The Report finds that the path towards economic, financial and fiscal integration raises questions about the eurozone’s ability to protect against financial and fiscal instabilities. A balance between risk reduction and risk-sharing is vital to completing Economic and Monetary Union (EMU) and will require appropriate democratic accountability structures. Sufficient political will exists for the euro to "muddle through" but the 2025 target to complete EMU is ambitious.
Commenting on the report, Baroness Falkner of Margravine, Chair of the Committee, said:
"Our committee report broadly welcomes the proposals set out in the Five Presidents’ Report to achieve financial and fiscal integration, by, among other things, ensuring better adherence to fiscal rules and putting a financial risk reduction agenda in place. While we identify challenges that must be overcome, we believe that there is sufficient political will to ensure that the euro survives.
“The report considers risk reduction as a crucial element to achieving consensus on risk-sharing, through the pooling of funds. Risk-sharing, for instance through the creation of a fiscal stabilisation mechanism, is more controversial and is likely to be a longer-term goal.
“Elsewhere, the report welcomes progress on the Capital Markets Union, which, as a means of enhancing private risk-sharing, could prove not only useful across the European capital markets as a buffer against financial sector shocks, but could also be a vital boost to the UK financial services providers.
“While we found that the plans for strengthening eurozone institutions, such as the Eurogroup, are currently very speculative, we feel that it is vital that the UK keeps a watchful eye on how these plans develop, and that the UK should do everything in its power to ensure that its position is maintained. The report notes that any major developments would require treaty change and therefore the UK would be well placed to ensure that its interests are preserved.
“The report also finds that because treaty change would be required to achieve significant integration within the eurozone, and many Member States would have to hold referendums, the target to achieve those plans by 2025 is ambitious.”
Findings of the report include:
Enhancing economic and fiscal integration in ‘Stage 1’ of the Five Presidents’ Report
- Effective fiscal coordination and the success of the new advisory European Fiscal Board will depend on the political will at the Member State level;
- Imbalances in the euro area will probably continue to be a source of instability. Strengthening the Macroeconomic Imbalances Procedure is unlikely to encourage more symmetrical adjustment between euro area Member States;
- The establishment of National Competitiveness Boards must be accompanied by a set of clear objectives of how they will improve policy making and increase national ownership of those policies; measures to improve competitiveness need to stress solutions that enhance productivity;
- The Expert Group’s White Paper in 2017 will need to achieve the right balance between further economic and fiscal integration measures and appropriate democratic and accountability structures.
Creating a ‘Financial Union’
- A European Deposit Insurance scheme (EDIS) is a useful addition to the Banking Union and the risk reduction agenda will contribute to reducing moral hazard concerns held by some Member States;
- Capital Markets Union will benefit the UK as the City of London is Europe’s leading financial hub. If properly constructed it would be able to act as a shock absorber, but its ability to do so may be limited in a crisis.
Longer term fiscal and democratic structures in ‘Stage 2’ of the Five Presidents’ Report
- ‘Fiscal Union’ is a nebulous concept but the stabilisation mechanism proposed in the Five Presidents’ Report is a pragmatic way forward. A fiscal union that includes the pooling of funds will be unlikely to succeed in the short term, and certainly not before risk reduction measures have been put in place;
- It is for eurozone Member States to decide the appropriate mechanisms of democratic accountability needed to support their chosen level of fiscal integration. So far, these mechanisms have not kept pace with the EMU crisis architecture and this undermines the legitimacy of EMU for EU citizens. Any new structure should be accompanied by a clear mandate from the citizens of the eurozone countries;
- The creation of a eurozone parliament, treasury or finance minister would require treaty change.