European countries are not ready for proposals for a political union. Economist Wim Kösters argues that the decisive question at present is whether shared rules for the currency union can be held to.
DW: Many have criticized the lack of a political union to back up the euro. For months, people have worked on a concept that would fix this problem retroactively. Ideas have ranged from a joint finance minister for the whole currency union all the way to a shared eurozone budget. None of that came up at the EU summit in mid-December. Has the concept of a political union failed?
Wim Kösters: It's very hard to agree to a political union when important rules have been broken in the past. Those rules, like the no-bailout clause or the stability and growth pact, formed the basis of a rudimentary political union. That showed that people didn't want a constitution at all for the EU. As such, it's hard to agree to a political union in Europe now. It doesn't have the majority's support. So for now, you have to see it as a failed idea.
And a European finance minister - is that a solution to the crisis? I don't think so. The first question is what this minister is supposed to be doing. Is he supposed to operate according to strict regulations, or should he decide from case to case, as France would like to see. Until we've reached agreement on these issues, it's of no use to introduce such an institution.
Wim Kösters: It's very hard to agree to a political union when important rules have been broken in the past. Those rules, like the no-bailout clause or the stability and growth pact, formed the basis of a rudimentary political union. That showed that people didn't want a constitution at all for the EU. As such, it's hard to agree to a political union in Europe now. It doesn't have the majority's support. So for now, you have to see it as a failed idea.
And a European finance minister - is that a solution to the crisis? I don't think so. The first question is what this minister is supposed to be doing. Is he supposed to operate according to strict regulations, or should he decide from case to case, as France would like to see. Until we've reached agreement on these issues, it's of no use to introduce such an institution.
However, EU finance ministers had agreed to oversight for Europe's banks ahead of the summit. Will that help the euro zone avoid future crises?
Basically, I think so. If we get a European banking union that entails first and foremost shared oversight over banks, then we avoid the errors that result when some countries are too lax in supervising banks.
The establishment of funds for bank restructuring was also agreed. That guarantees some room to act - for instance, in closing or reforming banks - in addition to bank supervision. Nevertheless, the concrete form and shape of banking oversight brings many problems with it.
Basically, I think so. If we get a European banking union that entails first and foremost shared oversight over banks, then we avoid the errors that result when some countries are too lax in supervising banks.
The establishment of funds for bank restructuring was also agreed. That guarantees some room to act - for instance, in closing or reforming banks - in addition to bank supervision. Nevertheless, the concrete form and shape of banking oversight brings many problems with it.
Wim Kösters says the euro zone has much work ahead
Europe-wide supervision of banks is a controversial move. Some here view it as problematic for the European Central Bank to take on this role. Ifo President Hans-Werner Sinn commented on the plan by saying, 'It's as if you're giving the salesman of a junk car the right to issue vehicle inspection certificates.' Is there really a danger of the ECB becoming like a shady used car dealer?
It's very problematic to give the ECB the role of overseeing banks in addition to its responsibility for the monetary value of the euro. Then the ECB starts serving two masters. When the banks get in trouble, the ECB has to think: Can we now raise interest rates, which we would have to do in order to ensure price level stability? But then the bank would go under. In that sense, I can support what Hans-Werner Sinn said. So we have to find a solution that strictly separates the ECB's oversight function from its role in monetary policy. That will require firewalls between the two, and whether that will succeed is very questionable.
From a political perspective, is it possible to make sure that governments stick to the rules?
In Germany, the rules have largely been observed. One example is the rule stipulating the independence of the federal bank - Germany has held to that. But when multiple countries are involved, it gets harder. When you have various approaches to the economy, it's very hard to agree to rules that can apply to everyone. That's the problem we have in Europe. But an efficient system of adherence to the rules is key for a currency union. Without it, the euro will no longer be able to exist.
In the past, there were many violations of the rules. That's one reason we're where we are today. You say we could win back trust by at least sticking to the guidelines we've established. But we're not doing that at all. The interest rates for emergency loans are being lowered, and deadlines extended. Red lines are kept for just a couple weeks, sometimes just days. It looks bad in terms of rule adherence.
That's true, and I have to say you're right that people haven't kept to the rules. But maybe we'll learn something from the crisis. My hope is that European countries come to see that the crisis came about essentially because people abandoned the rules. I hope that people reflect on that and say: We have to stick to the guidelines, otherwise the currency union will break apart. This danger is very real.
Do you think politicians have realized that?
I have my doubts there. And that's why we can't be sure that the currency union will continue to exist.
Wim Kösters is a professor emeritus of economics at the Ruhr University Bochum and the chair of the Rhenish-Westphalian Institute for Economic Research (RWI), based in Essen, Germany. dw de
It's very problematic to give the ECB the role of overseeing banks in addition to its responsibility for the monetary value of the euro. Then the ECB starts serving two masters. When the banks get in trouble, the ECB has to think: Can we now raise interest rates, which we would have to do in order to ensure price level stability? But then the bank would go under. In that sense, I can support what Hans-Werner Sinn said. So we have to find a solution that strictly separates the ECB's oversight function from its role in monetary policy. That will require firewalls between the two, and whether that will succeed is very questionable.
From a political perspective, is it possible to make sure that governments stick to the rules?
In Germany, the rules have largely been observed. One example is the rule stipulating the independence of the federal bank - Germany has held to that. But when multiple countries are involved, it gets harder. When you have various approaches to the economy, it's very hard to agree to rules that can apply to everyone. That's the problem we have in Europe. But an efficient system of adherence to the rules is key for a currency union. Without it, the euro will no longer be able to exist.
In the past, there were many violations of the rules. That's one reason we're where we are today. You say we could win back trust by at least sticking to the guidelines we've established. But we're not doing that at all. The interest rates for emergency loans are being lowered, and deadlines extended. Red lines are kept for just a couple weeks, sometimes just days. It looks bad in terms of rule adherence.
That's true, and I have to say you're right that people haven't kept to the rules. But maybe we'll learn something from the crisis. My hope is that European countries come to see that the crisis came about essentially because people abandoned the rules. I hope that people reflect on that and say: We have to stick to the guidelines, otherwise the currency union will break apart. This danger is very real.
Do you think politicians have realized that?
I have my doubts there. And that's why we can't be sure that the currency union will continue to exist.
Wim Kösters is a professor emeritus of economics at the Ruhr University Bochum and the chair of the Rhenish-Westphalian Institute for Economic Research (RWI), based in Essen, Germany. dw de
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