European economic governance in an international context.
Date: 2013-10-30
Institutions: Directorate-General for Education, Youth, Sport and Culture
Subjects: Community budget, European Central Bank, European Monetary Fund, anti-crisis plan, economic growth, economic policy, financial aid, governance

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José María de Areilza

Nikolaos Baltas

José Manuel Barroso

Dai Bingran

Josep Borrell

Fritz Breuss

Marco Buti

Olga Butorina

Nikolaos Chountis

Enrique Barón Crespo

Etienne Davignon

Sylvester Eijffinger

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Detlef Fechtner

José-Maria Gil-Robles

Daniel Gros

Roberto Gualtieri

Woosik Moon

Robert Mundell

Anni Podimata

Dusan Sidjanski

Jan Truszczyński

Androulla Vassiliou

Amy Verdun

Paul J. J. Welfens

European Commission
Directorate-General for Education and Culture
1049 Bruxelles/Brussel
BELGIUM/BELGIË
Tel. +32 22991111
Fax +32 22955719
eac-info@ec.europa.eu

European Commission
Directorate-General for Education and Culture
Jean Monnet programme

Commission Européenne  
Direction générale de l’education et de la culture
Programme Jean Monnet

European economic

governance
in an international context

doi:10.2766/34238

Education  
and Culture

 
 
 
 
 
 
European Commission

European economic governance in an international context

Luxembourg: Publications Office of the European Union

2013 — 202 pp. — 14.8 × 21 cm

ISBN 978-92-79-25434-5

doi:10.2766/34238

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European Commission

European economic 
governance in an 
international context

José María de Areilza

Nikolaos Baltas

José Manuel Barroso

Dai Bingran

Josep Borrell

Fritz Breuss

Marco Buti

Olga Butorina

Nikolaos Chountis

Enrique Barón Crespo

Etienne Davignon

Sylvester Eijffinger

Detlef Fechtner

José-Maria Gil-Robles

Daniel Gros

Roberto Gualtieri

Woosik Moon

Robert Mundell

Anni Podimata

Dusan Sidjanski

Jan Truszczyński

Androulla Vassiliou

Amy Verdun

Paul J. J Welfens

European Commission

Directorate-General for

Education and Culture

Jean Monnet programme

Commission Européenne

Direction générale de 

l’éducation et de la culture 

Programme Jean Monnet

2013

Directorate-General for Education and Culture

2

Contents

Welcome speech

Jan Truszczyński
Opening remarks 

I.  Opening session

José Manuel Barroso
European economic governance in an international context 

Androulla Vassiliou
European economic governance in an international context 

Anni Podimata
European economic governance in an international context 

II.  Keynote speech

Robert Mundell
Keynote address 

III.  Safeguarding the stability of the euro area and the enhanced 

instruments for crisis intervention

Roberto Gualtieri
Safeguarding the stability of the euro area and the enhanced instruments for crisis  

intervention: political and institutional dilemmas 

Nikolaos Baltas
Safeguarding the stability of the euro area and the enhanced instruments for crisis  

intervention 

Daniel Gros
Liquidity in times of crisis: even the ESM needs it 

6

10

13

18

22

40

46

54

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXTIV.  Reinforced fiscal and macroeconomic coordination and 

surveillance: economic aspects

Josep Borrell
Reinforced fiscal and macroeconomic coordination and surveillance: economic aspects 

Sylvester Eijffinger
The Greek tragedy 

Paul J. J. Welfens
Towards a euro fiscal union: reinforced fiscal and macroeconomic coordination and  

surveillance is not enough 

Detlef Fechtner
Concluding remarks 

V.  Strengthening the governance of the euro area: political and 

institutional aspects

José-Maria Gil-Robles
Introductory remarks 

Nikolaos Chountis
Strengthening the governance of the euro area: political and institutional aspects 

Amy Verdun
Strengthening the governance of the euro area: political and institutional aspects 

José María de Areilza
A strengthened government for the eurozone: political and legal considerations 

IV.  The EU and global macroeconomic governance (G8, G20, IMF)

Enrique Barón Crespo
Resolving the eurozone crisis and enhancing global governance 

Marco Buti
The EU and global macroeconomic governance (G8, G20, IMF) 

Olga Butorina
Economic crisis and EU strategic challenges 

Dai Bingran
EU and global economic governance: a Chinese perspective 

Woosik Moon
European debt crisis and Asian responses: a Korean perspective 

3

66

68

73

91

94

95

100

108

118

130

137

146

150

4

VII.  Closing session

Jan Truszczyński

Maro Buti
Closing remarks 

Fritz Breuss
Euro crisis as a chance for a restart of the European Union 

Etienne Davignon
Closing remarks 

Dusan Sidjanski
The European Union and the eurozone: is an end to the crisis in sight? 

Annex

Programme of the Global Jean Monnet Conference 

163

168

181

191

197

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXTWelcome speech

Jan Truszczyński

6

Opening remarks

Jan Truszczyński
Director-General for Education,  
Training, Culture and Youth of the  
European Commission

Excellencies, ladies and gentlemen, allow 

me to welcome you warmly to this 2011 

Global Jean Monnet Conference. Every day 

now  confirms  the  pertinence  and  time-

liness of the topic of this year’s conference: 

European economic governance in an inter-

national context.

The world of thought and the world of action 

keep  moving  with  high  intensity.  We  are 

waiting for President Van Rompuy’s report 

to the European Council meeting in 2 weeks, 

and  yesterday  the  European  Commission 

published its Green Paper on the feasibility 

of introducing stability bonds. This, as we 

know, was preceded earlier this autumn with 

a new fiscal surveillance and enforcement 

mechanism known as the six-pack.

A few weeks ago, we saw the documents 

from the German CDU party pleading for 

the completion of economic and monetary 

union. Last week, Jurgen Habermas was kind enough to contrib-

ute to the governance discussion with his new book Zur Verfassung 

Europas on Europe’s constitution.

It is of course useful to recall that many of the governance argu-

ments  advanced  today  were  formulated  many  years  ago,  as 

many professors here know from their own academic practice and 

ex perience. I recently read a report by Professor Iain Begg, pub-

lished by the Bertelsmann Stiftung, which quotes from the 1970 

Werner report on economic and monetary union. This report saw 

the harmonised management of national budgets as an essential 

feature of cohesion in such a union. Furthermore, the Werner report 

requested that the European Community should be in a position to 

influence the national budgets.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT7

This morning we will have the privilege of hearing from some of 

the most important voices in the debate on the future of the Euro-

pean Union and on the future of European economic and monetary 

integration. First of all, we will have the honour of hearing from 

President Barroso, who has, this time, addressed a video message 

to us. It will be a follow-up of what he was saying recently, speak-

ing about the deepening of economic governance in the European 

Union, and in the eurozone as a single currency area.

I. 
Opening session

José Manuel Barroso
Androulla Vassiliou
Anni Podimata

10

European economic governance 
in an international context

Ladies  and  gentlemen,  as  many  of  you 

will know, the Jean Monnet programme is 

very close to my heart. As a young scholar, 

I  myself  participated  in  many  European 

academic  programmes  and  exchanges. 

I always  do  my  very  best  to  attend  your 

conferences, not least because I find them 

as enjoyable as they are intellectually stim-

ulating. Very sadly, today events have con-

spired against me and unfortunately I can 

only be with you through this video mes-

sage.  I hope  to  compensate  my  absence 

with some good news for you. I am pleased 

to tell you that yesterday the Commission 

adopted  new  proposals  to  reinforce  the 

Jean Monnet programme in the next finan-

cial framework programme. This is a clear 

demonstration of our sincere commitment 

to the Jean Monnet programme.

José Manuel Barroso
President of the European Commission

Ladies and gentlemen, the topic we have 

chosen for this year’s Jean Monnet global conference could not 

have been timelier. As we are still fighting one of the worst crises, 

probably the worst, since the start of European integration, and we 

are also fighting its consequences on the eurozone in particular, 

we need both firemen and architects. We need to see the urgency 

and respond to the urgency of the situation, but we also need to 

lay down foundations for a stronger euro area and European Union 

for the future.

The world around us is changing fast, and Europe needs to change 

too  if  it  is  not  to  be  left  behind.  In  our  globalised  world,  more 

Europe, and not less Europe, is more essential than ever, so that 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT11

we can preserve our way of life, protect our values and promote 

the prosperity of our citizens. And I believe that more Europe is also 

important for the rest of the world. In the age of globalisation, the 

world needs a stronger Europe more than ever. Together with our 

Member States and the other European institutions, we have been 

at the forefront of developing a collective and common European 

response to the crisis. The reality is that there is still much to do. 

We need to build a strong and sustainable recovery on sound foun-

dations. To restore confidence we need a Union of responsibility, but 

also of solidarity. We need banks that are able to lend and govern-

ments that are able to borrow, companies that are willing to invest 

and consumers who are willing to spend. We need bold reforms at 

a national level accompanied by enhanced cooperation and govern-

ance at the European level.

For that to happen, for this stability Union and this solidarity Union 

to happen, we need more discipline and also more convergence. We 

clearly have to focus our efforts on enhancing stability and conver-

gence between the 17 members of the eurozone. But we have to 

be sure that it will be done without damaging the interests of the 

European Union as a whole and all its 27 Member States. There 

is no time to waste if we want to prevent Europe from suffering 

a lost decade, to get out of the crisis stronger and also more united. 

The reality is that the cost of deferred action has already been 

very high. The cost of non-action, as I’ve said already, is fragmen-

tation; it could ultimately be disintegration, and this would be an 

unbearable cost for all of us. Therefore, it is essential to get on 

with implementing the important decisions already taken and to do 

everything we can to ensure the stability of the eurozone and the 

future of the European Union. This is needed, and leadership is pre-

cisely to ensure that what is needed is done. It is in this spirit that 

yesterday the Commission adopted further proposals to enhance 

our economic governance within our existing treaty framework. As 

Europe is at a crossroads, fresh ideas from other European actors 

and friends and a renewed commitment to the European project 

are more necessary than ever. I am sure that your conference will 

bring some of these ideas. I wish you very fruitful work, and I do 

hope I can look forward to being with you next year. I wish you 

every success.

12

Jan Truszczyński

Let me thank President Barroso for these inspiring remarks and 

let  me  now  introduce  our  next  keynote  speaker,  Commissioner 

Androulla Vassiliou, Commissioner for Education, Culture, Multi-

lingualism, Sport, Media and Youth. In all these capacities she has 

the political responsibility and accountability for making policy in 

all of these fields at the European level, including in the field of the 

Jean Monnet actions. As President Barroso has just remarked, her 

proposals found acceptance and support yesterday at the  College 

and  were  transformed  into  a draft  legislative  proposal  for  our 

 Member States and for the European Parliament in the context of 

the Jean Monnet actions.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT13

European economic governance 
in an international context

Thank you Jan, and good morning ladies 

and gentlemen, distinguished participants. 

In  his  video  message,  President  Barroso 

underlined that in this crucial moment of 

European integration, we would need both 

firemen for ad hoc solutions and architects 

for  a  systemic  impact.  With  his  words, 

he  set  the  scene  for  our  conference  and 

I am convinced that today and tomorrow 

proposals  for  immediate  solutions  and 

long-term perspectives will be made and 

discussed. I would also like to thank Vice-

President  Anni  Podimata  from  the  Euro-

pean  Parliament.  She  has  always  shown 

strong commitment to the European pro-

ject, and I greatly appreciate her presence 

here today. It is equally an honour to have 

among us this morning Professor Mundell. 

His groundbreaking work on exchange rates 

and currency areas has underpinned much 

of the reflection that led to European mon-

Androulla Vassiliou
Commissioner for Education, Culture, 
Multilingualism, Sport, Media and Youth

etary union. We are all very eager to hear his views on the current 

situation. But all of you here, in this room, in your respective fields 

of expertise, contribute to the effort of building a stronger Europe 

and a more prosperous world. I would therefore like to thank you all 

for your participation.

I do not need to tell you that these are challenging times. We all 

know that the European Union is going through one of the most 

serious crises since its creation. The euro is a pillar of our Union. 

When it is threatened, our Union and its ability to move forward 

are also threatened. This is due to the nature of the euro project. 

The euro was not born as a purely political project, but also as a 

14

mechanism designed to realise the dreams of the European ideal-

ists. Neither was it a purely technocratic project. The creation of the 

euro certainly responded to an acutely felt economic necessity: that 

of creating monetary stability, leaving behind the financial chaos 

of the seventies and eighties, and putting Europe’s growth trajec-

tory on a more stable footing. It also responded to another deep-

seated aspiration: the vision of an ever-closer union of the peoples 

of Europe. It marked a great political and economic step towards it, 

and was recognised as such by all.

It has remained a work in progress though; unfinished business 

to the extent that the politics of European economic integration 

lag behind the accomplishment of formal monetary union. Now, in 

order to find a solution to the problems that beset the euro, the 

economic and political sides of the equation must be rebalanced. 

This is the burning topic you will debate today. European economic 

governance: the political mechanism needed to ensure good eco-

nomic progress.

Your contribution could not be more timely and more welcome. 

Actually in these times of economic and financial turbulence, I am 

convinced that the Jean Monnet programme has never been more 

relevant. I cannot imagine a more engaged and competent group 

than the Jean Monnet professors gathered here. Your sharp ana-

lysis gives us the independent critical view on European integration, 

which we need to hear in particular in times of crisis. In addition, 

the Jean Monnet network provides a much needed space for a truly 

trans-European reflection, above and beyond the debates of each 

Member State. This is a space that we need to preserve and enlarge 

if we are to avoid the risk of fragmenting into separate national 

positions, thus making it much more difficult to perceive where the 

European common good lies. This is of course not a risk we run 

here. Here we are among friends, new and old ones.

I am glad that Professor Sylvester Eijffinger and Paul Welfens will be 

addressing us this afternoon on the EU and euro governance. They 

were already among the protagonists of the 1998 Jean Monnet 

conference on the European Union and the euro. I am also delighted 

that Professor Fritz Breuss could again be with us today. Profes-

sor Breuss’ contribution at the conference 13 years ago showed 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT15

tremendous foresight. His treatment of fiscal federalism and his 

original proposal for the creation of a stabilisation fund read as if 

they had been written yesterday. The sharp pertinence of this ana-

lysis of 1998 underscores the importance of policymakers to listen 

carefully to the assessments made by the academic world, and 

that is precisely the function of these Jean Monnet conferences: to 

deepen the dialogue and mutual understanding between the policy-

makers and the flourishing community of expert academics.

When I say flourishing, I am notably referring to the application 

figures  of  this  year.  I am  very  glad  that  university  demand  for 

Jean Monnet support continues to be so high, with 617 Jean Mon-

net applications; a further 10 % increase compared to 2010. The 

Jean Monnet action is once again the most successful activity in 

the lifelong learning programme. With a 2011 selection, four new 

countries have been added to the Jean Monnet network, bringing 

the total number to 72 countries. And the quality of Jean Monnet 

projects is simply outstanding. This is not my assessment; it comes 

from the independent assessors of this action.

We can only be extremely pleased with such a healthy and dynamic 

state of play, and this comes in addition to the highly praised work 

at renowned institutions like the European University Institute and 

the College of Europe. I am proud to say that they have also found 

their rightful home in the Jean Monnet programme.

I am committed to ensuring that our Jean Monnet activities con-

tinue to prosper well into the future. I believe this is of vital impor-

tance. From the start, the basic idea underlining the Jean Monnet 

action was both functional and political. On the functional level, 

Europe needs lawyers, economists and other professionals who 

understand the acquis communautaire and are able to apply it. 

On the political level, the European Commission is convinced that 

knowledge and awareness of the workings of the EU are essential 

to promote a sense of involvement in Europe’s development. There-

fore, I am happy to take advantage of this occasion to confirm our 

support to your work. As President Barroso has already mentioned, 

the Commission yesterday has formally presented its future pro-

gramme for education, training and youth for the period 2014–20, 

and the Jean Monnet activities are a key part of it.

16

Our proposal aims to take on the challenge of the Europe 2020 strat-

egy, and to ensure its vision for the future: a future where Europe is 

back to the track of long-term growth and job creation. If we want our 

economy to prosper and grow, we need to ensure a steady supply of 

highly-skilled workers, and we need to mobilise the skills and compe-

tences of the unemployed. This is why we have proposed increasing 

the EU budget for education, training and youth for the multiannual 

financial period of 7 years. The new programme will be simplified and 

made stronger, and the Jean Monnet support will continue as a sep-

arate activity within the programme. Future Jean Monnet  activities 

will focus on promoting teaching and research on European integra-

tion worldwide, notably through the continued expansion of Jean 

Monnet chairs and other academic activities. Whilst we will certainly 

not forget the need to continue our support for European integration 

studies in the Member States, we will give particular attention to spe-

cific geostrategic areas in line with the priorities of EU external action.

Let me briefly highlight four areas where I would like to focus our 

future work with you. First, I want to ensure the participation of 

a new generation of professors and researchers in Jean Monnet 

projects. We need your high-quality teaching and research on Euro-

pean Union topics to continue in the future. This is why I call on you 

to strongly encourage your younger colleagues to apply for Jean 

Monnet projects.

Second, European integration now touches all areas of society. This 

should be reflected in our educational curriculum. I therefore want 

Jean Monnet programmes to reinforce European integration studies 

in faculties not traditionally involved in the subject. Of course, such 

models would have to be targeted to meet the specific needs of the 

students in question.

Third, I believe that it could be beneficial to create a Jean Mon-

net label of excellence for those institutions interested in securing 

recognition of the quality of their European integration study pro-

grammes. Our new programme will provide us with a legal base to 

move in this direction.

Fourth, we are emphasising the think tank capacity of the Jean 

Monnet professors network. For the first time the proposed legal 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT17

basis makes an explicit reference to the Jean Monnet network’s role 

in promoting policy debate and exchanges between the academic 

world and policymakers on EU policy priorities. I want to stimulate 

the openness of higher education to societal needs and the greater 

outreach of academics to civil society, for the mutual benefit of 

both.

Ladies  and  gentlemen,  the  European  construction  is  facing 

momentous  challenges,  even  beyond  the  economic  and  finan-

cial crisis: an ageing population; threats to the environment and 

to energy supplies; migration; internal and external security; the 

fight against terrorism; and the competitiveness of Europe in a glo-

balised world. These challenges and the transformations they will 

trigger will have a fundamental impact on the lives of people both 

in and outside the European Union. The changes that the younger 

generations will see in their lifetimes are likely to surpass anything 

we have seen in our own. We need to solve the problems of the 

euro area effectively and swiftly because of the danger they pose 

to our Union, and because there are so many more fundamental 

problems that we also need to tackle. And we will only be able 

to tackle them if we will finally build a Europe that punches its 

full weight both economically and politically. In facing these chal-

lenges, I am convinced that the Jean Monnet network will continue 

to make a significant contribution.

Thank you once again for your presence, and for your commitment. 

I wish you a fruitful conference, and of course I look forward to the 

continuation of our cooperation.

Jan Truszczyński

We now move from the European Commission to the European Par-

liament. The European Parliament, as we all know, has been and 

remains a strong supporter of the Jean Monnet actions. The Euro-

pean Parliament, which is the lawmaker on all of the secondary 

legislation aimed at improving the performance of economic and 

monetary union, is a driving force in the entire debate on the future 

of European economic and monetary governance. For all of these 

reasons and more, it is a great privilege to welcome Anni Podimata, 

Vice-President of the European Parliament.

18

European economic governance 
in an international context

Anni Podimata
European Parliament

I would like to thank you for inviting me to 

participate, and to congratulate Commis-

sioner Vassiliou for taking the initiative to 

organise this conference. Under the inspir-

ation and guidance of the Jean Monnet pro-

gramme and with the contribution of many 

distinguished speakers, some of whom are 

the most reputable Members of the EP and 

who helped draft and negotiate the six-pack 

regulation, this conference will enrich and 

open  the  debate  for  innovative  ideas  on 

economic governance and also on how we 

will deal with the current crisis.

As Mr Barroso pointed out, this has become 

a systemic crisis. Its systemic character is 

not only linked to the interconnected nature 

of the banking services, its systemic char-

acter also challenges our decision-making 

process at the national, EU and global level. 

It challenges the credibility of our political 

systems and of our representative institutions.

Ladies and gentlemen, despite delays in the decision and imple-

mentation process, delays and deficiencies that have been early 

appointed by the EP, I believe that important steps have been taken 

to strengthen the provisions of the stability and growth pact, to 

further  coordinate  national  budgetary  policies  and  to  enhance 

the cooperation of macroeconomic policies. Moreover, as you very 

well know, the EU Councils of July and October have reached sig-

nificant decisions on strengthening the EFS mechanism and on 

dealing with the great crisis. But also, as you are fully aware, we 

need to do more, more quickly, in order to be able to reverse the 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT19

impression that we do too little too late. In other words in order to 

regain — this is something that we repeat very often now — mar-

ket confidence.

I would like to point out though that equally important, if not more 

important, is the task of regaining European citizens’ confidence. In 

order to do this I believe that we should make sure that we do not 

simply deal with the symptoms of the crisis but also address the 

underlying causes at the national, EU and global level. Undoubtedly, 

responsible fiscal policy and sustainable public finances are essen-

tial to stabilise and strengthen the common currency. I believe 

though that it is equally essential to deal with the inefficiencies of 

a largely unaccountable financial system that does not serve the 

real economy and increases inequalities. But I believe it is also true 

that our fiscal deficits have sometimes led to deeper democratic 

deficits: our citizens often feel more and more powerless, less and 

less represented by European institutions and political parties. They 

have lost faith in the EU because too many decisions are made 

behind closed doors by small groups of powerful leaders through 

processes that are not always transparent.

Let me make reference to the recent results of a Eurobarometer 

survey, according to which, throughout the recent crisis, EU citi-

zens have developed a rather negative attitude to the EU’s added 

value and have a clear and identifiable feeling that European lead-

ership is missing while extremism and nationalism are present in 

almost all Member States with rising tendencies. But on the positive 

side, European respondents of the same survey say they are still 

expecting a strong European response to the crisis. So this is clearly 

what they are expecting from us; they want us to deliver. And the 

question is how? How to deliver? And I have a few answers to this 

question.

I believe that we can deliver by making a shift from the intergov-

ernmental  to  the  community  method,  because  the  community 

method combines efficiency, balance and democratic legitimacy. 

That implies full involvement of the European Commission and of 

the European Parliament during the whole decision-making process. 

By ensuring a balance between the necessary fiscal consolidation 

and growth enhancement, making stability in public finances not 

20

the ultimate objective but a tool in the long-term objectives of 

job creation, growth and sustainable development, a tool in the 

achievement of EU 2020 goals. Ensuring strong taxation coordin-

ation across Europe is one of the basic pillars of stronger fiscal 

and economic coordination. By embracing ambitious policy instru-

ments, such as the long-anticipated proposals on eurobonds, or the 

stability goals as the European Commission named them in yes-

terday’s announcement and which were very much welcomed. As 

Mario Monti pointed out recently, it is clear that there is  enormous 

work ahead of us and I firmly believe that if we manage to deal ef -

fectively and efficiently with all these priorities we do have a chance 

to successfully overcome this crisis, to restore calm and confidence 

to the markets and, again most importantly, to European citizens. 

And then, most probably, we will have the appropriate conditions 

in place in order to open a discussion on eventual treaty change. 

And this is, I believe, the right order to proceed. After all, as Monnet 

pointed out, I believe and agree that European integration will not 

happen with one big bang but in a step-by-step process.

Jan Truszczyński

I now have the great honour of introducing Professor Mundell and 

recalling the milestones of his academic career. Dr Mundell is Uni-

versity Professor of Economics at Columbia University in New York. 

Known as the father of the theory of optimum currency areas, he 

was actively involved in the European monetary unification from 

the early stages. In 1970, he acted as consultant to the European 

Monetary Committee and, in 1972–73, he was a member of the 

team who prepared one of the key reports on European monetary 

integration after the end of the Bretton Woods regime. In 1999, he 

received the Nobel Prize in Economic Sciences, and this is just the 

most well known of a series of prestigious awards. After receiving 

the Nobel Prize, Professor Mundell remained an engaged commen-

tator of European monetary affairs and edited a book entitled The 

euro as a stabilizer in the international monetary system. I should 

add that it was published in 2000! Sir, it is a great honour to have 

you here with us today. May I kindly ask you to offer your keynote 

address.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXTII. 
Keynote speech

Robert Mundell

22

Keynote address

It is a great pleasure for me to speak at 

the Jean Monnet Centre and in the Charle-

magne building, which has so much history 

attached to it. I have admired Jean Monnet 

as a great friend of the United States and 

one of the founding fathers of European 

unity.  I  mention  the  United  States  here 

because I have lived in that great country 

for much of my working life and will draw 

somewhat on its unique experiences when 

it was, like the EU today, a confederation 

groping with the need to press forward with 

deeper political integration.

In my remarks today I want to ramble over 

a number of issues all connected in some 

way with the current crisis of the eurozone 

and the direction political reform should 

take. At the outset I think I should empha-

sise  that  I  do  not  share  the  widespread 

view that the crisis is a problem of the euro, 

but rather it is a crisis of fiscal solvency of 

some  countries  in  the  eurozone  and  the 

Robert Mundell
Winner of the Nobel Prize in Economic 
Sciences; University Professor of Economics 
at Columbia University; father of the theory 
of optimum currency areas

challenge is to find a way of allocating fiscal responsibility and 

sovereignty between the eurozone leadership and its constituent 

nation state members.

Trichet’s Aachen speech

In his Aachen speech on 2 June 2011, Jean-Claude Trichet of the 

ECB proposed central EU control of national budgets as the means 

of imposing discipline on countries that failed to keep their public 

finances in order. His question was this: in this Union of tomorrow, or 

of the day after tomorrow, would it be too bold, in the economic field, 

with a single market and a single central bank, to envisage a minis-

try of finance of the Union? He continued by saying that this could 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT23

possibly involve a transfer of power to the central authority in the 

field of taxation, although he was not completely committed on that.

Would a European minister of finance solve Europe’s problem? The 

answer would depend on his powers. Suppose he had the same 

power as the Secretary of the Treasury of the US. He would have 

power over the federal budget, but none at all over the budgets 

of the individual states. This would be quite a lot of power in the 

US because the federal budget is more than 20 % of GDP. But in 

Europe the central budget is only 2 % of GDP and that would be 

hardly any help at all.

A minister of finance in Europe would contribute to a solution only if 

he had power to control the budgets of the sovereign nation states. 

As Trichet fully realises, this is a delicate political issue intimately 

connected with the issue of where sovereignty lies. The nation states 

could voluntarily cede that control over their budgets individually but 

could not be coerced without agreeing to a new treaty. Should the 

new treaty specify new powers of the central government that would 

shift functions now controlled by the nation states to a federal gov-

ernment or should it merely shift watchdog control or discipline over 

nation state spending and taxing to a federal authority? To make 

the point clear, should the functions of and revenues for big-budget 

items like social-support entitlements and defence be reallocated to 

the central state or should the central state merely have supervisory 

control or veto power over budgets, spending or taxation?

American experience

The formidable issue facing the constitutional convention in Phila-

delphia in 1787 was the issue of where sovereignty lies. The con-

ventional wisdom then was that sovereignty had to reside in one 

place, such as a king. America had had enough of the king and 

wanted sovereignty to rest with the people. After the 1783 Treaty of 

Paris ending the Revolutionary War, the 13 states were formed into 

a confederation that was in some respects similar to the EU today. 

The ‘Union’ part in the name of the EU is a hope rather than a fact.

Confederations have a bad reputation. They move on to a feder-

ation or self-destruct. This was in the minds of the 13 states that 

24

met in Philadelphia in 1787. Defence was an obvious pressure. The 

possibility that the 13 states might form three unions, not one with 

a north-eastern wing, a southern wing and a western wing, was 

an ever-present danger. The need for a common currency, perhaps 

a central bank like England and France and Holland, regulation 

of the free trade among the states and the potential for Ameri-

can expansion to the west were important issues. The support of 

Thomas Jefferson, the brilliant lobbying in the federalist papers 

authored (anonymously) by James Madison and Alexander Hamilton 

and above all the supportive father figure of General Washington, 

the hero of the revolution and ‘first in the hearts of his countrymen’ 

presiding over the Philadelphia Constitutional Convention, won the 

day, setting up the inaugural term of the United States to begin on 

schedule in March 1789.

Europe already has its euro currency, its monetary union (albeit 

with 10 members left out) and its central bank, so what interests 

us most here is the consolidation of state debts in a US public 

debt. One of the stumbling blocks in achieving that debt consoli-

dation was the great disparity in debt ratios among the states, but 

Hamilton managed to finesse the issue with the argument (only 

partly correct) that the bulk of the disparities were produced in 

the interests of a common cause, the finance of the Revolution-

ary War.

After  the  consolidation  in  1792,  the  states,  which  were  sover-

eign over their own debts, could start with a clean slate of zero 

debt and were free to rebuild them. They did so but over a long 

period of time. About 50 years later, in the deflationary years of 

the late 1830s and early 1840s, several states defaulted on their 

debts. The largely British creditors asked their own government to 

assume responsibility for the debts but the latter pointed out that 

the states were sovereign entities with respect to their debts and 

left it up to the creditors to solve their own problems. The possibility 

of bailouts became a big issue in the United States but in the end 

the federal government left the problem up to the individual states 

to solve. Of the eight states involved (plus Florida which hadn’t yet 

become a state), three states paid almost everything, other states 

shared the losses with their creditors and two states went to out-

right repudiation.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT25

As it turned out, the states which were able to pay in full did so by 

tapping a new source of taxes — the property tax. Those states 

which defaulted in whole or in part already had property taxes, and 

thus could not access this feasible new source of revenue.

