The Future of Economic & Monetary Union – law and policy issues of EMU reform – updated workshop report

In May 2017, the European Commission published a reflection paper on Deepening of the Economic and Monetary Union and other key policy proposals. On 11 and 12 December, the European University Institute hosted a workshop to take stock of how economic and monetary union has evolved since the crisis and to assess the legal issues arising out of policy proposals that arise from the reflection paper. ADEMU researcher Giorgio Monti provides a comprehensive review of workshop proceedings.

As well as the work of economists on the ADEMU project, the workshop entailed a discussion of existing policy and of working papers assessing various policy options.

Democratic, good and transparent governance for the Eurozone

Participants discussed the desirability of a separate Parliamentary assembly for the Eurozone and the tension between the desirability of a policy initiative that could bring greater representation for Eurozone members against the risk of fragmentation of the European Parliament.

The accountability of the ECB was discussed, and in particular the extent to which an effective means of keeping the ECB’s actions in check through judicial review was considered.

The proposal to incorporate the fiscal Compact Treaty into EU Law by a directive was discussed: while there had been a commitment to integrate this when the Treaty was signed, it was argued that while the treaty was an important message to the markets in 2012, its usefulness today was less apparent.

Towards Fiscal Union

The Commission’s proposal to transform the European Stability Mechanism into a European Stability Fund was discussed from the following perspectives: first, the precise legal status of the new EMF as a matter of EU Law was discussed: it appears that the intention is to create a new EU agency and it is not clear how this legal form would operate. Second, there was discussion as to what difference the transformation of the EMS into the EMF would entail. In the debates before the reform two visions had emerged: some wished for the EMS to take on more of an ex ante monitoring role to check Member States’ fiscal soundness, thus taking tasks away from the Commission and entrusting them to an actor who would be less political; conversely some saw the ESF as a source of funds to help states manage their economies before a crisis struck, for example by providing funds for structural reforms or for pubic investments. Neither of these visions found themselves in the Commission proposals. The novelties of the proposal include  reduced role of the IMF in future lending programmes and the possibility of using the EMF s a fiscal backstop for banks.

The workshop discussed options for an Eurozone budget and note the legal difficulties of creating this new heading in the budget.

Two options for managing sovereign debt were considered: one is the creation of Eurobonds, for which the EU and Member States would be jointly and severally liable. While in principle these bonds would allow access to financial markets to refinance debts, moral hazard issues caution against this policy as there would be little incentives to reduce debt. From a legal perspective there was discussion as to whether there is a sound legal basis in the Treaty to implement this initiative, furthermore Article 125 TFEU seems to militate against joint and several liability.  A second alternative is a mechanism for debt restructuring: while there could be a risk that this impacts on the market price of bonds issued with a collective clause, it was felt that there was a more secure legal footing for this initiative. At the same time it was noted that while the ESM Treaty appeared to foresee this approach, it was not clear how far this policy line is present in the proposal for an ESF.

EMU as an Economic and Social Union

EU unemployment insurance. Current proposals are not about an EU-wide insurance scheme but about creating a re-insurance fund that tops up national funds. This would serve as a temporary scheme, triggered by a serious event (e.g. a fiscal crisis) and relies on Member State contributions. The discussion hinged on two points: the first is that it is not clear what legal basis could justify this initiative (neither the social policy nor the cohesion policy provisions of the treaty seemed hopeful and nor did Article 122(2) TFEU). The second question is one of capacity and how the scheme would be funded.

Stability and Growth Pact: the workshop discussed how this arm of EMU had become more flexible and based less on enforcing rules and more about negotiating economic policies between the EU and Member States. At the same time it was noted that the procedures allowed the EU to recommend measures that go beyond the formal competences of what the EU can request by legislation.

European Pillar of Social Rights: the workshop discussed the role of this initiative and how far it could serve to balance the economic policy interventions. There was discussion as to how the rights could be enforced and by whom and what its role might be in the framework of the European Semester.

Financial Union in EMU

Banking Union remains incomplete. While the single supervisory mechanism (SSM) is now up and running and the ECB oversees 128 systemically significant banks accounting for 65% of all bank assets in the EU, this will soon require updating with the agreement on Basel IV. There was discussion about the need for a regulatory pause on the basis that both regulators and banks may struggle to cope with ever-varying regulatory requirements. A number of additional flanking policies remain to be implemented: European Deposit Insurance Scheme and a fiscal backstop were seen as necessary pillars to a well-functioning system. Moreover the Single Resolution Mechanism reveals some weaknesses by allowing national law provisions to apply on winding-up.

As far as the fiscal backstop is concerned, there was discussion on how this was provided indirectly for Spanish banks via the ESM in 2012, and why other states like Italy, had not taken advantage of this facility.  The proposal for the ESF now includes direct recapitalization, although this would be subject to review by the European Commission. The option of giving the ECB competence to determine if banks under the SSM should be provided with Emergency Liquidity Assistance was also discussed.

More generally, it was considered that regulatory burdens to avoid risks to banks which would impact the sovereign could reduce the incentives of banks to lend to the real economy, which would also create problems for the state. Looking forward the development of a capital markets union could take pressure off banks as the principal source of financing, but it was not clear whether capital markets would develop at equal pace throughout the Eurozone.

The workshop was organised by Bruno De Witte, Claire Kilpatrick and Giorgio Monti.

Speakers were:

Thomas Beukers, Dutch Ministry of Foreign Affairs
Richard Crowe, European Parliament
Bruno De Witte, European University Institute
Diane Fromage, Maastricht University
Christos Gortsos, University of Athens
Herwig Hofmann, Université du Luxembourg
Claire Kilpatrick, European University Institute
Paivi Leino-Sandberg, University of Helsinki
Elisabeth Lentsch, University of Salzburg
Giorgio Monti, European University Institute
Pierre Schlosser, European University Institute