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ECB’s Cœuré Calls on Politicians to Hurry Up and Build the Eurozone Superstate and Federal Budget

Summary:
Credit: Politico/European Voice Speaking at an Interparliamentary Conference “Towards a Progressive Europe” organized by the German Social Democrats (presumably an event with MPs from different countries), the European Central Bank’s Benoît Cœuré has fleshed out his vision of the Eurozone some more. Cœuré was candid about his “frustration” in attending high-level Eurozone meetings and urged the politicians (which presumably included MPs from different countries) to come up with a positive narrative for a kind of Eurozone Federation – as opposed to a reactive, negative narrative focused on greater Eurozone powers for narrow crisis management – as “an opportunity for Europe to move forward in the Weberian sense.” Sic! I am glad to see that Parliaments are at the forefront of the debate on the future of Economic and Monetary Union or EMU. You may wonder what an unelected central banker has to say about the political foundations of EMU. After all, the European Central Bank (ECB) is not a political institution. Indeed, for our work to be effective, the “M” in EMU must be kept free from political interference. But to secure this in the long term, we need to develop the “E”, so economic union, further. I will argue today that the political dimension of economic union will be crucial.

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Speaking at an Interparliamentary Conference “Towards a Progressive Europe” organized by the German Social Democrats (presumably an event with MPs from different countries), the European Central Bank’s Benoît Cœuré has fleshed out his vision of the Eurozone some more.

Cœuré was candid about his “frustration” in attending high-level Eurozone meetings and urged the politicians (which presumably included MPs from different countries) to come up with a positive narrative for a kind of Eurozone Federation – as opposed to a reactive, negative narrative focused on greater Eurozone powers for narrow crisis management – as “an opportunity for Europe to move forward in the Weberian sense.” Sic!

I am glad to see that Parliaments are at the forefront of the debate on the future of Economic and Monetary Union or EMU. You may wonder what an unelected central banker has to say about the political foundations of EMU. After all, the European Central Bank (ECB) is not a political institution. Indeed, for our work to be effective, the “M” in EMU must be kept free from political interference. But to secure this in the long term, we need to develop the “E”, so economic union, further. I will argue today that the political dimension of economic union will be crucial. […]

CJW: Cœuré’s legitimacy in defining the new Eurozone régime’s new constitution is as the representative of the closest thing the currency area has to a Schmittian sovereign: The decider.

As the ECB’s power derives from the existence of the Eurozone, the Bank then has every motivation to make sure the currency area is as functional and prosperous and (perceived as) legitimate as possible. In addition, the ECB has the experience of power under the previous system and the responsibility of wielding power in the emerging system.

This legitimacy is that of an independent executive – rather like that of an absolute monarch or emergency dictator – that of an expert, practitioner, and responsible leader, entirely different from that claimed by elected assemblies. But ECB managers like Cœuré aren’t entirely comfortable in this position, which is why they’d like some politicians to take charge (but not in the wrong way, lest you end up like Berlusconi and Papandreou).

“Almost, one hundred years ago Max Weber famously described politics as “a strong and slow boring of hard boards which takes both passion and perspective” .

The board we want to drill into today, the future of EMU, is certainly one of the hardest and thickest, requiring not only passion but also an ability to cope with frustration – had you asked me in July and August about my passion for attending lengthy Eurogroup meetings, night-long negotiations and teleconferences, I would not have shown great enthusiasm; all too often, we lose perspective of what we want to achieve.

CJW: Candid!

First, some people simply want EMU to be dismantled – either in its entirety or at least where their country is concerned. They can be found on both the left and right of the political spectrum. This is what I would call the “ostrich fallacy”. As a euro area country, you may theoretically give up your voice in the euro project. But you cannot forgo interdependence. We are too closely interlinked and frankly too small individually to solve problems alone in the face of globalisation. Sticking our heads in the sand will not make these facts go away. This was why we moved from fixed exchange rate regimes – which were more volatile, asymmetric and unpredictable than what we have today – to a single currency. And this single currency, as recent months have once again shown, is here to stay.

