Mario Draghi, President of
the ECB, defended ECB's economic policies in an opinion piece he wrote
for Project Syndicate on2 January and stressed that EU needs to find
better ways to prove to Eurozone Member States that they are better
inside the euro area. Mr. Draghi wrote:
There is a common misconception that the euro area is a monetary
union without a political union. But this reflects a deep
misunderstanding of what monetary union means. Monetary union is
possible only because of the substantial integration already achieved
among European Union countries – and sharing a single currency deepens
that integration.
If European monetary union has proved more resilient than many
thought, it is only because those who doubted it misjudged this
political dimension. They underestimated the ties among its members, how
much they had collectively invested, and their willingness to come
together to solve common problems when it mattered most.
Yet it is also clear that our monetary union is still incomplete.
This wasthe diagnosisoffered two years ago by the so-called “Four
Presidents” (the European council president in close collaboration with
the presidents of the European Commission, the European Central Bank,
and the Eurogroup). And, though important progress has been made in some
areas, unfinished business remains in others.
But what does it mean to “complete” a monetary union? Most important,
it means having conditions in place that make countries more stable and
prosperous than they would be if they were not members. They have to be
better off inside than they would be outside.
In other political unions, cohesion is maintained through a strong
common identity, but often also through permanent fiscal transfers
between richer and poorer regions that even out incomesex post. In the
euro area, such one-way transfers between countries are not foreseen
(transfers do exist as part of the EU’scohesion policy, but are
limited in size and are primarily designed to support the “catching-up”
process in lower income countries or regions). This means that we need a
different approach to ensure that each country is permanently better
off inside the euro area.
This implies two main things. First, we have to create the conditions
for all countries to thrive independently. All members need to be able
to exploit comparative advantages within the Single Market, attract
capital, and generate jobs. And they need to have enough flexibility to
respond quickly to short-term shocks. This comes down to structural
reforms that spur competition, reduce unnecessary red tape, and make
labor markets more adaptable.
Until now, whether or not to carry out such reforms has largely been a
national prerogative. But in a union such as ours they are a clear
common interest. Euro area countries depend on one another for growth.
And, more fundamentally, if a lack of structural reforms leads to
permanent divergence within the monetary union, this raises the specter
of exit – from which all members ultimately suffer.
In the euro area, stability and prosperity anywhere depend on
countries thriving everywhere. So there is a strong case for sharing
more sovereignty in this area – for building a genuine economic union.
This means more than beefing up existing procedures. It means governing
together: shifting from coordination to common decision-making, and from
rules to institutions.
The second implication of the absence of fiscal transfers is that
countries need to invest more in other mechanisms to share the cost of
shocks. Even with more flexible economies, internal adjustment will
always be slower than it would be if countries had their own exchange
rate. Risk-sharing is thus essential to prevent recessions from leaving
permanent scars and reinforcing economic divergence.
A key part of the solution is to improve private risk-sharing by
deepening financial integration. Indeed, the less public risk-sharing we
want, the more private risk-sharing we need. A banking union for the
euro area should be catalytic in encouraging deeper integration of the
banking sector. But risk-sharing is also about deepening capital
markets, especially for equity, which is why we also need to advance
quickly with a capital markets union.
Still, we have to acknowledge the vital role of fiscal policies in a
monetary union. A single monetary policy focused on price stability in
the euro area cannot react to shocks that affect only one country or
region. So, to avoid prolonged local slumps, it is critical that
national fiscal policies can perform their stabilization role.
To allow national fiscal stabilizers to work, governments must be
able to borrow at an affordable cost in times of economic stress. A
strong fiscal framework is indispensable to achieve this, and protects
countries from contagion. But the crisis experience suggests that, in
times of extreme market tensions, even a sound initial fiscal position
may not offer absolute protection from spillovers.
This is a further reason why we need economic union: markets would be
less likely to react negatively to temporarily higher deficits if they
were more confident in future growth prospects. By committing
governments to structural reforms, economic union provides the
credibility that countries can indeed grow out of debt.
Ultimately, economic convergence among countries cannot be only an
entry criterion for monetary union, or a condition that is met some of
the time. It has to be a condition that is fulfilled all of the time.
And for this reason, to complete monetary union we will ultimately have
to deepen our political union further: to lay down its rights and
obligations in a renewed institutional order.