The defaults did not have any noticeable effect on the dollar (the 

US was theoretically on a bimetallic standard, but after the increase 

in the legal bimetallic ratio to 16:1 in 1834, overvaluing gold, it 

was on a de facto gold standard). The problem states were all able 

to come back into the bond market in a few years. There have not 

been any bailouts since. It remains to be seen, however, whether 

historical precedents would be enough to resist intervention in 

heavily indebted states like California and Illinois today.

The EU not initially a fiscal union

The Maastricht Treaty contained a no-bailout clause (clause 103) 

but it was overridden by another clause (clause 104) which con-

doned help to a state in trouble. Once the ice was broken, it became 

generalised. The problem was that many nation states, like espe-

cially Belgium, Italy and later Greece, were allowed in the Union 

with debt–GDP ratios far above the Maastricht levels. It was widely 

believed (and I believed it too) that a unique political moment in the 

integration of Europe had to be seized in 1999, and failing which 

the momentum of European integration would be lost and Europe’s 

bicycle might come to a stop and fall over.

After Greece joined — a country with one third the GDP per capita 

of its northern partners — the issue of a potential default was 

widely discussed. Greece was not the only problem. Belgium, the 

very  centre  of  the  EU,  had  a debt–GDP  ratio  even  higher  than 

Greece and Italy. Belgium would have to be saved, but if Belgium, 

a rich country, why not Greece, a poor country?

The global boom of 2002–08 — arguably the greatest the world 

has ever experienced — put these problems on hold despite the 

fact that little progress was made to scale down the debts of the 

problem countries. But this optimism came to an end with the hous-

ing crash and the financial crisis that struck the United States in the 

summer and fall of 2008.

26

The soaring dollar against the euro in the summer and fall of 2008 

aggravated the recession and brought on the insolvencies of sev-

eral of the top financial institutions in the United States. The strong 

dollar delayed the spread of the recession to Europe but when it 

came the increased budget deficits put the high debt-ridden coun-

tries on the brink of insolvency. The first bailout, a EUR 110 billion 

loan from the eurozone countries and the IMF to Greece, was made 

in May 2010, followed up by the creation of the European Financial 

Stability Facility with a comprehensive rescue package of EUR 750 

billion in the same month, with large amounts being dispensed to 

Ireland and Portugal. In the next year interest rates of large coun-

tries like Spain and Italy had raised the stakes and revolts against 

austerity had put the solidarity of the eurozone in doubt.

Whatever current measures are adopted to resolve the financial 

crisis in Europe, the eurozone must find a solution to the problem 

of achieving fiscal discipline in the individual states. There is no 

point to a grand strategy like debt consolidation or eurobonds if it 

does not fix the accountability and responsibility for deficits of the 

fiscally weak countries.

We know that there are two corner solutions. One is to restore the 

fiscal and debt independence of the nation states, playing hardball 

with respect to bailouts and taking away the immoral hazards of 

soft budget constraints. This was the direction the Americans took 

in the years between the creation of the United States and the Civil 

War (but we don’t know if it will still work for the 21st century). 

The other corner is to move forward towards a strong central state 

with a ministry of finance that has control over national budgets as 

proposed by Trichet.

Ten years ago I would have been emphatically in favour of the first 

choice, on the principle of subsidiarity, decentralising decision-

making and self-accountability. But I am not sure that today it is 

any longer possible. There is hysteresis. The steps taken during the 

current crisis have foreclosed on some options that might have 

been possible before the crisis. But it is also difficult to go forward 

toward increased centralisation because it requires a big shift of 

sovereignty to a central authority that does not yet exist. I wonder 

if there is any middle way.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT27

Eurobonds, eurobills and the European 
Central Bank

An argument can be made today that an EMU (or EU, but let us 

sidestep that question for the time being) public debt would be 

beneficial. Despite the current crisis the euro is one of the two 

most important currencies in the world and an alternative to the 

dollar as a reserve currency and anchor. But the lack of EU treas-

ury bills and bonds severely limits the power and usefulness of 

the euro as an international reserve currency. Buying individual 

national debts and bills of different degrees of solvency is a cum-

bersome alternative to the convenient and vast offerings on the US 

financial market.

This is not to say that becoming a reserve currency is an unmixed 

blessing.  But  the  eurozone  could  take  advantage  of  an  oppor -

tunity for a source of funding of trillions of dollars that would be of 

tremendous use in buying time to resolve the current crisis. It will 

continue to be way behind the curve in the global competition for 

bills and bonds used to finance international trade and payments 

and for use in official reserves as long as its bonds and bills are 

splintered into 17 national offerings.

But there is another argument for eurobonds and bills that can 

be made. Quite apart from tapping new sources of funds inter-

nationally, the consolidation of national debts into eurozone debts 

would contribute to the eurozone’s survival in its present con-

stituency. There is now some risk that at least one country might 

decide to leave the eurozone. That would probably be a calamity 

for the country in question, but it would to some small extent 

tarnish the reputation of the euro. If the crisis spreads, the project 

of European unity could be back for a long time if not undermined 

forever.

We know of course from American experience that the creation of 

a US public debt in 1792 was not an unmixed blessing. Only a cou-

ple of decades later, it had become a vexing enough problem to 

produce a remark by Jefferson who said, in 1810, thinking of course 

of Hamilton back in 1792: ‘And we were told that the public debt 

would be a blessing!’

28

Today these words might be echoed in nearly all of the democ-

racies in the world. Ever since the breakdown of the international 

monetary system in 1971, fiscal discipline went out the window. 

Keynes was right when he referred to the convertibility mechanism 

as ‘a means of strapping down ministers of finance’. Hamilton him-

self would be stunned today by the fiscal profligacy of democratic 

governments and onward march of fiscal deficits and debt ratios 

onward and upwards toward insolvency.

It must be acknowledged that there is some risk that debt con-

solidation could have a corrosive effect in increasing Europe’s 

debt–GDP ratio; the same political pressures that have pushed 

the debts of the nation state to unsustainable levels could infect 

the central government. You can see this process operating in the 

United States where the federal deficits are close to record highs 

for a peacetime economy. To mitigate that, some restriction, per-

haps even at the constitutional level, should be placed on deficits 

and debt levels. It would of course also be necessary to impose 

an outright prohibition on further national debt issues and some-

thing close to a balance-budget requirement for each participat-

ing nation state.

What would be the ‘common cause’ argument for the creation of 

a eurozone debt? A euro-debt level of about EUR 9 trillion would 

have a great international market if the risks of a eurozone breakup 

could be allayed. It would be a good rival to the US debt, which has 

over USD 5 trillion held abroad. The creation of a eurozone pub-

lic debt would provide a strong incentive for non-members of the 

EU to join the eurozone and participate in the lower interest rates 

available to eurozone members.

The question is whether the creation of this debt would be at the 

expense of a surplus country like Germany. The equilibrium inter-

est rate on eurobonds would probably be somewhat higher than 

that on Germany’s debt, but not necessarily higher than it would 

be in the absence of debt consolidation and eurobonds in a situ-

ation where the eurozone crisis deepens. Taking into account the 

international market for eurobonds and eurobills the extra supply 

of international capital could keep interest rates on eurobonds at 

the international level.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT29

Finessing the problem of sovereignty

Now we turn to the issue of sovereignty and again we take a look at 

the American solution. It was the ingenuity of the American foun-

ders at the Constitutional Convention (May to September 1787) 

that they were able to cut the Gordian knot on the question of sov-

ereignty. The states wanted to be sovereign but federalists wanted 

sovereignty in the central state. The conventional wisdom of the 

late 18th century was that sovereignty could not be shared, and 

democracy was possible only in small republics; Rousseau had even 

said that the smaller the state the better. The Constitutional Con-

vention provided for divided and overlapping sovereignties, in con-

trast to saying that sovereignty had to reside in one place.

The United States was the first country to create a nation-sized 

democracy dividing sovereignty between the states and the central 

government. The powers not allocated to the central government 

were reserved for the states.

At first it might seem that this division of sovereignty might solve 

the  fiscal  problems  of  Europe.  But  the  division  of  powers  was 

associated with the means of financing them. The central govern-

ment had the responsibility for financing their mandates, and so 

did the states. But there was no arrangement for the central state 

to  assume  powers  over  state  spending  or  deficits.  What  could 

be achieved either by constitutional amendment or else quasi- 

usurpation was that the central government could co-opt for itself 

new functions like social security, income redistribution and medical 

entitlements that never existed when the constitution was set up.

The European system is to organise the welfare state spending at 

the nation state level, whereas the American system achieves this 

at the federal level. General government expenditure in both the EU 

and EM was slightly over 50 % in 2010, of which social transfers 

accounted for 43 %, or 21 % of GDP. If social transfers in Europe 

were shifted from the nation state to the central state level, the 

weight of the central government in Europe’s GDP would be at over 

20 % close to its weight in the US. Of course appropriate taxes 

would also have to be shifted from the nation states to the central 

governments.

30

Under these conditions, Trichet’s proposal of a European minister of 

finance would, if given the powers equivalent to that of the Secretary 

of the Treasury of the US, put European fiscal policy, from the stand-

point of its control over spending, in the same position as US fiscal 

policy. In Europe total government spending would be about equally 

divided between federal and nation state level, whereas in the US 

state spending would be considerably smaller than federal spending.

I raise this issue now to propose this shift in spending at the  present 

time, but to make clear that the share of sovereignty is pretty 

straightforward when it is accompanied by a shift in the share of 

spending mandates. But this is not the situation in Europe today. 

A shift of welfare state spending from the nation state to the fed-

eral level would involve a substantial redistribution of income from 

the richer to the poorer states. In the long run there may be much 

to be said for this redistribution on grounds of social solidarity but 

it was not part of the bargain made for entry into either the EU or 

EMU, and in any case it would be unfair to impose the burden of this 

redistribution all at once on one generation. If as I assume this shift 

of spending power to the central government is not politically feas-

ible at the present time, we have to see what headway can be made 

with a shift of authority without the shift of spending mandates.

A natural model is the IMF, with its 187 members including the 

17 EMU members. The IMF is an institution that imposes adjust-

ment policies as a condition of its aid, and it has a multiplier effect 

because private-sector lenders (e.g. the Paris Club or London Club) 

often require compliance with IMF conditions as a prerequisite to 

lending or debt rescheduling or forgiveness.

Suppose that Trichet’s eurozone minister of finance were suddenly 

interposed between EMU members and the IMF. To abstract from 

possible differences in expertise let us suppose that the relevant IMF 

staff is seconded to the euro minister of finance and that existing 

IMF policies are continued. This arrangement would give power to 

the EMoF without diminution of sovereignty from the nation states 

that has not already been given up to the IMF Board of Governors. 

But  actually,  the  individual  members  of  the  eurozone  affected 

would have reclaimed some sovereignty because they have a larger 

stake in EMoF decisions than they have in the IMF decisions. The 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT31

allocations of funds that would have been made by the IMF to their 

clients in the eurozone would now go through the EMoF.

Independent of an EMoF taking over some power from the IMF, 

there  could  be  a ceding  of  sovereignty  from  the  nation  states 

to a central government in exchange for better benefit against 

insolvency.

European political reform

Actions taken today can promote or derail the cause of European 

political integration. It is important to look at the political insti-

tutions to see the desirable paths for them to evolve. The main 

institutions are:

—  the Commission,

—  the European Council,

—  the European Parliament,

—  the electorate.

What Europe needs is:

—  an executive power,

—  an  upper  chamber  or  senate  that  serves  as  the  electoral 

college,

—  a lower chamber or assembly,

—  the electorate.

The Commission could be turned into the executive power with its 

cabinet/commissioners appointed by the president. The electoral 

college would appoint the president.

The  European  Council  representing  the  governments  could  be 

turned into the upper chamber or senate and electoral college with 

the vice-president as its chairman.

The European Parliament could serve as the lower chamber.

The alternative to an electoral college would be the general elec-

tion of the president. My own view is that in an area as diverse and 

32

heterogeneous as Europe it would be better to elect the president 

and vice-president through an electoral college by majority vote. 

The extra attention given to the general electors of the electoral 

college would create a level of excitement and interest far above 

that of a Europe-wide majority vote.

The executive would nominate the judiciary with approval by the 

senate. The executive makes treaties subject to ratification by the 

upper chamber, and it proposes bills subject to ratification by both 

chambers.

The president is the commander-in-chief with a special proto-

col for British and French nuclear weapons. The lower house or 

assembly  has  around  500  deputies  distributed  among  coun-

tries in proportion to population. Budget proposals initiated in 

the lower house must be accompanied by finance solutions. The 

Council of Ministers is expanded to the upper house and given 

certain special powers. In this model, with a total of 128 sen-

ators, countries with a population of over 80 million would have 

12 senators; 65 to 80 million would have 10; 50 to 65 million 

would have nine; 35 to 50 million would have eight; and so on. 

You would then have a framework for division which isn’t as rigid 

as that which determines the composition of the US senate and it 

would be a correction for disparities that exist in the senate, such 

as having two senators for Maryland, with a population of less 

than a million people, and an equal number for California with 

40 million people.

In the electoral college, which votes for the president and the vice-

president, each nation has electoral votes equal to the number of 

senators and representatives in congress. The presidential candi-

dates with the majority of votes get the entire vote of the nation 

state.

The European Commission is a very successful institution. It is nec-

essary to preserve some of its competence as a technical bureau-

cracy. Vice-ministers would be drawn from the civil service, but 

ministers would be members of the cabinet appointed by the presi-

dent with the approval of the senate.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT33

The international monetary structure

I would now like to make a few quick comments about the inter-

national monetary picture, which I believe has a great bearing on 

the future of Europe. In the world currency system, the biggest cur-

rency area is the dollar area, the second biggest is the euro area, 

the third biggest is the Chinese yuan area, the fourth is the Ja -

panese yen area and the fifth is the pound sterling (or the rouble). 

A major problem in world finance since the early 1970s has been 

the huge swings in major exchange rates.

All  the  major  systemic  crises  have  been  associated  with  large 

swings in the major exchange rates. Associated with these swings 

is a proliferation of crises including debt crises.

Over most of history since the invention of coinage, a kind of fixed 

exchange rate has characterised the monetary world because of 

the use of one or more of the precious metals as currency anchors. 

Currencies were names for different weights of the metals.

Whether the system was the gold standard or bimetallism or the 

Bretton Woods brand of fixed exchange rates based on the gold-

convertible dollar, monetary and fiscal policies were constrained 

by a hard budget constraint — at least in the middle run. If dur-

ing wars debt levels were run up, they were regularly brought back 

down after the war with surpluses invested into a sinking fund. If 

in the rare instance a country had a crisis or a large budget deficit 

there would be a run on its currency, and a currency crisis.

With the introduction of flexible rates, however, there came a very 

soft  budget  constraint.  It  was  thought  incorrectly  that  flexible 

exchange rates added another degree of freedom; this was true 

only if monetary stability were thrown to the winds. The only worry 

might be that you would end up creating inflation in the long run if 

you allowed too much money into the system, but you would not 

worry about the early warning system of a deteriorating currency. 

The Federal Reserve, for example, did not apparently worry about 

the depreciating dollar in the late 1970s and the two-digit inflation 

of the years 1979–81 came to it as a complete surprise.

34

You can see the analogy when a country like Greece gets into the 

euro with habits that it had formed in relation to what would hap-

pen to the drachma. When it got into the eurozone it could run def-

icits and pile up its debt level, polluting the debt pool of the whole 

euro area, without any constraint falling entirely upon itself.

Somehow, you need to keep discipline in the system. This has been 

a major problem for countries on flexible exchange rates leading up 

to all kinds of crises such as the sovereign debt crisis in 1982 start-

ing with Mexico and Poland, the savings and loan crisis, the Asian 

crisis and finally the 2008 crisis.

I was debating whether I should spend my short remaining time 

here explaining my theory of the great crisis in 2008. It is that, in 

the third quarter of 2008, the Federal Reserve, in the middle of 

a recession, let the dollar soar by 30 %, knocking down all those 

banking institutions with real estate debt vulnerability and creating 

the unprecedented bankruptcies or insolvencies of premier insti-

tutions like General Motors, General Electric and others. Allowing 

a 30 % appreciation of the dollar against the euro in a space of 3 

or 4 months was the major policy-caused problem that sent the 

financial system down.

Now we can see huge swings in the rate of the dollar to the euro. 

Under the Bretton Woods period, and even in the early 70s, the dol-

lar represented the mainstream of the world economy. Now, with 

the rise of the EMS bloc and its culmination in the single euro cur-

rency, the mainstream has been split into two parts with violent 

swings between them.

A  big  problem  now  is  the  absence  of  a universal  currency  and 

a global unit of account. John Maynard Keynes, in his A treatise 

on money, wrote about the importance of the unit of account. The 

first line in his two-volume work reads: ‘The unit of account is the 

most important function of money.’ This is very important in today’s 

world of international currencies. The euro is starting to become the 

currency for pricing certain things, such as airline fares, and you 

could argue that oil prices and the price of gold are more stable in 

euros than in dollars. It would be a shock to the system if oil prices 

began to be denominated in euros rather than dollars.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT35

Stabilising the dollar–euro exchange rate 
to reform the system

The big swings in the dollar–euro exchange rate have not been to 

the advantage of either the United States or Europe. Both areas 

would be much better off with a stabilised rate and policy coordin-

ation  that  would  keep  the  balance  of  payments  in  equilibrium. 

If you stabilised the dollar–euro rate you would have an anchor 

for the global economy. There is no possibility of a genuine inter-

national monetary system with big swings in the exchange rates 

between the two biggest currency areas. However, if the rate was 

fixed you would have a zone of stability that would represent over 

40 % of the world economy. This could be the anchor for a global 

monetary system. You could build upon that with monetary coor-

dination and stability of the common price level of the two areas.

In the long run, a fixed exchange rate requires compatible monetary 

policies. As the (moving) band between them narrowed, there would 

have to be increased coordination of interest rates and quantitative 

measures. You can’t have any fixed exchange rate system in the 

long run without monetary coordination if there are two independ-

ent producers of money.

It is interesting to note that, for some time, the Chinese yuan has 

been tied to the dollar almost de facto, trending upward now and 

then.  In  1997–2005  it’s  been  fixed  to  the  dollar  and  after  that 

allowed to rise with a crawling peg until 2008. After that, with the 

dollar soaring the yuan was restabilised until the dollar returned 

to normal. My question is: could the yuan be part of the solution? It 

would be very easy to fix because China has found that a fixed rate 

with the dollar is the best way for a command economy to import 

the scarcity relationships of the rest of the world. The yuan would 

have to be made convertible and it would have to follow a monetary 

policy that brought about equilibrium in its balance of payments. 

The coordination of monetary policies in the dollar, euro and the 

yuan — what I call the DEY — would create a central core for the 

world economy, just by fixing two exchange rates and having policy 

coordination. You would then have 50 % of the world economy in 

that monetary reform, and other countries would have the benefit 

of a stable DEY bloc upon which they could fix their own currencies.

36

That is the way I think the world could go, looking outside the prob-

lems of just the euro area. It could move on from that to global 

monetary reform, creating a global currency and using the DEY cur-

rencies as the anchor for it. The euro-dollar could then become the 

central pivot for a restored international monetary system. A world 

currency, the INTOR, based on the euro-dollar as an anchor pivot, 

could be created for the IMF system as a whole in which every 

member of the Fund would share. It may be something which will 

materialise over the long term, but it is something that is neces-

sary. It is not just ivory-tower academics that think so. Paul Volcker, 

the former chairman of the Federal Reserve and former advisor to 

Obama, has uttered what I call the Volcker imperative: the global 

economy needs a global currency.

Concluding remarks

I am now going to sum up what I have said. Great benefits could 

be achieved by the creation of a European ministry of finance, 

with some authority over the spending and deficits of the nation 

states. Great gains can be got for the euro area by the creation 

of eurobonds and eurobills, but it would be dangerous to create 

them without putting ceilings on government spending and deficits. 

Bringing the future to the present, the centralised fiscal authority 

should be put into place at an early date, eurobonds could follow, 

and in the interim, the ECB’s firepower and tools for maintaining 

price stability could be built up.

It seems likely that the ECB will on occasion have to intervene in 

some markets to prevent insolvency when interest rates rise to 

dangerous levels over or at 7 %. ‘Discount freely in a crisis’, Bagehot 

said. The choice might be that either the central bank intervenes, or 

the eurozone breaks up. The problem with intervention by the ECB 

to avert insolvency is that the amount of intervention might conflict 

with the ECB’s mandate to give priority to macroeconomic stability 

and in particular inflation rate stability.

Some  degree  of  expansionary  monetary  policy  on  the  part  of 

the European Central Bank is necessary for a solution to Europe. 

My own view is that the European Central Bank has been erring 

substantially on the side of being too tight in the context of the 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT37

deleveraging crisis Europe has been in. The Federal Reserve has 

gone far beyond what the ECB has done in satisfying the demand 

on the part of the banks for excess reserves. We are all aware of 

course of the ECB’s mandate to avert inflation. But some risks have 

to be taken to avert insolvencies, which, theoretically, could result 

in higher inflation than otherwise. I’m suggesting here not a big step 

to inflation but a temporary movement up of inflation targets to say 

3.5 %. That kind of shift could do much to relieve the situation and 

start a speedier recovery in the euro area.

I think that Europe should have a somewhat more expansionary 

monetary policy. But there is a possibility that the monetary expan-

sion resulting from support for a particularly weak national bond 

market may exceed the rate needed for even a higher inflation 

rate. In this case, however, my suggestion is that the ECB can have 

recourse to a financial innovation that would let it support the bond 

market of a potentially insolvent country without causing excess 

inflation. The ECB could issue its own bonds to keep ‘bailout policy’ 

in line with monetary stability, in effect to sterilise the some of the 

monetary effects of bailout policy.

Other central banks have done the same but in a different context. 

Which banks? The answer is China. The PBC issues its own bonds to 

mop up any excess reserves created by the purchase of dollars in 

the foreign exchange market to keep the yuan from appreciating (or 

from appreciating at too fast a rate).

ECB bonds would add a new instrument for preventing inflation. 

Suppose for example, EUR 400 billion is needed to avert a solvency 

crisis. But only EUR 200 is needed for monetary policy objectives. If 

the ECB had no other tools of stabilisation, it would have to restrict 

its intervention to what was needed for monetary policy alone. But 

with ECB bonds available, the ECB can go ahead with its EUR 400 

billion anti-insolvency intervention, and then sell EUR 200 billion 

of ECB bonds to sterilise the excess inflationary component of the 

intervention.

Ultimately, ECB bonds are debts of the European Union. Eventually, 

when Europe creates its own Eurobonds, these ECB bonds could 

be absorbed into the debt of the EU. But the ECB bonds could be 

38

useful instruments during the transition period before eurobonds 

and eurobills are established. There is an urgency for fiscal reform, 

but it seems hard to make such weighty changes quickly. But when 

we look back at what those Americans accomplished, back in 1787, 

it is astonishing to see how quickly they were able to act. Within 

a year or two of the Constitutional Convention, they had a first-rate 

government in place and in the last year of Washington’s first term 

as president, they had created a national money, a monetary union 

for 13 states, a central bank and a consolidated public debt. When 

the chips are down, there is much that Europe can do too.

Jan Truszczyński

Professor Mundell, on behalf of all those here today, allow me to 

thank you most warmly for this address. It was an excellent scene 

setter and I am sure that many people here will want to refer back 

to elements of the design proposals, or even to the entirety of the 

design which you formulated here today. Thank you very much.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXTIII. 
Safeguarding the stability 
of the euro area and the 
enhanced instruments 
for crisis intervention

Roberto Gualteri
Nikolaos Baltas
Daniel Gros

40

Safeguarding the stability of the 
euro area and the enhanced 
instruments for crisis intervention: 
political and institutional dilemmas

This  conference  is  taking  place  at  a  par-

ticularly appropriate moment for us to dis-

cuss the stability of the euro area. On the 

one hand, the sovereign debt crisis is get-

ting worse each day; on the other hand, the 

debate on enhanced instruments for crisis 

intervention  has  gained  momentum,  not 

only with the Commission Green Paper on 

stability bonds and the two new draft regu-

lations on strengthened budgetary surveil-

lance  in  the  euro  area,  but  also  with  the 

German request for a limited treaty change. 

As a member of the Constitutional Affairs 

Committee, I focus my intervention on what 

in this debate appears to be one of the main 

obstacles  to  an  adequate  reaction  to  the 

crisis: the limits imposed by the treaties on 

eurozone policies. In a few words, I will try 

to answer the following question: is the Lis-

bon Treaty the main obstacle to us reacting 

effectively to the crisis? Does the EU have 

an institutional problem, or a political prob-

lem? Both the Commission Green Paper and 

proposals, and Merkel’s request for a treaty 

Roberto Gualtieri
Member of the European Parliament 
and its Committee on Constitutional 
Affairs; Rapporteur on the setting-up of 
a permanent stability mechanism for the 
euro countries

change deal with this question, with different answers, but also with 

some common elements.

Before examining those answers, I wish to recall a recent exam-

ple  of  how  conflating  a  political  difficulty  with  an  institutional 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT41

obstacle may cause unnecessary problems, and waste time. One 

year ago, Germany said that the legal basis for the current EU sta-

bility mechanisms (EFSF and EFSM), that is Article 122(2) TFEU, 

was inad  equate and that we needed a treaty change. With the new 

simplified revision procedure, a new paragraph was introduced to 

Article 136, empowering the Member States (and not the Union) to 

establish the ESM. After 1 year, the treaty change is far from being 

ratified, the German Constitutional Court (BVG) has said that both 

the EFSF and the EFSM are completely legal, that is that Article 

122(2) provides an adequate legal basis, and after the 21 July deci-

sions the tasks of the EFSF have been stretched far beyond the 

limits imposed on the new ESM. The reasons why this treaty change 

was unnecessary have been clearly expressed in the European Par-

liament’s opinion, so I will not reiterate them here, but this story is 

a very clear example of what I will try to say.

The German request for a treaty change identifies the main limits 

imposed by the treaties as the insufficiently binding character of the 

provisions concerning the Stability and Growth Pact and the excessive 

deficit procedure. As far as we are aware, the German government is 

asking the EU to introduce simple majority voting in multilateral sur-

veillance, to allow the intervention of the CJEU in the excessive deficit 

procedure and to try to give the Commission the powers to interfere 

in the national budget procedure in order to enforce EU decisions.

I will not discuss whether those changes would have any positive 

impact on the crisis. Personally I consider the austerity therapy 

wrong and counterproductive, even if the EU needs stronger control 

of national fiscal policies and a drastic but sustainable reduction of 

its public debt, combined with a correction of its macroeconomic 

imbalances. Furthermore, the recently approved ‘six-pack’ has sig-

nificantly strengthened the SGP and made it more binding, and its 

impact in enhancing fiscal discipline appears to be widely underes-

timated, even by national governments and policymakers. However, 

here I concentrate only on the institutional dimension. Do the goals 

which are at the basis of the German request really require a treaty 

change? My answer is no. As the new draft regulations presented 

by the Commission show, and as the Parliament has been saying 

for a long time, the treaty offers many instruments for a stronger 

convergence of eurozone fiscal policies.

42

One is the result of Articles 5 and 136 TFEU, which allow specific 

measures to strengthen the coordination and surveillance of the 

budgetary discipline of eurozone countries. The two draft regula-

tions are a clear example of what I am saying, but the same pro-

cedure might be applied for introducing stricter rules and also for 

bypassing the limits imposed by Articles 121 and 126 TFEU on 

voting procedures and role of the CJEU, as those limits refer to 

the provisions of those articles and not to possible new provisions 

introduced under Article 136.

The second instrument offered by the treaties is the so-called 

flexibility clause under Article 352 TFEU, which allows the Union 

to give the EU institutions new powers which may prove to be 

neces sary to attain objectives set out in the treaties. Among those  

powers there could also be those of a new EU finance minister for 

the eurozone, or of a new debt agency. The limits to the interfer-

ence of this minister in the national budgetary procedure would 

depend more on the national constitutions than on the European 

treaties,  and  would  not  be  overcome  by  a treaty  change.  The 

BVG has granted the flexibility clause the same value as a treaty 

change. That means not only that it requires the same kind of 

vote by the Bundestag (but before and not after its activation), 

but also that it has no problems of constitutional legitimacy, and 

is in any case far more rapid than a treaty change. The main dif-

ference with a treaty change is that the flexibility clause requires 

the consent of the European Parliament, which is probably the 

reason why the Member States do not want to use it. The flexibility 

clause might also be associated with Article 136, activating it with 

the vote of the eurozone countries only, which would make its use 

even simpler.

