Build a fair and stable European Economic System!
The Eurozone has major structural shortcomings, which have become apparent in the Eurozone financial crisis and led to major divergences between EU economies. We need to reform the European economic and financial institutional setup and reduce accumulated imbalances to prevent the possibility of future crises and mitigate their effects. The Eurozone needs to balance risk sharing and risk reduction to serve the interests of the Union as a whole, while being respecting our common principles and values.
What will we do first?
Create a Eurozone+ budget!
What’s going on?
In 2008, Europe was hit by a financial and economic crisis which lingers until today. Youth unemployment stands above 30% in Greece, Spain and Italy, and several countries have debt-to-GDP levels above 90%, stripping them of fiscal space to counter recession and stagnation. At the same time, debt levels have not declined and inflation rests well below 2%, while monetary policy remains accommodative. Finally, the stability and growth pact’s numerical targets of a maximum 3% of government deficit and government debt levels below 60% are chosen arbitrarily and render the implementation of a growth-oriented policy almost impossible for a growing number of member-states
The Eurozone was created as a political project dominated by national interests. As such, its economic structure has major design flaws which do not benefit the general interest of its citizens, are not sustainable, nor supportive of long-term growth and have proven to be unable to deal with major crises. This incomplete economic setup ties countries to one monetary policy while lacking fiscal mechanisms to counteract macroeconomic imbalances. Throughout the crisis, the economic and financial system was further weakened by banks holding a large share of their own national sovereign debt, creating a fatal interdependency between banks and sovereign states.
What is our vision?
The European financial and economic setup should (1) be governed by fully transparent, accountable and democratic European decision-making procedures, (2) act in accordance with our shared norms of fairness and solidarity, building the foundation for a functioning community, and (3) be conducted in the interest of the Union as a whole.
Volt wants the economic structure of the European Union to balance long-term sustainability and collective solidarity. Reforms need to ensure macroeconomic stabilisation and prudent fiscal policy, as well as to reduce moral hazard in the system, while allowing for risk-sharing between states to prevent self-fulfilling runs on member states’ sovereign debt.
How do we get there?
1. Create a Eurozone+ budget: All Eurozone countries share a common currency with common interest and exchange rates, while their position in the business cycle - showing if a country is doing well compared with the past - and the structure of their economies may differ substantially.
In order to address this, a budget needs to be set up through new EU-wide own resources, raised through a common corporate tax, among other measures. This will have three major features: (1) Given the cyclical nature of corporate taxes, this will directly lead to a smoothing of business cycles across countries. (2) Such a budget will allow for common European public goods (such as defense and transnational energy networks) to be financed where they ought to be financed: at the European level. (3) Lastly, this budget will serve as an insurance mechanism allowing for emergency funding at the European level to provide basic financial security such as unemployment benefits, payment for public sector workers, in case a state is incapable of doing so.
Whilst this budget will be primarily aimed at Eurozone member states, it should be open for all other EU member states for voluntary participation - hence its name, Eurozone+.
2. Democratise Eurozone politics: With the creation of the European Monetary Union (EMU), the responsibility for monetary policies was transferred to a new European supranational institution - the ECB - as single monetary authority. However, economic policy decisions have remained with national governments. This became particularly evident throughout the Eurozone crisis, when the Heads of State or Government, and their 18 Ministers of Finance and Economic Affairs, were key policy-makers. Policy-making thus shifted from the European institutions to an intergovernmental level, bypassing the European Parliament’s oversight and, to a large extent, the involvement of the Commission or non-Eurozone member states. This is exemplified by the Eurogroup and the Euro Summit. The Eurogroup operates through informal meetings of the Eurozone's finance ministers and played a decisive role in managing the Euro crisis. The Euro Summit is an informal platform for meetings between the Heads of State or Government of the euro area.
Eurozone politics affects all EU member states’ economies. We want to democratically legitimise EU economic policy-making to make it work for everyone. We thus propose economic and financial policy be decided by the European Parliament and Council of the European Union as co-legislators. Finance ministers’ meetings need to be formalised and made transparent, and informal meetings of and decisions taken by Heads of Governments need to be abolished. In the long run, the position of an EU Economic and Finance Minister must be established to increase democratic accountability for EU economic policy.
3. Reform the Stability and Growth Pact: The Stability and Growth Pact proved ineffective at preventing the buildup of unsustainable debt levels. Whilst the pact is too rigid to allow for strong countercyclical policy once a crisis materialised, its rules prevent necessary smart and sustainable investments across Europe, and lead to unnecessary and harmful reductions in public service provisions. This stifles economic growth, leading to social and political instability, distrust and alienation. We propose transparent fiscal rules which incentivise prudent fiscal policies and allow for flexibility in counteracting macroeconomic shocks.
4. Expand the mandate of the ECB: We propose an expansion of the ECB’s mandate that includes considerations of unemployment and sustainable growth in monetary policy decision making, similar to the mandate of the US FED. This will allow the ECB to address contemporary challenges of persistently low investments, low growth, environmental degradation, and high unemployment more directly.
5. Introduce a European deposit insurance: A European Deposit Insurance shifts the protection of bank deposits from the national to the European level and therefore adds to breaking the sovereign-bank nexus. The Europeanisation of deposit insurance also reduces the likelihood of bank runs and thereby increases financial stability. Due to moral hazard concerns, its introduction needs to be conditional on a prior diversification of sovereign exposures and a risk reduction in balance sheets. This means that a bank ought to demonstrate it has invested in a wide range of areas, so that its investment risk is responsibly spread out. Otherwise, banks might use the new insurance scheme to accumulate riskier investments, undermining financial stability.
6. Introduce concentration charges: Within the Eurozone the fates of states and their banking sectors are intimately linked due to the so-called “home bias”. The “home bias” describes a situation in which banks hold significant shares of their own state’s debt (e.g. government bonds), creating a situation where a failure of either of two parties can easily lead to the failure of the other. If a sovereign restructuring regime is to be credible, then these state-bank links must be broken for good. In order to build on efforts of reducing contagion from banks to States, we propose the introduction of concentration risk charges for sovereign exposures to reduce contagion from states to banks. Banks would therefore have to diversify their national bond portfolio and hold bonds from other states than their own. Introducing capital charges for concentrations to sovereigns will incentivise a diversification of banks’ sovereign portfolios across Eurozone member states. This allows for risk-sharing and an orderly default, if necessary.
7. Reform the European Stability Mechanism: The European Stability Mechanism (ESM) is currently an intergovernmental instrument. In the future, the governance of the ESM must reflect common voting procedures in the EU, become a full EU body subject to EU law and be fully embedded in strengthened EU accountability mechanisms to the European Parliament.