The Five Presidents’ Report on Completing the EMU: A Glimpse at the Future of Europe

Menelaos Markakis, DPhil student at University of Oxford, Academy of Athens scholar

On 22 June 2015 the Presidents of the EU and Euro area institutions presented their report on ‘Completing Europe’s Economic and Monetary Union’. The report provides a roadmap for ‘deepening’ and ‘completing’ the Economic and Monetary Union (EMU). Building on the measures enacted to combat the crisis, the Five Presidents’ Report makes a wealth of valuable suggestions for strengthening the EMU governance framework and deepening economic integration in the Euro area. The EU Presidents recommend that progress be made towards a genuine Economic Union, a Financial Union, a Fiscal Union, and a Political Union.

An overview of the proposed reforms

The proposed reforms would be implemented in two consecutive stages. In the first stage (1 July 2015 – 30 June 2017), the EU institutions and Member States ‘would build on existing instruments and make the best possible use of the existing Treaties’ (p. 5). In the second stage (mid-2017 to 2025), ‘concrete measures of a more far-reaching nature would be agreed to complete EMU’s economic and institutional architecture’ (p. 5). What follows is perforce merely a general indication of the content covered within the report.

(i)                 A genuine Economic Union

As regards the economic ‘pillar’ of the EMU, the Five Presidents’ Report recommends that each Euro area Member State create a Competitiveness Authority which would be ‘in charge of tracking performance and policies in the field of competitiveness’ (p. 7). The rationale behind this proposal is twofold. Such bodies ‘would help to prevent economic divergence’ and ‘would increase ownership of the necessary reforms at the national level’ (p. 7).

It is patently clear that these Authorities are expected to boost economic convergence in the Euro area, most notably in relation to policy areas which fall outside the EU’s competence. These bodies would have a mandate to ‘assess whether wages are evolving in line with productivity and compare with developments in other euro area countries and in the main comparable trading partners’ (p. 8). Moreover, ‘these bodies could be mandated to assess progress made with economic reforms to enhance competitiveness more generally’ (p. 8). The Five Presidents’ Report further recommends that a Euro area system of Competitiveness Authorities be created, in order to coordinate the actions of these Authorities on an annual basis.

The report seeks to link this proposed technique of policy co-ordination to already existing forms of rules-based governance in the Euro area. The Commission is expected to ‘take into account the outcome of this coordination … in particular for … decisions to be taken under the Macroeconomic Imbalance Procedure (MIP), including whether to recommend the activation of the Excessive Imbalance Procedure’ (p. 8). In principle, Euro area Member States are and would remain free to choose whether to follow the best practices in Europe. However, if they choose not to, the Commission and Council might respond to such divergence by subjecting the Member States concerned to the Excessive Imbalance Procedure. In this connection, the presidents of the institutions explicitly recommend that the corrective arm of the MIP be used ‘forcefully’, in order to ‘encourage structural reforms’ (p. 8). Furthermore, they do not shy away from adding that social partners ‘should use the opinions of the Authorities as guidance during wage setting negotiations’ (p. 8).

At a later stage, ‘the convergence process would be made more binding through a set of commonly agreed benchmarks for convergence that could be given a legal nature’ (pp. 5 and 9). These binding standards would be laid down in EU legislation. In some areas, this would lead to ‘further harmonisation’ (p. 9). In other areas, ‘it will mean finding country-specific solutions’ (p. 9).  ‘Significant progress towards these standards – and continued adherence to them once they are reached – would be among the conditions for each euro area Member State to participate in a shock absorption mechanism for the euro area’ (p. 5), which will be discussed below (iii).

It is not clear which competence basis the EU institutions would use for the adoption of such instruments. It might be the case that the Five Presidents’ proposals rest on the implicit assumption that the EU Treaties will be amended before or during stage two of this process. It might also be the case that the EU institutions plan to make full use of Articles 114, 136, 153 and 352 TFEU and/or of the Treaty provisions on enhanced cooperation.

In this connection, the Constitutional Affairs Committee of the European Parliament has proposed that binding economic policy guidelines for the Euro area countries be adopted on the basis of Article 136 TFEU (p. 10 para. 15). It has further called for ‘the dropping of the restrictions under Article 136 TFEU’ and for ‘the upgrading of this article into a general clause for the adoption of legal acts concerning the coordination and setting of legally-binding minimum standards with regard to economic, employment and social policy’ (p. 16 para. 73). This would give more say to the European Parliament on Country-Specific Recommendations.

Moreover, it should not escape our notice that ‘Country-Specific Recommendations would continue to be used in this context’ (p. 9). Furthermore, the report suggests that the MIP ‘be utilised as a tool … to foster reforms and monitor progress in each euro area Member State towards these common standards’ (p. 9). As such, rules-based and co-ordination based governance techniques would continue to ‘form “hybrid” normative grids and accountability frameworks’ (Armstrong).

(ii)               Towards a Financial Union

As regards the proposed Financial Union, the Five Presidents’ Report recommends that the Banking Union be completed and that the Capital Markets Union be launched. First, the report recommends the full transposition into national law of the Bank Resolution and Recovery Directive. It is recalled that, in the opinion of the Commission, 11 Member States have not fully implemented the Directive into national law. Second, the report argues that, before the Single Resolution Fund (SRF) is sufficiently capitalised, an ‘adequate bridge financing mechanism’ should be created for banks that need to be orderly unwound (p. 11). Third, a common backstop to the SRF should be implemented. In the opinion of the EU Presidents, this could be achieved through a credit line from the European Stability Mechanism (ESM) to the SRF (see p. 11). ‘In due course, the effectiveness of the ESM’s direct bank recapitalisation instrument should be reviewed, especially given the restrictive eligibility criteria currently attached to it’ (p. 11). Fourth, the report recommends that a European Deposit Insurance Scheme be launched. Fifth, it proposes strengthening macroprudential supervision at EU level and ‘review[ing] the treatment of bank exposures to sovereign debt, for example by setting large exposure limits’ (p. 12).