CJW: It is to a certain extent Cœuré’s job to say this. But I do not think it is really true: Britain, Poland, Sweden, the Czech Republic, and many other small-to-large countries do fine with their own currencies. Britain and Italy did better economically after they were allowed to devalue in the 1990s by being kicked out of the pre-euro Exchange Rate Mechanism. The argument that “globalization makes the Nation-State impotent” might be true for some environmental issues, but evidence suggests it is mostly false for monetary issues (or migration issues, for that matter, as little Israel and Hungary show).

The Eurozone’s legitimacy cannot be based on the supposed impotence of a national currency – because actually a system of national currencies is, overall, pretty good at instituting necessary economic adjustments and allowing different national electorates and policymakers to pursue their preferred policies and trade-offs – but rather on the hope that the Eurozone, as the embryo of a European State-like power, will eventually lead to better things politically (“great things,” ECB President Mario Draghi once said).

Second, other people think that we can continue to muddle through with the architecture and arrangements that we have today, occasionally propped up by crises. […]

CJW: This is basically the, rather unreal, Establishment German view which ultimately boils down to: MORE OF THE SAME. You think this is a caricature until you read German monetary bigwig Otmar Issing arguing exactly that.

ECB’s Cœuré Calls on Politicians to Hurry Up and Build the Eurozone Superstate and Federal Budget

Merkelian Solidarity: Not for Greeks and other lazy Europeans.

I have been very struck that Chancellor Angela Merkel has taken radical, highly unconservative decisions on occasion: 1) The phasing out of nuclear power (Energiewende) 2) Importing unlimited (pseudo-)Syrian refugees. She has done this despite this being highly unpopular with large segments of her right-wing coalition. Emmanuel Todd has argued that her rather stubborn and uncreative euro policy – just do the absolute minimum and always at the last minute to keep it together and no more – was a conscious strategy by German Government and Industry to lastingly wipe out European competitors in France, Italy, Spain, Portugal, etc. I used to think this was wild exaggeration and that the crisis was more one due to the the inertia of the Eurozone’s flaws than oligarchic German interests, but given how unconservative and “generous” Merkel can decide to be on occasion, now I am not so sure…

Third, there is the temptation to view a transfer of all important economic policy functions to the European level as the “silver bullet solution or, as Charles De Gaulle once said, to jump up and down on your chair like a goat kid bleating “Europe! Europe!”. […]

CJW: These “Europe! Europe” bleaters do exist. I was at former Belgian Prime Minister and current EU Parliament Liberal leader Guy Verhofstadt’s event earlier this weak at the BOZAR presenting his latest book: Endless impotent, impractical, moralistic endless preaching with absolutely no political content (“art of the possible”) or any engagement with the realities of the Nation-State (paraphrase: “The Nation-State is bad, mmkay.”) He talked about American political history far, far more than about Europe’s. He effectively endlessly repeated: “The EU currently sucks. We’re not like America!” Yes, the EU has a lot of goofy compromises (there are good reasons for that), and Europe is not like America. What is else is new? Otherwise just uncritically repeating every single mainstream media narrative. I guess every man must have his niche, but I am not sure how Verhofstadt doesn’t bore himself to death. Miseries of the professional politician?

Back to Cœuré:

However, the basic set-up in terms of the allocation of competencies under the Maastricht framework has remained unchanged: labour market legislation, social protection schemes, tax policies, many aspects of the product markets, and the overwhelming majority of business environment factors, such as judicial systems, have remained within the remit of Member States. […]

In our case, the boomerang took the form of bubbles bursting and loss of market access, followed by harsh macroeconomic adjustment programmes. These programmes were necessary, and they worked. But they nevertheless came with economic, social and political price tags: economic and social, because implementing ad-hoc measures and the disorderly correction of imbalances always come at a greater cost than preventing imbalances in the first place. And political, because drastic corrections have consequences for political stability; they challenge the legitimacy of EMU.

