Blogpost: Alexandra Zeitz, St. Antony’s College, University of Oxford
Speaker: Francisco Torres, LSE
Chair: Charles Enoch, St. Antony’s College, University of Oxford
The edited volume Governance of the European Monetary Union, published by Routledge in 2016, is dedicated to the memory of Max Watson, honouring his scholarship, policy-making and commitment to interdisciplinary research and cross-disciplinary conversation. That commitment to reaching across disciplines and forging common understanding seems particularly necessary in these fraught and challenging times for Europe.
Francisco Torres (LSE) introduced the book to an Oxford audience at a PEFM seminar in December. In his presentation, he outlined the contributing authors’ case for urgent institutional reforms in the European monetary union. Torres said the book, which he edited together with Erik Jones (Johns Hopkins University), is based on a broadly consensual narrative of the Eurozone crisis.
In this narrative the crisis is understood to have emerged from pervasive economic imbalances among Eurozone members, with flows primarily going from Germany, Netherlands, and France to Spain, Italy, Greece, and Ireland. Excessive public and private debt, which mostly took the form of foreign borrowing, left economies vulnerable to a “sudden stop” in credit. Torres explained that these imbalances arose out of EU countries’ failure to internalize the common objectives agreed upon in the Lisbon Treaty or the Stability and Growth Pact, with necessary reforms delayed in the absence of market pressure or binding and enforceable rules. The European Monetary Union (EMU) was slow to respond once the crisis unfolded, Torres argued, because of institutional design flaws that were only incrementally and gradually corrected, given the reluctance of some EU member states, particularly the UK.
To address the remaining institutional weaknesses, Torres and contributing authors recommend the following: completing the banking union, severing the feedback loop between banks and sovereigns, establishing some Eurozone-wide risk-sharing, coordinating fiscal policy while reinforcing discipline, developing a form of a sovereign debt restructuring mechanism, and determining the European Central Bank’s role as lender of last resort.
These proposals are intended to create some fiscal space at the Eurozone level and to allow for necessary debt restructuring. Of course, proposals to establish risk-sharing and centralize fiscal policy are met with scepticism and resistance in Northern European capitals, where they are seen as paving the way to permanent fiscal transfers. However, Torres made a strong case that these measures were necessary to preserve the stability and gains of the monetary union.
To preserve the EMU, member states, particularly those with persistent imbalances, must also commit to necessary reforms, Torres argued. He distinguished between structural reforms and austerity policies, saying that political backlash to the severe costs of austerity had allowed governments to delay reforms that would increase productivity. When queried by seminar participants whether there is sufficient evidence that structural reforms in fact increase productivity and boost economic growth, Torres was adamant that structural reforms are necessary to reduce waste.
Overall, Torres struck an urgent but hopeful tone on the prospects of the EMU. Most citizens are in favour of the currency union, he said, and with necessary reforms it can remain robust. However, the discussion among seminar participants was more sceptical, coloured by the aftermath of Brexit and prospect of the Italian referendum (which at the time of the seminar had not yet taken place, but has since confirmed the strength of Eurocritics). The continued ascent of Eurosceptic parties across the EU has challenged the incremental, elite-led process of European integration. These are uncertain times for the European project, making inter-disciplinary research and creative policy solutions particularly important.