Blueprint for a deep and genuine Economic and Monetary Union (EMU)

29 November 2012
by eub2 -- last modified 29 November 2012

The European Commission adopted on 28 November a Blueprint for a deep and genuine Economic and Monetary Union, which provides a vision for a strong and stable architecture in the financial, fiscal, economic and political domains.

Why has the Commission published this Blueprint?

The Commission has taken a leading role in tackling the crisis by reforming financial sector supervision, overhauling the governance of budgetary and economic policies and spearheading support for the real economy. Moreover, a substantial firewall to assist Member States with limited market access has been set up, and banks now have access to exceptional European Central Bank liquidity. While these measures are substantial, they have not prevented the sovereign debt crisis from turning into a crisis of confidence that calls into question the very existence of the economic and monetary union (EMU). Instead, the crisis of confidence has led to a re-fragmentation of financial markets, a negative feedback loop between sovereigns and banks, and different risks for businesses and households depending on their location within the EU. More than 50 years after the foundation of the EU, the crisis appears to be undoing the integration achieved so far, threatening the Single Market and the EMU itself. The Blueprint provides a comprehensive vision for a deep and genuine EMU conducive to a strong and stable architecture in the financial, fiscal, economic and political domains to underpin stability and prosperity in the future.

What does the Blueprint mean by a deep and genuine EMU?

In a deep and genuine EMU, all major economic and fiscal policy choices by Member States should be subject to deeper coordination, endorsement and surveillance at the European level. Steps towards more responsibility and economic discipline should be combined with more solidarity and financial support. Political integration, ensuring democratic accountability and legitimacy, is necessary every step of the way. This transformation would take place gradually, over the short, medium and longer term, and would entail eventual Treaty changes.

This must be built on the following basic principles. First, the deepening of EMU should build on the institutional and legal framework of the Treaties. Second, the Euro Area must be able to integrate quicker and deeper than the EU at large, whilst the integrity of the policies conducted at 27, notably the Single Market. This means that, wherever appropriate, the Euro Area measures should be open to the participation of other Member States. Indeed, while the Treaties foresee that a number of rules apply only to Euro Area Member States, The present configuration of the Euro Area is only of a temporary nature, since all Member States but two (Denmark and the UK) are destined to become members under the Treaties.

What steps are needed in the short term?

There are several measures that can be taken now to foster closer coordination and which do not require changes to the Treaty. In the short term (within 6 to 18 months), immediate priority should be given to implementing the governance reforms already agreed (six pack) or about to be agreed (two pack).

An effective banking union would not only require the setting up of a Single Supervisory Mechanism, but after its adoption, also a Single Resolution Mechanism to deal with banks in difficulties. It would be in charge of the restructuring and resolution of banks within the Member States participating in the Banking Union.

And once a decision on the next Multi-annual Financial Framework for the EU has been taken, the economic governance framework should be strengthened further by creating a "convergence and competitiveness instrument" within the EU budget – but separate from the MFF - to support the timely implementation of structural reforms, on the condition that "contractual arrangements" are concluded between Member States and the Commission. This would support the rebalancing, adjustment and therefore growth of the economies of the EMU and would serve as the initial phase in the establishment of a stronger fiscal capacity alongside more deeply integrated economic policies.

Building on progress achieved in the economic governance of the euro area, a strengthening and consolidation of its external representation should be pursued.

What about the medium term?

In the medium term (18 months to 5 years), as further steps in the strengthening of the collective conduct of budgetary policy and economic policy, the Euro Area would benefit from deeper coordination in the field of tax policy issues and labour markets, given the significance of labour mobility for adjustment capacity and growth within the euro area.

Building on the Convergence and Competitiveness Instrument, the fiscal capacity for the euro area should be further enhanced. It should be autonomous and rely solely on own resources. It should provide sufficient resources to support important structural reforms in a large economy under distress.

A clearly reinforced economic and fiscal governance framework could allow considering the reduction of public debt significantly exceeding the SGP criteria through the setting-up of a redemption fund subject to strict conditionality. This would warrant increased surveillance and power of intervention in the design and implementation of national fiscal policies.

The common issuance by euro area Member States of so-called eurobills - short-term government debt with a maturity of up to one or two years - could constitute a tool against the present fragmentation, reducing the negative feedback loop between sovereigns and banks, while limiting moral hazard.

The monitoring and managing function for the fiscal capacity and other instruments should be provided by an EMU Treasury within the Commission. The further strengthening of policy coordination and enhancement of the fiscal capacity would initially start under secondary law, but would require Treaty changes at some point. The creation of a Debt Redemption Fund and the common issuance of short-term government debt would require Treaty changes.

And in the long term?

In the longer term (beyond 5 years), based on the progressive pooling of sovereignty, responsibility and solidarity at the European level, an autonomous euro area budget providing for a fiscal capacity for the euro area to support Member States in the absorption of shocks should become possible. The central budget would provide for an EMU-level stabilisation tool to support adjustment to asymmetric shocks, facilitating stronger economic integration and convergence and avoiding the setting-up of long-term transfer flows. Overall, a shared instrument could deliver net gains in stabilising power, as compared with current arrangements. How large this fiscal capacity would ultimately turn out to be will depend on the depth of integration desired and on the willingness to enact accompanying political changes.

