The euro was built on a Franco-German understanding but also on a typically European compromise. This gives France and Germany a particular responsibility to straighten what is crooked.
In the late 1980s we shared a common political project that was grounded in different economic ideals. Germany was marching towards unification and wanted to replace the defunct European monetary system with a harder fixed exchange rate regime built on the culture of the Bundesbank. France wanted to firmly embed Germany in Europe and improve Europe’s chances to harness globalisation.
These projects served the broader purpose of European integration, but they overlooked critical flaws in the architecture of monetary union that need to be decisively addressed so that the euro fulfils its promise of economic prosperity and prevents Europe from slipping even more into division and discontent.
In order to do so, we have to launch an economic and social union by agreeing on a new, staged process of convergence that would involve not only structural reforms (labour, business environment) and institutional reforms (functioning of economic governance) but also social and tax convergence where necessary (consistent, though not necessarily equal, minimum wages, and a harmonised corporate tax).
This would strengthen our individual economies, establish a truly level playing field across the eurozone, and ensure that tax competition and social dumping don’t create races to the bottom and uncooperative fiscal devaluations.
It would bring our economies closer, improve the economic potential of EMU and allow us to establish clearly which policies should be centralised, harmonised or simply coordinated.
This convergence between member states would allow the creation of a preliminary eurozone budget, a feature of any functioning monetary union. The current, rules-based fiscal framework – while flexible and important, to ensure fiscal discipline – doesn’t guarantee that the sum of national fiscal policies will lead to an adequate fiscal stance for the eurozone as a whole, in either good or in bad times.
This demands a fiscal capacity over and above national budgets that would improve the ability to provide automatic stabilisation and allow the European level to expand or tighten fiscal policy in line with the economic cycle.
This budget would have its own revenues (for instance a common financial transaction tax, as well as a small portion of a harmonised corporate tax) and would provide for borrowing on that basis.
A eurozone-level budget should not and need not come at the expense of fiscal discipline at the national level. On the contrary: this should be strengthened by establishing a legal framework for orderly and legitimate sovereign debt restructurings, should they become necessary as a last resort.
This would prevent both inappropriate use of crisis lending and self-defeating bouts of austerity when countries face unsustainable debts. At the same time, the European stability mechanism (ESM) should be brought under community law and transformed into a proper European Monetary Fund.
These changes would create a eurozone architecture that increasingly relies on common institutions. This need not occur at the expense of the eurozone’s ability to accommodate different national situations and circumstances. To make its institutions work, however, Europe will need to address its democratic deficit as well as its executive one.