The conclusion is that the treaty change proposed by Germany 

is legally unnecessary, economically insignificant and politically 

dangerous. Of course a fully fledged fiscal union would require 

a more ambitious treaty change, but the best way to prepare it 

and to make it more realistic is to start immediately to build up an 

eff ective fiscal union with the institutional instruments we already 

have. Among those instruments I do not include an intergovern-

mental treaty, which risks being the consequence of the difficul-

ties to get unanimity on a treaty change, but which would have no 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT43

practical effectiveness on economic governance, and would hardly 

go beyond what we already have with the ‘six-pack’.

This need for speed and effectiveness is even greater for the stabil-

ity instruments. In this respect the Commission Green Paper has the 

great merit of opening a true institutional debate on stability bonds, 

and to show clearly how much they would be useful and necessary. 

The Green Paper is very rich in detail, and I will not analyse the dif-

ferent options. I am not entering into the debate as to whether the 

full or the partial substitution system would be better. From the 

institutional point of view, the true difference is between a system 

based on joint guarantees and another based on guarantees which 

are not joint. It is clear that to implement the first option (joint guar-

antees) Article 125 TFEU is an obstacle, even if its second clause, 

which leaves open the possibility to specify the definitions in Article 

125 (and those in Articles 123 and 124), may open the same legal 

options, especially for the issuance of new bonds guaranteed by 

the Union budget.

But the Green Paper cleverly suggests a combined approach based 

on sequential steps, which may start with the immediate issuance 

of stability bonds, with several but not joint guarantees, and the 

partial substitution of national issuance. In the logic of the Green 

Paper, this first step, which does not require any treaty change, 

might prepare the most ambitious step of a joint guaranteed bond, 

given the time needed for a treaty change. The disadvantage of 

this option, apart from the political opposition of Germany, is that, 

especially if the tensions in the markets increase, it might not be 

sufficient, both in terms of credit quality and in terms of resources 

gained. What I would argue here is that the institutional issue could 

also be seen from a different perspective, not focusing only on 

Article 125, and that this different perspective may suggest some 

further options that are both quick to implement and economically 

effective.

Again, one should start to look at what we already have. We have 

Article 122(2), which is the legal basis of the current EFSF and 

EFSM, and which allows the Union to grant financial assistance to 

Member States seriously threatened by exceptional occurrences 

beyond  their  control.  This  legal  basis,  which  perfectly  reflects 

44

the current situation, might be used to implement two different 

solutions.

The first is the solution envisaged by the German Council of Eco-

nomic Experts, which is briefly examined also in the Green Paper, 

even if it is not listed among the main options. The German Council 

of Economic Experts proposes a temporary financing tool, a so-

called ‘debt redemption fund’, which would pool government debt 

exceeding 60 % and be liquidated once that goal is reached, but 

would be based on joint liability. This idea of eurobonds as a crisis 

tool rather than a permanent instrument would not only bypass the 

limits set by the recent ruling of the BVG and by the German consti-

tution, but would also fit perfectly with the particular legal basis of 

Article 122(2), perhaps requiring only the activation of the flexibility 

clause or even just a decision and a regulation under Article 122(2). 

The debt redemption fund would provide sufficient firepower to 

address a deterioration of the sovereign bond market immediately, 

and at the same time allow the time for more wide-ranging reform 

of the treaties in order to establish a permanent stability bonds 

system in the context of a fully fledged fiscal and democratic union.

A  second  option  based  on  the  same  legal  basis  would  be  the 

enhancement of the current EFSM, which as a Community instru-

ment is not guaranteed by individual quotas of the eurozone Mem-

ber States, but by the Union’s budget, more precisely by the (virtual) 

resources between the MFF and the limit of the own resources. 

Notwithstanding the fact that everybody seems to have forgotten 

it, the EFSM exists; it has not been put into question by the Ger-

man Constitutional Court. Its only limit is political, as it involves 

also the UK and the other non-euro countries, which guarantee with 

their share of the Union’s budget the issuing of bonds for the euro 

countries in difficulty. This problem might be overcome by a rebate 

system, while the problem of the quantity of resources could be 

solved either by increasing the limit of their own resources or by 

contributions of eurozone countries.

We have also a third option, less ambitious because based on lev-

eraging, but which could be also very effective: the transformation 

of the EFSF into a bank (as suggested amongst others by Dan-

iel Gros and Stefano Micossi), which would bypass the prohibition 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT45

of credit facilities with the ECB set out by Article 123(1) TFEU, as 

Article 123(2) says that the prohibition shall not apply to publicly 

owned credit institutions.

Of course, these considerations are only a first reaction to the new 

documents and proposals of the Commission, as well as to the 

leaks about the German plans for treaty change. But, coming back 

to the question I asked at the beginning of my intervention, the con-

clusion I would like to draw is clear. We don’t have institutional but 

political problems, and they will not be solved by a treaty change, 

but by the political determination to take action now, using in an 

intelligent way all the institutional tools we have, without losing 

more time. At the end of this process, the EU will need a compre-

hensive treaty change, but it will succeed and will be supported by 

the European people only if the political leadership demonstrates 

that it is able to save Europe from the worst crisis since the Great 

Depression by taking the necessary decisions now.

46

Safeguarding the stability of 
the euro area and the enhanced 
instruments for crisis intervention

Introduction

The sovereign debt crisis in the euro area 

during the spring of 2010 has revealed that 

the monetary and fiscal policy framework 

of the European monetary union (EMU) is 

still incomplete. Obviously, the rules-based 

framework for fiscal policy created by the 

excessive deficit procedure (EDP) and the 

Stability and Growth Pact (SGP) was insuf-

ficient to prevent a debt crisis despite its 

emphasis on keeping public sector deficits 

low  and  strengthening  forward-looking 

budgetary  planning.  Moreover,  once  the 

crisis occurred and financial markets were 

agitated by it, it became obvious that EMU 

did not have the policy tools to manage and 

resolve the crisis. In the end, the European 

Union responded to the crisis first by agree-

ing on stabilisation for Greece and then by 

creating the European Financial Stability 

Nikolaos Baltas
Jean Monnet Chair at the Athens University 
of Economics and Business

Facility (EFSF) that relatively succeeded in calming the markets. 

However, these responses were developed in an ad hoc manner and 

on a temporary basis only and do not provide a sufficient basis for 

dealing with any possible future debt crises in the euro area.

Several proposals have been put forward for how to improve the 

euro  area’s  capacity  to  deal  with  problems  of  excessive  public 

debts. In order to prevent sovereign crises, the European Commis-

sion (2010) has proposed a number of measures to strengthen 

the EDP and the SGP. These proposals focus mainly on making the 

rules of the current framework more effective and on strengthening 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT47

their enforcement by introducing stiffer and more automatic pen-

alties for violating these rules. The European Central Bank (ECB) 

has made proposals (2010) going in the same direction and, at the 

same time, has called for the creation of a crisis management fund 

for the euro area, which might encompass some lender-of-last-

resort characteristics (Gianviti et al., 2010).

The European Council of 28 to 29 October 2010 stated that ‘Heads 

of State or Government agree on the need for Member States to 

establish a permanent crisis mechanism to safeguard the financial 

stability of the euro area as a whole and invite the President of the 

European Council to undertake consultations with the members of 

the European Council on a limited treaty change required to that 

effect’ (European Council, 2010). There are also reports that the 

German finance ministry has been preparing a proposal for coor-

dinating the demands of bondholders in a sovereign debt crisis and 

imposing ‘haircuts’ on the face value of the debt of a government 

in financial distress. There have been several plans along similar 

lines, most notably by Gros and Mayer (2010) who proposed the 

creation of a European Monetary Fund (EMF) aimed at both improv-

ing crisis prevention and financing a mechanism for sovereign debt 

resolution.

The euro area needs a mechanism for dealing with sovereign debt 

crises in an effective and predictable way. Even the most sophis-

ticated and most effectively enforced set of fiscal rules will not 

eliminate the possibility of future debt crises in the euro area.

A new European economic convergence

Policymakers in Europe must now concentrate their action on at 

least three areas (Draghi, 2011).

First, they need to deliver the growth-friendly fiscal adjustments 

they have committed to implement.

Second, they need to focus on the structural reforms that Europe 

needs in order to boost potential growth; current problems in many 

countries stem as much from excessive debt as from the weak eco-

nomic growth expected in the years ahead.

48

Third, they need to agree on a thorough reform of European eco-

nomic governance. The crisis highlighted some major shortcomings. 

Fiscal rules and procedures have proved unable to deliver prudent 

policies: many Member States entered the crisis with an already 

high public debt and insufficient margins of manoeuvre. Moreover, 

macroeconomic imbalances were not given an adequate role in 

the design of EMU governance: tensions hit not only countries with 

problems of public finances, but also those with a high external 

deficit, unbalanced growth and/or a highly indebted private sector. 

Finally, an appropriate framework to safeguard the financial stabil-

ity of the euro area in crisis situations was missing altogether.

Reform proposals have been set out in all the three areas, by the 

European Commission and the task force, chaired by President Van 

Rompuy.

Concerning fiscal surveillance, the report of the task force states 

that ‘the debt criterion should be made operational to be effectively 

applied’. It is well known that, while the Maastricht Treaty requires 

countries with high public debt to reduce it ‘at a satisfactory pace’, 

this provision has never been effectively implemented. The report 

also envisages a wider range of sanctions, both financial and polit-

ical, to be applied progressively, starting at an early stage in the 

budgetary surveillance process, in order to strengthen the incen-

tives to comply with the rules in good times to avoid procyclicality 

effects. However, the procedures remain too lengthy.

With regard to the surveillance of macroeconomic imbalances, 

the task force proposes an alert mechanism, based on the ana-

lysis of macroeconomic and competitiveness developments, and 

an enforcement mechanism that includes sanctions if a country in 

‘excessive imbalance position’ does not comply with the Council’s 

recommendations. As the crisis showed, macroeconomic imbal-

ances  may  lead  to  unsustainable  development  and  dangerous 
spillovers to other countries (1).

(1)  See, for example, Giavazzi and Spaventa (2010).

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT49

A crisis management framework has to be designed so as to ensure 

appropriate incentives for countries applying for financial support 

and for private credit markets, in order to limit moral hazard. At 

the end of November 2010, the Eurogroup agreed on the main fea-

tures of a crisis management framework aimed at safeguarding the 

financial stability of the euro area as a whole. In particular, it has: 

(i) stressed that assistance will be based on a stringent programme 

of economic and fiscal adjustment and on a rigorous debt sustain-

ability analysis; (ii) clarified that the mechanism does not represent 

an unconditional bailing out and that there is always a possibility 

that private creditors may incur losses if the country concerned 

does not succeed in implementing the necessary adjustment.

The reformed stability and growth pact, the new excessive imbal-

ances procedure and the Euro Plus Pact will reinforce the economic 

and fiscal coordination and surveillance in the euro area and ensure 

that any deviation from the objectives set by these instruments are 

recognised and addressed at an early stage. This policy of preven-

tion will be crucial to the medium- and long-term stability of the 

euro area.

At the same time, establishing the EFSF and, from mid 2013, the 

European Stability Mechanism (ESM) will enable targeted interven-

tion if indispensable to safeguard the stability of the euro area 

as a whole — always subject to adequate conditionality. Member 

States which benefit from the EFSF undertake considerable efforts 

to tackle the causes of the crisis — principally excessive public debt 

and a lack of competitiveness — effectively.

All the Member States of the euro area have committed themselves 

to swiftly reducing their deficits, achieving balanced budgets in the 

medium term and implementing the structural reforms required to 

enhance the competitiveness of their economies on a sustainable 

basis, namely:

1.   Strengthening the governance of the 

euro area

All the decisions taken in the last year are aimed at enhancing sta-

bility and fostering growth in all Member States. In order to support 

50

this process, the euro area needs to strengthen and streamline its 

institutional framework to reinforce the efficiency of its decision-

making process and to promote the coherence of its institutions 

and procedures.

2.   Enhanced surveillance and integration 
of budgetary and economic policy

Economic and monetary union needs to be based on an even closer 

coordination of national budgetary and economic policies.

It should be further enhanced through the following proposals.

—  All Member States of the euro area will incorporate a balanced-

budget fiscal rule into their national or constitutional legisla-

tion. The fiscal rule should implement the objectives of the SGP 

and ensure that every Member State of the euro area achieves 

a balanced budget as soon as possible. Therefore, it would 

ensure a sustained reduction of the debt ratios in the case 

they exceed the reference value (60 % of GDP). In line with the 

revised SGP, all Member States of the euro area whose debt 

level exceeds the reference value must present an adjustment 

path for reducing their debt below the reference value.

—  All Member States of the euro area should confirm without 
delay their resolve to swiftly implement the European recom-

mendations for fiscal consolidation and structural reforms, 

especially as regards the labour market, competition in services 

and pensions policy, and adapt their draft budget appropriately.

—  In line with the Euro Plus Pact, euro area Member States should 

take all the necessary measures to improve competitiveness, 

foster employment, ensure the stability of the euro area as 

a whole and deepen economic integration. In particular, further 

progress should be made on tax policy coordination to support 

fiscal consolidation and economic growth.

—  Structural and cohesion funds should be used to support essen-
tial reforms to enhance economic growth and competitiveness 

in the euro area. The European Commission should automati-

cally check to ensure that structural and cohesion funds pro-

vide the optimum support for the macroeconomic adjustment 

programme, and they should be involved in the selection and 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT51

implementation  of  projects.  In  the  future,  payments  from 

structural and cohesion funds should be suspended in euro 

area countries not complying with recommendations under the 

excessive deficit procedure.

Concluding remarks (2)

In summary, it has been shown that the euro area requires:

First, a stronger commitment on the part of countries to effectively 

prevent the pursuit of unsustainable fiscal policies and the emer-

gence of other harmful macroeconomic developments.

Second, if imbalances in public finances, significant losses in com-

petitiveness or excessive macroeconomic imbalances nonetheless 

emerge, robust corrective mechanisms must come into force. There 

must be an appropriate degree of automaticity to ensure that these 

mechanisms are not open to wide interpretation or to undue polit-

ical discretion.

Third, in the unlikely event that the reinforced preventive and cor-

rective arms of the proposed enhanced framework are unable to 

prevent a crisis in the future, the euro area would benefit from 

a well-designed permanent crisis management framework.

Fourth, with regard to the debt reduction, the Commission proposal 

must be seen as the absolute minimum, as it may not constitute 

a sufficient incentive for fast debt reduction for countries with high 

debt and relatively robust nominal GDP growth. With regard to the 

assessment of compliance with the debt criterion, relevant factors 

should only be considered when the government debt ratio will 

decline over a 3-year horizon according to the Commission’s fore-

casts. Irrespective of whether the debt ratio is above or below the 

60 % of GDP reference value, when assessing whether the deficit is 

excessive, the relevant factors should only be taken into consider-

ation if the deficit ratio, before taking into account such factors, is 

(2)  See European Central Bank (2011).

52

close to the 3 % of GDP reference value and the excess over the 

reference value is temporary, in line with the current rules.

Fifth, general exemption clauses, which are proposed under the pre-

ventive and corrective arms of the SGP, should not be implemented. 

The  application  of  the  SGP  in  past  years  lacked  the  discipline 

needed to achieve sustainable fiscal positions before the crisis.

Sixth, greater automaticity is required in all surveillance procedures, 

including the new macroeconomic surveillance framework. When 

Member States fail to comply with recommendations to adjust 

their policies, this should lead to the consequences provided for in 

the preventive and corrective procedures, and the Council should 

have less room for halting or suspending procedures against the  

Member States.

Seventh, the macroeconomic surveillance framework should have 

a clear focus. In particular, it should focus on euro area countries 

with  large  current  account  deficits,  significant  competitiveness 

losses or high levels of public and private debt, as well as any other 

vulnerability threatening EMU.

Eighth, financial sanctions should be applied at an early stage and 

gradually within the macroeconomic surveillance framework to pro-

vide clear and credible incentives for countries to adopt appropriate 

macroeconomic policies.

Ninth, a new economic governance framework should include a cri-

sis management framework that safeguards the financial stability 

of the euro area as a whole if one or more countries experience 

a sovereign debt crisis.

In creating a crisis resolution mechanism, Europe is taking the lead 

where the international community failed to find agreement a dec-

ade ago. There are good reasons to think it has a fair chance to 

succeed, and we do not share the view of those who claim that no 

European solution can be found in the absence of a global solu-

tion. By the same token, however, we certainly consider that there 

would be significant benefits in the definition of a global response 

to the sovereign crisis-resolution issue, and we hope that Europe’s 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT53

decision to create a regional mechanism will help advance the 

global discussion.

References

Draghi, M., ‘Complementarity and coordination of macroeconomic 

and financial policies to tackle internal and external imbalances’, 

Financial Stability Review, No 15, Banque de France, February 2011, 

pp. 43–51.

European Central Bank, ‘The reform of economic governance in 

the euro area: essential elements’, Monthly Bulletin, March 2011, 

pp. 99–119.

European Central Bank, ‘Reinforcing economic governance in the 

euro area’, Brussels, 10 June 2010.

European Council, ‘Conclusions of the Meeting of Heads of State or 

Government’, Brussels, 29 October 2010.

Gianviti, F., Krueger, A., Pisani-Ferry, J., Sapir A. and von Hagen, J., 

A European mechanism for sovereign debt crisis resolution: a pro-

posal, Bruegel, 9 November 2010.

Giavazzi, F. and Spaventa, L., ‘Why the current account matters in 

a monetary union: lessons from the financial crisis in the euro area’, 

discussion paper series, 8008, CEPR, September 2010.

Gros, D. and Mayer, T. ‘Towards a Euro(pean) Monetary Fund’, CEPS 

policy brief, No 202, February 2010.

54

Liquidity in times of crisis: even 
the ESM needs it

Abstract

This  contribution  argues  that  the  per-

manent  European  rescue  fund,  the  ESM, 

should be provided with a  liquidity back-

stop by having it registered as a bank — 

and treated as such by the ECB. Should the 

crisis become again more acute, a renewed 

generalised breakdown of confidence could 

then be stopped because the ESM would 

stand  ready  to  intervene  in  secondary 

markets or recapitalise banks, potentially 

with  almost  unlimited  amounts.  Access 

to  central  bank  financing  becomes  cru-

cial in a crisis because when risk aversion 

increases not even the ESM might be able 

to raise quickly the hundreds of billions of 

euros that might be required at very short 

notice to prevent a breakdown of the finan-

cial system.

Daniel Gros
Director of the Centre for  
European Policy Studies

Once  the  ESM  can  refinance  itself  at  the  ECB  the  central  bank 

could be restricted to the classic function of a lender of last resort, 

leaving the management of public debt under the supervision of 

the finance ministers which run the ESM. The ECB could still man-

age area-wide liquidity as the ‘ESM bank’ (effectively a European 

Monetary Fund) would be subject to the same rules as all other 

banks and as the ECB would accept only good quality collateral 

from it. Moreover, the ECB could abandon definitely its purchases 

programme of peripheral government bonds.

NB: This contribution is based partially on Gros and Mayer (2012).

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT55

Introduction: sovereigns like banks

Canaries were kept in coal mines because they die faster than 

humans when exposed to dangerous gases. When the birds stopped 

singing, wise miners knew that it was time to gear up the emer-

gency  procedures.  Greece,  as  it  turns  out,  was  the  eurozone’s 

canary. In 2010 the canary was resuscitated, and a small rescue 

mechanism was set up to revive a further canary or two — but 

beyond this the warning was ignored. The miners kept on work-

ing. They were convinced that the canaries had overeaten and just 

needed a diet to get well again.

But the problems of Greece should have been seen also as the first 

manifestation of a general problem, namely that the global crisis 

was spreading to public debt as capital markets refuse to refinance 

excessive levels of public debt, especially in the eurozone, whose 

members can no longer rely on central bank support.

The Maastricht Treaty explicitly ruled out any form of ‘monetary 

financing’ for governments. This was done to safeguard the inde-

pendence of the ECB and thus ensure that governments would be 

forced to follow sound fiscal policies. However, while this prohibition 

of financing deficits via the printing press was needed to safeguard 

price stability, it can create a problem when risk aversion increases 

so much that even solvent borrowers can no longer roll over their 

debt. In such a situation liquidity become key, both for the sovereign 

and the banking system.

For the sovereign the problem can be a summarised as a maturity 

mismatch issue: a government has long-term assets (flow of tax 

revenues) and liabilities of a much shorter duration. A country with 

a balanced budget would normally be considered solvent even if 

the debt to GDP ratio is 100 % because with a balanced budget the 

debt to GDP ratio will decline towards zero as long as GDP grows 

in nominal terms. However, even if the average maturity of govern-

ment debt is 8 years (rather conservative and almost the case for 

Italy) the same country has to refinance every year 12.5 % of GDP: 

much above what even the strongest government could hope to 

finance out of a surplus. This implies that any government could 

become immediately insolvent if investors refuse to roll over the 

56

debt coming due. This is exactly the same mechanism as in a bank 

run. A bank has typically long-term assets (loans) but short-term 

liabilities (deposits). If all depositors want their money back at the 

same time the bank will not be able to liquidate immediately its 

loan portfolio (Diamond and Dybwig, 1983).

The danger of a run on government debt does not exist for a coun-

try with its own national currency (as long as government debt is 

in local currency) because then the national central bank can pro-

vide the liquidity needed to keep the sovereign solvent in the short 

run, even in case of a total investor’s strike. The potential for bank 

runs and their widespread occurrence during the 1930s was the 

main reason why central banks became the lender of last resort 

for banks. Within the euro area, national governments, similarly to 

banks, need a liquidity backstop (see also de Grauwe (2011) and 

Kopf (2011)).

The key problem is of course that any liquidity backstop mech-

anism — whether for banks or for sovereigns — requires by defin-

ition a distinction between insolvency and illiquidity.

For banks the final decision is usually taken by the fiscal authorities. 

We argue (see already Gros and Mayer (2011)) that one should fol-

low the same approach also for euro area sovereigns.

Moreover, even a ‘suprasovereign’ institution like the ESM could 

be subject to the same problem. After all the ESM has only rather 

long-term assets, namely the taxing power of the Member States 

which have subscribed to its capital (and given the promise to pay 

a certain share of the liabilities of the ESM).

It is entirely possible that one day even the ESM will not be able to 

place all the bonds it would like to issue. The ESM is likely to need 

to go to financial markets when risk aversion is high because that is 

when peripheral euro area countries are likely to experience difficul-

ties themselves. During these times the market might also become 

more wary of the political commitment of the remaining core coun-

tries to support and might not absorb the hundreds of billions which 

might be needed quickly. This is the fundamental problem which 

remains unresolved so far.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT57

The summer of 2011:  
the anatomy of a crisis

The problem created by the absence of a lender of last resort for 

the sovereign became particularly acute after the July 2011 Euro-

pean Council, which was supposed to end the crisis by settling the 

Greek case with a mixture of generous long-term financing at low 

interest rates and some private sector rescheduling and restructur-

ing. The result of this summit was the opposite of what it set out to 

achieve as the crisis entered an even more acute phase with inves-

tors anticipating the quick nature of the 21 July 2011 ‘solution’ (an 

anticipation which proved to be correct).

The markets noticed the first ever official announcement of a ‘vol-

untary’ haircut on private investors in government bonds of an EU 

member country and re-evaluated all their holdings of all peripheral 

government debt. The European Council officially assured investors 

in July 2011 that Greece was an ‘exceptional and unique case’; and 

this assurance has been repeated ever since. However, investors 

were not fully convinced then (and still are not today) because at 

least one other country (Portugal) is facing a fundamentally similar 

problem to that of Greece, at least in terms of overconsumption 
and foreign debt (1). Moreover, the size of the haircut initially pro-
posed (21 %) was clearly unrealistic from the outset and indeed 

increased to approximately 80 % when Greece effectively defaulted 

in March 2012.

Whatever the official promises, with the official announcement 

that private investors would be required to make losses on their 

holdings of Greek government bonds, a sort of Pandora’s box was 

opened because this meant that, potentially at least, other coun-

tries with high debt levels might end up in a similar situation. This 

opened the potential for vicious feedback loops. The argument is 

quite simple: even a rather high level of public debt would be sus-

tainable if the government had to pay only a low interest rate, say, 

close to the compensation required on a riskless investment. How-

ever, the same level of debt might become unsustainable, forcing 

(1)  See Gros (2010).

58

a country into default, if the borrowing cost is much higher. Hence 

many authors (most persuasively de Grauwe (2011)) have argued 

that there might be multiple equilibria: if the market thinks the 

government can pay it will be able to pay because its borrowing 

cost will be low. However, if the market thinks the government can-

not pay, in practice it will not be able to pay because the high-risk 

premium requested will make the debt service so expensive that 

it will not be able to find the necessary resources. Doubts about 

the ability of a government to service its debt could thus become 

self-fulfilling.

This  mechanism  is  similar  to  the  maturity  mismatch  described 

earlier. However, it works more slowly and becomes less likely the 

longer the maturity of government debt. But the fact that high 

interest rates can become self-fulfilling prophecies about the abil-

ity of a country to service its debt provides a justification to provide, 

under exceptional circumstances, fundamentally sound countries 

(those countries which are solvent at a reasonable risk premium) 

with financing at lower-than-market rates. But the question that 

then arose in 2011 was simply whether there was enough money 

for everybody.

The Greek public might not appreciate it, but it has received pref-

erential treatment from the EU. The offer to Greece was to have 

essentially all its financing needs arranged for a decade whilst pay-

ing less than 4 % on the new debt. Moreover, given that the country 

has little private debt left after the PSI it is clear that even the pub-

lic creditors will in all likelihood have to agree to a de facto haircut 

as well once the new programme goes off track.

In 2011 the two other countries with a programme, Ireland and 

Portugal, had to be treated ‘equitably’. So they were also given 

more lenient terms (low interest rates and longer maturity) and the 

implicit assurance of further financing should they not be able to 

face the test of the markets in a few years.

But while Greece, Ireland and Portugal obtained more generous offi-

cial long-term financing, Spain and Italy experienced a surge in their 

borrowing costs in the summer of 2011. At that point the debt fears 

started to affect even the core, with peaks in the spreads for France 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT59

and even the Netherlands. The reason for this contagion is quite 

simple: there is not enough highly rated fiscal power in the euro-

zone. Germany cannot pay for everybody and countries like Italy 

and Spain cannot be expected to provide billions of euros in credits 

to Greece (and Portugal and Ireland) at low rates (approximately 

3.5 %) when they are themselves paying much more. Europe’s lead-

ers wanted to be generous to Greece, Ireland and Portugal. But the 

supply of cheap funds is limited. Not everybody can be served this 

way.

The EFSF and the ESM can only deal with 
a peripheral crisis

The eurozone’s permanent rescue fund, the ESM (which will super-

sede the European Financial Stability Fund (EFSF) in the course 

of 2012), cannot provide everybody with financing on the scale 

required so far by the GIP. It simply does not, and will not, have 

enough funds to stabilise Spain and Italy as well. Although the EFSF 

and the ESM might run in parallel the overall financing volume of 

about EUR 500 billion which will be available in the long run is just 

sufficient to take care of the small peripheral countries like Greece, 

Ireland, and Portugal. But would clearly be too little to face the 

massive contagion which might result from a Greek exit.

Moreover,  any  financing  that  relies  on  guarantees  and  other 

con tributions from Member States separately is vulnerable to 

a domino effect. Countries facing high borrowing costs cannot 

eff ectively be relied upon to provide contributions to the rescue 

fund (whether the EFSF or the ESM). This does not matter that 

much as long as only small countries are in trouble. But if (when) 

the borrowing costs of large countries like Italy and Spain (which 

account  together  for  about  one  third  of  the  eurozone  GDP) 

increase further and pass the widely accepted threshold of 6-7 %, 

only the core eurozone members would remain to back the EFSF. 

At this point, the debt burden on the core countries would become 

unbearable and its own borrowing costs might even increase. 

Events  in  2011  showed  this  clearly.  Even  France  experienced 

market  pressure  as  doubts  arose  over  its  ability  to  deal  with 

the contingent liabilities from the rescue of others on top of its 

already large existing stock of debt.

60

This implies that a larger rescue fund is not the solution, if anything it 
can accelerate the domino’s fall (2). The widely held view- that the fire-
power of the EFSF/ESM should be increased — does not make sense (3).

In  the  summer  of  2011,  the  domino  effect  started  to  operate 

because financial markets do not wait for country after country to 

be downgraded; they tend to anticipate the endgame, or at least 

one potential scenario, namely the collapse of the entire EFSF/ESM 

structure. Markets were caught between three seemingly inconsist-

ent constraints: (1) Little chance for a sizeable increase of the bor-

rowing capacity of the EFSF; (2) little chance for the introduction of 

eurobonds; and (3) great reluctance of the ECB to engage in large-

scale purchases of bonds of financially troubled governments.

In the end the ECB ended up buying large amounts of Spanish and 

Italian debt, but it was clear from the outset that it would never do 

so on the scale required to permit all investors to exit. The ECB has 

since stopped its bond buying programme since it has become clear 

that its task cannot be to prop up sovereign debt markets indefinitely.

The bank–government–debt snare

As usual, banks are the weakest link. They create negative feedback 

loops and accelerate the transmission of the domino effect. There 

are two reasons for this:

•	 many	banks	hold	large	amounts	of	government	debt;

•	

their	credit	rating	usually	falls	along	with	that	of	their	own	

sovereign.

(2)  See Giovannini and Gros (2012) for a calculation of the size of the 

EFSF/ESM needed to deal with Spain and Italy.

