At his last Eurogroup meeting the departing German finance minister left a chilling message of his own in the form of a short non-paper on European economic policy. I will go through point by point, but the spoiler is simple: it represents a doubling down of believers in Maastricht and a complete rejection of all the risk-sharing and stability-promoting ideas tabled by the European authorities and, most vividly, by French President Macron.
The non-paper enunciates three basic principles: fiscal responsibilities and control must be kept together (aka avoid moral hazard); Member states need to be forced more effectively to implement structural reforms; and credible stabilization functions are needed to deal with global or domestic shocks. There is not so much wrong with the principles themselves; it is the ends to which they are put and the way they are operationalised. [...]
First, in a very real sense it effectively abandons elements of monetary union altogether and brings back characteristics of the previous European Monetary System (EMS). Even in relatively stable times countries perceived as weak would pay an interest premium over “hard-currency” countries, just as they did in the EMS; it would just reflect the probability of default rather than depreciation. This would, by itself, tend to perpetuate and even exacerbate income differentials within the monetary union. A key incentive for former “soft currency” countries to sign up to the Euro would be removed. (It is true that the substantial lowering of interest rate differentials on joining monetary union, created some problems for periphery countries, but the answer would have been tighter fiscal policy and/or macroprudential policies). German economists tend to emphasise incentive compatibility: but they have failed to consider (or maybe simply do not care about) the incentives of the majority of Euro Area members, who would be effectively tied into a system that, for them, combines the disadvantages of the EMS and the EMU. [...]
To sum up the above analysis, Wolfgang Schäuble’s parting gift to the Euro Area is a recommendation, first, to destabilize the Euro Area through measures (sovereign debt restructuring) designed to remove moral hazard, second to reject the most prominent various measures on the table in the direction of a deepening of economic policy integration and, third, instead to rely on “structural reforms”, a deepening of the Single market including a true banking and capital union to bolster resilience. There is nothing on the table here to encourage crisis-hit countries to see their future and economic advantage firmly in continued Euro Area membership. And nothing to indicate to the European institutions – who have jointly signed up to the idea of deepening EMU – and the new French President that Germany is willing to jump over its own shadow,m despite some warm words from the Chancellory in recent weeks.
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