Building on the Commission’s Green Paper on ‘Building a Capital Market Union’, the report further proposes launching a Capital Markets Union for all 28 EU Member States. This would ‘ensure more diversified sources of finance’ and would ‘strengthen private sector risk-sharing across countries’ (p. 12). However, financial integration carries risks with it, because a problem in one country can rapidly spread to another. As such, the Five Presidents’ Report recommends that financial supervision be strengthened in the EU and that a single European capital markets supervisor be created (p. 12).

(iii)             Towards a Fiscal Union

As regards the proposed fiscal union, the Five Presidents’ Report puts forward two proposals. First, it recommends that an advisory European Fiscal Board be created. This body would coordinate and complement the national fiscal councils that have been set up in accordance with Regulation 473/2013. The European Fiscal Board ‘would provide a public and independent assessment, at European level, of how budgets – and their execution – perform against the economic objectives and recommendations set out in the EU fiscal framework’ (p. 14), thereby adding extra pressure on national Executives and legislatures to take EU fiscal rules seriously. ‘Such a European Fiscal Board should lead to better compliance with the common fiscal rules, a more informed public debate, and stronger coordination of national fiscal policies’ (p. 14).

Second, the report proposes the creation of a fiscal stabilisation function for the Euro area. Such a mechanism would enhance public risk-sharing in the Euro area (p. 4) and could build on the European Fund for Strategic Investments. However, it ‘should not lead to permanent transfers between countries or to transfers in one direction only’ (p. 15). ‘It should also not be conceived as a way to equalise incomes between Member States’ (p. 15). Notably, this stabilisation function ‘should be developed within the framework of the European Union’ (p. 15, emphasis added).

Democratic Accountability, Legitimacy, and Institutional Reform

The discussion thus far has focused on the economic reforms proposed by the presidents of the EU institutions. The focus now shifts to proposed reforms for enhancing the democratic credentials of the EMU. Save for the proposals for a more timely and better-structured parliamentary debate during the European Semester (see p. 17), it is hard to see how these proposals add anything to the already existing ‘six-pack’ and ‘two-pack’ arrangements for ‘institutional dialogue’. Be that as it may, the added emphasis on the role of social partners and civil society, as well as on consultation with EU-level social partners, should be readily applauded (see p. 22).

There is a strong focus on output legitimacy and on synergies between the European and national parliaments. ‘After many years of crisis, governments and institutions must demonstrate to citizens and markets that the euro area will do more than just survive. They need to see that it will thrive’ (p. 5).

Moreover, the report lays down a number of proposals for strengthening the EMU governance framework. More specifically, the EU Presidents suggest that the various treaties concluded outside the formal confines of the Lisbon Treaty be incorporated into the EU Treaties and secondary legislation and that the governance structure of the ESM be ‘fully integrated within the EU Treaties’ (p. 18). The report further suggests that a full-time presidency of the Eurogroup be considered and proposes the creation of a Euro area treasury (see p. 18). In the opinion of the authors of the report, ‘the world’s second largest economy cannot be managed through rule-based cooperation alone’; ‘it will need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions’ (p. 5). The division of labour between a Euro area and national treasuries is not made clear.

Regrettably, there is no elaboration of what accountability structures should be put in place if a Euro area treasury or fiscal stabilisation function were to be created. Likewise, there is no analysis of the desired accountability mechanisms for the proposed Financial Union. To be sure, requiring the consent of the European Parliament for the appointment of the Chair and the Vice-Chair of the Supervisory Board was a major step forward (see Article 26(3) of Regulation 1024/2013). What is more, there are no proposals for improving transparency in the workings of the Eurogroup, whose role in economic governance has now been heightened. A body actively seeking to foster economic convergence among Euro area countries (see p. 9) should not operate behind closed doors.

Final remarks

There will be no attempt to summarise the preceding argument. It is nonetheless worth highlighting certain features that are of particular importance. First, since ‘all euro area Member States must participate in all Unions’ (p. 5), these proposals would, if implemented,  put the idea of a multi-speed Euro area to sleep. To be sure, it might still be the case that not all Euro area Member States would meet the requirements to make use of the proposed shock absorption mechanism. Second, the EU Presidents’ proposals would, if implemented, entail a massive upward flow of power from the national to the EU/Euro area institutions and bodies. Arguably, this should be matched by increased democratic controls and robust accountability mechanisms. Third, it is particularly noteworthy that the report notes that all members of the Euro area should gain from EMU membership (p. 4). Spreading welfare gains across the Union and promoting economic, social and territorial cohesion might require that more thought be given to the EU’s regional and structural policies (see also the 1989 Delors Report). Lastly, at least some of the proposed reforms might require a Treaty amendment in order to be implemented, and therefore the Prime Minister of the United Kingdom might get his chance to renegotiate Britain’s relationship with the EU and to enshrine the desired precepts in primary law.

Barnard & Peers: chapter 19 

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