The euro-area crisis has exposed a number of deep structural flaws of monetary union. This column explains how to stop the crisis and to re-launch European integration in a way that supports economic growth and enhances solidarity across Euroland, in the spirit of both the “Europe 2020” strategy and the European Economic Recovery Plan aimed at fulfilling the objectives of the European Union (EU) as laid down in the EU Treaty.
Stopping the crisis within Euroland
The “original sin” of European monetary union was to create a single currency without any form of political integration appended to it (Padoa-Schioppa 2004). Money and politics should therefore be reconciled at the level of the euro area as a whole. The first step in this direction needs to involve the European Central Bank (ECB). Without going as far as modifying its statutes (a task that will have to be considered in a not too distant future, in order to make them converge towards the mandate of the US Federal Reserve), the ECB has to make sure that any euro-area banks benefiting from its Longer Term Refinancing Operations increase their credit lines to both the private and general government sectors of the relevant country, for an amount, maturity, and interest rate that are consistent with those of the ECB facilities thus exploited. If so, then the ECB should reduce its policy rates of interest, moving close to zero the interest rate on its main refinancing operations. Besides, the ECB should accept as eligible assets for its monetary-policy operations only sovereign bonds of those governments that rebalance the national tax pressure so as to reduce the burden on labour income, whose taxation has to be calibrated in order to support consumption and home-ownership of middle-class wage earners. National fiscal policies should be coordinated among themselves and with the monetary policy carried out by the ECB, in order to reduce Germany’s trade surplus through higher German imports of other euro-area countries’ products. The rebalancing of intra-euro-area foreign trade should indeed allow for an expansion, rather than a contraction, of economic activity across Euroland.
In this respect, wage-earners’ compensation in Germany has to increase according to the productivity improvements in the relevant sector, and above the ECB’s inflation target, which should also be increased to 3 per cent at least (see Blanchard et al. 2010). Also, the monetary-policy strategy of the ECB needs to become symmetrical, reducing policy rates of interest when there is an expected reduction in inflation rates. To date, in fact, there is an anti-growth bias in the monetary-policy decisions of the ECB, as, “in practice, we are more inclined to act when inflation falls below 1% and we are also inclined to act when inflation threatens to exceed 2% in the medium term” (Duisenberg 2003, p. 13, emphasis added).
As regards national fiscal policies, their coordination should also replace tax competition with tax harmonization in the whole euro area, particularly as regards taxation of business profits. The rush-to-the-bottom competition that has been observed in this domain, in fact, has spoiled the public sector of tax revenues that could have supported economic growth and solidarity across euro-area countries. Tax incentives can be designed in order for both financial and non-financial businesses to contribute to reorienting economic activity towards a sustainable, investment-led production system based on life sciences, clean technologies, and urban renewal considering the social and economic problems elicited by an ageing population. Minimum standards have to be introduced in order for businesses to hire young people and let senior workers transfer to them their human capital before retirement. Their job agreements should be of unlimited duration, both to reduce workers’ uncertainty (hence to increase their propensity to consume, as a growth-enhancing factor) and to reduce the incentives for businesses’ relocation. Increasing the number of employment contracts of indefinite duration will reduce the firms’ mark-up over factor costs, inducing businesses to increase their research and development activities in order to re-establish their mark-up by innovation and investment in human capital. If so, then the resulting dynamics on the labour market could contribute to raising employment levels and households’ well-being, with positive consequences for economic as well as financial stability across the whole euro area.
Moving towards the United States of Europe
The idea of setting up the United States of Europe, first spelt out by the founding fathers of the EU back in the 1950s, should be revived as the thread capable to blend “policies, politics, and polity”, in order to achieve the ultimate objectives laid down in article 3 of the EU Treaty. In particular, it is through a series of taxes levied at the EU level that the EU could progress in the interest of all its member countries. The first step in this direction might be a pan-European tax levied on financial transactions recorded by any bank within the whole EU as well as a carbon tax on non-renewable resources: the tax revenue generated thereby will then have to be shared between the “federation” (that is, the EU as a whole) and its member states, in order for the EU to dispose of a budget that is consistent with both the size and scope of the Union, and for every member country either to contribute to or to benefit from a pan-European financial equalization transfer mechanism aiming at averting excessive real economic divergences across EU countries (measured by per-capita income levels in real terms, and by unemployment rates for the most problematic categories of wage earners, namely, the young, women, and senior workers).
