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The structures of the eurozone are being discussed again at the highest level. In the aftermath of the French election, President Macron put forward bold visions for a more integrated economic and monetary union. President Juncker responded in his State of the Union address, approving of the general thrust but also seeking to ensure that the Commission maintains a key role. Chancellor Merkel has made encouraging noises. Notions such as fiscal union, European finance minister, eurozone budget and Treasury, and European Monetary Fund are bandied around in earnest. The discussion is to be welcomed. Many of the basic ideas were already put forward years ago at the height of the crisis in the Commission blueprint for a deep and genuine economic and monetary union. They have been reiterated in a number of high profile policy documents and reflection papers since. What remains is putting more of them into action, and it is hoped that the political window of opportunity is at least partially open. However, it is important to maintain perspective. Arguably equally important developments for EMU are taking place at a lower level, somewhat removed from the limelight of high politics.
First, the building of the European Banking Union has begun, but it is not yet complete. Two features are conspicuous in their absence. There is no fiscal backstop. While the EU has set up a mechanism for resolving troubled banks, the funds available may not be sufficient, given the size of the banking institutions. There is a need to ensure that the system has the capacity to respond even to major crises. Helpfully, the European Stability Mechanism could be brought to this role. Further, there is no common deposit insurance. Banks still depend on the credibility of the scheme of their home country. This is not the case elsewhere in the world�everywhere else the task has been allocated to or taken over by the federal level. As a result, there is still an incentive to shift funds abroad in case of national economic trouble, potentially creating a modern equivalent of a classic bank run. The difficulty with deposit insurance has been the reluctance of countries with well-capitalised schemes to extend their guarantees to countries where banks have legacy problems. As with any system of insurance, cover cannot be extended to past events. Helpfully, the EU institutions, in particular the European Central Bank, are now taking action to clean up problems lurking in banks of countries such as Italy, potentially answering the objections that Germany has been putting forward.
Secondly, there is a need to develop the Capital Markets Union. The financial services markets have re-fragmented as a result of the crisis. This needs to be reversed both for the reasons of re-establishing the internal market but also to support the euro. It is true that unfettered capital flows can be destabilising. Loans to finance property speculation or consumption are often a bad idea, whether in a domestic or cross-border context. By contrast, equity investments emanating from the wealthier Member States to finance productive investments in the poorer ones offer opportunities both for catch-up growth and for risk diversification, fulfilling one of the original promises of EMU. Importantly, capital markets play a vital part in smoothing out economic trouble in countries such as the US and Germany. In fact, private risk sharing may be more important than fiscal transfers in helping out troubled states in federations. Unfortunately it is here that Brexit may come to undermine what should be achieved. Before the referendum, the UK acted as a formidable advocate of capital markets integration. Now its input is missing and much of the attention is instead going towards dealing with the consequences of the British withdrawal. It is a distraction that the eurozone can ill afford.
The different elements are connected. Private sector risk sharing is more likely to work and more credible if public risk sharing is also in place�they are complements rather than substitutes. Banking union and capital markets union support each other. In other words, the eurozone reform should advance on a broad front. There is no shortage of proposals. To my mind, the ones that do not simply channel money from one Member State to another but rather via the EU to individual Union citizens are the most promising. For example, a genuine European unemployment benefit scheme would involve protecting unemployed Europeans, not bailing out particular countries. It could avoid some of the divisive and bitter disputes between debtor and creditor countries that we witnessed during the crisis. Over time it would end up benefiting all Member States, as their economic cycles wax and wane. Most importantly, it would answer the question �where is Europe when it is needed the most?� But regardless of the bigger picture, the lower profile work on the intricacies of non-performing loans and various elements of capital markets union, including matters such as reducing the costs of the IPOs of small and medium sized enterprises, eliminating preferential treatment of debt over equity for tax purposes, and harmonising insolvency regimes, are just as important as bold constitutional initiatives with grand titles.