Going forward, there is thus a clear choice: either we engage in a debate and end up collectively deciding how our economic and social policies can form a coherent European social contract that brings out the best in each national social contract and renders these sustainable, or we continue to rely on the premise that the most essential economic and social policies are decided at the national level alone and wait for the boomerang to come back again. To my mind, this should not be a difficult call to make.

But making this call and moving forward without losing perspective will mean progressing beyond the functional narrative that has, in my view, reached its limits. It will require, once more, a clear political narrative to justify why drawing closer together is not only necessary, but is actually a good idea. In particular, such a narrative should demonstrate that, when we speak about more Europe, this does not mean that our cherished European social model is under attack; rather, more Europe is precisely what can protect and sustain the social achievements that set us apart from the rest of the world and that can help to further develop our social model to cope with the challenges of globalisation.

CJW: Isn’t this Angela Merkel and François Hollande’s job? Why haven’t they done it? Their recent joint appearance at the European Parliament didn’t do it.

Conceptualising this kind of political narrative is, by definition, not the role of a technocrat; it is your job, not mine. […]

A “convergence process 2.0” should foster convergence, not towards nominal targets this time, but towards a similar level of resilience for economic structures.

“Resilience” is to be understood here both at the level of individual countries (i.e. internal adjustment mechanisms, such as price and wage flexibility to compensate for the loss of nominal exchange rates) and at the level of the euro area as a whole (i.e. cross-border adjustment mechanisms, such as risk pooling in capital markets or labour mobility).

CJW: Just to spell it out again for center-leftists: Cœuré is saying job security is not compatible with Eurozone membership.

Yet, in order to foster not only economic convergence and, moreover, go beyond this to create political convergence and lasting buy-in through a new political narrative, requires a process that is both economic and political.

What would be the key features of the economic dimension of the process?

In my view, a small number of simple, but important conditions would need to be met, namely a) consensus on designating economic policies as a shared competence; b) agreement on which policy areas should be subject to convergence; and c) a mechanism ensuring that convergence will continue beyond the end of the initial process.

If these conditions are fulfilled, a “convergence process 2.0” would not only be an effective instrument for preventing and managing imbalances and macroeconomic risks. In my view, it would also be a precondition for adding a layer of fiscal stabilisation at the European level. Sufficient convergence in terms of resilience could help Member States to deal with asymmetric shocks without leading to permanent transfers in one direction. […]

CJW: Can we imagine big multi-percentage point budget transfers between Germany and other countries? I can’t.

France, though in perma-stagnation, is still a relatively rich Eurozone country and would then normally find a percent or two her GDP sucked up by any theoretical Eurozone Federal Budget and given to the GIIPS/CEECs. In the current and foreseeable political climate in France – where the government is constantly engaged in niggardly, foot-dragging fights and recriminations to tax/cut a few euros here and there to pretend to be closing the existing deficit – this strikes me as completely impossible. A true Eurozone Federal Budget would mean France accepting to indefinitely hand over billions of euros to foreigners. Good luck with that!

ECB’s Cœuré Calls on Politicians to Hurry Up and Build the Eurozone Superstate and Federal Budget

What was the plan again?

What’s more, there isn’t actually any evidence that transfers would actually solve the underlying problems, which are: the causes of inequality between the Nation-States (see my post on EU convergence doctrine). Indeed, I can’t think of a single country, no matter how much redistributive spending there is, which has achieved perfect convergence in behavior and performance between different ethno-national groups, as opposed to, only ever partially, artificially equalizing outcomes. At best a modest Eurozone budget would just smooth over economic crises a bit. This is something those who endlessly repeat the U.S. model for the Eurozone never mention.

On the other hand, I could imagine a Eurozone government making decisions in common on things like budget deficit levels or labor markets. Maybe. And this would give cover, not for real transfers, but perhaps to some limited implicit transfers and risk-sharing by the ECB, enough to at minimum to make the Eurozone at least a functional, self-defending thing, if not an optimal one.

