Friday, February 14 15:20:59
Euro zone economic integration may have reached its limits for now even though the 18-country monetary union needs a treasury to make it work better, the head of the influential Bruegel think-tank said today.
Speaking at the Reuters Euro Zone Summit, Guntram Wolff said policymakers have used the sovereign debt crisis of the last three years to shore up the euro zone, but not impregnably.
"I'd say 50-60 percent of the opportunities were used. If you think of the single bank supervision mechanism, that's massive. If you think of the European Stability Mechanism (ESM), that's massive," Wolff said.
But too much emphasis fell on the European Central Bank, which has shied away from more aggressive action to kick start the economy despite rapid disinflation, Wolff said.
"The economics of a monetary union is that to function well, it needs a small treasury. We need the next step, which is fiscal union," Wolff said.
"The problem is that we don't have political acceptance for it at the moment, but I would really love to see the treasury as a backstop for some things, including the banking area and also for big shocks," he said.
Such a treasury, financed from taxes on industry and euro zone citizens, would be sufficiently large even at 1 percent of euro zone GDP - roughly 90-100 billion euros, Wolff said.
Such annual revenue would allow the treasury to borrow up to 3 trillion euros on the market, if necessary, making it a powerful public backstop.
"If you then have a systemic banking crisis and everybody thinks all the big banks in Europe will fall apart, you have (the treasury) saying 'we guarantee the deposits if necessary' and everyone will believe it because it can go to the market and borrow 3000 billion," Wolff said.
The possibility of raising that kind of money would make it unnecessary ever to do it, he said.
Wolff said the euro zone cold also set up an insurance mechanism to help countries in deep recession when their GDP contracts by 5-7 percent. Countries could pay insurance premiums in normal times in order to get outside help in times of crisis.
"This would allow governments to avoid massive pro-cyclical fiscal consolidation, which is what we did in this crisis," Wolff said.
"For a smaller recession, you just need normal national automatic stabilisers. But when you have a big, big recession like this one, you need direct outside support."
Progress on such ambitious projects was unlikely now, before European Union parliamentary elections in May and the influence of eurosceptic parties that is likely to increase after the vote.
"I don't see much movement this year and next year," Wolff said. "It could come when the crisis flares up again. We need another crisis for that."