(3)  This should be the case in particular for the country whose government 
has been most active in pushing for an increase in the funding for the 
ESM because financial markets have understood this risk and are driv-
ing up borrowing costs for France — the core country most in danger 
of losing its AAA rating. But if France definitely loses its AAA status 
only Germany (and some of its smaller neighbours) would be left and 
have to carry the whole burden. This would be not only politically unac-
ceptable but also economically impossible — the Italian government 
debt alone is equivalent to the entire German GDP.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT61

This implies that anyone expecting a country’s downgrade would 

not be selling only government securities but also shares of its 

banks. This, in turn, increases the cost of capital for the banks mak-

ing them even weaker. Moreover, even stronger banks — who see 

their own share prices falling and credit-default spreads widen-

ing — react by refusing to provide the other banks with interbank 

liquidity. The breakdown in the interbank market, in turn, leads to 

a breakdown of the credit circuit, which kills growth.

This was the dynamic that led to the severe recession experienced 

after  the  Lehman  bankruptcy  showed.  During  the  worst  crisis 

moments of 2011 capital markets were anticipating the potential 

for a doomsday scenario with the economy going abruptly into 

a severe recession as the interbank market breaks down and the 

public debt problems are expected to grow further. These expecta-

tions might well have materialised had the ECB not addressed the 

issue in December of 2011 with the announcement of its new facil-

ity providing very long-term funding (3 years) coupled with easier 

collateral rules (the LTRO). The breakdown of the interbank market 

was averted.

What needs to be done?

In times of crisis only a massive infusion of liquidity can prevent 

a disaster. How could this be ensured? Given the structure of the 

ESM, the solution cannot be a massive increase in its size. Rather, 

the ESM could simply be registered as a (special) bank or ‘monetary 

financial institution’ in Luxembourg with access to refinancing by 

the ECB in a case of emergency.

The ESM, which we would prefer to call the European Monetary 

Fund (EMF), would then have access to ECB funding on the same 

condition as ‘normal’ banks, for which the Central Bank acts as 

a lender of last resort.

Adjustment  funding  and  help  for  debt  restructuring  would  be 

carried  out  by  the  EMF  with  the  financial  endowment  already 

decided. Smaller secondary market intervention in case of limited 

liquidity gaps could be funded in the same way. However, in case 

of a big liquidity crunch, the EMF could access ECB facilities by 

62

borrowing against the government bonds it is purchasing as collat-

eral. Assuming that the ECB insists on the top quality of the assets 

it takes for collateral — as for instance assured by a high rating — 

it would ensure that it only lends in case of a liquidity crunch and 

not when a country suffers from insolvency. The decision to inter-

vene to buy national government bonds would be taken by the EMF, 

based on expert assessments and under the supervision by finance 

ministers and not, as de facto at present, by the ECB, whose task is 

not to determine fiscal policy in specific countries, but to look after 

price and financial stability for the euro area as a whole.

Moreover, the EMF would also be the proper place to formulate and 

monitor the conditionality which would have to go hand in hand 

with any EMF intervention, including buying bonds on the secondary 

markets. At present this is done implicitly by the ECB, which uses 

its SMP to pressure the Italian government into reforms and fiscal 

adjustment. However, there is no representation of the European 

taxpayers on the Governing Council of the ECB, which might have 

a tendency to be too much concerned about instability in financial 

markets and have too little regard to the interests of taxpayers.

The ECB would still be able to control liquidity developments for the 

entire euro area because once financial markets have returned to 

normal it could simply stop its policy of full allotment. At this point 

any refinancing by the EMF would simply crowd out financing to 

other banks and thus not increase area-wide liquidity.

Backstopping the EFSF with the ECB — i.e. creating an EMF — 

would have the advantage over the current mess that it leaves the 

management of public debt problems in the hand of the experts 

and finance ministries, but it provides them with the liquidity back-

stop that is needed when there is a generalised breakdown of con-

fidence and liquidity. In a crisis the fundamental problem of banks 

and governments is always one of liquidity. This is exactly when 

a lender of last resort is most needed.

The  ECB  is  the  only  institution  which  can  provide  the  required 

‘lending of last resort’ quickly and in convincing quantity. It would 

of course be much better if the ECB did not have to ‘bail out’ the 

European rescue mechanism, but in this case one has to choose 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT63

between two evils. Even a massive increase in the ECB’s balance 

sheet (which, if the US experience is any guide, will not lead to infla-

tion) constitutes a lesser evil compared to a breakdown of the euro-

zone financial system.

Conclusions: no silver bullet

Bringing  EMU  back  to  safe  ground  will  of  course  only  succeed 

if  first  deficits  are  reduced  substantially  and  then  debt  levels 

(as a percentage of GDP) are brought down slowly as well. The 

financial crisis has vividly demonstrated that excessive debt loads, 

especially  if  combined  with  large  deficits,  cannot  be  financed 

in  anything  but  the  extremely  benign  markets  that  prevailed 

between 2000 and 2007. Countries that accumulate excessive 

debt will sooner or later ex perience their ‘Minsky moment’, when 

the  rolling  of  this  debt  becomes  impossible.  For  a stable  EMU 

a long-term movement towards lower debt levels is a ‘condicio 

sine  qua  non’.  The  mechanisms  to  achieve  this  have  now  been 

considerably strengthened through the tightening of the rules of 

the Stability Pact, the reverse qualified voting mechanism (under 

which  a  proposal  by  the  Commission  to  sanction  a  country  in 

excessive deficit is taken to be approved unless it is overruled by 

a qualified majority) and the so-called fiscal compact, which forces 

member countries to adopt essentially balanced budget rules at the  

national level.

However, debt reduction takes a very long time, hence the need 

for an effective crisis management mechanism along the lines 

sketched above. One without a mechanism with which to forestall 

liquidity crisis means that the other mechanisms will not be able to 

work, and EMU will fail.

Our proposal will certainly not satisfy the purists who regard EMU 

as the rebirth of the gold standard. For the purists, our proposal 

amounts to monetary financing of government debt behind a thin 

veil. We would answer them that in the real world of today a pure 

gold-standard-like arrangement will not work. In today’s environ-

ment, the central bank needs to look after financial stability, which 

means that it needs to assume the role of a lender of last resort 

to  banks  and —  because  of  the  bank–government–debt  nexus 

64

described above — also governments. The question is not whether, 

but how this role is performed.

References

De  Grauwe,  P.  ‘Governance  of  a  fragile  eurozone’,  CEPS  work-

ing  documents,  WD  346,  May  2011  (http://www.ceps.eu/book/

governance-fragile-eurozone).

Diamond, D. W. and Dybvig, P. H., ‘Bank runs, deposit insurance, and 

liquidity’, Journal of Political Economy, 91 (3), 1983, pp. 401–419.

Giovannini, A. and Gros, D., ‘How high the firewall? Potential periph-

eral financing needs’, CEPS commentary, 2011 (http://www.ceps.eu/

book/how-high-firewall-potential-peripheral-financing-needs).

Gros, D., ‘A simple model of multiple equilibria and default’, CEPS 

working document, 2012.

Gros, D. and Mayer, T. ‘Refinancing the EFSF via the ECB’, CEPS com-

mentaries,  Brussels,  August  2011  (http://www.ceps.eu/content/

refinancing-efsf-ecb).

Gros, D. and Mayer, T., ‘Liquidity in times of crisis: even the ESM 

needs it’, CEPS policy briefs, March 2012 (http://www.ceps.eu/book/

liquidity-times-crisis-even-esm-needs-it).

Kopf,  C.,  ‘Restoring  financial  stability  in  the  euro  area’, 

CEPS  policy  briefs,  March  2011  (http://www.ceps.eu/book/

restoring-financial-stability-euro-area).

Obstfeld, M. (1986), ‘Rational and self-fulfilling balance of pay-

ments crises’, American Economic Review, 76, pp. 72–81.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXTIV. 
Reinforced fiscal and 
macroeconomic coordination 
and surveillance: 
economic aspects

Josep Borrell
Sylvester Eijffinger
Paul J. J. Welfens
Detlef Fechtner

66

Reinforced fiscal and macroeconomic 
coordination and surveillance: 
economic aspects

This  session  is  devoted  to  fiscal  and  

macroeconomic  coordination  and  surveil-

lance. These are clearly very important ques-

tions. Let me start by recognising that the 

macroeconomic imbalances between euro-

zone  members  have  had  a strong  impact 

on the private and public debt, and on the 

fiscal trouble that Member States are suffer-

ing. We have to tackle these underlying eco-

nomic imbalances. Recognising this, national 

governments and European institutions put 

forward several instruments to reinforce the 

fiscal and macroeconomic coordination and 

economic governance of the eurozone.

Our panellists today should try to focus on 

the following issues: how these measures 

will effectively contribute to narrowing the 

macroeconomic  imbalances;  which  are 

the strengths and the weaknesses of the  

chosen measures, in particular the European 

semester and the recently decided package; 

how they can be implemented in the most 

efficient way; how the fiscal discipline can 

endanger the required recovery; and which 

Josep Borrell
Former President of the European 
Parliament; President of the 
European University Institute; former 
Spanish Minister for Public Works, 
Transport, Environment, Housing and 
Telecommunications and former Spanish 
State Secretary for Finance

reforms can push growth and employment.

There is a tension between austerity and growth which has to be 

taken into account when we talk about macroeconomic coordin ation. 

The general role of the European Central Bank has already been 

taken into consideration, but the role of the European Central Bank 

as more active in tackling the crisis also needs to be examined.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT67

Finally, something which cannot be forgotten is the question of fis-

cal and tax harmonisation. This has to be taken into consideration 

when we talk about macroeconomic coordination. Macroeconomic 

coordination is also related to the fiscal part of the public budget. 

These are the key questions which I am sure our panellists will 

address.

68

The Greek tragedy

The idea is that we learn something from 

this Greek tragedy. As you know, a Greek 

tragedy  has  many  parts.  When  it  builds 

up, at the end is the catharsis. We are now 

in that stage, but there was a time when 

every player was doing his or her part and 

trying to do the best that they could. Of 

course we, the chorus, the intellectual elite, 

were  saying  no,  this  is  going  wrong.  You 

saw the process in the last 2 years through 

which the whole tragedy escalated and was 

uncontrollable.

First, let me ask: could we have recognised 

this process 10 or 12 years ago? That is an 

interesting question and the answer is yes, 

not only with the benefit of hindsight but 

also ex ante. When we look at these cur-

rent account imbalances, we can already 

see how they build up. Of course, the north-

ern part of Germany has surpluses and the 

southern  part  has  deficits.  This  went  on 

for a long time without any thinking about 

corrective  mechanisms.  Of  course,  the 

exchange rate was not available anymore, 

so then you have to do it with inflation, with 

Sylvester Eijffinger
Jean Monnet Chair of European Financial 
and Monetary Integration at the Centre for 
Economic Research at Tilburg University; 
President of the Tilburg University Society; 
Member of the Panel of Economic and 
Monetary Experts of the European 
Parliament’s Committee on Economic and 
Monetary Affairs

nominal wage differences. That is also interesting because this 

building up of the process is typically also visible in the net position, 

for example that of Greece with the assets and liabilities.

Do  you  know  how  the  net  position  of  Greece  deteriorated  over 

the last 10 years? Nothing was done, nothing was considered to 

be urgent, and of course, there was also the role of the ratings 

agencies.  If  you  look  to  the  ratings  before  the  credit  crunch  in 

2008 there were almost no differences in perceived default risk 

between the countries. I am currently writing a briefing paper for 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT69

the European Parliament committee about the monetary dialogue 

with the ECB. The ratings agencies were sleeping before the crisis 

and are now they are off-shooting after the crisis. They are just fol-

lowing the spreads and they do not have so called objective criteria 

with which to measure the default risk premium of certain coun-

tries. Anyhow, this was still a development which was foreseeable, 

and also available for everybody to say, well, this is getting out of 

hand.

Take Portugal: more or less the same picture; assets and liabilities 

in that position. You see a deterioration which is not as bad as in 

the case of Greece, but I would say that it has typically been a  

worrying  situation  from  2000  onwards.  If  we  look  at  the 

demarcation line where EMU started, you see that the process 

of imbalances increased. Apparently we then had mechanisms to 

rebalance that and normally there are two mechanisms which can 

do so. On the one hand you have wage flexibility, nominal wage 

flexibility  and  real  wage  flexibility.  On  the  other  hand,  which  is 

much more difficult in Europe, you have labour mobility, not only 

of the low segment or the high segment (the professionals), but 

of all the people. You know what happens in the US if you become 

unemployed? You lose your job, you lose your house and sometimes 

you lose your partner. Well, that is a good incentive to move from 

the west coast to the east and/or the other way around.

This is typically something which we have not thought about and 

actually, if you look to the discussions amongst economists and 

political scientists before EMU was set up, everybody said that we 

should care about labour mobility and wage flexibility as adjust-

ment mechanisms. Ireland is a special case. The net position of 

Ireland is, of course, not that bad, but do you know what happened 

with Ireland? After the credit crunch, after the Lehman moment, 

Ireland, which was overbanked, took on all the problems of the 

banking system. First, the deposit of the insurance guarantee. It 

was one of the first countries which raised the limit to 100 000, 

like Greece by the way, and then ultimately Germany followed. 

Second, they took the debt in the housing market over from the 

banks, and thereby the banking problem became a sovereign debt 

problem. And now, of course, an interesting phenomenon: why were 

these countries driven to engage in debt, especially the southern 

70

countries? This is not surprising because we have one interest rate 

in the eurozone, but it does not mean that we have one inflation 

rate. All the regions have different inflation rates. If the nominal 

wage demands are higher than productivity developments then 

there are high inflation rates in those regions of the eurozone.

So what actually happened, in some southern countries, is that the 

nominal wage development was higher than productivity. This is 

because these economies, especially the Greek economy but also 

the Portuguese economy, were sheltered. They were part of the 

common currency but they were never a real part of the common 

market and did not have the discipline which the internal market 

enforces. And thereby, the nominal wage demands exceeded the 

productivity development, and that means inflation. What happens 

then, if you have the same interest rate, short or long-term interest 

rate, and you have high inflation — you get negative real interest 

rates. What does it mean if you have a negative real interest rate, 

like now? It means that you are stimulated to engage debt, privately 

or publicly, and not to save. So we promoted that in those countries, 

privately and publicly, by having negative real interest rates for 

a long time. All of these things were part of the process of having 

no adjustment mechanisms.

Then if we look to the real site, the real effective exchange rate which 

is the competitive position of a country, we know, of course, that 

the competitive position of the southern countries also deteriorated 

gradually. Germany was a country which, I would say, redesigned its 

institutions in the last 10 years and became more competitive. In 

the case of the more northern countries, such as the Netherlands 

and Denmark, what you see is that the competitive position of these 

countries was deteriorating gradually. Therefore, they were not able 

to have enough earning capacity and growth potential. This growth 

potential was also harmed by the fact that the economies were shel-

tered and they were not fully part of the internal market. As a result 

they did not enforce higher productivity, for example in the exporting 

sectors but also in sectors such as the service industry.

The last slides here are quite simple, showing the debt to GDP 

ratios. Of course we can also go to the typical Greek case, and now 

in October 2011 we have a forecast again for the world economic 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT71

outlook. That means, of course, that the perspective for Greece 

in terms of debt will deteriorate further and thereby the refinan-

cing becomes much more difficult. Every half year we have a kind 

of adjustment to a higher level, and that also makes these prob-

lems worsen because it’s a solvency problem. There was a liquidity 

problem at the start, but it became a solvency problem. The same 

happens with other southern countries; Italy is a typical case. It is 

a liquidity problem, not a solvency problem, but a liquidity problem 

can become a solvency problem if we wait too long.

Now, the last thing is the unemployment rates. Spain has the worst 

unemployment rate, not only general unemployment but especially 

youth unemployment, which has stood at 40 % for a long time. 

40  %  youth  unemployment,  what  does  that  do  for  your  social 

co hesion? I would say it’s completely unacceptable, and we have to 

do everything we can to address it. Some of things we could use, 

for example, are the Structural Funds, and the Cohesion Funds, and 

the European investment banks. For example if you know that the 

solvency ratio for the European Investment Bank is 27 %, that’s 

quite a lot; there is some firepower there too.

However, let me go to the solutions. There was a big debate in the 

Netherlands about this, and also in Germany. Germany is a spe-

cial case because of the Bundesverfassungsgericht, the supreme 

court, which sets very strict conditions for increasing the EFSF. 

The Deutsche Bundesbank must be fully involved in every deci-

sion, which makes Frau Merkel’s position very difficult, but the real 

reason why the crisis deteriorated is the non-functioning of the 

French–German axis. If you look to the past, the French–German 

axis was always very effective in the last decades. If we look to the 

deal of Dauphil, but also to the accord of 26 October, we see that 

there are no real solutions. Every time it is behind the curve, and 

the real solution is very simple.

First, implement, like President Draghi of the ECB says, the accord 

of 26 October, and do it as quickly as possible. The EFSF does not 

have enough firepower, which means that you have to put your 

money where your mouth is and increase the rescue fund. How can 

you expect China or Brazil to put their money there, when you’re 

not prepared to put your own money there? Then we come to the 

72

issue of leveraging. Klaus Regling, the head of the EFSF, has already 

admitted that it is strange. How can you leverage without putting 

real guarantees and real money there? The leveraging is not auto-

matic; you cannot have your cake and eat it. If you take 20 % of the 

part of the risk, the marginal 20 % or the 25 %, then the risks of 

this 20 or 25 % increase. So one thing is to increase the emergency 

fund right away, and implement it as soon as possible.

Second, the ECB must play a role. It’s very difficult for the ECB in this 

time frame when, for example, the French President says that we 

should use the ECB for monetary finance and quantitative easing, 

like the Fed or the Bank of England does. The ECB has its statutes 

and it has to comply with them. There is only one thing which the 

ECB must do, and that is also in the statutes and the treaty. The 

ECB is responsible for financial stability. That means that ECB has to 

play a role in the secondary market now, with the security markets 

programme. It is on the edge of its mandate, but it is allowed. It 

is allowed as long as the ECB preserves financial stability without 

jeopardising  price  stability.  We  are  going  to  a recession,  so  the 

risks of price stability are limited, but this is the condition, the only 

condition the ECB will hold to. That means that the ECB will not 

engage quantitative easing, like the Federal Reserve system does, or 

the Bank of England, but the ECB can, of course, play a role in buying 

on the secondary markets, and thereby help to reduce the spreads. 

It can only do this if there is the perspective that it is temporary and 

that the ECB is able to sterilise the money-market effect.

Lastly, what we cannot have now is a disagreement between the 

Heads of State or Government in Europe, which we have on a regu-

lar basis. Secondly, we cannot have a disagreement between the 

Heads of State or Government with the ECB on the other side. That 

is very disruptive for the financial markets, so, there is only one 

solution — a common declaration of the European Council and the 

ECB, saying that they agree about this solution.

As long as there is a public fight, a public debate between some 

Heads of State or Government and the ECB on the other side, the 

problem will escalate in the financial markets because of increasing 

uncertainty. There comes a moment when even I, as a true Euro-

pean, am not certain that the eurozone will survive.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT73

Towards a euro fiscal union: 
reinforced fiscal and 
macroeconomic coordination  
and surveillance is not enough

Introduction

The  first  decade  of  euro  integration  was 

successful as low inflation rates, increas-

ing financial market integration and higher 

employment  were  achieved  (European 

Commission, 2008; ECB, 2008; Deutsche 

Bundesbank, 2008); and there was interest 

rate convergence across countries, namely 

at the low level of German and French gov-

ernment bonds.

In  the  EU  traditionally  there  was  rather 

limited fiscal policy coordination and even 

during the transatlantic crisis there was no 

strong coordination, as only the informal 

institution of the Council of Euro Finance 

Ministers  exists  to  discuss  this  topic.  An 

implicit  tool  of  fiscal  policy  coordination 

was the Stability and Growth Pact that was 

supposed to avoid countries’ deficit–GDP 

ratios from exceeding 3 % in the euro area 

(unless there was a severe recession) and 

Paul J. J. Welfens
Jean Monnet Chair at the Institute of 
Macroeconomic Theory and Politics of 
the University of Wuppertal; President of 
the European Institute for International 
Economic Relations

also assumed that countries would engage in bringing excessive 

debt–GDP ratios towards the maximum of 60 % in the long run. 

The fiscal compact adopted at the EU summit of December 2011 — 

a new set of stricter fiscal rules to be adopted by 25 EU coun-

tries within a separate treaty — is not likely to solve the credibility 

problems. The litmus test will come when the first excessive deficit 

cases come up: if no country takes the ‘sinner’ to the European 

74

Court of Justice the credibility of the euro area will be shattered 

again. Only the creation of a euro fiscal union could overcome the 

problem of fiscal policy coordination.

The background of the euro crisis

Belgium and Italy were starter countries with debt–GDP levels 

above 100 % in 1999 and Greece also joined the euro club with 

more than 100 %. However, these countries (including Ireland) 

showed considerable success in reducing debt–GDP ratios in the 

period 2001–07 (Italy and Belgium also in the run-up to the launch 

of the euro), but after 2008 the situation deteriorated dramat-

ically in many euro countries. The European Commission (2011) 

in its report on public finances showed that the debt–GDP ratio 

increased by 22 % for the euro area in the period 2007–12; the rise 

in the EU as a whole was 24 %. About half of the increase is due 

to automatic stabilisers. The debt–GDP ratio of the 17 euro coun-

tries is expected to reach 89 % in 2012, which is about 5 percent-

age points higher than in the EU-27 group. The main driver behind 

the rise of debt–GDP ratios is the transatlantic banking crisis of 

2007–09, rather than a special sovereign debt crisis or a general 

tendency towards excessive deficits. This holds despite the fact 

that many observers referred to the Greek debt crisis — which 

indeed is a special case of a national sovereign debt crisis — and 

concluded that together with the debt problems visible in Ireland 

and Portugal (and later in Spain and Italy) the euro area is fac-

ing a general sovereign debt crisis. This, however, is an inadequate 

view of the problems; for most observers the debt dynamics of EU 

countries are rather opaque.

There is no doubt that Ireland’s problems are almost completely 

related to the transatlantic banking crisis and the associated spe-

cial Irish banking crisis whose dynamics are rooted mainly in Dublin, 

namely in a government which failed for years to implement any 

decent standard of prudential supervision. Portugal fell victim to 

well-known structural problems in improving its international com-

petitiveness. Years with high double deficits (in the current account 

and in the government budget constraint) implied not only that the 

debt–GDP ratio was increasing but the role of foreign indebtedness 

was growing over an extended period in a rather dangerous way.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT75

In 2011 there emerged a growing perception of a rather general 

over-indebtedness of countries in the eurozone — sometimes even 

interpreted as a fully fledged euro area crisis. This perception is not 

related to hard facts, but rather to destabilising crisis management, 

contagion and a Greek political crime respectively.

•	

The	EU/euro	summits	have	failed	to	push	Greece	towards	broad	

privatisation — a country where government assets according 

to the IMF (2010) exceed government debts by at least EUR 30 

billion has received massive rescue loans from euro partner 

countries (EUR 110 billion in May 2010, another EUR 130 billion 

in October 2011). The doubtful wisdom of the summits brought 

haircuts on private creditors of 21 % during the Brussels meet-

ing of July 21 and even 50 % in late October.

•	

The	debt	shock	of	Greece	—	a	‘political	fraud’	—	took	place	

in  2009  right  before  the  elections  when  the  conservative 

government made strange decisions implying an incredible 

deficit–GDP ratio of 15 % for that year. One should note that 

a 15 % deficit–GDP ratio implies — given the fact that typically 

a reduction of only 3 percentage points per year is possible — 

that within 5 years the debt–GDP ratio will increase by about 

45 %; thus such an increase is totally irresponsible for a coun-

try whose debt–GDP ratio is already at 110 %.

•	

At	the	same	time	one	may	argue	that	the	intensity	of	conta-

gion observed in the case of a small country such as an over 

indebted Greece is surprisingly strong (see the subsequent 

analysis). That a political crime such as a national deficit–GDP 

ratio of 15 % neither triggered sharp public admonishment 

from the side of the European Commission or sharp sanction 

is quite disappointing and indeed very worrying; and given the 

very  sobering  experience  of  a non-functional  Stability  and 

Growth Pact one cannot hope to deter other potentially irre-

sponsible governments from substantially exceeding the maxi-

mum deficit ratio of 3 %.

When the risk premiums shot up after the 2008 failure of Lehman 

Brothers, it was clear that countries with high debt–GDP ratios and 

high external indebtedness were bound to face serious problems. 

As this author wrote in a book published in early 2009, whose  

manuscript was finished in late October 2008:

76

The eurozone could face serious problems if the risk premiums 

for such countries as Greece, Italy, Spain or Portugal should 

increase. Considering that Greece and Italy face high debt–GDP 

ratios and high deficits plus high foreign indebtedness one can-

not rule out that during a temporary accentuation of the global 

financial crisis it will no longer be possible for these countries 

to get refinancing from markets. In such a situation, the no-

bailout clause of the Maastricht Treaty should not be applied 

if indeed a country such as Greece should face serious prob-

lems in the aftermath of impulses from the US banking crisis. 

Rather, member countries of the eurozone should support mem-

ber countries with refinancing problems in the spirit of solidar-

ity and responsibility. Similar to the massive guarantees of EU 

countries for their respective banks, they should come up with 

guarantee packages for countries with serious refinancing prob-

lems. It should also be considered that the European Investment 

Bank — an EU institution — also gives particular guarantees for 

several years. It would not be adequate during a global financial 

crisis to apply the rules of the Maastricht Treaty established 

for the case of a normal world. This, however, is not to say that 

EU countries should excuse lax fiscal policies and high deficit–

GDP ratios as a new loose fiscal framework. Given the fact that 

monetary integration and monetary union, respectively, have 

proven to be useful in the transatlantic crisis, it would be quite 

insensible to undermine economic and monetary union through 

an overly strict interpretation of the Maastricht Treaty.

(Translated from Welfens, 2009, pp. 158–159).

While the strong recession of 2008–09 could explain why euro 

countries resorted to expansionary fiscal policy in that period, it is 

absolutely unclear why deficit–GDP ratios remained very high and 

above the 3 % deficit–GDP ratio in Spain, France and Italy even 

in 2010 — as well as in the UK and in the US (with the latter two 

countries moving towards 10 % of GDP).

The Greek crisis of 2010/2011 raised several issues.

•	

How	 could	 a	 government	 manage	 to	 deceive	 the	 European	

Commission  so  bluntly  as  in  the  case  of  Greece  where  the 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT77

government under the Nea Dimocratia indicated (in mid 2009) 

that the deficit–GDP ratio would be about 5 % while in reality it 

turned out to be 15 %, as became clear in 2010? (The type of 

political fraud which has occurred in 2009 in Greece cannot be 

avoided by stricter deficit rules because once it has happened 

it is too late!)

•	 Why	did	the	European	Commission	not	immediately	impose	

sanctions on Greece for failure to deliver correct data? Part of 

the answer is that imposing sanctions on a country that already 

is facing a 110 % debt–GDP ratio is difficult; part of the answer 

is that the European Council could block sanctions for even 

extreme violations of the pact.

•	

To	 what	 extent	 is	 there	 a	 problem	 of	 contagion	 or	 herding	

behaviour in the euro area? Empirical analysis by Missio/Watzka 

(2011) provides evidence for contagion and clearly indicates 

that Greek debt problems affect Belgium, Portugal, Spain and 

Italy, and that the downward rating of Greece also negatively 

affects Portugal and Spain; Greek and Spanish ratings depend 

on each other. Such contagion effects might then justify the 

use of a euro rescue fund to stabilise Belgium, Portugal, Spain 

and Italy. ECB intervention could also be justified with refer-

ence  to  serious  contagion  problems.  Corsetti  et  al.  (2005; 

2010) define contagion as a structural break in the transmis-

sion mechanism of shocks and Missio/Watzka (2011) follow 

this approach. However, one may add with specific reference 

to Greece that part of contagion problems is typically also one 

of small crisis countries affecting relatively large economies, 

which is counter to the implications of standard small-country 

models in the literature (so there should be no effect of Greece 

on Italy or Spain; e.g. with respect to Italy, trade and invest-

ment links are too small to explain that an economic crisis in 

Greece would affect Italy). Since contagion problems of Greece 

with respect to Italy, Portugal and Spain (plus Belgium) are 

obvious and significant it is clear that any haircut for Greece 

will negatively affect the valuation of Italian, Spanish and Por-

tuguese bonds. Rising interest rates in Italy, Spain and Portugal 

could be the immediate consequence of a haircut for private 

creditors of Greece.

•	

Surveillance	of	economic	policy	should	be	a	natural	element	

of supranational policy in all euro countries and it is indeed 

78

part of the EU’s policy approach. However, surveillance is to 

a large extent effectively delegated to the IMF, which is respon-

sible for its standard Article IV consultations every year and 

for reports on financial stability (financial sector assessment 

programme — FSAP). The EU comes up, however, with its own  

regular reporting, but few consequences are visible from even 

very critical reports, for example on Italy with respect to low 

growth  rates  (the  Commission/DG  Economic  and  Financial 

Affairs has published lengthy reports on growth issues, hence 

it is not true that there is a lack of analytical material on the 

weak points of Italy’s growth performance).