Cœuré then talks about “monetary dominance” in the current setup (e.g.: primacy of preset non-inflationary monetary policy eventually dictates, at least according to ECB’s interpretation, all other policies, including fiscal, price-competitive-labor, and financial bailouts..). A bit complicated. Also the Eurozone Superstate can only be created through trust, which means following existing rules, says Cœuré.

[T]here is a significant temptation to devise such a convergence process with a sole focus on output legitimacy: experts determine the relevant policy areas and the right policies, and a new strong independent institution enforces them afterwards. This would then lead to sound policy outcomes which would legitimise the process after the event. But this would bring us back to the functional narrative.

Indeed, a new convergence process cannot be a technical exercise for two reasons: first, the matters under discussion – be they labour market institutions, taxation, or the organisation of the judicial system and administrative capacity – are inherently political and much closer to the day-to-day life of citizens than, for example, monetary policy ever will be.

Second, an institutional architecture in a democratic system cannot be based mainly on coercion. After all, in our everyday lives we do not follow rules because we constantly fear punishment, but because we believe in the purpose of the rules and understand that they can only work if adherence to them is the norm, not the exception.

We need a process that ensures the buy-in of citizens, governments and parliaments, that fosters a broad debate concerning our common understanding of what economic policies in a monetary union should look like, and that, for the most part, works based on consent to a common framework and provides fully legitimate institutions with the right instruments to intervene if the consensus is not respected.

CJW: e.g., the Federal Eurozone authorities need to be seen as legitimate enough to coerce, if necessary, a national government which is breaking the rules.

This kind of political convergence process represents an opportunity: it could lead us to the political narrative I mentioned before.

But for that to emerge we would need to develop a common understanding of economic policies – it could mean that national parliaments and the European Parliament need to speak to each other more, as we are doing today.

If we were to commit to such a process, there would be a political cost to pay upfront as this would mean admitting to citizens that national parliaments alone cannot address all future challenges on their own anymore. But let us acknowledge that there is no such thing as a free lunch. This political cost is precisely the visible measure of collective commitment to the single currency project, which is necessary to ensure the economic and political resilience of EMU in the future.

European political parties could be a catalyst for such a debate – by organising more discussions than they do now, not along national lines, but according to social preferences. This could also mean that social partners would need to go beyond their national remit and adopt a European perspective.

CJW: Slightly underwhelming, which does suggest the limited means at one’s disposal in implementing European grand designs. Really that should be Merkel and Hollande’s job.

The outcome of this kind of process would certainly not be optimal from a purely economic standpoint. That is a key feature of democracy. But it would be legitimate; it would not have to rely on its outcome alone to be acceptable, and it would give citizens a clear indication as to why we must move forward together. In my view, this would be a major achievement that would provide the political underpinning for EMU. It would not only create a more stable environment for growth and prosperity; it would also allow us, as a central bank, to conduct our monetary policy in an environment of much greater certainty. In the end, the more developed the “E” in EMU, the better we can do our job on the “M” side.

What I have proposed today is an opportunity for politics to reconnect with what matters most to our citizens; and an opportunity for Europe to move forward in the Weberian sense, with both passion and perspective, preserving what we have in common while accommodating differences where these are an asset. This would indeed be faithful to the model of the European Union – united in diversity.

CJW: The most striking aspect of politics today – it was almost ever thus – is the manifest insincerity of most of the participants. They clearly do not believe in their hearts what they are saying. There is no earnestness and enthusiasm.

Craig Willy
This is the blog of European affairs writer Craig James Willy. Elite and popular discourse on the European Union tends to have a weak relationship with reality. Both pundits and politicians – whether American liberals or conservatives, British eurosceptics or simply French – tend to project their national dreams and nightmares upon it. I have a nuanced analysis of Europe based on the primacy and diversity of national realities and on actual EU decision-making practices.

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