Reforming the Eurozone: A Transatlantic Perspective
Over the last decade, the state of the Eurozone has become a serious concern in the transatlantic relationship. At the outset of the European sovereign debt crisis, the United States was more than willing to help the European Union in overcoming the state-debt crisis. President Obama made the case for financial assistance and the involvement of the International Monetary Fund (IMF) to prevent Greece from going bankrupt. Over the course of the crisis, the enthusiasm toward the IMF’s involvement in Europe has waned. The American representatives repeatedly had to defend their role in Eurozone lending programs in front of the U.S. Congress. And the latter eventually pushed the IMF into taking back a rule change it implemented to allow financial assistance for Greece in 2010. The list of American complaints over the EU’s handling of the crises is long: the continuing involvement of the IMF in the Eurozone, macroeconomic imbalances, Germany’s trade surplus, European financial market regulation or debt relief in Greece. Already before President Trump took office, the U.S. administration has become ever more dissatisfied with the EU’s crisis response. While improving transatlantic relations might not be one of the top motivations for a reform of the Eurozone, surely it would be a positive side effect not only for Europeans and Americans, but also for the global economy.
Europe’s Response Ability: Enhancing the European Stability Mechanism
The European state-debt and financial crisis has posed an unprecedented challenge for the EU, both its institutions and its member states. Neither the Eurozone’s framework nor the institutions were designed to deal with bankrupt states or bailing out crisis-ridden member states. After some reluctance, EU member states came up with an ad-hoc collaboration of European Commission, IMF, and ECB to assist Greece and other member states. While this form of cooperation has been mostly successful in Ireland, Portugal, Spain, and Cyprus, the situation in Greece remains fragile. At the latest, in the third program, the collaboration between the Washington-based IMF and the EU has been characterized by conflicts over debt relief and disagreements in several policy areas. The continuing reliance on the IMF sheds light on the EU’s lack of capacities to deal with financial crisis. An enrichment of the European Stability Mechanism toward some form of European Monetary Fund including a role in prevention of excessive deficits and organizing debt restructurings in a predictable manner could change that. In case of another crisis, the ESM would have the capabilities to deal with financial matters in a financial assistance program, while the IMF could play more of an advisory role in the Eurozone and focus on technical assistance. The division of labor in the financial sector program in Spain could serve as a blueprint for future financial assistance programs in the Eurozone. In Spain, the resources for the program were provided by the ESM; the IMF together with EU institutions focused on reforms in the financial sector and the European Commission applied the excessive deficit and the macro-economic imbalance procedure to stipulate structural and fiscal reforms.
Facilitating Investment in the Eurozone
Another crucial issue is Europe’s investment gap. The lack of investment not only hampers economic growth in the Eurozone, but also causes macroeconomic imbalances and adds to Germany’s eminent trade surplus. The American side has especially taken issue with the last one. Combining measures that address the supply and the demand side such as structural reforms and public investment may be able to increase economic growth in the Eurozone. Structural reforms have been a fundamental element in all Eurozone financial assistance programs. In some Eurozone countries, however, they failed to spur the necessary investment to meet the challenge of high unemployment, non-performing loans, and most importantly economic growth. These countries need more growth-friendly structural reforms that are accompanied by public investment. Whereas some Eurozone countries have the fiscal space to invest in important areas such as education, technology, and infrastructure, others face serious constraints in their public spending. Therefore, some argue for a separate Eurozone budget to provide more fiscal space. The EU, however, already has an institution with the experience, the knowledge, and the resources to invest in growth-friendly projects in the Eurozone. The European Investment Bank (EIB) has a legacy in investing in larger projects with transnational impact, but also in funneling money to small and medium enterprises. Following the announcement of the Juncker-Plan, the European Commission joint forces with the EIB to overcome the EU’s investment gap. But the EIB can do more to. Given the experience as an investment bank, the EIB should have a role in identifying barriers for investment and advising Eurozone countries in structural reforms. For example, the advancement of renewable energies and the grid connection in Europe are not only a means to fight climate change, but also an important-for-growth path for countries in the European periphery. Having the EIB on board to identify investment-friendly reforms and at the same time provide investments in areas such as renewable energies may be an important step to close the EU’s investment gap and lower macroeconomic imbalances.