However, financial integration carries risks, as problems in one country can quickly spread. Therefore, the report recommends bolstering financial supervision in the EU and creating a single European capital markets supervisor.

(iii) Towards a Fiscal Union

Concerning the proposed Fiscal Union, the report presents two proposals. First, it recommends establishing an advisory European Fiscal Board to coordinate and complement national fiscal councils established under Regulation 473/2013. This board would publicly and independently assess how budgets and their execution align with the economic objectives and recommendations outlined in the EU fiscal framework, thereby encouraging national governments to take EU fiscal rules seriously. The board is intended to improve compliance with common fiscal rules, promote informed public debate, and strengthen coordination among national fiscal policies.

Second, the report proposes creating a fiscal stabilization function for the Euro area. This mechanism would enhance public risk-sharing within the Euro area and could utilize the European Fund for Strategic Investments. Importantly, it should not result in permanent or one-sided transfers between countries, nor should it aim to equalize incomes between Member States. This stabilization function should be developed within the framework of the European Union.

Democratic Accountability, Legitimacy, and Institutional Reform

Beyond the economic reforms, the report addresses enhancing the EMU’s democratic legitimacy. While proposals for a more timely and structured parliamentary debate during the European Semester are presented, it is unclear how these significantly improve upon the existing “six-pack” and “two-pack” arrangements for “institutional dialogue.” However, the emphasis on the role of social partners and civil society, including consultations with EU-level social partners, is commendable.

The report strongly emphasizes output legitimacy and collaboration between European and national parliaments. After years of crisis, demonstrating that the Euro area can thrive, not just survive, is crucial for governments and institutions.

Furthermore, the report outlines proposals to strengthen the EMU governance framework. Specifically, the EU Presidents suggest incorporating treaties concluded outside the Lisbon Treaty into EU Treaties and secondary legislation. Additionally, they recommend fully integrating the ESM’s governance structure within the EU Treaties. The report suggests considering a full-time Eurogroup presidency and creating a Euro area treasury. The report argues that managing the world’s second-largest economy solely through rules-based cooperation is insufficient; a shift towards shared sovereignty within common institutions is needed. However, the division of labor between Euro area and national treasuries remains unclear.

Unfortunately, the report lacks details regarding the accountability structures for a potential Euro area treasury or fiscal stabilization function. Similarly, there is no analysis of accountability mechanisms for the proposed Financial Union. While requiring the European Parliament’s consent for appointing the Supervisory Board’s Chair and Vice-Chair was a step forward, there are no proposals to improve transparency within the Eurogroup, whose role in economic governance has expanded. A body promoting economic convergence among Euro area countries should not operate secretly.

Final Remarks

This summary highlights some key aspects. Firstly, the proposal states that “all euro area Member States must participate in all Unions,” suggesting a single-speed Euro area. However, not all Euro area Member States might meet the criteria for the proposed shock absorption mechanism. Secondly, implementing the EU Presidents’ proposals would transfer significant power from national to EU/Euro area institutions and bodies, necessitating increased democratic controls and robust accountability. Thirdly, the report emphasizes that all Euro area members should benefit from EMU membership. Achieving this and promoting economic, social, and territorial cohesion might require reevaluating the EU’s regional and structural policies. Finally, some proposed reforms might necessitate amending the Treaty, potentially providing the UK Prime Minister with an opportunity to renegotiate Britain’s EU relationship and enshrine desired principles in primary law.

Barnard & Peers: chapter 19 

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