Share

OPINION: Europe’s still not ready to mend the Monetary Union

Not long ago, EU leaders were talking about a grand bargain to reform their currency union. It isn’t happening. Europe’s finance ministers have just approved a package of reforms to strengthen the monetary union. Their plan falls far short of what’s needed.

The new proposals aren’t worthless — any steps to better equip the euro zone to deal with the next financial crisis are welcome. But they conspicuously fail to address the system’s most important weaknesses: deposit insurance and fiscal policy.

Most economists agree that the euro zone needs joint deposit insurance, covering balances up to say €100 000 (about R1.6m). This would complete Europe’s banking union, and help to break the so-called doom-loop connecting national-government finances and failing banks.

But the ministers, yet again, came up with no plan. A working group will think about it and report next June. Europe has been thinking about this for six years.

The currency union also needs a small euro-zone budget to help to stabilise countries suffering from isolated shocks.

The European Central Bank sets monetary policy for the zone as a whole, so it can’t support an individual country in recession, makings some such fiscal mechanism necessary. France and Germany seemed to have reached agreement on the idea, but opposition from others seems to have blocked it.

The ministers did agree to change the European Stability Mechanism (ESM), the euro zone’s rescue fund. Here too, though, the reforms aren’t bold.

Finance ministers wanted to make it easier for countries with basically sound fiscal positions to draw on a line of credit when conditions demand it — but the changes leave the rules attached to these loans unduly strict. In practice, the credit lines are likely to be available only to countries that don’t need them.

Was there any progress at all? A little. The European Commission and the ESM have agreed to a clearer division of labour. The ministers finalised an agreement to strengthen the common fund that handles banks in trouble. And they agreed to encourage the use of collective-action clauses in new bonds; these make debt-restructuring easier, should it prove necessary. 

That’s something — but the grand bargain on euro-zone reform is nowhere to be seen. When the next recession comes around, the EU might very well pay the price.

* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.94
-0.2%
Rand - Pound
23.91
-0.1%
Rand - Euro
20.43
+0.2%
Rand - Aus dollar
12.34
+0.1%
Rand - Yen
0.13
-0.2%
Platinum
910.50
+1.5%
Palladium
1,011.50
+1.0%
Gold
2,221.35
+1.2%
Silver
24.87
+0.9%
Brent Crude
86.09
-0.2%
Top 40
68,346
+1.0%
All Share
74,536
+0.8%
Resource 10
57,251
+2.8%
Industrial 25
103,936
+0.6%
Financial 15
16,502
-0.1%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders