At the Euro Summit in Brussels, on December 14th, EU leaders agreed on a major measure to deepen integration of the Economic and Monetary Union, created in 1992, to coordinate economic and fiscal policies of the 19 eurozone members, as well as non-euro EU states. The group decided to create a eurozone budget — something French President, Emmanuel Macron, has been pushing for since the start of his presidency, albeit a scaled down version of his vision.
Although the details will not be hashed out until June, after European elections in late May, the broad agreement promises funding for common projects, in areas like infrastructure, transport, and employment. The funding will be a part of the EU budget through the Multiannual Financial Framework (a seven-year framework that regulates the EU’s annual budget) — in accordance with other EU policies.
Macron had originally pushed for the faster integration of national economies to the eurozone level, by calling for an ambitious fund, equal to several percentage points of gross domestic product of national economies. However, the agreed upon budget will promote longer-term economic convergence, and almost assuredly have a much smaller money pool than Macron envisioned.
Northern EU countries — the Netherlands and Germany in particular — have been wary of Macron’s grand ideas for a single currency area, with the Netherlands arguing, that deep economic and monetary integration, goes against the principle that countries should be responsible for their own finances. Germany, too, had fought against this deep integration; as a country whose GDP has grown solidly since 2012, and which does not accept much blame for the financial crisis across the eurozone, just a few years before.
On the other hand, most of the Southern EU states — whose economies were hit hard by the financial crisis, and whose economies are not as big as Germany’s and, thus, were not able to recover as quickly — support deepening integration of the Economic and Monetary Union, and a common eurozone budget. Spain has repeatedly called for more eurozone integration, calling for the immediate creation of a shared budget, back in August.
“Spain is backing a European finance minister, and a European budget, which will progressively bring closer together living standards, and the wealth of all European countries,” said the then Spanish Prime Minister, Mariano Rajoy, a few months back, before the budget was agreed upon.
Yet even with this major stride toward integration, many additional steps remain — like work on the Banking Union, and Capital Markets Union.
The first two pillars of the Banking Union, which entered into force in response to the 2000s financial crisis, are the single supervisory mechanism and the single resolution mechanism — and both are in place and fully operational. However, a common system for deposit protection still needs to be established, and further measures are needed to address remaining risks in the banking sectors — including those related to non-performing loans and initiatives, that help banks diversify their investment in sovereign bonds.
The Capital Markets Union, a project launched by the European Commission in 2015, to help unlock funding for investment through more integrated capital markets, has seen steady progress since its inception — for example, the Commission adopted a proposal to promote small and medium-sized enterprise growth markets, in May 2018, and has also adopted an action plan on financing sustainable growth. However, a true single market for capital in the EU is still in the works.
EU leaders at the summit in December, called for “ambitious progress” on the Capital Markets Union, by spring 2019, and they adopted a banking package, and a non-performing loans backstop, that will help the Banking Union progress further.
All of these efforts are directed toward avoiding another financial crisis on the scale of the one seen in the early 2000s, which spread through the PIGS economies — Portugal, Italy, Greece and Spain — and had dire effects on the rest of the European Union, and eurozone, as it is tied to these countries economically and monetarily.
So far, the progress seems to be good — with agreements being reached step by step (like the recent one on the eurozone budget), and with EU countries writ large coming out of the crisis, and growing at rates not seen since before the crisis, including in Greece — one of the countries hardest hit.
The bad news for Macron, is that while the common eurozone budget is a huge step forward, the Northern EU countries, with bigger and more stable economies, are still likely to view full integration as being a system where they are underwriting the finances of smaller and less stable EU economies. This means the vision of a truly single currency union remains far off.