Also, a deeply integrated economic and fiscal governance framework could allow a common issuance of public debt, which would enhance the functioning of the markets and the conduct of monetary policy.

This would be the final stage in EMU.

What does the Blueprint say about a fiscal capacity?

The purpose of a fiscal capacity, as set out in the Blueprint, is to underpin the structural reforms that would accompany the further integration of national economic and budgetary policies and to ensure greater ex-ante coordination of major reform projects. The potentially sizeable spillover effects associated with structural reforms in the euro area justify the use of specific instruments. Financial support would be granted for reform packages that are agreed and important both for the Member States and for the good functioning of the EMU, and would be defined in "contractual arrangements" concluded between Member States and the Commission. It would, in an initial phase, be set up as a "Convergence and Competitiveness Instrument" (CCI) within the EU's budget but separate from the Multi-annual Financial Framework. The "Convergence and Competitiveness Instrument" would combine the deepening integration of economic policy with financial support, and thereby respect the principle according to which steps towards more responsibility and economic discipline are combined with more solidarity. Building on the Convergence and Competitiveness Instrument, the fiscal capacity for the euro area could be further enhanced in the medium term, provided it promotes rebalancing, adjustment and sustainable growth in the euro area.

In the longer term, a central budget could provide an EMU-level stabilisation tool to support adjustment to asymmetric shocks, facilitate stronger economic integration and convergence and avoid the setting-up of long-term transfer flows. Overall, a shared instrument could deliver net gains in stabilising power, as compared with current arrangements. How large this fiscal capacity would ultimately turn out to be will depend on the depth of integration desired and on the willingness to enact accompanying political changes.

What kinds of "contractual arrangements" are proposed in the Blueprint?

These contracts would build on the country-specific recommendations (CSRs) issued by the Commission and endorsed by the European Council (in the context of the European Semester). The contracts would be negotiated by Member States and the Commission and discussed in the Eurogroup, and would contain detailed reforms and a timeline for their implementation. The reforms would be financially supported as a complement to the extra discipline required. Member States that breach the contracts would have to pay back any support received.

How would the debt redemption fund work?

A European Debt Redemption Fund, subject to strict conditionality, could provide an anchor for the credible reduction of government debt, to bring it below the 60% of GDP ceiling set out in the Maastricht Treaty. The setting up of such a debt redemption fund could only be envisaged in the context of a revision of the current Treaties. For accountability reasons, the act creating such a fund would need to be framed with great legal precision as regards the maximum transferrable debt, the maximum time of operation and all other features, to guarantee the legal certainty required under national constitutional laws. In order to limit moral hazard and to ensure the redemption of payments, increased surveillance and power of intervention in the design and implementation of national fiscal policies would be warranted.

Does the Blueprint support "eurobonds"?

The Blueprint refers to the introduction of eurobills, the common issuance of short-term government debt with a maturity of up to one or two years, to reduce financial fragmentation and the negative feedback loop between sovereigns and banks, while limiting moral hazard. Due to their character as financial instruments requiring joint and several guarantees by the participating Member States, changes to the Treaties would be required to allow these instruments to be developed.

The implementation of such a common debt instrument would require a closer coordination and supervision of Member States' debt management in order to ensure sustainable and efficient national budgetary policies. This monitoring and managing function should be provided by an EMU Treasury within the Commission.

In the longer term, a deeply integrated economic and fiscal governance framework could allow for the common issuance of public debt, which would enhance the functioning of the markets and the conduct of monetary policy. The Commission's Green Paper on the feasibility of introducing Stability bonds sets out three options for the common issuance of public debt.

What Treaty changes is the Commission proposing, and on what basis?

First and foremost, the Commission is committed to exploring all the possibilities offered by secondary legislation before considering changes to the Treaties. Article 136 of the Lisbon Treaty provides the basis for deeper integration in the Euro Area. Second, any further deepening of EMU should be done within the Treaties, with intergovernmental action only on an exceptional and temporary basis. And the process should, wherever appropriate, be open to other Member States. With this in mind, the Commission has suggested Treaty changes in the following areas:

    New tailor-made treaty bases could be created to allow for deeper coordination in the areas of tax policy and labour markets.

    A debt redemption fund, eurobills or Stability Bonds could only be envisaged in the context of a revision of the current Treaties.

    The enhancement of the fiscal capacity on the basis of the convergence and competitiveness instrument would benefit from a new, specific legal basis that goes further than Article 136. Treaty change would be essential to allow the fiscal capacity to be financed through borrowing.

    In the context of a Treaty reform conferring further supranational powers to the EU level, steps should be considered to ensure a commensurately stronger democratic accountability. A way of strengthening the EU's legitimacy would be to extend the competences of the Court of Justice..

How does the Blueprint link to the four presidents' report?

The Blueprint will feed in to the debate at the European Council on 13 and 14 December, when the final report by the "four presidents" - President Barroso, European Council President Herman Van Rompuy, Eurogroup President Jean-Claude Juncker and European Central Bank President Mario Draghi - will be presented. The Blueprint is the Commission's contribution to this debate, as outlined by President Barroso in his State of the Union address in September.

Source: European Commission