Provided that a EU budget between 10 and 15 per cent of the Union’s GDP can be put together as explained above, it will then make sense to ask some EU institution, such as the European Financial Stability Facility or the European Stability Mechanism, to issue euro-bonds in order to support an investment-led sustainable recovery throughout the EU, thus replacing austerity with solidarity. As Holland (2010, p. 53) notes in this regard, “if the investments [financed through euro-bonds] were in the social domain, in areas such as health, education, urban renewal and the environment, they could lift the cost of this from national budgets and enhance the ability of lower-income member states to align their investment, employment and welfare levels with those of more advanced member states, without recourse to a common fiscal policy.”
Euro-bonds will thereby provide productive investment opportunities for those savings within (and beyond) the EU that are looking for sustainable returns on assets on a long-term basis (as pension funds, owing also to the problems of an ageing population in this respect, requiring these funds to look for reliable income streams over the long run). As this approach alleviates the upward pressures on spreads concerning government bonds of several “peripheral” countries in the euro area, it will protect them from speculative attacks from market players, since the latter will not be anymore in a position to impose the “market rule” at the taxpayers’ costs. Issuing euro-bonds will notably provide an interesting choice for private as well as institutional investors, because it will enable creditor countries, in Asia as well as in Europe, to diversify their reserve assets.
As issuing euro-bonds does not require mutualizing EU countries’ debt, the ECB will be in a position to buy them without infringing either its current statutes or the EU Treaty. Its purchases of euro-bonds issued by some European institution (see above) will mimic the open-market operations carried out by the US Federal Reserve when it purchases Treasury bonds issued by the federal government of the United States (as a way of advancing a future income that the US Treasury will collect through taxes, and thus pay back to the national central bank). The ECB intervention on the primary market for euro-bonds will be a clear signal to market participants that these bonds can be used as eligible assets in their refinancing operations. The liquidity of the euro-bonds market, as well as its geographical extension, will be massively increased thereby.
Financial-market pressures on euro-area countries and their governments are pushing to more rather than less European integration. The euro-area crisis is a unique opportunity to dispose of a number of major flaws in monetary union, restoring the essential link for money and politics to be steered together and towards the same economic-policy goals.
There are two main areas of urgent intervention. On one hand, the ECB has to contribute to macroeconomic stabilization, without the need for a modification of its statutes in that respect. On the other hand, national fiscal policies must rebalance the tax burden in order to enhance an investment-led, job-creating economic growth in many areas that are promising for sustainable development.
Further, over the medium-to-long run the EU needs to design and introduce a number of pan-European taxes to finance the Union’s budget up to 15 per cent of the Union’s GDP, as this will substantiate the issuance of euro-bonds by some EU institution. The introduction of a transfer mechanism for financial equalization across the EU will make sure that the less advanced and competitive countries can reduce if not close the gap separating them from the leading countries within the EU. Real convergence of all EU member countries is indeed crucial for enhancing economic growth and solidarity across the whole Union. It can be achieved through a political-institutional process that alleviates the burden on a number of national governments’ budgets, thereby freeing up resources to be invested in those countries most in need of a recovery, which will thereby be in a position to reimburse maturing debts and to pay for the variety of goods and services that they need to import in order for them to grow and develop further.
Blanchard Olivier, Dell’Ariccia Giovanni and Mauro Paolo (2010), “Rethinking macroeconomic policy”, IMF Staff Position Note, SPN/10/03, Washington (DC), 12 February.
Duisenberg Willem (2003), “Monetary dialogue with Wim Duisenberg, President of the ECB”, EU Parliament Economic and Monetary Committee, Brussels, 17 February.
Holland Stuart (2010), “Financial crises, governance and cohesion: can governments learn up?”, in Richardson Joanna (ed.), From Recession to Renewal: The Impact of Financial Crises on Public Services and Local Government, Bristol: Policy Press, pp. 50–68.
Padoa-Schioppa Tommaso (2004), The Euro and Its Central Bank: Getting United after the Union, Cambridge (MA): MIT Press.
 A financial transactions tax could raise a number of issues over the short run in a framework already highly volatile and characterized by fundamental uncertainty about the future: it could reduce liquidity in European financial markets, increase asset price fluctuations, and dislocate various financial transactions to more deregulated markets (especially if the United States will not levy a similar tax in its jurisdiction). Over the medium-to-long run, however, the financial and macroeconomic stability brought about by this tax is likely to attract foreign capital and stimulate economic growth within the EU.
 This argument could convince in particular German taxpayers (hence the country’s political authorities), so much so if one explains to them that there is an essential difference between a fiscal transfer such as funding a European institution’s “own resources” and a bond issuance as a means of channelling savings into productive investments (Holland 2010, p. 57).