•	

Fiscal	policy	coordination	through	the	Stability	and	Growth	

Pact has turned out to be largely ineffective, as the pact has 

been breached more than 60 times in the first decade and 

no country ever had to pay a fine despite several countries 

showing strong and sustained violations of the pact. The Greek 

government was, however, able to get a first rescue package in 

May 2010 and a second one in autumn 2011 — each time with 

minimal promises in the field of privatisation. The first rescue 

package was given without much consideration of the issue of 

privatisation in Greece. The second rescue package brought 

a lukewarm promise from Greece to privatise EUR 50 billion 

by 2015, which is less than one seventh of overall government 

assets as estimated by the IMF (2010) in December 2010.

Euro Plus Pact

On April 20 2011 the European Council issued a statement on the 

Euro Plus Pact, according to which euro area member countries 

plus  several  other  EU  countries  want  to  strengthen  economic 

governance in order to achieve enhanced fiscal discipline and to 

avoid crit ical macroeconomic imbalances. This includes emphasis 

on a reform of the Stability and Growth Pact aiming at a better 

surveillance of fiscal policies. There is, however, a broad analytical 

lack with respect to the topic of macroeconomic imbalances. It is 

absolutely unclear which analytical basis is taken as the basis of 

selected indicators of macroeconomic imbalances.

Economic and monetary union is likely to fall apart if the key prob-

lems observed in the EU continue.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT79

•	

As	regards	economic	and	monetary	union	and	the	functioning	

of global capital markets there is a lack of understanding as to 

how the systems work, both on the side of the European Coun-

cil and (it seems to a lesser degree) on the side of the European 

Commission.

•	

There	seems	to	be	a	broad	political	view	according	to	which	

agreement of a large number of countries on certain measures 

implies that the measures chosen are adequate. This, however, 

is an irrational approach. The adequacy of any measures sug-

gested and taken depends on a sound analysis of the prob-

lems at hand. Such analysis is missing (for example, in the case 

of the Greek debt crisis), and this is the main reason why the 

Greek debt crisis remains unsolved 2 years after the outbreak in 

late 2009. Well-known economists have contributed with poor 

policy advice — calling for high haircuts and ignoring key con-

tagion aspects — to a partly dangerous policy of the European 

Council in the fields of the Greek debt crisis and the euro crisis 

respectively.

•	

If	the	euro	area’s	leaders	should	be	unwilling	to	discuss	critical	

analysis of their strategy and policy, the EU will most likely fail 

this historical challenge.

Macroeconomic surveillance

Surveillance refers to an indicator-based/qualitative analysis of 

subsystems or the whole economic system of a country, where the 

goal is to identify critical system dynamics that could cause ser-

ious or persistent problems in the country under consideration, as 

well as in other countries. In a European context one may point out 

that general surveillance is more or less an orchestrated effort of 

the IMF, the European Systemic Risk Board (led by the ECB) and the 

EU — see the subsequent exhibit.

In the field of surveillance, for example, one may rely on the IMF’s 

Article IV reports and the updates on the financial sector assess-

ment programme, as well as specific cooperation between the IMF 

and a programme country; that is a country getting funds from 

the IMF. The EU has so far relied on the Stability and Growth Pact 

and the excessive deficit procedure in the euro area. However, the 

pact could not really be enforced. The idea to get earlier access 

80

Figure 1:  General surveillance

General surveillance

IMF

EU

European Central Bank/
European Systemic Risk Board (ESRB)

Reporting

Cooperation

European
semester

Stability and
Growth Pact

Other
elements 

to budget planning data, namely within the European semester, is 

a useful element. However, this does not help in the case of outright 

deficit fraud, as in the case of Greece in 2009.

Starting in 2011 the Commission’s new macroeconomic surveil-

lance approach is about a broad set of indicators. Basically the 

objectives are to look at:

•	

The	financial	stability	of	the	economy,	where	the	European	Sys-

temic Risk Board is of key importance. The working of this new 

institution is still rather unclear, but the role of the ECB could 

become doubtful if the ECB’s buying of government bonds of 

highly indebted countries cannot be explained within a consist-

ent strategy: The ECB as part of the European Systemic Risk 

Board would have to critically assess its own interventions — 

and this is not a convincing role.

•	

Fiscal	 policy	 developments	 within	 the	 framework	 of	 the	

Stability  and  Growth  Pact,  and  procedural  development 

within  the  European  semester.  There  is  an  unsolved  key 

issue here, namely how governments could accept any public 

criticism or even a fine. The only way to impose a fine would 

be an automatic mechanism, for example, a country which 

has not achieved at least a budget surplus of 0.5 % of GDP 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT81

automatically pays 0.25 % of GDP to the European Investment 

Bank. Each country would have to make an advance deposit so 

that no discussion could occur whether or not the country really 

wants to pay the fine or not. So far no real automatic regime 

has been installed and there are no sanctions considered for 

a country that is not achieving a surplus in a boom situation. 

This, however, is — according to the view adopted here — of 

paramount im portance for shifting the deficit path upwards. 

From a political economy perspective one could expect that 

a fine in a surplus situation will be paid; to put it differently, the 

resistance will not be as strong as in a crisis situation in which 

a fine would raise any existing deficit.

•	

The	excessive	imbalance	procedure,	which	means	to	look	at	

the external imbalance and the internal imbalance. There is no 

consistent approach by the EU. From a theoretical perspective, 

one may point out that a poor country normally has a current 

account deficit over many years (since capital flows from rich 

countries to poor countries if catching-up is to take place), but 

this deficit should be financed mainly by foreign direct invest-

ment inflows. Greece’s main problem has been that the country 

had only about 1 % of GDP as FDI inflows in the long run. This is 

so low that it is an indicator that Greece has certain problems. 

Given the global expansion of China and other Asian countries 

one might want to take a critical look at the dynamics of the 

composition of trade: Poor countries which are catching up in 

terms of per capita income should raise export unit values over 

time as more high-quality goods and services are exported; 

better quality of export products is typically associated with 

the production of more knowledge-intensive and capital-inten-

sive goods. Borbely (2006) has shown that Greece and Portugal 

faced considerable problems in the 1990s in certain industries 

when these countries were compared to eastern European EU 

accession countries.

•	

The	Europe	2020	strategy,	which	puts	the	focus	on	sustain-

able  growth  and  cohesion.  Here  the  Commission  has  put 

a focus on green growth, innovation and cohesion. However, 

the results from the Lisbon agenda 2010 were rather sober-

ing  (ECB,  2008)  and  there  could  be  similar  problems  with 

the  Europe  2020  strategy.  It  is  disappointing  that  the  EU 

Lisbon agenda 2010 placed so much emphasis on improving 

82

international competitiveness while Greece and Portugal con-

tinued with a policy leading to sustained high current account 

deficits. In the case of Greece the very low foreign direct invest-

ment inflows should have been taken as a signal that such high 

deficits were not sustainable.

As  regards  the  six  macroeconomic  indicators  selected  by  the 

Commission, it is absolutely unclear why the current account balance 

of a country should be a matter of concern, unless there is a major 

current account deficit of the euro area and this deficit could be 

traced back, to a large extent, to the country considered. However, 

the net external position could be a case for concern, namely to 

the extent that it is high relative to GDP and could trigger a wave 

of  non-confidence  by  investors  from  abroad.  The  real  effective 

exchange rate based on unit labour costs is of some interest in the 

case of a critically negative net external position. In addition, the 

public sector debt–GDP ratio is potentially a concern. Less convin-

cing  is  that  government  should  be  much  concerned  about  real 

house price increases unless they occur in a dramatic way in a short 

time period. This was the case in Ireland, but the main underlying 

problem of Ireland was that its government had not implemented 

any serious prudential supervision since the beginning of the 21st 

century and as a consequence excessive lending in the real estate 

sector in Ireland occurred, which in turn caused extreme relative 

price increases. It is also unclear why the private sector debt–GDP 

ratio  should  be  a particular  cause  of  concern  since  one  should 

assume that private households themselves will know — along with 

advice from the respective banks — what is adequate borrowing. 

Rather one might consider that the European Systemic Risk Council 

should take a look at the ratio of private sector debt to GDP and this 

council’s report could feed into the decisions of the Commission.

From a theoretical point of view one may raise several questions.

•	

To	 what	 extent	 is	 the	 overall	 euro	 current	 account	 position	 

relevant for assessing the vulnerability of individual countries’ 

debt–GDP positions? The answer, surprisingly, is that as long as 

there are no supranational eurobonds the external aggregate 

euro area position is irrelevant — it almost only matters which 

positions individual member countries have. In a monetary 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT83

union without fiscal union even a small member country can 

destabilise the whole monetary union, namely through conta-

gion effects.

•	

If	 the	 eurozone	 has	 no	 extreme	 sustained	 current	 account	

deficit, intra-euro area deficits should not matter, unless the 

national debt–GDP ratio exceeds, for example, 80 %. National 

current account deficits which are financed within the euro sin-

gle market should not be of concern, since an intra-euro area 

current account deficit simply means that people from euro 

area partner countries increase the share of real estate, stocks 

or bonds from the internal deficit country; if the debt–GDP ratio 

exceeds the assumed critical point of 80 % there is some risk 

that, with the debt–GDP ratio further increasing under adverse 

effects, there could be an international confidence crisis which 

first drives up the interest rate of the respective country, and 

which through contagion is undermining the overall stability of 

the euro area and the EU respectively. The intra-euro indebt-

edness would no longer matter much once there were supra-

national eurobonds.

•	

The	emission	of	supranational	eurobonds	should	be	related	to	

the creation of a euro area government and a euro parliament 

which would elect the government; only this euro government 

should be allowed to place eurobonds in the market and the 

ECB would intervene in the future only in supranational bonds 

markets.

Approach of the Commission

The  European  Commission  apparently  interprets  the  sovereign 

debt crisis of many euro countries as largely standing for macro-

economic imbalances, and thus presented on 29 September 2010 

a proposal for a regulation of the European Parliament and of the 

Council on the prevention and correction of macroeconomic imbal-

ances (COM(2010) 527 final): The Commission writes (p. 2):

The emergence of large macroeconomic imbalances, includ-

ing wide and persistent divergences in competitiveness trends, 

proved highly damaging to the European Union, and in par-

ticular to the euro, when the crisis struck. In the years pre-

ceding the crisis, low financing costs fuelled misallocation of 

84

resources, often to less productive uses, feeding unsustainable 

levels of consumption, housing bubbles and accumulation of 

external and internal debt in some Member States. It is there-

fore important to develop a new structured procedure for pre-

vention and correction of adverse macroeconomic imbalances 

in every Member State.

In its communication and report on ‘EMU@10: successes and 

challenges after 10 years of economic and monetary union’ 

the Commission proposed a broad policy agenda with the aim 

of improving the functioning of EMU. It stressed, in particular, 

the need to broaden economic surveillance in order to detect 

and address macroeconomic imbalances at an early stage. 

Enhanced surveillance was seen as particularly warranted in 

the areas of external competitiveness and current account bal-

ances, where noticeable divergences between Member States 

had emerged since the launch of the euro. In order to address 

these challenges, in July 2008 the Euro Group agreed to initiate 

a regular review of developments in competitiveness within the 

euro area that has been fruitful.

Europe 2020 sets out an ambitious and comprehensive strat-

egy towards smart sustainable and inclusive growth for the 

EU economy. Against the background of the crisis it sets a new 

focus on addressing Europe’s weaknesses in the surveillance of 

macro-financial and structural challenges. Taking account of 

the deep economic and financial inter-linkages within the euro 

area and their impact on the single currency, Europe 2020 calls 

for the development of a specific policy framework for the euro 

area to tackle broader macroeconomic imbalances. A mech-

anism embedded in legislation monitoring sources of macro-

economic  imbalances  and  ensuring  appropriate  corrective 

action when necessary is required from that perspective. The 

necessary linkage between preventive and corrective action is 

crucial to avoid painful economic adjustment when imbalances 

grow out of control.

The Commission has developed a complex system for an excessive 

imbalance  procedure  (EIP),  which  is  based  on  a  scoreboard 

backed up by judgmental analysis. The European Commission has 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT85

finally adopted a new set of complex criteria to implement better  

macroeconomic surveillance. While the Commission certainly has 

good intentions, the proposed complex set of indicators is more 

confusing  than  helpful,  and  some  points  emphasised  by  the 

Commission are difficult to understand.

New approach: European semester and 
scoreboard

The European Commission has suggested a new tool for the pre-

ventive monitoring of economic policies of EU member countries, 

particularly concerning fiscal policy. The so-called European semes-

ter is assumed to bring enhanced policy coordination through the 

European Commission. The procedure of the European semester 

can be summarised briefly as follows.

•	

In	March	of	each	year	the	European	Council	will	identify	the	

policy  priorities,  namely  on  the  basis  of  a report  from  the 

European Commission (the annual growth survey published in 

January). Based on this, recommendations will be derived for 

budgetary policy and economic policy of EU Member States.

•	

In	 April	 the	 Member	 States	 will	 submit	 their	 medium-term	

budgetary plans and economic policy strategy to the European 

Commission.

•	

In	June	and	July	the	European	Council	and	the	Council	of	Minis-

ters will issue country-specific proposals and recommendations 

on general economic policies and on budget policy. The European 

Commission’s annual growth survey for the subsequent year will 

assess the implementation progress of these recommendations.

The European Commission has prepared and published several pro-

posals for a scoreboard in the field of macroeconomic policy. Of 

the indicators proposed for the macroeconomic scoreboard, only 

the current account balance is useful for covering the dynamics 

of external indebtedness and the government debt–GDP ratio as 

a sensitive indicator showing how sustainable current fiscal poli-

cies are. Real house price increases should always be monitored by 

economic policymakers but it is quite doubtful to assume that real 

house price increases stand for macroeconomic imbalances; possi-

bly, if strong nominal (and real house) price increases should occur, 

86

regional governments as well as national governments could try 

to encourage construction building by reducing transaction costs 

and selling part of the government’s land to prospective investors.

The surveillance mechanism consists of two key elements.

•	

The	European	Commission	will	monitor	the	scoreboard	indica-

tors: this is stage I of the new European semester approach. 

If specific threshold limits of the scoreboard indicators are 

reached — for example, the upper quartile or the lower quar-

tile of the statistical distribution of each variable are exceeded 

or not achieved — closer analysis by national economic pol-

icymakers should clarify whether or not the macroeconomic 

imbalances are damaging.

•	

Stage	II	will	start	an	excessive	imbalance	procedure	and	this	

should stimulate countries to change their respective policies.

Based on this set of indicators the European Commission then 

wants to establish a multipronged surveillance mechanism.

Conclusions

Surveillance is the regular analysis of macroeconomic variables and 

key policy measures in countries. How good is surveillance, which in 

practice consists of analytical papers written by teams from the IMF, 

the EU or other international organisations or a mixture of organisa-

tions (e.g. the Troika group, which consists of the IMF, the ECB and the 

EU)? Surveillance is useful for creating more transparency and for 

generating pressure for timely economic reforms; however, a system 

of surveillance should be professionally organised and this means 

that there should be external random evaluation of the reports of 

major international organisations. This however is not happening. 

Subsequently, we take a brief look at some IMF surveillance activ-

ities, which are largely believed to be the cream of the analytical crop.

With respect to Greece it is noteworthy that the IMF’s Article 4 con-

sultation report of May 2008 was quite optimistic that the country 

could continue output growth and achieve a balanced budget in 

2010 — the official goal of government. However, in hindsight it is 

well known that Greece’s deficit–GDP ratio had already exploded 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT87

in 2009. Footnote 10 of the IMF Article 4 report of 2007 noted 

(IMF, 2008, p.16): ‘As Figure 3 shows, if real GDP growth dropped 

to 2 % on average, the public debt-to-GDP ratio would rise to 98 % 

by  2013,  compared  with  a  decline  to  72  %  under  the  baseline  

scenario.’ The expected debt–GDP ratio for 2013 is in 2011, how-

ever, close to 160 %. It is surprising how fast the Greek debt–GDP 

developments got out of control.

At the bottom line it is obvious that only a shift towards a euro 

political union can bring long-term stability for monetary integra-

tion in the EU (Welfens, 2012). Government expenditures should be 

shifted from the national to the supranational level, which should 

get about 4 % of the euro area GDP so that fiscal policy can be 

shifted exclusively to the supranational policy layer; expenditures 

on infrastructure, defence and promotion of research and develop-

ment should be key elements of a much larger role for the supra-

national policy layer. A euro area parliament should elect a supra-

national government and this could then also place true eurobonds 

in international capital markets. The present crisis approach of 

European policy organised on the basis of EU/euro summits is inad-

equate, and brings the risk that the role of the European Commis-

sion is further undermined, and that the strongly visible role of Ger-

many and France contributes to resistance of euro partner coun-

tries and could indeed contribute to renewed nationalism in Europe.

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EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT91

Concluding remarks

From a journalist’s point of view who has 

heard all this, it is not as negative as has 

been mentioned. There are also some posi-

tive elements, in that every one of you has 

a solution for the problem. Unfortunately 

they are very different solutions and there 

was not much agreement on some points. 

The  more  long  term  the  perspectives 

become, the less agreement there seems 

to be, at least the long-term perspectives 

seemed very different from what I heard. In 

the short term I think there is some kind of 

agreement that the European Central Bank 

should  play  its  active  role  in  accordance 

with its mandate and there is some chance 

to buy more time.

When it comes to the real key questions of 

real, long-term reforms, I have heard many 

different  things.  I have  heard  from  Elisa 

Ferreira that we have to reinforce owner-

Detlef Fechtner
EU correspondent of Börsen-Zeitung

ship, that it is not a question of simplicity, that we have to give each 

country the chance to elaborate a realistic solution which works in 

this country. On the other hand, Mr Welfens remembered that we 

need some rule-based orientation in the way that we have to go to 

court if some countries do not play by the rules. There were some 

differences between these two positions. From another perspective, 

Laurence Boone told us that the ECB is not the permanent solution 

and the eurobond in its current form is not the permanent solution. 

As I understand, she was in favour of fiscal integration. Mr Eijffin-

ger’s contribution offered us somewhat of a Nike slogan: ‘Just do it’. 

We found some solutions in October, so let’s go on to implement, 

deliver and try to increase the EFSF, and try to give the ECB the 

chance to play an active role.

92

I will conclude with one experience myself. I come from Vienna 

and I was talking to trade unionists about the same issue. This 

will directly link to the next session because all of the proposals 

which were made here, even the fiscal integration, even increas-

ing the EFSF, and asking the Member States to take more financial 

responsibility, are hardly opposed when you talk to common people. 

Therefore, the question we have left for the next session is how to 

translate this into politics and bring Europeans with us along the 

way, because all of these splendid proposals are very difficult to 

implement in the political arena.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXTV. 
Strengthening the 
governance of the 
euro area: political and 
institutional aspects

 José-Maria Gil-Robles
Nikolaos Chountis
Amy Verdun
José Maria de Areilza
Pierre Lemoine

94

Introductory remarks

Dear Professors: my role as session Chair 

is, of course, to act as a moderator, but also 

to  frame  the  main  questions  that  could 

or  should  be  treated  during  the  session. 

I intend to do it shortly and in my mother 

tongue.

1. 

 The first question I have to formulate is 

whether, given the developments in the 

past few weeks, we should put aside 

the ambiguous term ‘governance of the 

euro’ and speak clearly and openly of 

‘economic government of the euro area’ 

without euphemisms.

2. 

 In other words, and said with the same 

clarity, I am asking you: in your opinion, 

should the economic policy in the euro-

zone be ‘managed by common demo-

cratic institutions to which the neces-

sary sovereignty has been delegated’, to 

quote Jean Monnet, or would an inter-

governmental coordination be sufficient?

José-Maria Gil-Robles
Former President of the European 
Parliament; President of the European 
Council for the Jean Monnet programme; 
Jean Monnet Chair and Director of the 
Jean Monnet Centre of Excellence at 
the Complutense University of Madrid; 
President of the Jean Monnet Foundation

3. 

 In both cases, what role should the current European institutions 

play, if they had to play any?

4.  This question is essential: in your opinion, how does the demo-

cratic control of the decisions have to be guaranteed?

5.  Regarding the modus operandi of possible reforms, I understand 

that the most feasible system and least subject to obstructions 

and delays would be to establish enhanced cooperation between 

countries willing to do so, at least before tackling a more radical 

reform of the treaties. Do you share this idea with me or, on the 

contrary, you would prefer other methods?

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT95

Strengthening the governance 
of the euro area: political and 
institutional aspects

Today’s discussion concerns strengthening 

the governance of the euro, especially after 

the recent changes in the management of 

the  common  currency  through  economic 

governance and the political and institu-

tional aspects thereof.

The  discussion  is  taking  place,  however, 

at  a time  when  the  eurozone  debt  crisis 

is  greater  than  ever.  The  debt  crisis,  i.e. 

the ‘follow-up’ to the crisis in 2007–08, is  

taking on new features and dimensions.

We can no longer speak of a crisis of ‘unre-

liable countries’; we can no longer consider 

just the outskirts of the eurozone to be in 

crisis, while the core is on track to healthy 

growth and so on.

The debt crisis is also affecting the likes of 

Germany, as we have recently seen from its 

Nikolaos Chountis
Member of the European Parliament and 
its Committee on Economic and Monetary 
Affairs

failed attempt to borrow from the markets. Italy, Spain and France 

are borrowing at high — borderline prohibitive — interest rates.

In addition, the crisis concerns all eurozone countries and the struc-

ture and architecture of the euro as a common currency.

The other dimension of the crisis is Europe’s heavily indebted banks. 

One only has to see how much the ECB has lent European private 

banks on the interbank market to understand that the banking sys-

tem is being maintained by the liquidity injections of firstly Mr Tri-

chet and now Mr Draghi.

96

The crisis, while having a decidedly economic complexion, is in fact 

political in nature and is rooted in the coexistence of neo-liberalism 

and democracy, i.e. in the market’s policy dichotomy.

The neo-liberal model for economic and political management of 

the world economy was formed in the explosive decades of the 

1970s and 1980s, and its dominance marked the total imposition 

of this economic way of thinking, ‘market efficiency’ and ‘the free 

movement of capital’ having primacy over social achievements, 

welfare and job security.

At the same time, all thoughts of democratic control and legitim-

isation of not just economic choices but also economic policy were 

brushed aside.

We therefore find ourselves in a paradox — which Greece and Italy 

are currently experiencing to the full — where governments and 

parties are successively voted in and social unrest is high but policy 

freedom in general is limited by the notion that neo-liberalism is 

the only way forward for the economy.

Thus, both during the 2008 mortgage loan crisis and subsequently 

in the eurozone debt crisis, politicians, politics and citizens are at 

the margins, while the markets take centre stage, determining 

developments and, ultimately, imposing their own interests.

The sovereignty of the markets over politics has therefore greatly 

influenced explanations for the current crisis and for the policies 

followed to overcome it.

More specifically, the ruling European elites interpret this global 

capitalism crisis as a problem of regulation, a problem of errone-

ous calculations and policies by a national elite which has ruled the 

global system (economic, political and social) these last decades.

They interpret the crisis not as the logical outcome of a system 

which creates huge disparities within its societies, limits democracy 

and overthrows national and popular sovereignty, but as a problem 

of ‘policy technique’, i.e. a problem to be solved by the right mix of 

political, economic and institutional reforms.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT97

For all this, they were not able to anticipate the mutation from the 

credit crisis which hit the USA and the United Kingdom to the debt 

crisis now affecting the eurozone.

On the other hand, the policies in place to overcome the crisis are 

a mix of traditional economic thinking, with the emphasis on aus-

terity, privatisation, circumventing labour rights and disciplining the 

‘unruly countries’; the characteristic features of this are a demo-

cratic deficit and a loss of national sovereignty.

These  policies  have  already  had  a  major  impact  on  Europe’s 

so cieties and economies, with governments ousted for the meas-

ures they have taken or being forced to take other measures which 

have no democratic legitimacy.

The decision of 26 October 2011 failed even before it was imple-

mented. We have already seen two eurozone governments stand 

down, dramatic falls in the markets, spectacular rises in lending 

rates in both ‘indebted’ and ‘prudent’ countries (Greece, Portugal, 

Spain,  Ireland,  Italy,  France,  Germany)  and  officials  calling  into 

question whether the ‘50 % haircut’ will yield results.

As regards economic governance and yesterday’s proposals from 

the European Commission, it is now clear that ‘strengthening gov-

ernance of the euro’ has become something of a standing joke.

The Commission has been trying for a year to get its package of 

six initiatives through the Parliament and to get Ms Merkel and Mr 

Sarkozy to come and impose the Euro Pact on us, following the 

decision of 21 July. And now, following the decision of 26 October, 

the Commission is now saying it intends to issue new regulations 

to: (1) abolish national sovereignty; (2) establish austerity and neo-

liberalism; (3) force these policies to be implemented.

The review of the EU Treaty to legitimise the permanent support 

mechanism under Article 136 and the simplified procedure laid 

down in Article 48.

The involvement of the IMF in the internal affairs of the eurozone 

without prior activation of Article 218 of the Treaty on the Functioning 

98

of the European Union (which stipulates that Parliament’s approval is 

required for ‘agreements with important budgetary implications for 

the Union’) shows that the EU has taken the path of strongly chal-

lenging democratic standards and national sovereignty, to the extent 

that politicians are now being asked for written assurances regarding 

the policies they intend to implement in the coming years.

The  EU  is  undergoing  radical  political  change  and  has  passed 

beyond a critical turning point; the upshot is that the decisions, 

policy considerations, even the electoral processes of the leading 

Member State, Germany, now determine the road ahead and the 

prospects of Europe and the other Member States. They will deter-

mine whether or not unemployed people in Greece will get unem-

ployment benefit, whether or not homeless people in Spain will have 

minimum welfare, and so on.

Therefore, the EU’s answer to the global crisis and debt crisis is 

a poorly defined reinvigoration of political union, a poorly defined 

kind of ‘European integration’, which is taking it back almost a dec-

ade to the discussions on the European constitution and the sub-

stance of European integration.

Here are the questions.

•	

•	

•	

•	

•	

Is	 the	 EU	 simply	 a	 union	 of	 countries	 coordinating	 an	 ever	

increasing number of specific policy features?

If	so,	how	are	people	and	societies	involved?

How	can	such	choices	be	legitimised	or	rejected?

Is	the	EU	a	union	of	countries	and	peoples,	and	to	what	extent	

does this dual process have democratic and social legitimacy?

To	what	extent	are	the	peoples	and	social	classes	of	Europe	

represented in decision-making?

Sadly,  the  prevailing  political  forces  give  no  answers  to  these 

important questions. They prefer to continue along a path, we know 

not how long, no longer of European integration but of neo-liberal 

integration.

But for the left, EU integration and the EU itself are not a panacea. 

They are not neutral procedures, but foreign to social and class 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT99

conflicts within Member States, foreign to political national and 

global conflicts, and foreign to the sharing of geopolitical power 

within Europe.

For  this  reason,  one  factor  that  is  of  crucial  importance  but  is 

quite often overlooked by the leaders and officials of the EU is the  

people — the people who since last summer have been reappearing 

everywhere in the developed world. From the Arab Spring, which 

removed reactionary and authoritarian regimes in place for dec-

ades, to the outraged citizens of Madrid, Athens and Rome, Wall 

Street, San Francisco, Auckland, Wisconsin, the US and the 99 % 

movement in London, Frankfurt, Berlin, and Brussels.

For this is the main solution to the crisis, though we must be ever 

mindful of the democracy, freedom, equality, solidarity, values and 

visions which characterise Europe as a continent, which gave vision 

and hope to whole peoples and which for decades spelled hope for 

the EU, in spite of the initial mistakes that were made when set-

ting it up.

100

Strengthening the governance 
of the euro area: political and 
institutional aspects

Ladies and gentlemen, it is my pleasure to 

be asked to speak to you here this after-

noon.  When  I  was  asked  to  speak  I  was 

first going to be later on tomorrow. When 

I discovered I was going to be the third sec-

tion in the afternoon, and probably with the 

letter V usually the last speaker, I thought 

I’d give you a bit more light entertainment 

besides sort of the dull, negative, predom-

inantly critical and sceptical comments that 

you have heard to date. Not that my talk 

does not have some of that, but I thought 

I would give you some lighter stuff.

I  was  asked  to  give  an  academic  per-

spective  on  the  question  of  how  to 

strengthen  the  governance  of  the  euro 

area — both looking at political and insti-

tutional aspects. Some of you may know 

most of what I have to say but I am going 

to  rehearse  it  anyway.  I  think  when  we 

looked at the issues this morning we had 

Amy Verdun
Jean Monnet Chair, Director of the Jean 
Monnet Centre of Excellence and Chair of 
the Political Science Department at the 
University of Victoria

some of the possible solutions being front-loaded, some of the 

political economic analysis in the second part, and it is my under-

standing that this part is sort of a political institutional analysis of 

where we stand. I will try to shed some light on it from an academic 

perspective.

