Achieving a permanent a comprehensive EFSF through Enhanced Cooperation

The events of this year have shown what economists have been saying for years, that the eurozone, in its present shape, is an unfinished project. Given the wage and price rigidities of our individual markets and the limited mobility of our labour forces, we need some form of intra-euro-zone redistribution to occur in order to deal with asymmetric shocks. This mechanism would come as a replacement for the currency devaluations that used to occur when euro-zone countries had their own currencies. When this tool was eliminated it put an end to currency manipulation as a source of European squabble. However, the policy hole that it left must be replaced by some form of alternative solution. No one is politically deaf to the point of seriously suggesting that the European Commission should become a fiscal authority in the Union, no matter how much economic sense it may make. However, this absence of a recession smoothing tool and the pressure it puts on affected Europeans is socially and politically very dangerous. What if the bomb sent to the German Chancellery building had reached Angela Merkel? What if someone had died? This vacuum endangers not just our citizens, who must needlessly endure economic hardship, but in its inertia it attacks the very sustainability of the idea of European integration, as an engine of peace and prosperity. So, for the last year, we have spent a substantial amount of resources and legislative prowess trying to address this issue.

As a result we have taken giant leaps in economic governance integration Mmost relevantly, I believe that the enhanced powers of monitoring granted to Eurostat, the new regulatory framework which introduced the EBA, etc, the stress tests and the upcoming financial services regulation will go a long way towards decreasing the risk of another financial debacle similar to the one experienced in 2007-2009. However, these are solutions to the problems we are aware of, not the ones we have not yet considered. A fiscally redistributive tool would allow us to smooth the pain of the next shock, no matter what it is. It would be the second best general solution to this problem, given that our lack of clairvoyance eludes us from the set of first best solutions.

Given the legal and political impossibility of a proper fiscal Europe, we have opted for a guarantor Europe. The European Financial Stability Fund (EFSF) is a little known luxembourguish firm, effectively run by the German finance ministry, that can issue debt guaranteed by several euro-zone countries. So it is not really a pogrom of European delegation. The money is then channelled, with many unpleasant strings attached, to a country in need, on the promise that it will pay the interest and initial value to the EFSF who will then pay its creditors. Just in case that country falls short or outright defaults, the fund was provided with a guarantee from a number of EU countries that ensures that its own payments will not fall short. In effect, this allows any country willing to accept the conditionality to borrow at a cheaper cost by borrowing the credit worthiness of it's guarantors. Greece's specific fund is only a scaled down version of the EFSF.

There are at least two problems with the EFSF, as it stands, both of which could be fairly easily solved. The first is that it is incomplete. Redistribution can occur along time as well as space. Thus, aside from the guarantee provided by each country which at an early stage is fundamental, a complementary approach could see EU member states guarantee themselves at a future time. What could be done is to develop the EFSF into an insurance mechanism. This would deal with the opposition of Germany that it's citizens should not be bailing out the Greeks. At the same time, a system with insurance premia that reflect the risk of each country ensures that there is some progressiveness in the manner in which the countries are incentivised against running deficits. This would be a very efficient complement to the SGP. The existence of actual funds rather than guaranteed virtual ones may also go some way towards deterring markets from speculating against these countries. Finally, the fund could be divided into two. A first fixed and strongly conditional one which would serve the purpose of dealing with too high deficits and another looser complement that would be meant to smooth purely uncontrollable outside shocks, that could be financed by the contributions excessive to the fixed deficit related one. Spreading risk over time and consumers is why we all cherish our national health care services, so it seems like a good idea.

The other problem is the one of feasibilty. The above proposal is not what is under discussion. What is under discussion is the creation of a permanent version of the EFSF as it is, complemented by some form of burden sharing by the private sector. However, recent news reports have indicated that the deal struck at last week's European Council meeting is proving too dodgy and member states seem to be breaking ranks. Outrage at the Franco-German Deauville agreement that excluded other EU grandees and fears that the Council agreement will not withstand the pressure of judicial scrutiny at member state level have shed some doubt into the European Council's ability to create the EFSF by unanimous decision and without refering the treaty change to their respective electorates. If this were to be the case, we would be back to muddled fiscal waters. Or would we? According to articles 326-334 of the Consolidated Treaty on the Functioning of the EU, if every political alternative has been exausted, and if the Council accepts through qualified majority voting(article 329,1.), a minimum of eight member states can engage in "Enhanced Cooperation". This would not require a treaty revision, only independent and non contingent national constitutional revisions. Moreover, ratification wise, it would frame the issue in a much more voter friendly manner. It would not be a vote on the EU, but rather on the fiscal sustainability and credibility of each member state involved. There will be 17 euro-zone member states by this time next year. I'm sure we could find at least nine that would be able to ratify this measure without much problem. The rest would follow!

Obviously this is not the last word on fiscal integration in the EU. However, it would move it from the purview of Intergovernmental cooperation to that of EU coordination. From there it is only a short leap to delegation.