It seems to me that the European Union stands at a crossroads and 

I would like to highlight some of the recent challenges. Obviously 

the economic challenges that we have been looking at are some of 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT101

the bailouts that were necessary because of the countries not being 

able to refinance their debt. Yet it seems to me that the political 

challenges are maybe even more serious (not that the economic 

challenges are not serious). Rather, it is my concern that some of 

the political challenges are maybe more difficult to address, as it 

will be hard for us to refocus the orientation of citizens and political 

leaders in a direction of creating these many solutions that were 

being offered to us earlier today. We have had resignations of prime 

ministers in Greece and Italy just this last month, and a change of 

government in Spain and other countries where governments have 

been moving from one side of the political spectrum to another. 

Of course, we also have continuous turmoil in financial markets 

and the accompanying governance challenges. So the way I have 

structured the remaining of my 8 minutes are first to look at some 

of the historical background to the situation, then examine some of 

the triggers, the EU responses, some of the lessons from some aca-

demic literature on European Integration and finally look at some 

steps for the future.

If we look at the historical background I am often surprised at how 

many people still need to say we did not see this coming; we did 

not know what was going on. As far as I am concerned the liter-

ature in both political science and economics has highlighted very 

clearly that the design of economic and monetary union from its 

very first day was asymmetrical. Earlier in the day we heard about 

the Werner plan. Already in the 1970s it was clear that the plans 
to create economic and monetary union were called economic and 
monetary union because we needed something on the economic 

side and something on the monetary side. Our journalists and stu-
dents in our classes often write European monetary union as the 
full term for EMU because they have no clue what the ‘economic’ 

is all about. And they sure know it is all about ‘Europe’. But the 

term included the ‘economic’ because it was very much a structure 

within which something needed to be integrated in the economic 

domain. It is at this point in time that we are looking at what that 

‘something’ might be.

Hence, we are looking at incomplete economic integration. What 

has been done in the past is to say that we understand what mon-

etary integration is: we created a central bank, fixed the exchange 

102

rates, even though I could now with hindsight say we understood 

only that part of the monetary integration process which had been 

done successfully under the European Monetary System (EMS). But 

banking supervision, understanding about reporting on national 

accounting and statistics, and at what level we need to oversee 

accounting and supervision was not something that was carefully 

thought through.

On the economic side it was decided that there was insufficient 

understanding of what it was that one would want to do at the EU 

level. Because of a lack of understanding it was decided to just 

leave it for now and work with a system of rules. In a more fis-

cal federalist system, about which we heard Bob Mundell talk this 

morning, we could easily create a more federal-like institution with 

a ministry of finance or a transfer of funds to a higher level that in 

turn would redistribute. For all of that you would need to decide if 

you wanted to have more redistribution through a more federalist-

type system. Because that was not on the cards when economic 

and monetary union was created, that part was underdeveloped. 

But again it was not as if we did not know. In the literature — and 

I contributed to this literature already back in 1996 and 2000 — 

we see emphasis on this point by highlighting that once there is 

a crisis, there will be a recognised need to redesign. And I think we 

are now in that situation where there is a recognised need, and 

the question is will one redesign or will one, if you like, give up 

something.

The rules so far have included the Stability and Growth Pact (SGP), 

and now we have some presentations about how that has been 

strengthened. In 10 years of EMU we have seen that just being 

together in a single currency area means that some matters just 

go through the market place, we have had presenters talk about 

the spreads, but also the lack of spreads in earlier stages. I think 

that one of the other contexts we need to keep in mind is the very 

severe  difficulties  with  treaty  changes,  referendums  that  were 

necessary for constitutional change but also something that was  

present already back in the days of the ratification of the Maas-

tricht treaty: increasing euro scepticism. This is a background that 

makes it very difficult for the leaders right now to say: ‘OK this is the 

crisis we have all seen coming at some point — we know that EMU 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT103

needs to be redesigned’. But in the context of increasing negativity 

around Europe, but also the way in which leaders continue to play, 

if you like, a two-level game where they say one thing to domes-

tic audiences and an entirely different message in the European 

context and then subsequently national leaders proceed to blame 

Europe or each other. It is very difficult to be a visionary leader.

So I just thought I would pull out for you today one of these Euro-

barometer statistics about whether citizens think that Europe is 

a ‘good or a bad thing’. These Eurobarometer statistics are from 

February 2010 and I  also looked at the August 2011 statistics. 

They have not really changed very much. We still see predominantly 

most Member States thinking the European Union is a good thing 

and very few countries that are below. It is of course now chan ging 

a little, the most recent statistics have not been uploaded yet but 

it is showing that there is a bit more worry about it. But overall we 

are still looking at an audience that as a whole thinks the EU is 

a good thing. And it is something we need to keep in mind as we 

move forward.

What are some of the recent triggers? The financial crisis, economic 

crisis, sovereign debt crisis and the euro area crisis. I will speak 

about those now in turn.

The financial crisis: what I think was remarkable from a citizen’s 

perspective and also from a political perspective was that there 

was a very slow EU response. Again if we go back to those Euro-

barometer  statistics,  you  see  that  the  citizens  want  the  EU  to 

respond. Indeed, they actually find the EU responded fairly well. But 

if you actually look at what happened in 2008, most of what the EU 

was doing ended up culminating into a fairly slow response. It is not 

so surprising because the EU, particularly in 2008 (as a result of the 

fairly minor reforms in this area in the years prior to the financial 

crisis) has had very few instruments to respond to a crisis of this 

nature. Instead what we had was a response from Member States. 

It was just referenced in one of the earlier presentations: Ireland 

and securing the bank deposits and being reprimanded by the Ger-

mans who then very quickly did exactly the same. In other words, 

we saw a competition among Member States to respond while the 

EU had a harder time to act collectively. The EU needed to come up 

104

with a coordinated response; it took some time to formulate what 

that response might be, then to speak on behalf of the Member 

States, and again they had to go back to the Member States to have 

that be endorsed.

Economic crisis, the reduction in growth, the reduction in gross 

domestic product (GDP) per capita in the period following the onset 

of the financial crisis, was also quite stark and again the responses 

to this period were predominantly national. One of the reasons we 

have the debt, and we saw again in the presentations earlier the 

reasons why we have increasing debt in the European Union, was 

the belief at that point that they were all thinking like Ben Bernanke 

(Chairman of the US Federal Reserve): ‘The last thing we need is 

that nobody does anything. By all means spend your money!’ At 

this point, of course, everybody was thinking: ‘Well there must have 

been a balance between spending money and not spending every-

thing’, but anyway it was a national response to the economic crisis.

Now we are into the sovereign debt crisis, which clearly follows the 

heavy spending that has happened, with Germany initially opposed 

to any bailouts, but then in the end a bailout was necessary. It was 

a very difficult period of the EU trying to find the right tone and the 

right tools. Yet the EU did find a way to create the European Financial 

Stability Facility (EFSF) and plan for the establishment of the Euro-

pean Stability Mechanism (ESM). And they were looking to create new 

instruments that consist in my view of being quite big steps forward 

compared to where the EU was in the early days. Now in the past days 

and weeks we have seen proposals for deeper political and budgetary 

integration and talks about fiscal union. Again, I think these are huge 

steps compared to where the EU was even just a year ago.

Today we are looking at the euro crisis turmoil and political crises, 

including fall of national governments, which I have already men-

tioned briefly, and I think these are really serious challenges for the 

European Union. Also in part because it is hard for the citizens to 

keep an understanding of who is in charge and what could be some 

of the solutions, the EU is faced with a major challenge.

Let us turn to some of the more academic work in this area, to 

learn some lessons from the European Union’s history. When the 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT105

crisis first erupted it occurred to me that we are seeing yet another 

crisis. If we put this crisis in the context of a whole row of crises 

that we have seen, it almost looks like the European Union is more 

frequently in crisis than it is out of crisis. Think of the long process 

of UK entry into the European Economic Community, the empty 

chair crisis of the late 1960s, eurosclerosis of the 1970s and 1980s, 

difficulties  surrounding  the  Maastricht  treaty  (in  particular  the 

ratification of that treaty), the run up to stage III of EMU, and so on; 

some people say it is the most amazing thing that happened that 

EMU even got off. Then there is the Constitution and its aftermath, 

which includes the French and Dutch referendums that stalled 

the  constitution  process,  then  the  reflection  period  that  led  to  

moving from the Constitutional Treaty to the Lisbon Treaty. It is 

not  an  exaggeration  to  say  that  the  EU  has  experienced  quite 

a lot of crises. Having said all of that, I do think today’s crisis is 

of a different order of magnitude. It is something that is not just 

in  the  internal  heart  of  the  EU  but  it  is  on  every  newspaper  in 

every continent and everybody seems to have an opinion of it, 

including US President Barack Obama coming up in the G20 saying 

something like this (and I paraphrase): ‘You guys have a lot of 

different democracies and hold a lot of meetings. But at some point 

you need to get stuff going’. I think it is something that says a lot.

Another lesson of European integration is again to remind ourselves 

that the European integration process followed a sequential set of 

steps but these would not have necessarily needed to be exactly in 

this sequence. Yet, we are looking at a very late stage of integra-

tion and that in each of those steps the progress has been made in 

order to proceed into deeper integration. We are now somewhere 

between economic and monetary union and political union, and if 

this model does not work we may be returning to having just a sin-

gle market. All of this states that it clearly is something that the EU 

has not really thought through if it is as easy to go back as it is to 

gradually move forward. Now in the literature of European integra-

tion we have a lot of theoretical approaches about how to under-

stand integration and how integration problems are being solved. 

I have just put down four different approaches here that I draw 

on an earlier book I did (Heipertz and Verdun, 2010) published by 

Cambridge University Press, in which we looked at the Stability and 

Growth Pact.

106

What I think is most remarkable is that the literature on European 

integration never really settles on the answer to the question as to 

what drives integration. There are the people who argue that it is 

always the Member States it is has to be in their interest, so an inter-

governmentalist approach that focuses on state interests and bar-

gaining between leaders. Then there is a more functional approach, 

there is a need to do it now, so we need to do the next thing, there is 

a lot of domestic politics, which is typically a little underestimated 

in integration theories because they typically focus on what happens 

at the EU level or how integration has moved forward. But a lot of 

trends can be traced back to what happens in the domestic arena. 

Then of course there is the role of experts and technocrats. What we 

have seen if one looks at these four approaches is that the biggest 

weakness at the current time is sort of, if you like, the intergovern-

mental. It makes it very difficult for national leaders to decide if it is 

in their interest individually to be proactive on Europe and then have 

to sell that back to their constituency, to do that and seem to be 

a winner. If we now have had numerous governments changing direc-

tion after elections, because you know, the financial crisis has been 

interpreted as a failure of this government, then just to stick out your 

neck and try to do something seems to be very difficult. I would hope 

that they are willing to make that step, because I think that is the 

leadership we need right now. I could speak to the other three but 

I think that at some point the chair will look at me from behind and 

say my time is up. I am happy to speak on these other points.

So drawing to a conclusion, I think we are looking at a challenging 

economics that shows the limits of EMU’s institutional design. It 

means that the asymmetrical institutional structure of EMU is being 

brought to the test: how much monetary integration can you have 

without deeper political and economic integration? We have weak 

political leadership and with weak political leadership I mean that 

those actors that have traditionally been taking the lead to move 

the  integration  process  forward  are  not  as  strong  today  as  they 

may have been in times gone by. So typically we look at the Franco-

German axis and it is not something that will surprise any of you 

that it is not a particularly warm relationship between German Chan-

cellor Angela Merkel and French President Nicolas Sarkozy. But it is 

also something that I think the rest of the Union has responsibility 

over, the leadership that would have been possible to be set up by 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT107

having a leadership of the European Council, the leaders that were 

chosen were those that would not rock the boat. You may remember 

all the discussion we had about whether we could have a Tony Blair 

or whether we could have a whoever it would be, but it should not 

be somebody who makes national leaders feel uncomfortable. So, 

it wasn’t only is Merkel doing well or Sarkozy doing well, it is also 

the rest of the EU not willing to give the power that could be there 

to strong leadership in the EU context. The experience of the past 

is that the EU only makes small incremental path-dependent steps 

towards solutions. That is particularly trying at this period of time 

and in that sense it is, in my view, very optimistic that we are now 

seeing lots of people speaking about various different options and 

solutions and possible steps forward. Because I think these steps are 

very difficult to make for the European Union. It always requires many 

different steps and everybody needs checks and balances and needs 

to think it through and have the experts thought about that and what 

we need to do next. And that is merely one of the downsides of, if you 

like, I think a fairly democratic Europe, even if democracy does not 

mean that everybody feels involved. That definitely is an issue. But 

having said that, I think the question for the next little while is how 

do you govern Europe without a full commitment to political union, 

whereas a state-like equivalent would use state-like tools to respond. 

And also, one of the concerns is those citizens who were still permis-

sive towards the European Union. Will they be sympathetic to an EU 

that has taken such a long time to solve the problems? And I think if 

we look at the situation in Spain and Greece and Italy with very high 

youth unemployment we are running the risk of a lost generation 

where so many people are unable to find work. It’s a bit sad to think 

that with a restructuring comes responsibility for a nation state to 

solve its financial problems, but that then gets downgraded on those 

that are very weak in society. Maybe the very brilliant will go and 

move from Spain or Greece or Italy to countries in the north but those 

who are looking after elderly relatives or have young children at home 

or don’t feel secure to go to another country where they might not get 

welfare state payments right away, they will not go. And they will be 

sitting in an environment where it is very difficult to find a job. I think 

it is the responsibility of the EU to think of those people as citizens of 

the EU and not just subjects of the nation state that has failed to do 

its finances. We need to think about how good our proposals are and 

what are we going to achieve. I think I will leave it there.

108

A strengthened government 
for the eurozone: political 
and legal considerations

Introduction

The next few years will determine if Euro-

pean  integration  falters  and  loses  nor-

mativity or, to the contrary, the process is 

revitalised and new qualitative strides are 

made. One thing is certain: things are not 

going to stay the way they are. Conditions 

do not exist for a consolidation and a slow-

ing down of the project, as was believed 

after  the  enlargement  of  2004  and  the 

failure of the European Constitution. The 

current mix of political and economic crises 

surrounding the single currency demands 

a strengthening of integration both inward 

and outward if we are not to see the pro-

cess slip backward.

It is no secret to anyone that the European 

Union has seen better days. On the geo-

political stage on which the United States 

José María de Areilza
Jean Monnet Chair and Dean of the 
IE University Law School

and China are competing, Europe is not a global player. For the 

past 4 years, the economic crisis plaguing our continent has also 

led to a certain degree of retreat toward the individual state. But 

this trend, in which policy seeks refuge in the national realm, had 

already begun some time ago in the EU. Integration had already 

lost normativity, appeal and the ability to mobilise, even before the 

euro crisis struck.

To some extent the European project has been a victim of its own 

success.  Some  time  ago  it  achieved  its  fundamental  goals  of 

peace and shared prosperity, with fantastic landmarks such as the 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT109

creation of an internal market, a single currency and the enlarge-

ment from six founding members to the current 27, representing 

nearly 500 million people. The current refusal to take full advan-

tage of the European system in order to fight the worst economic 

crisis in 70 years stems from this lack of European impetus. The 

crisis emerged just when we were still going through some par-

ticularly tough years, marked by the failure of the Constitution and 

adaptation to a more complex Europe composed of 27 very differ-

ent Member States. But the crisis has highlighted how, now more 

than ever, what is needed is a European political power with the 

legitimacy to manage the EU economy and make its decisions stick.

The complications besetting the current 27-member Union are 

due not only to its size and the scant pro-European sentiment of 

some of the new Member States. Rather, the problem is that among 

the governments of the most populous countries a kind of distan-

cing from the integration process has taken root. The French and 

German trend toward less Europeanism has greatly weakened the 

historic duo that drove and energised integration. Today, relations 

between Paris and Berlin are not what they used to be. They have 

gone  from  being  the  axis  that  shaped  all  major  proposals  for 

moving forward in economic and political integration, to becoming 

a relationship that is complicated and, at times, a bit forced. It is 

no longer a pact among equals who identify long-term interests 

and seek ideas that are attractive for everyone. Between these two 

countries there is now just a weak agreement to help each other 

out over the short term. They have failed to generate an appealing 

vision of Europe with robust supranational institutions, a vision the 

other countries could sign up to. Both governments should resist 

the populist temptation to blame ‘Brussels’ for the world’s woes 

and, with a view to the long term, manage their concerted actions. 

This is the only way to confront the crisis with the advantages that 

come with a bloc on the scale of Europe.

Three challenges in relaunching economic 
and political integration

Mired as we are in a moment of European disorientation, it is easy to 

neglect the fact that integration involves steps forward but also cri-

ses and setbacks. A kind of will-driven or Hegelian vision of history 

110

dominates many allegedly pro-European arguments, according to 

which the EU is running on autopilot toward a supposedly inexor-

able destiny. However, first the Community, and then the Union, have 

been forced to face all kinds of unforeseen circumstances and dif-

ficult situations. The way to stay the course toward integration has 

been to combine the ability to adapt the project to the needs of each 

moment and political leadership committed to dynamic European 

ideals — in other words, the opposite of blind belief in progress.

However, in the euro crisis the Union faces three legal and political 

challenges — not at all simple, and interconnected. I dare say that 

in resolving these challenges the very future of the EU is at stake. 

In essence, the three challenges illustrate the high degree of eco-

nomic and political integration the EU already enjoys, and they can 

be summed up thusly: what is Europe’s political and legal model and 

how can it be strengthened, to what extent should the EU’s drive to 

achieve results take precedence over reforming the rules of play and 

over constitutional introspection, and how does one limit the powers 

of the EU while at the same time allowing it to undertake new tasks?

These challenges appear constantly in debate on the idea of eco-

nomic government, and will engage us thoroughly for the rest of 

this decade.

1.   Rescue the legal–political model after the constitutional 

rescue

Despite the elimination of the term European Community with the 

new Treaty of Lisbon, and people’s sense of being fed up with end-

less debate on treaty reform, with the new Treaty of Lisbon it is 

necessary to enhance the EU model implicit in the rules of play of 

the old and the new European Union.

This political and legal system has been created gradually, over the 

course of more than 50 years, on the basis of institutional practice, 

the jurisprudence of the Luxembourg tribunal and how it is received 

by national judges, and successive treaty reforms.

The EU model is based on the simultaneous creation of a legal fed-

eration and a political confederation, in such a way that the Union 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT111

limits economic protectionism and nationalist excesses (and also 

regional ones) in its Member States, but never aspires to replace 
them and therefore shies away from a statist European discourse, 
which is artificial and counterproductive.

In order to preserve this model, the role of European Union law 

is essential. From a legal standpoint, the goal of simplifying and 

strengthening  the  European  community  of  law  has  not  been 

achieved following the failure of the European Constitution, an 

event which also weakened the so-called ‘material constitution’ 

(basically, the rules governing relations between the EU and its 

Member States and between the EU and Europe’s citizens). The 

rescue of the Constitution’s contents via the Treaty of Lisbon has 

produced  a text  that  is  very  complex  and  does  not  sufficiently 

strengthen the European judicial system and EU legal structures, 

which are essential for developing the internal market and com-

mon policies.

From a political standpoint, we have reached a point of confusion, 
in which people often make the mistake of seeing integration as 

a clash, or a zero sum game between the European project and 

the  development  of  Member  States’  identity.  This  forgets  that 

the Treaty of Rome of 1957 was enacted to provide peace and 

shared prosperity to Member States through a common market, 

not to try over time to erase them and put in their place a European 

macro-state.

It is true that integration requires states to subject themselves to 

legal and economic discipline, an exercise which benefits them over 

the medium and long term. However, in the language of politicians 

and communicators there often appears in a very blunt way the 

idea of ‘Europe vs. its Member States’. And the clash of interests 

between the two levels of government is dramatised in an exagger-

ated fashion. But people do not realise that European integration 

does and must mean national integration, and therefore the revi-

talisation of the identity of each state.

So  it  is  wrong  to  apply  the  models  of  political  organisation  of 

a state to the European institutional system, be it in order to under-

stand it or to criticise and reform it. Many things can be exported 

112

from the national to the European level in terms of the technology 

of democracy: greater transparency, better accountability, limits on 

power. But the European Union has its own system of separation 

of powers, and checks and balances, which is just as good as the 

national one. And European democracy is not comparable to that 

which exists at the national level. It must be founded on plural-

ism and diversity of identities, on a cosmopolitan vision in which 

the national projects of Member States are respected and renewed 

even as European integration moves forward.

2.   The EU should aim to achieve results, but must also continue 

to debate in a democratic way on the European decision-

making process and on its identity and constitutional values

During the constitutional ratification process, much political energy 

was invested — too much, in fact — and the end result is the very 

pragmatic Treaty of Lisbon. It was and is necessary to break out 

of the constitutional labyrinth. A results-oriented approach seems 

most necessary, given the urgency of the economic crisis and grow-

ing demands for the EU to be a global player. But it is also needed 

as a way to breathe new life into the integration process and in 

order to be able to present Member States and Europe’s citizens 

with a blueprint for a better EU.

Since  last  spring  we  have  been  locked  in  a  critical  and  urgent 

debate: what new economic powers should be transferred to Brus-

sels in order to tackle an economic crisis that is jeopardising the 

future of the single European currency?

Member governments have resisted completing the economic gov-

ernment of the euro since it was launched in 1999. The clearest 

example of this inertia was the failure to implement the Lisbon 

agenda approved in 2000, an ambitious programme of economic 

reforms that should have borne fruit in 2010 and in the end was 

reformulated and extended until 2020.

Just 11 years after it was introduced, the euro has not been incor-

porated into a coherent system of European economic governance. 

The crisis struck a bloc that had left too many pieces of the puz-

zle unresolved. Many decisions at the EU level clash with national 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT113

decisions, or run into failure to act at this level. Monetary policy is 

European. But fiscal policy only halfway so, and structural reforms 

depend on each government. International representation of the 

euro is fragmented and so far, oversight of the financial system has 

been in national hands. So the dozen or so banks of true European 

scale and their clients have suffered from the contradictions and 

externalities of being part of a single market but also having to 

answer to regulators with very different requirements and powers.

So after the failure of national-level agencies and bodies to regu-

late financial entities adequately, recently the EU has finally been 

moving toward common regulation and supervision through new 

kinds of EU authority in banking, insurance and securities. At the 

same time, the Union has decided to create a European Systemic 

Risk Board to detect asset bubbles and avert financial collapses. 

And the weekend of 9 and 10 May 2010 will go down in history 

because of the decision by Member States to create an emergency 

bailout fund to save the euro from the sovereign debt crisis engulf-

ing some countries, contradicting the spirit of the no-rescue clause 

of the Maastricht Treaty.

Much more needs to be done. Europe needs to contribute with a sin-

gle voice to the tough and necessary task of reinventing the rules 

of play of the global financial system. The presence of half a dozen 

European representatives in the G20 is not an exercise in harmonic 

European polyphony but rather a display of cacophony. Over the 

medium term, it makes sense to thoroughly Europeanise areas such 

as energy policy, research and development, or higher education. All 

of them are crucial to the continent’s economic future.

But the genie of the constitutional debate has already been let out 

of the bottle. Put another way, the questions about how we govern 

ourselves from Brussels still need answers, and it is not possible to 

go back to the elitism of the first 30 years of integration. For this 

reason, a results-oriented approach should not neglect the deep, 

underlying debate on democracy and the legitimacy of the EU. That 

is the challenge. A technocratic Europe that concerns itself only with 

getting things done would lack sufficient legitimacy at this stage 

of the integration process. We must address how we achieve such 

results and the principles which guide the quest for them and serve 

114

to determine priorities. In other words, we must enhance a kind of 

EU legitimacy based also on its decision-making processes and its 

identity. Although the failure of the European Constitution and the 

difficulties encountered in ratifying the Lisbon Treaty would seem 

to point us in the other direction, it is necessary to keep improv-

ing Europe’s rules of play, with gradual reforms of treaties and the 

Union’s institutional law. German Chancellor Angela Merkel may not 

be after this when she asks to revisit the Lisbon accord, but the 

effects of a renegotiation would yield their share of healthy side 

effects for European democracy.

3.   The EU must find limits to the continued expansion of its 

powers even as it undertakes new tasks

All plans to revitalise the European project require the transfer 

of new powers to Brussels. But as we see in the attitudes of the 

Germans and the British, these days there is major reluctance to 

give more competencies and resources to European institutions so 

they can undertake new tasks, although this is clearly more so the 

case among their national and regional leaders than among their 

everyday citizens. In the past few years there has been a loss of 

confidence in the EU, and the feeling has emerged that it has lost 

its impetus. In essence, the original project to move toward increas-

ingly close union has been diluted. ‘More Europe’ is a slogan that 

has problems, and it had them even before the Constitution project 

was associated with the absurd vision of a European superstate 

prepared to erase Member States’ national sovereignty.

For this reason it is necessary to consolidate and uphold the cur-

rent model of economic and political integration, which respects 

and renews national identities and subjects them to a healthy dose 

of legal and economic discipline. The only possibility for moving 

integration forward cannot be continued expansion of European 

jurisdiction, because part of Europe’s legitimacy rests on material 

limitation of the Union’s powers and people’s perception that more 

integration is not tantamount to less national identity.

In that sense, it is essential to take seriously the idea of limiting 

EU powers and construe that feature not as an obstacle that must 

be overcome, but rather as part of the social contract that is at 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT115

the core of the process and an issue that is key to European and 

national legitimacy — a pact that could follow the principle I have 

formulated with the expression ‘limited Union, limited Member 

States’. The European Union rests on what Miguel Poiares Maduro 

called ‘a constitutional order without constitutional foundations’, 

as a result of which it must limit its material realm of action, even 

if the system retains enough flexibility for the EU to intervene on 

a case-by-case basis in new areas. This aspiration to limitation and 

flexibility requires that eventually some areas of jurisdiction must 

be open to renationalisation. Meanwhile, through voluntary subord-

ination, the Member States are subject to the permanent limitation 

of European integration, also in the material realm of their areas 

of jurisdiction. The distribution and exercising of powers between 

the European and national level has been the most important legal 

and political debate since 1992, and for a long time to come it will 

remain at the heart of European politics. The Treaty of Lisbon has 

established strict legal limits on current European areas of jurisdic-

tion. Luckily it does not contain a restrictive and rigid catalogue. At 

the outset of the European Convention, I witnessed the imperious 

demand in which German regions wanted to transfer their federal 

model to the new European accord, with an attitude toward Brus-

sels that was clearly defensive. Well, the new classification of com-

petencies is flexible, and it will be subject to a double interpretation: 

that of the Luxembourg court, i.e. that of the European political 

process, on one hand, and that of national high courts and national 

parliaments, thanks to the new subsidiarity protocol.

Both levels — national and European — must exercise respons-

ibly the task of setting out limits to the scope of flexible European 

jurisdiction.

In any case, the future transfer of new powers to Brussels should 

be able to happen with the same flexibility with which some can be 

renationalised. What is more, two risks should be averted: on one 

hand, pro-European rhetoric, an escapist way of blaming the EU for 

any pressing problems, often without giving it resources or power 

to deal with them. The other risk would be that of not being able 

to make the European realm serve for horizontal learning of solu-

tions that work in different Member States. The sum of the scope 

of European government and of national areas of jurisdiction can 

116

be a true laboratory for regulation and liberalisation, in the best 

tradition of federalism.

Conclusions

The real obstacle to confronting these three challenges and over-

coming the political and economic crisis is the lack of leadership 

and strategic vision. It is possible to relaunch the process of inte-

gration without the Lisbon Treaty or without reforming it, but not 

without leaders who are capable of policymaking at European insti-

tutions to make them more appealing and thinking over the long 

term about an attractive political blueprint that nearly 500 million 

European citizens perceive as something of their own.

Part of the success of European integration has been the gradual, 

day-to-day development of political and legal community that is 

growing, moving smoothly with the confidence that comes with the 

experience of decades of integration.

But at time there have also been flashes of what we could think was 

the start of a new European epic, an opening to uncharted waters. 

I am thinking of the surprising Schuman Declaration of 1950, of 

the ambitious Treaty of Rome in 1957, of the daring step moving to 

decision-making by majority at the Council of Ministers in the sum-

mer of 1987, of the courageous creation of the euro on 2 May 1998 

or the successive enlargements that have reaffirmed the ideals of 

democracy and shared prosperity across the continent. Europe 

needs more moments like these, ones that are not just decisions 

on those things we already do from Brussels but rather a reflection 

of how we want to do things together to share the future. Javier 

Gomá, a Spanish philosopher, put it this way: ‘The European Union 

has no symbols because the Union itself is the supreme symbol, 

boasting an extraordinary power to integrate. It is a magic formula, 

a prestigious brand without a patent and available for use. The 

originality of this great collective undertaking lies in the fact that 

we have the symbol before the reality that it symbolises.’

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXTIV. 
The EU and global 
macroeconomic governance 
(G8, G20, IMF)

 Enrique Barón Crespo
Marco Buti
Olga Butorina
Dai Bingran
Woosik Moon

118

Resolving the eurozone crisis and 
enhancing global governance

Introduction

The  failure  of  European  governments  to 

resolve  the  eurozone  crisis  from  the  end 

of 2009 through to the spring of 2012 has 

major global implications. If not resolved it 

could result in a serial disintegration of the 

single currency area and the worst economic 

crisis since the 1930s. Meanwhile, although 

the world’s leading countries formed a G20 

after the financial crisis of 2008, there is as 

yet no evidence that it will be more effective 

in avoiding the next financial crisis than was 

the G20 of finance ministers formed after 

the Asian financial crisis at the end of the 

1990s. Both European and global economic 

governance are in question.

This chapter posits that there are lessons to 

be learned in this regard from the manner in 

which the Roosevelt administration brought 

Enrique Barón Crespo
Former President of the European 
Parliament; Jean Monnet Chair at the 
Universidad de Castilla La Mancha; former 
Spanish Minister for Transport, Tourism and 
Communications

the US out of the Depression of the 1930s, and that Europe can 

and should adopt them now by enhanced cooperation without the 

need for either new institutions or treaty changes. It claims that 

the same enhanced cooperation principle could transform the G20 

into a framework for global governance, which can reinforce the 

effectiveness of UN institutions on a mutual advantage basis. It also 

draws lessons from the scope and limits of the post-war Bretton 

Woods conference and the financial institutions that it engendered.

The eurozone crisis

One of the reasons for the failure of Ecofin and the European Coun-

cil to resolve the eurozone crisis is resistance, not least in Germany, 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT119

to debt buyouts, national guarantees, mutual insurance and fiscal 

transfers between Member States.

Yet  none  of  these  are  necessary  either  to  convert  a  share  of 

national bonds on an enhanced cooperation basis to the Union, or 

for net issues of eurobonds.

1. 

In funding the New Deal the Roosevelt administration did not 

buy out the debt of Member States of the American Union, nor 

require them to guarantee US treasury bonds, nor demand fis-

cal transfers from them.

2.  The US funds its treasury bonds from federal taxes whereas 

Europe does not have a common fiscal policy. But Member 

States can finance the share of their national bonds converted 

to Union bonds without fiscal transfers between them.

3.  The EIB has issued its own bonds for 50 years without national 

guarantees or fiscal transfers, and already is twice as large as 

the World Bank. The ECB is the guardian of stability, but the EIB 

Group can safeguard growth.

4.  Conversion of a share of national debt to the Union could be on 

an enhanced cooperation basis whereby some Member States 

could retain their own bonds.

5.  However, a conversion of a share of national into Union bonds 

could be held by the Union on its own account, rather than 

traded. This would ring-fence the converted bonds from rating 

agencies and enable governments to govern rather than the 

agencies rule.

6.  Both Union bonds to stabilise the eurozone and eurobonds to 

finance recovery could be introduced by an enhanced coopera-

tion procedure which would neither bind those Member States 

unwilling to adopt it, nor could be opposed by them.

Enhanced cooperation

Enhanced cooperation is a procedure within the European treaties that 

has rarely been used. But it provides a means by which a minority — 

or majority — of Member States can adopt a common policy without 

them all agreeing to or being bound by it. According to the treaties, 

enhanced cooperation should aim to further the objectives of the 

Union, protect its interests and reinforce its integration process. Such 

120

cooperation should be open at any time to all Member States. The deci-

sion for enhanced cooperation should be adopted: ‘… as a last resort, 

when it has been established that the objectives of such cooperation 

cannot be attained within a reasonable period by the Union as a whole, 

and provided that at least nine Member States participate in it.’

This certainly can be claimed to be the case in relation to the crisis 

of the eurozone which Member States have failed to resolve for 
3 years (1). Enhanced cooperation has further potential for unblock-
ing the eurozone crisis, in that all members of the Council may par-

ticipate in deliberations on the proposal of a policy to be adopted by 

it, but only the members of the Council who want a policy enabled 
by it shall vote on it (2).

This has major implications for bypassing the current deadlock in 

the eurozone and also for decision-making through Union institu-

tions. It is entirely different from the procedure for qualified major-

ity voting, or voting weighted by population, which not only favours 

larger Member States but can in principle bind those in a minority. 

Nine Member States, or more, are needed to invoke an enhanced 

cooperation procedure, but more than nine have been unaffected 

by the downgrading of their debt by rating agencies.

It also has been overlooked that, although an enhanced cooperation 

procedure was not formally invoked at the time, the introduction of 

the euro itself was a de facto case of majority enhanced coopera-

tion. It was adopted by some Member States without the euro being 

imposed on others. The politics also should be self-evident. Nine or 

more such Member States opting either to convert a share of their 

national debt to the EU, or to issue bonds for growth and recovery, 

could not be blocked in doing so by others.

Stabilising the eurozone

The way to stabilise the eurozone is to convert a share of national 

debt to the Union. The conversion could be either of debt of up to 

(1)  See further Article 20 (TEU) and Articles 326 to 334 (TFEU).

(2)  Article 330 TFEU.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT121

60 % of GDP, as outlined in a proposal from the Bruegel Institute 
(3) or of over 60 % as proposed by the German Council of Economic 
Advisers (4).

1.  We and others have supported the former approach for a con-

version of national debt of up to 60 % of GDP, but (in contrast 

with the Bruegel proposal) on the grounds that that this would 

not require a new institution or the joint and several guaran-

tees to which Germany and other Member States are opposed.

2.  The debt converted to Union bonds would not be a write-off 

or require fiscal transfers between Member States. It would 

demand that the Member States agreeing to it service their 

share of it from national revenues.

3.  A conversion of debt of up to 60 % of GDP from Member States 

to the Union would also mean that the remaining national debt 

of most Member States would be Maastricht compliant. Greece 

would be a special problem but, as such, manageable.

4.  This would not require a revision of the Stability and Growth 

Pact but could gain it the credibility it currently lacks with mar-

kets, where rating agencies such as Standard & Poor’s have 

stressed that resolving the eurozone crisis requires growth.

The European Financial Stability Facility could hold the ring debt. 

This would be consistent with its stabilisation remit. It could do so 

even though it is due to be replaced in 2012 by the European Stabil-

ity Mechanism. The converted debt then could be held by the ESM.

The terms of reference for the ESM have not yet been defined. 

Those of the EFSF have proved contentious. Yet the principle that 

converted debt should not be traded would safeguard the EFSF 

from downgrading by rating agencies and bond markets.

(3)  Delpla, J. and von Weizsacker, J. ‘The blue bond proposal’, Bruegel 

policy brief 2010/03, May 2010.

(4)  GCEE, 9 November 2011 http://www.sachverstaendigenrat-irtschaft.

de/aktuellesjahrsgutachten.html

122

Issuing eurobonds for recovery

What we are proposing does not differ in principle from the stability 
bonds proposed by Commission President José Manuel Barroso (5). 
But its context does, in four regards.

First, stabilising eurozone debt does not require the draconian aus-

terity such as has been sought by Chancellor Angela Merkel and 

President Nicolas Sarkozy in their Stability Treaty or Stability Pact, 

which will neither work in reducing debt on a sufficient scale, nor 

gain political consent.

Second, cumulative austerity on the lines that the treaty or pact 

intends will be profoundly damaging for the US and the emerging 

economies by reducing European imports from them.

Third, while some national debt needs to be reduced, Europe needs 

to recover sustainable growth which is the best means of reducing 

debt and deficits. This was shown by the Clinton administration, in 

whose second term growth had ensured that the federal budget 

remained in surplus for 4 years.

Fourth, to finance such growth, the EU should issue its own bonds 

rather  than  only  national  bonds  denominated  in  euros.  Such 

eurobonds would not only attract investment by and from the cen-

tral banks of the emerging economies and sovereign wealth funds, 

but also thereby fulfil a key role in recycling global surpluses and 

thus sustaining a more balanced global economy.

Our case in this regard draws on that which one of us made to 

Jacques Delors in 1993. It lay behind his recommendation that 

Europe should issue its own bonds to counterpart the deflation-

ary effects of a stability and growth pact constraining national 

spending, by ensuring that the Union could finance investments 

in the cohesion areas of health, education, urban renewal and the 

(5)  European Commission, Green Paper on the feasibility of introducing 

stability bonds, COM(2011) 818, November 2011.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT123

environment, and also finance also a European venture capital fund 
for small and medium firms (6).

This design drew directly on the Roosevelt New Deal which achieved 

recovery from the Depression not by cutting debt and deficits but by 

shifting savings — high in either a recession or depression — into 

socially productive investments which also had a major regional 

dimension, such as in the case of the Tennessee Valley Author-

ity. Drawing on the precedent of the New Deal, it also recognised 

that European bonds could finance structural, social and regional 

policies which had been the intent of the 1956 Spaak report for 
a common market (7).

Both stability and growth

Financial inflows to eurobonds from the central banks of emerging 

economies and sovereign wealth funds could make the commitment 

of  Member  States  and  the  European  Parliament  (since  2008)  to 

a European economic recovery programme into a reality. This would in 

turn be to the advantage of both the emerging economies and the US.

The bonds could be issued either by the European Central Bank or 

by the European Investment Fund which one of us recommended 

to Delors in 1993. This was set up by him in 1994, and its role was 

downgraded (after Delors resigned from his 10 year presidency) 

to investment guarantees for small and medium firms. However, 

in recent discussion of a proposal for restarting growth from the 
Economic and Social Committee of the EU (8), a representative of 
the EIF confirmed that it could issue eurobonds without a treaty 

revision. It is also now part of the EIB group which has massive 

and successful experience in bond issues since 1958. Since 1997 it 

(6)  Stuart Holland, The European imperative: economic and social cohe-
sion in the 1990s, Spokesman Books, Nottingham, 1993. Foreword by 
Jacques Delors.

(7) 

Intergovernmental Committee on European Integration, Report on the 
general common market [the Spaak report], Brussels, 1956. MacDou-
gall Report, pp. 14–15.

(8)  European Economic and Social Committee, ‘Growth and sovereign debt 

in the EU: two innovative proposals, ECO 307, February 2012.

124

has also had a remit to do so in order to finance cohesion and con-

vergence investments in health, education, urban renewal, green 

technologies and protection of the environment. It has quadrupled 

its lending and now is more than twice the size of the World Bank.

Although initial flotation of the bonds would be incremental, the 

cumulative inflows from a share of the surpluses of the central 

banks  of  the  emerging  economies  and  sovereign  wealth  funds 

would be substantial, not least when China alone has surpluses 

of more than USD 3 trillion. The inflows could well come to match 

or exceed the Commission’s own resources and do so without the 

fiscal transfers which Germany and some other Member States 

oppose. Incremental issues of eurobonds could also be oversub-
scribed which would merit a low interest rate on them (9).

Global implications

If some Member States of the eurozone default, and the single 

currency serially disintegrates, there would be catastrophic conse-

quences not only for Europe but also for the US and the global trad-

ing system. Yet debt stabilisation by cuts alone in Europe, without 

a recovery programme, would be profoundly damaging for the US 

and risk a double-dip recession in both. By contrast, net issues of 

eurobonds would:

1.  secure the euro as a reserve currency and contribute to the 

more plural global reserve system which is one of the main 

aims of Brazil, Russia, India, China and South Africa;

2.  contribute to balanced global growth, which is a central aim of 

the G20, by recycling global surpluses.

The implications for the US of the euro as a global reserve currency 

are two sided. The dollar would no longer have the advantage of 

being the sole reserve currency. Inversely, it would not be subject to 

the risks of not being able to sustain this.

(9)  The interest rate is of less concern for central banks of emerging econ-
omies and sovereign wealth funds than to diversify their holdings from 
dependence on the dollar. The bonds therefore would primarily have 
a store of value function rather than only revenue generation.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT125

The  depreciation  of  the  dollar  due  to  its  twin  trade  and  fiscal 

deficits has been long standing since the Nixon devaluation. But 

the downgrading of US treasury bonds by Standard & Poor’s in 

April 2011 was the first since S & P started ratings 70 years ago. 

The rating change from ‘stable’ to ‘negative’ means that there is 

a one-third chance of a further downgrade in the next 2 years.

Unlike the US, Europe is broadly in balance in its trade with the rest 

of the world and has no fiscal deficit as a Union, nor would it have 

one on the basis of Union bonds without debt buyouts and without 

national guarantees or fiscal transfers.

Net gains for the US would depend on net issues of eurobonds to 

finance  the  European  economic  recovery  programme.  With  such 

a  recovery,  and  with  Europe  a  third  of  the  global  economy,  US 

exports would increase. In its own interest, yet also to mutual advan-

tage, China could agree to an orderly reduction of its holdings of 

dollars, or to maintain them while its net surplus flows are into euros.

Beyond Bretton Woods

During the 2008 financial crisis calls were being made for a ‘new 

Bretton Woods’. Yet we suggest that such a new agenda for global 

governance also should also recognise the limits to the original 

Bretton Woods design, and also the intentions of Keynes for the 

1943 ‘Keynes plan’. For this was not realistic at the time, nor can 

the world now simply go ‘back to Keynes’.

1.  The Keynes plan was also politically unrealistic. It failed to gain 

acceptance at Bretton Woods because it was supranational. 

His International Clearing Union would have imposed penalties 

on both surplus and deficit countries and have obliged them to 

revalue or devalue. This was unacceptable to the US then and is 

unlikely to be acceptable to the major emerging economies now.

2.  The Keynes plan was a system designed for already developed 

economies in a still colonial era. Most of Africa and much of 

Asia were not ‘at the table’ at Bretton Woods, just as they still 

are not in the ‘green room’ meetings by which some developed 

countries set the WTO agenda and then are surprised that, 

since Cancún, this has been challenged by others.

126

3.  While  Keynes  was  right  in  stressing  the  role  of  effective 

demand, the key issue now is meeting the latent demand for 

higher levels of income and social inclusion of the 1.4 billion 

people who are living on the margins of existence on the equiv-

alent of less than USD 2 a day and, because they have next to 

no income, cannot generate either local effective demand or 

contribute to the expansion of world trade.

4.  This could be achieved by the G20 constituting itself as the 

governing body of a world development organisation which 

could address issues of global economic cooperation on the 

same principle of enhanced cooperation as we are recommend-

ing to resolve the eurozone crisis.

Not only the IMF and World Bank

Such a new framework for global governance would imply key roles 

for the IMF and the World Bank, but depend not only on them nor 

on a protracted renegotiation of voting rights, for several reasons.

1.  The IMF and the World Bank alone cannot assure either global 

recovery  or  sustainable  world  development.  They  lack  the 

resources.

On his appointment to the IMF, Dominique Strauss-Kahn called on 

the major world economies to agree a global economic stimulus, 

and later proposed that the central and eastern European Member 

States should gain early access to the euro without strict financial 

conditionality, yet gained no effective response. Robert Zoellick then 

also called for the European Union to do more to assist central and 

eastern European economies than the World Bank can offer, but 

gained only a partial response.

2.  The sovereign wealth funds should be part of a new global 

financial framework.

The sovereign wealth funds of China and the Middle East already 

have resources more than double those of the IMF. Three of China’s 

four state-owned banks are now the biggest in the world. China 

has sovereign control of their surpluses and does not gain from  

ceding  it  to  a single  supranational  institution  such  as  the  IMF. 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT127

Where it could gain, as could the sovereign wealth funds of the Mid-

dle East and those being created by Brazil from the surpluses of its 

new oil finds, is from an international organisation which does not 

claim sovereignty over them, but through which they could mobilise 

effective joint actions in regional and global investments which can 

sustain demand in the global economy.

3.  Regional development banks and funds have the potential for 

both regional and interregional global roles.

The borrowing and investments of the European Investment Bank 

are already more than double those of the World Bank. The Banco 

Nacional de Desenvolvimento Económico e Social, or BNDES, of 

Brazil, also bigger than the World Bank, is joining forces with the 

Comunidade Andrina de Fomento to finance projects in adjacent 

Latin  American  countries.  Such  development  banks  and  funds 

should be represented in the working groups of a new world devel-

opment organisation.

4.  A major reform of the IMF and the World Bank may be merited 

but could be highly contentious and not gain the support of the 

US Congress.

The very modest 2008 IMF quota and vote reform took nearly 2 years 

to negotiate, yet was cosmetic. China and India between them gained 

not a fifth of the voting share in the IMF, but a fifth of the share that 

the US holds in the IMF. If they were to gain a share proportionate to 

their global influence this could be rejected by the next Congress. By 

contrast, support by a president of the US for a new global develop-

ment organisation that does not depend on protracted reform of the 

IMF and World Bank, nor would be supranational and override the 

sovereignty of the US, could gain the support of the Congress.

Enhanced cooperation and the G20

As with the proposal that the European Union could resolve the 

eurozone crisis on the basis of enhanced cooperation, this also 

could be the principle on which a world development organisa-

tion, of which the G20 nominated the governing body, was able to 

address issues of global cooperation.

128

This could give agency to like-minded governments in the G20 on 

joint initiatives and policies, such as an orderly recycling of global 

surpluses, without binding those who decline to participate in them. 

The IMF and the World Bank would report to the WDO much as had 

been recommended by Dominique Strauss-Kahn when he was the 

director of the IMF. This would enhance both its and their effective-

ness without the need for a protracted revision of the voting on 

their governing bodies.

A world development organisation would parallel the WTO. But it 

would be based on joint actions to promote sustainable growth 

and development rather than a rule-governed mechanism for trade 

such as that of the WTO. It would not exclude future reform of the 

WTO such as increasing its provisions for social or environmental 

protection.

It also could relate directly to the UN and its institutions by includ-

ing them in its working groups and committees, such as those on 

global finance, employment and the environment. It would thereby 

be centrally concerned with offsetting global poverty, promoting 

social inclusion and reducing global warming. Both from them and 

by also including the main regional and multilateral development 

banks and funds, it could gain lateral learning of a kind that ad hoc 

secretariats for G20 meetings cannot.

Traction

Both of the proposals for twin bonds to stabilise eurozone debt and 

restart growth have gained some initial traction. They have been 

supported not only by ourselves and by the Economic and Social 

Committee of the EU, but also by Giuliano Amato, Guy Verhofstadt, 

Michel Rocard and Mario Soares, former prime ministers of Italy, 

Belgium, France and Portugal, as well as by Jacek Saryusz-Wolski, 

former Polish Minister for Europe and by Jan Pronk, former Deputy 
Secretary-General of Unctad (10). Both Verhofstadt and Saryusz 
Wolski (as leaders of the Alliance of Liberal Democrats and the 

(10)  Giuliano Amato and Guy Verhofstadt, ‘A plan to save the euro and curb 
the speculators’, The Financial Times European Edition, July 4 2011.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT129

People’s Party in the European Parliament respectfully) have been 

backing them.

The case that the G20 should constitute a WDO, of which it would 

be the governing body, was also discussed with Permanent Rep-

resentatives to the UN of China, Japan, India, South Africa, Brazil, 

Mexico, the UK and Germany at a meeting in New York in 2009, 

hosted by Nirupam Sen, the High Representative of India. The dis-

cussion was of interest for three reasons. Those who came had 

already seen a paper outlining the case. None of them needed to 

attend unless they were interested. None of them dissented from it, 

they rather than asked questions on practicalities.

Notably, the Permanent Representative for Germany commented 

that it was unlikely that the proposal would be adopted in the near 

future, but that when ‘all else failed’ in terms of gaining effective-

ness from the new G20, it could be a template on which govern-

ments then could draw. Such a time, both in relation to the crisis 

in the eurozone and the need for a feasible framework for global 

governance, is not only overdue, but also could be now.

130

The EU and global macroeconomic 
governance (G8, G20, IMF)

Shifting patterns in 
economic power

Some stylised facts

Economic power is shifting from advanced 

to  emerging  and  developing  countries. 

Emerging markets accounted for nearly two 

thirds of the total growth in global output 

in  the  past  2  years,  compared  with  one 

third in the 1960s. As a result, at the end of 

2010, emerging and developing eco nomies 

accounted  for  48  %  of  global  output 

(measured  in  terms  of  PPP;  34  %  when 

measured  at  current  prices).  The  EU  and 

US contributed for approximately 10 % and 

15 % to world growth respectively in 2010. 

According to the IMF, the share of emerging 

and developing countries in global GDP will 

exceed that of advanced economies from 

2013. China has already overtaken Japan 

Marco Buti
Director-General for Economic and 
Financial Affairs at the European 
Commission

as the world’s third largest economy, after the EU and the US.

The global financial crisis has accelerated this shift in economic 

power — at least for the time being and emerging markets are now 

the growth engine of the global economy.

The share of the EU and euro area in world GDP declined by about 

5 % over the last 2 decades and is expected to decline further over 

the next 2 years. Nevertheless, in 2010, the EU and euro area still 

accounted for 20 % and 15 % of world GDP respectively (meas-

ured in terms of PPP; 26 % and 19 % when measured at current 

prices). At the end of 2010, the EU as a whole remained the largest 

economy in the world.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT131

Shifts in global economic governance

Against this background, if the EU and its Member States want to 

continue to play a key role in world economic affairs, they have to 

agree that they need to speak with one voice and to accelerate the 

move towards unified representation in international institutions.

In the last decade, the large economic and financial size of the euro 

area and the existence of a single monetary and exchange rate 

policy have made euro area policy decisions and economic develop-

ments increasingly relevant for the world economy.

However, because of the fragmentation of our representation in 

international financial institutions, Europe does not have the influ-

ence and leadership commensurate to its economic weight. Despite 

the efforts made to coordinate European positions, on too many 

issues European representatives have different views and are unable 

to promote the European agenda and priorities. While this is a handi-

cap already in normal times, in the current situation it is a major 

drawback that weakens significantly the EU international standing.

It has become increasingly clear that, when faced with a global 

shock for which a collective response is needed, it is both the size 

and the expression of unified positions by Europe that matters in 

influencing the policy responses that will be taken in international 

financial institutions and I. This is why President Barroso in his 

‘State of the Union’ explicitly called for a more unified external rep-

resentation of the euro area and announced that the Commission 

would table soon concrete proposals.

The case for a strengthened EU representation at the international 

level has been reinforced by recent changes in our internal govern-

ance. In particular, further to the joint agreement of the European 

Parliament and the Council on the legislative package to strengthen 

economic governance in the EU and the euro area (the so-called 

legislative six-pack), EU legislation on the conduct of economic pol-

icies in the euro area has widened and deepened.

These developments lay down the basis for ambitious progress on 

the external agenda. To deal with more concrete issues, the rest 

132

of my presentation will focus in particular on two topics: the G20 

and the IMF.

G20

The current crisis was a watershed in global economic governance. 

President Sarkozy and President Barroso, in a meeting in 2008 

with the US President in Camp David, recognised that the finan-

cial crisis required a globally coordinated response and proposed 

to have meetings of the leaders of the G20. Without elevating the 

G20 from a ministerial process to a leader-driven one, many of the 

bold actions and decisions would not have been taken since 2009. 

Therefore, the G20 has now become the ‘prime forum for inter-

national economic cooperation’.

The G20 is unique in bringing together the major advanced and 

emerging economies to coordinate their economic and financial 

policies. It has proven a very effective forum for engaging our inter-

national partners to implement solutions to strengthen global gov-

ernance. It is also driving bilateral relations, in the sense that the 

decision taken in the G20 is a reference for leaders when they meet 

and discuss bilateral economic relations.

Nevertheless,  the  G20’s  emergence  has  also  raised  questions 

about its future role and effectiveness. The G20 is still very much 

in a learning mode and cooperation in the G20 is founded on vol-

untary cooperation. Such an approach is encountering problems 

in delivering concrete policy actions, e.g. with regard to resolving 

global imbalances. The G20 therefore risks losing relevance when 

the momentum for coordinated policy action fades. The G20 should 

ensure that its informality does not mean that there is no need to 

follow through on its political commitments (cf. Cameron report).

Europe is pushing for more macroeconomic policy coordination in 

the context of the G20 ‘Framework for growth’ initiative, in order to 

boost growth and reduce global imbalances. Europe is also actively 

promoting adherence to and implementation of financial regula-

tory reforms. We are active on topics such as the reform of the 

international monetary system and commodity price volatility. In 

addition, the G20 is an appropriate platform to inform our partners 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT133

of developments in Europe and how we are addressing the crisis, 

while we receive feedback from our partners.

On several occasions, the EU has been successful in getting its 

views  across.  For  example,  the  G20  agreed  to  use  a two-step 

approach to select the countries to be scrutinised and to be sub-

mitted to an in-depth analysis so as to identify the root causes of 

persistent imbalances. This two-step approach, which was first sug-

gested by the European Commission at the G20 summit in Seoul, 

has been strongly inspired by the excessive imbalance procedure 

that the EU puts in place to address EU internal imbalances.

Nevertheless, the EU has not always been able to push through 

its position. The EU G20 members occasionally have views which 

are not congruent. Our ex ante internal coordination procedures 

are often cumbersome. We also haven’t fully settled the ques-

tion whether agreements by the G20 are strictly binding for all EU 

Member States. A common theme of my presentation is therefore 

that we need stronger coordination of European positions to push 

forward the European agenda in the G20. Equally, we need better 

internal coordination procedures so that all EU members have some 

ownership of decisions taken by the G20.

Although better cooperation within the EU and euro area is crucial, 

solving today’s euro area crisis is a global challenge. In that respect, 

the Cannes summit came up with mixed results. First, G20 leaders 

committed to ensure that the IMF continues to have resources to play 

its systemic role to the benefit of all of its members and to stand 

ready, if needed, to ensure additional resources could be mobilised in 

a timely manner. However, there was no agreement on the amount 

and  way  by  which  resources  would  be  augmented.  G20  finance 

ministers were tasked to further discuss this issue in the coming 

months. Second, the G20 agreed on an action plan for growth and 

jobs to address short-term vulnerabilities and strengthen medium-

term foundations for growth. The global economy has entered a new 

and difficult phase and global imbalances are widening again. This 

requires  an  increased  attention  and  strengthened  international 

policy cooperation. It is not only the euro area that needs to do its 

homework. Enhanced commitment and action is required from the 

main economic actors as well, especially the US and China.

134

IMF

Let me now turn to the IMF.

The  IMF  has  substantially  strengthened  its  role  over  the  past 

years. It has taken a lead in shaping the debate on macroeconomic 

responses to the crisis and by providing financial assistance also to 

advanced countries, most notably three euro area members.

Europe has always been a staunch supporter of the IMF and our 

relationship has dramatically intensified over the past years. The 

troika of IMF, ECB and Commission is now a standard feature. The 

IMF’s Managing Director is a regular guest at the Eurogroup and 

Ecofin. IMF management discusses with us our policy challenges.

The 2010 quota review significantly realigned quota shares. We 

will  all  have  to  implement  it  quickly.  In  addition,  EU  advanced 

economies have agreed to transfer two of their seats to emer ging 

markets. If nothing is done, all this will imply a loss of weight and 

influence by Europe in the IMF. Against this background, I consider 

that we need a unified euro area representation at the IMF to be 

more effective and visible. Looking at last year’s quota and voice 

discussion,  the  EU  was  clearly  cornered  by  emerging  markets 

and the US, which led to a suboptimal outcome for EU members. 

Our current set-up with EU members being spread around many 

constituencies carries high transaction and coordination costs and 

above all it is inefficient. The crisis has brought to the fore that it is 

of utmost importance for the euro area to speak with a single voice 

on programmes, financing arrangements and the crisis resolution 

policy of the IMF.

At the IMF, we have initiated changes but more needs to be and 

will be done. The Commission is actively pursuing the objective of 

a unified external representation of the euro area in the IMF. The 

commitment by advanced European countries to reduce their rep-

resentation in the IMF offers in our view the ideal starting point. It 

cannot be done overnight as we first need to figure out our internal 

modalities and the IMF has also to make some changes to accom-

modate a euro area chair. In my view, the best way to do it is to set 

out a roadmap, which would start at regrouping euro area Member 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT135

States into predominantly euro area-led constituencies, and move 

after a few years to a euro area-only constituency.

I am convinced that a unified European representation would also 

be very beneficial for the IMF and our partners as we would have 

substantial constructive power to exert leadership and promote 

decisions in the European interest. Europe can provide value-added 

on advancing surveillance as we see a clear need to have a strong 

legal foundation for the IMF’s surveillance and are committed to 

engage in constructive dialogue with the IMF on its surveillance 

of Europe. We have a keen interest that the IMF has the necessary 

tools and adequate resources to fulfil its crisis resolution mandate. 

With a single voice we would be in a better position to reshape the 

IMF’s lending toolkit and to exert leadership on this issue, as we 

are also beefing up our own macro-financial surveillance. Finally, 

let me recall that Europe has always supported the role of the IMF 

in low-income countries and as the largest development aid donor; 

we have a keen interest in shaping the IMF’s policy towards its low-

income countries. Europe would thus become a player as significant 

as the US and would be in a better position to promote its interests.

Conclusion

The EU is one of the largest and most significant economic players 

at the global level. As we have witnessed over the past months, 

for good or bad, our actions or inactions reverberate around the 

globe. Conversely, our economy is affected by the policy choices 

made in other advanced and developing economies. We have there-

fore a strong interest in a well-functioning global economy and in 

a rules-based global economic governance.

Fundamental  changes  in  the  behaviour  of  all  stakeholders  are 

therefore warranted so as to move towards a more cooperative 

environment. In particular, Europe too needs to do its homework. We 

urgently need to bring our domestic house in order and strengthen 

our internal economic governance. To me this is a condicio sine qua 

non so that we can strengthen our external representation.

We Europeans are slowly, maybe too slowly, figuring out that global 

institutions need to be reformed. It is a painful process for some of 

136

our Member States, as any reform that will lead to a more unified 

external representation is likely to limit their individual influence. 

Still this is the way to go.

In the end, we cannot continue to hold on to archaic power struc-

tures in international institutions or attempt to exercise the influ-

ence of an era that is long past. We risk that with growth and 

increasing self-confidence emerging markets will disengage from 

global dialogue if we do not give them a say and the possibility to 

mould multilateral institutions in ways they also think appropri-

ate. But this does not necessarily imply that we have to relinquish 

our leadership role. The increasing weight of emerging markets in 

global governance can be matched by a stronger European voice, 

if we make sure that we push forward a single credible position.

Indeed, the EU has an important comparative advantage vis-à-vis 

other G20 partners, since it has practised enhanced cooperation for 

5 decades. Therefore it has a know-how that may prove very useful 

for the G20 in a long term perspective.

This is the main rationale behind the communication of the external 

representation of the euro area that we are going to present before 

the end of the year.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT137

Economic crisis and EU  
strategic challenges

It has been widely accepted that the cur-

rent economic crisis is tightly linked with 

the fact that EMU combines a centralised 

monetary  policy  with  decentralised  eco-

nomic policies. Recently the European Union 

has taken decisive action to create a much 

stronger economic and fiscal union. Great 

efforts  are  needed  to  put  the  European 

economy on the path to sustainable devel-

opment. Along with the strengthening of 

the economic pillar of EMU and construct-

ing missing institutions, the EU will have 

to deal with some other challenges. In this 

article I will draw attention to the following 

three: (1) the distortion of automatic sta-

bilisers, (2) the changing social structure, 

(3) the need to restore the European idea.

EMU and automatic 
stabilisers of the economy

EMU was created, inter alia, to cope with 

chaotic  movement  in  exchange  rates 

Olga Butorina
Jean Monnet Chair in Economics; Head of 
the European Integration Department at 
the Moscow State Institute of International 
Relations in Russia

caused by different rates of inflation. With EMU, monetary policy 

was passed into the hands of a supranational authority, which alone 

determines the size of issue and interest rates. And as the ECB’s 

main objective is to maintain price stability, then one would expect 

that inflation would be equally low in all countries of the euro area. 

Thus, its monetary factors — issue and interest rate policy — will 

be withdrawn from the competence of national authorities.

However, non-monetary factors remained, including the most impor-

tant one — the growth of labour costs. In theory these must match 

the growth in labour productivity, but in practice wages increase 

138

faster due to the policy of trade unions and because of the soaring 

public sector. For the first 11 years of existence of the single cur-

rency, consumer prices rose a total of 18 % in Germany, and of just 

over 20 % in Austria, Finland and France. In Portugal prices rose by 

32 %, in Ireland and Spain 37 %, while in Greece 40 %.

Due to differences in the inflation rate, the price competitiveness of 

Greek products and services in relation to German ones dropped in 

a period of 11 years by almost 19 %. In earlier times, to maintain 

its competitiveness, Greece would have had to devalue the drachma 

by 19 %. However, within a monetary union this is not possible. 

Since 1998, Greece participated in the exchange rate mechanism 2 

(ERM 2) and on the eve of its entry into EMU, the country held the 

first and the only revaluation of the drachma.

Since the decrease in competitiveness was not offset by depreci-

ation of the national currency, one should expect that imports will 

expand and exports will be squeezed. Indeed, throughout the 1990s 

the Greek negative current account balance averaged 2.8 % of GDP. 

In 2000–05 it was about 6–8 % of GDP, and in 2006–10 it grew to 

10–15 % of GDP. When the country switched to the euro, it for the 

first time got the opportunity to invoice import contracts in national 

currency. The local importers did not assume foreign exchange rate 

risk any more. Previously, when they invoiced trade contracts in Ger-

man marks or French francs, they understood that by the time of 

delivery drachma may depreciate, and they will have to pay more. 

After the introduction of the euro, this limiter has gone. In other 

words, the expectations of depreciation of the drachma acted as 

an automatic stabiliser of the Greek current account balance, but it 

ceased to exist after the introduction of the single currency.

According to one of the Maastricht criteria, the consumer price index 

should be no more than 1.5 percentage points higher than the average 

of the three best-performing EU Member States. Thus, if in the latter it 

is 2 % per annum, then the upper limit is 3.5 %. Consequently, for 10 

years this differential would cause the loss of competitiveness of the 

country with higher inflation by 15 %, and for 20 years — 34 %.

The increase in negative balance on the current account meant 

that economic growth (Greece, Cyprus, Portugal and to some extent 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT139

Spain) must increasingly rely on domestic demand. In Greece it has 

pushed the expansion of the public sector and unjustified increase 

in wages. In the short term these measures will allow domestic 

demand to increase and stimulate economic growth. During the 

period 1999–2008 Greek GDP grew by 3.9 % per annum, which 

was quite high by the standards of the EU. The German economy 

grew by 1.6 % per annum, French by 2.0 % and Italian just 1.2 %.

However, the growth in Greece was not based on a solid economic 

base. Since the early 1990s, the ratio of gross national savings 

to GDP steadily declined. In 1991 it was 21 %, in 2000 already 

16 %, and in 2006 only 9 %. A similar pattern was true for Portugal 

(Fig. 2). In addition, in Italy and Spain before the crisis the share of 

savings to GDP was kept, with a few exceptions, within 20–25 % of 

GDP, and in Ireland it even grew. When Germany and France initi-

ated the reform of the Stability and Growth Pact, they came out 

of the situation in their economies where low growth rates were 

coupled with low inflation and a sufficient level of savings. They did 

not pay much attention to the possible consequences for countries 

with high inflation and low savings rates.

Before Greece joined the euro area, the depreciation of its national 

currency hampered imports of equipment and, thus, modernisa-

tion of the economy. Once a country introduced the euro, which is 

a highly recognised international currency, this obstacle was over-

come. At the same time the usual automatic stabilisers became 

less effective.

Previously, the ability of Greece to borrow in international markets 

was limited. Loans in Greek national currency were not popular 

due to the low level of its internationalisation and high inflation 

expectations. In the economic literature, this phenomenon is called 

the original sin. Loans in foreign currencies assumed the foreign 

exchange risk: if drachma-depreciated debtors had to pay more. 

Having switched to the euro, the Greeks were able to borrow at no 

exchange rate risk, and their appetites increased. Since investors 

calculated their own risks with regard to the currency, and not to 

the country, the cost of borrowing decreased substantially. Greece 

experienced a wider access to external funding on unduly favour-

able terms. This caused macroeconomic imbalances that were not 

140

discovered until the global economic crisis hit the European econ-

omy. This implies that in the coming years the Member States and 

the EU institutions need to rethink the existing policy mix, especially 

for the countries with relatively weak economies, and they should 

be cautious about future enlargement of the euro area.

Changing structure of the European society

Other pan-European problems, the solution of which is impossible 

without active EU involvement, are excessive consumption against 

the backdrop of decreasing global competitiveness of European 

countries, deindustrialisation of the economy and consequent dis-

tortions of personal attitudes, and the dangerous shift in European 

demographic behaviour. All these factors affect, though to varying 

degrees, the mindsets of social groups, whose dissatisfaction may 

turn against the EU and its institutions.

The  deindustrialisation  process  wields  significant  influence  in 

European society. According to data provided by the United Nations 

Conference on Trade and Development (Unctad), the share of the 

population employed in the manufacturing sector shrank to 26 % 

from 42 % between 1970 and 2008. Simultaneously, the share of 

the workforce employed in the services sector increased to 71 % 

from 51 %. These figures indicate that the tertiary sector now 

employs almost three times as many workers than manufacturing. 

The closure of mines and factories is not only the sign of depressed 

terri tories with structural problems and chronic unemployment. It 

is also a disruption of the structure of human society and change 

in  the  system  of  personal  values.  Workers’  dynasties,  within 

which people with secondary education considered themselves 

respected  members  of  society,  have  been  disrupted.  A  highly 

qualified 60-year-old lathe operator knew that his work helped 

turbines rotate and trains run. A 60-year-old waiter, bartender, 

disc jockey and stockbroker are nonsensical. What consoles people 

in these professions on the eve of retirement? The speculation of 

multimillions or decalitres of beer sold?

Mass employment in the tertiary sector significantly complicates 

personal identification and the search for purpose in life. It mul-

tiplies  the  numbers  of  alienated  workers  who  do  not  see  their 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT141

connection to society and view their work only as a means of mak-

ing  money.  Deindustrialisation  generates  prolonged  distortions 

in the labour market. People who would previously have worked 

in factories now seek to join the white-collar ranks. In addition 

to clean work and stable earnings, they also want a confirmation 

of their own importance. From this situation arises a ubiquitous 

aggrandisement of the administrative and state machinery. Accord-

ing to OECD data, 10–17 % of government spending in EU countries 

goes towards maintaining the administrative apparatus, which is 

comparable with education or healthcare expenditures. Interest-

ingly, Greece, a country where state bureaucrats enjoy unimagina-

ble privileges, does not provide such statistics.

In other words, European society is drifting farther from manufac-

turing and is becoming increasingly bureaucratised. Europeans, 

despite a growth of material opportunities, find it all the more dif-

ficult to answer the questions formulated by Felix Antoine Philib-

ert Dupanloup, the Bishop of Orleans (1802–78): whence have we 

come? Who are we? Whither do we go? The lofty goal, the attain-

ment of which an individual is prepared to devote his life to, will be 

imperceptibly lost in the course of paid bills and applied discounts.

Europe’s population is aging; the large 1950s generation of ‘baby 

boomers’ came close to turning 60 in 2010. The number of people 

who have reached this milestone increases by more than two million 

with each passing year, although 3 years ago this figure was a million 

people. As of 2014, the able-bodied population in Europe will start 

shrinking in absolute terms. In practically all European countries, 

national budgets cannot endure the burden of pension payouts. In 

order to cope, governments have to upwardly revise the retirement 

age and to change over to flexible patterns of generating pension 

funds, and proposing workers increase their personal contributions.

Those retiring in 10–15 years’ time will not have an opportunity to 

complete all the required contributions to the funds if they did not 

do so earlier. In 1970, there were four to five able-bodied men and 

women per each retiree in Europe, and in 2010 there were slightly 

more than three. By 2030 this ratio will decrease even more. It will 

be two to one in some countries, including Germany. And if one 

takes into account the fact that no more than 65 % of able-bodied 

142

Europeans are employed (housewives and students are the largest 

non-working groups), then the ratio of pensioners and workers will 

be two to three. The existing systems of social security expend-

itures were not designed to handle such a ratio, and they will not 

withstand it in the future.

The Bank for International Settlements’ (BIS) experts say that state 

debt will grow to 200 % of GDP in Austria, Germany, Italy, the Neth-

erlands and Spain, and 300 % of GDP in France, Greece and Britain 

by 2030 if the current structure of state revenues and expend-

iture remains unchanged. At present, state debt in the euro area 

is approaching 90 % of GDP, which has already created numerous 

problems. In any case, national governments will have to reduce 

pensions. One of the gentler methods of resolving the problem is to 

fan inflation so it would decrease the real debt burden and the cost 

of pension payouts.

Another consequence of demographic shifts is the problem of the 

squeezed generation. Those who are 40–50 years old have been 

caught between obligations to children and to parents. A 50-year-

old man today often has 15-year-old children and parents who are 

75 years old, because he had children later in life than his parents 

did. As the human life span increases, the care of elderly parents 

and provision of high-quality medical treatment for them require 

considerable physical efforts and money. Additionally, the cost of 

raising children becomes more expensive, and the duration of sup-

port more protracted. With every passing decade young Europeans 

leave their homes at an increasingly older age. The same holds true 

for marriage and reproduction. At present, 75 % of young men and 

60 % of young women 20–24 years old across the EU live with their 

parents and do not have permanent partners.

Separation is especially delayed in southern and central Europe. 

For instance, 70 % of Italian men 25–29 years old and 35 % of 

30–34-year-olds live with their parents and without permanent 

partners. A new word, bamboccioni, or ‘overgrown children’ has 

been  coined  to  denote  the  phenomenon.  By  remaining  in  their 

parental homes until their hair turns grey, they do not strive for 

economic independence, instead seeking to spend their moderate 

earnings on fine things, hobbies and entertainment.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT143

People in older age groups have always been critical of the EU, 

and the conditions of the economic crisis strengthened their nega-

tive attitudes. According to opinion polls in 2011, 38 % of people 

older than 40 expressed trust in the EU, while 50 % did not trust 

it. Of course, Brussels is not guilty of all the troubles. However, as 

the euro became a symbol of the EU, so the euro area crisis has 

become a reflection of the crisis of the entire European model. The 

accumulation of huge state and private debts proves that the con-

cept of Wohlstand für Alle (prosperity for all) has contradicted the 

rules of globalisation, in which countries having cheap labour and 

no systems of social security enter world markets.

What can European civil society do in this situation? The first option 

is  to  mobilise  forces  to  defend  the  European  ideal  and  united 

Europe. The second is to retreat, hoping that the elites will some-

how solve everything. Consequences of the latter scenario may 

be the weightiest, not in the sense of a possible departure of one 

country or another from the euro area or the EU, but primarily in the 

sense of further strategies for the continuation of European inte-

gration and its ability to withstand the challenges of globalisation.

Will the European idea survive?

The EU’s biggest problem today is the loss of the European idea and 

the vagueness of European self-identity. Following the end of World 

War II it was clear what Europe needed: peace, concord and affluence. 

Political and ideological confrontation had accelerated centralising 

movements in each of the two blocs. The western European coun-

tries, with difficulty, experienced the loss of global leadership, the 

loss of colonies and growth of the international role of the US and 

the Soviet Union, which is why they gravitated towards each other.

In 1985, when Jacques Delors became President of the European 

Commission and Mikhail Gorbachev took the reins of power in the 

Soviet Union, the European idea resounded with new strength. An 

opportunity had emerged to bridge the continental schism and put 

an end to the Cold War. It excited people’s minds and inflamed their 

hearts. The next two decades were filled with romanticism and hard 

work. Western Europeans erected new levels of integration and 

introduced a single monetary unit. The former socialist countries 

144

built institutions of democracy and market economy. The majority 

of them received full-fledged EU membership from 2004 to 2007, 

while Slovenia and Estonia even entered the euro area. Almost all 

the plans were executed, and dreams came true. The economic cri-

sis which erupted soon after exposed, in addition to Greece’s budg-

etary problems, the absence of a super-idea that would cement 

the Europeans’ sense of solidarity and their readiness to withstand 

dangers together. The Constitutional Treaty necessary for the tran-

sition to a political union had failed 3 years before.

Despite the ongoing process of enlargement, EU leaders have been 

unable to persuasively answer the question of what it means to be 

a European today. The European values specified in the treaty — 

freedom, democracy, human rights, the rule of law — are universal 

for all in the civilised world, and in no way contain specifically ‘Euro-

pean’ characteristics. The mention of Europe’s Christian roots was 

eliminated from the text of the constitution when it was still at the 

preparatory stage.

Moreover, the EU is embarrassed to tell its citizens that contem-

porary Europe is inconceivable without the legacy of the crusades, 

the struggles between popes and emperors, the Renaissance, the 

Reformation and religious wars, colonialism, and the Enlighten-

ment. The socialist period in the history of central Europe has fallen 

under an unspoken ideological ban: all the bad is denounced while 

the good is kept quiet. Many citizens of EU states sincerely do not 

understand the necessity of helping Greece and other countries, 

which have irresponsibly accumulated huge debts, partly through 

the aid of accounting machinations. The Soviet threat or an admit-

tance ticket to the EU are no longer arguments for them.

Soon one more factor will cease to exist, which has infallibly bol-

stered European integration, as the fourth generation born after 

World War II is about to enter political life in Germany. These young 

Germans, once they become voters, may well consider that their 

country has expiated its historical guilt to the Europeans, since it 

has done so much for their unity and prosperity. A broad public 

discussion of the goals and instruments of integration was con-

ducted in Europe in the 1950s and 1960s, and it was then that 

the main ideological and scientific constructs, which support the 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT145

EU at present, were designed. No such discussions have been held 

since that time, and attempts to revive them at the sessions of 

the convention which drafted the text of the Constitutional Treaty 

ended in failure.

The most important tasks include fundamental change in the forms 

of governing the EU and the elimination of the democratic deficit; 

creating a political forum shared by all the countries, where united 

political forces would work out and discuss a single agenda; and 

beginning broad discussions of strategic tasks for Europe and the 

EU in the framework of globalisation. Incidentally, the absence of 

a forum of this kind heavily restricts the field of action for support-

ers of a united Europe. For this reason the decisive role in preparing 

society for change can be played by mass media, social networks 

and blogs. If the most conscientious Europeans succeed in using the 

crisis to initiate large-scale reforms of the EU, the Union and the 

whole of Europe will receive a second lease of life. EU citizens will 

feel much greater solidarity than they feel today and the European 

ideal will be imbued with new meaning.

146

EU and global economic governance: 
a Chinese perspective

When  we  gather  here  in  Brussels  at  this 

year’s  Global  Jean  Monnet  Conference, 

I  would  think  we  all  have  the  debt  crisis 

very much in our minds, and in our hearts. 

Somewhere 10 000 km eastward, the Chi-

nese people are feeling likewise concerned, 

and are having some heated debates on it, 

not only because we are heavily hit by the 

financial crisis as well — maybe in a different 

context — but also because China has had 

a very high stake in the EU, as one of its most 

important trade and economic partners.

Here I would like to present to you some of 

the thoughts that have come upon me out of 

the recent Chinese academic discussions, and 

to present to you some of our understand-

ings and concerns about the current crisis. My 

presentation will be in three parts, namely:

—  Chinese perceptions of the current crisis,

—  eurozone reforms,

—  China’s possible roles.

Dai Bingran
Jean Monnet Chair and Honorary Director 
of the Jean Monnet Centre for European 
Studies at Fudan University; Secretary 
General of the Chinese Society for EU 
Studies

Chinese perceptions of the current crisis

In the final analysis, debt is a lack of liquidity. When a country is in debt, 

the usual way to relieve it, alongside increasing revenues and reducing 

costs, is to raise new loans to cover the old debts. It becomes a crisis 

when the country is no longer able to borrow, either from the markets 

or from other countries. And that seems to be the case with Greece.

We all know that the current financial crisis started with the failure of 

the US subprime mortgage market. Then the question is: why should 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT147

Europe and the rest of the world suffer because of a failure in the US 

financial market, and even more seriously than the US itself?

An answer might well lie in the paradox between the international 

use and the sovereign issue of the US dollar. While people all over 

the world choosing to use the dollar is not the US’s fault, the US 

administration has misused and abused too much of the dollar 

advantage over the years by frequently indulging in the deficit budg-

etary policy. Whenever they ran into debt, they just tried to cover 

the shortage by issuing treasury bonds and printing the dollar, thus 

creating in the world an astronomical amount of speculative capital. 

This capital is, I believe, very much behind the financial crises — this 

debt crisis included — we have had so often nowadays.

A possible way out might be to have another international cur-

rency, which could, in cases, serve as a substitute to the dollar, as 

a means for business transactions and for foreign reserves. This 

was what the Chinese people expected when the euro was created: 

the new currency, backed up by the largest economic entity in the 

world, would play a balancing role to the dollar. Unfortunately, for 

reasons we are all well aware of, the expectation is far from being 

fulfilled; 10 years prove to be insufficient to make the euro into 

such a currency. It itself has now become the prey of international 

financial sharks and has plunged into a crisis unseen in its history.

Eurozone reforms

The eurozone is faced with a double task: to bail some of its Mem-

ber States out of their debt crisis and to mend the euro mechanisms 

to avoid future crisis.

It is true that Greece (and some other Member States too) has to be 

responsible for its heavy debts. However, you must know better than me 

that the current crisis is apparently not just the problem of Greece, but 

also the problem of the eurozone, and maybe of the entire EU, because 

on it rests their common fate. In this sense, to save Greece is to save 

the eurozone, to save the EU, and solidarity is necessary and essential.

With a consensus on this, Greece would not be difficult to save, as 

the eurozone as a whole does not lack money, and the world rather 

148

has too much money. At this particular moment what matters may 

be not just the money, but rather the solidarity spirit and political 

will of the eurozone. If the eurozone is able to show its determin-

ation and muscle, the market will follow the signal.

The  bailout  of  the  debt  crisis  should  go  hand  in  hand  with  the 

medium- or long-term reforms of the euro mechanisms, that is, 

to prevent the crisis from happening again and again. There have 

been suggestions for a fiscal union to go hand in hand with EMU, 

and the talks about a European economic government. It would be, 

of course, quite ideal if such steps could be taken. But the question 

is: are the eurozone or the EU Member States prepared to do so, 

especially at this moment? We have serious doubts. At this juncture, 

better to be practical rather than ambitious.

To our understanding, reforms in this context should include three 

elements.

First of all is a greater vigilance over the fiscal statuses and policies 

of the Member States. This could be fulfilled through reactivating 

the Stability and Growth Pact and making it more legally binding 

for enforcement.

Second, the role and functions of the ECB should be strengthened, 

along the line of making it really like the central bank of the euro-

zone. The ECB has been performing very well in maintaining price 

stability, but as the central bank, its functions should not remain as 

such for much longer. Its monetary policy should be more flexible 

and more growth friendly; and it should have the function and the 

means for monetary operations in times of difficulties, such as issu-

ing bonds and raising loans.

Third, there should be a more vigilant monitoring of the financial 

markets. In this respect, either or both the Commission and the ECB 

should play a more active role and work closely with the related 

authorities and institutions both at EU level and at international 

level, in order to maintain the stability of the financial markets.

More basically, the EU may have to make more effort towards the 

reform  and  adjustment  of  the  real  economy.  The  economies  of 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT149

the EU Member States differentiated greatly during the crisis. It 

is not accidental that certain countries, such as Germany, which 

has had stronger real sectors, fare much better than others, both 

in sustaining the crisis and recovering from it. And the four socio-

economic models in the EU — Scandinavian, Rhine, Anglo-Saxon and 

Mediterranean — performed differently as well. For the economic 

convergence in the eurozone and in the EU, it might be necessary 

to push forward structural reform programmes like ‘Europe 2020’.

China’s possible role

It is a totally wrong concept for China to ‘save’ Europe: Europe does 

not need China to save it; China needs to save itself — our prob-

lems are as serious, if not more serious. But it does not mean that, 

on the question of the European debt crisis, China could or should 

stand impassive. China’s economic wellbeing depends very much 

on its external economic relations, and Europe weighs heavily. From 

this perspective, to ‘save’ Europe is to save China as well.

Then, how? I would think the Chinese government is prepared to take 

part  in  the  rescue  actions,  like  buying  eurobonds  with  its  foreign 

reserves. But it has been somewhat reluctant, and with good reasons. 

For one, if the EU countries, as partners in the eurozone, hesitate to 

rescue Greece, how could China be convinced to intervene? For another, 

the foreign reserves are hard earned, and not to be squandered away; 

while China could buy some Greek bonds out of goodwill, the bulk 

should be guaranteed against losses. So, if there are bonds issued or 

guaranteed by the ECB or the IMF, China would be willing to hold.

China could also do something to support the recovery of the Euro-

pean economy. Even with the shrinking of its exports to Europe, 

it has been trying to increase its imports from Europe. And China 

should try to expand and deepen its economic and trade coopera-

tion with Europe, so as to make their markets more open to each 

other, not only for goods, but also for investment. Between Europe 

and China, there is still vast scope for development, and the impor-

tant thing is to tackle this in the spirit of partnership.

To conclude, in this globalised world, Europe and China share their 

destiny and have to work more closely.

150

European debt crisis and Asian 
responses: a Korean perspective (1)

Introduction 

The current debt crisis could have serious 

repercussions for Asian economies, and in 

particular emerging Asian economies. More 

specifically, if the current Greek crisis spreads 

to Italy and Spain, the world will have a sec-

ond  global  financial  crisis  which  will  have 

far more devastating effects on Asian and 

global  economies  than  the  2008  one  did. 

However, the containment and resolution of 

the crisis is not as straightforward as that of 

the 2008 global crisis, owing to the conflict-

ing interests of the Member States. Germany, 

for instance, is strongly opposed to the use 

of  the  ECB  as  lender  of  last  resort,  while 

most  southern  European  Member  States 

hope that the ECB plays a more active role in 

helping them more easily finance their gov-

ernment debts. In some sense the current 

European crisis is also a political crisis, as it 

would quickly fade if the ECB supported the 

Woosik Moon
Jean Monnet Chair in Economics at the 
Graduate School of International Studies of 
Seoul National University, Korea

troubled southern European Member States more substantially.

Insofar as the European debt crisis is expected to persist, emerging 

economies like Korea can consider three levels of policies. First, 

at the national level, the Korean government can explore reintro-

duction of some types of short-term capital controls which do not 

(1)  The basic idea of this paper was presented in the Global Jean Monnet 
Conference, of 24 to 25 November 2011, on ‘European economic gov-
ernance in an international context’. This work was supported by the 
Korea National Research Foundation Grant (KRF-2009-362-A00001).

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT151

violate free-market principles. Korea and many other emerging 

countries are indeed now trying to do just this. And such attempts 

are not limited to emerging Asian economies; even the EU is consid-

ering similar actions, with one example being its attempt to intro-

duce a Tobin tax on financial transactions.

Second,  at  the  regional  level,  Korea  could  consider  efforts  to 

strengthen  east  Asian  financial  cooperation  and  take  collective 

action to prevent the devastating effects of crises. During the 2008 

global financial crisis, for instance, the Korean Central Bank con-

cluded swap arrangements with the Bank of Japan and the People’s 

Bank of China, which can be considered parts of the regional finan-

cial safety net. This regional financial cooperation can be extended 

further to the taking of common actions against the current Euro-

pean crisis. Korea, Japan and China could, for example, make a joint 

confidence-boosting announcement that they will support the Euro-

pean countries and are willing to invest in the eurobonds issued by 

the European Financial Stability Facility, or in other important Euro-

pean member nations’ bonds. Given that Japan is already one of the 

largest investors in eurobonds, and that China has already made 

a commitment to make such investments, it is high time for the three 

Asian countries to move together to support European countries.

Finally, at the global level, the Korean government has already been 

emphasising the need for establishment of a global financial safety 

net. Strengthening of the IMF’s financial resources and financial 

instruments was one outcome of the G20 Seoul summit meeting 

in 2010, where this was stressed. And in fact, there is no country 

in the world more aware than Korea of the importance of a global 

financial safety net, since Korea has been hit by crisis twice — in 

1997 and in 2008. Unlike during the 1997 currency crisis, however, 

Korea was able to escape from the 2008 crisis owing to the Bank 

of Korea’s currency swap arrangement with the US Federal Reserve 

System, in the amount of USD 30 billion.

The organisation of this paper is as follows: In Section 2, it looks at 

how the European debt crisis affects the Asian economies. In Sec-

tion 3, it examines the possible policy actions that Asian emerging 

economies can take at the national, regional and global levels. Sec-

tion 4 then concludes.

152

Repercussions of the European debt crisis 
on Asian economies

As the European nations struggle to resolve their debt crisis, Asian 

countries cannot hope to be immune from the crisis fallout.

First, the impacts of the crisis on their economies are very visible, 

especially through the turbulence seen in their foreign exchange 

and financial markets. In Korea, for instance, the exchange rate of 

the Korean won vis-à-vis the US dollar has increased substantially 

because of foreign, and especially European, investors who have 

tried to withdraw their capital from Korea. Foreign reserves have 

also dropped. Each time there has been financial turmoil Korea has 

been affected, as it is now one of the most open economies in the 

world with full capital-account liberalisation.

Second, because Asian economies have adopted export-oriented 

growth strategies, their rates of growth will be hit by the abrupt 

fall in export demand and growth of the euro area. Although fis-

cal consolidation could help European economies to recover their 

growth potentials in the long run, it is in the short run very likely 

that their deficits and debt reductions will lead to lower growth and 

lower demand for imports.

Despite these negative shocks, the European debt crisis can have 

only a limited impact if it is short-lived. However, its resolution 

seems a protracted and time-consuming process, and will be very 

difficult for European countries to achieve quickly. The reason for 

this is that, unlike the case of the 2008 global crisis (which was 

able to be eased quickly by the active intervention of the US gov-

ernment and the Federal Reserve), support from the European Cen-

tral Bank in resolving the current European debt crisis can rarely 

be relied on, as its statute regarding central bank independence 

prohibits bailouts of European Member States. During the period 

of transition from the EMS to establishment of the ECB, it seems 

that European countries underestimated the need for a lender of 

last resort, and focused too much on the complete removal of 

exchange-rate variation. This explains why European countries have 

had to create a separate European Financial Stability Facility with 

limited funding power. And as long as containment of the crisis 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT153

depends on support of the EFSF, and not intervention by the ECB, 

it will not be easy to restore necessary market confidence. (See 

for example Moon (2011) for the contrasting experiences of Korea  

during the 1997 Asian crisis and 2008 global financial crisis.)

Naturally, east Asian countries hope that the firepower of the EFSF 

will be sufficient to contain the European debt crisis. There are con-

cerns, however, about whether European countries will be able to 

mobilise sufficient funds to restore market confidence and solve 

the crisis by themselves. In particular, given that the size of the 

EFSF should be extended to EUR 1 trillion, European countries seem 

unlikely to be able to easily mobilise all necessary funds on their 

own, and may need support from non-European countries. Many 

emerging and Asian economies are thus discussing ways of con-

taining the European debt crisis, and committing themselves to 

provision of funds either individually or collectively. To handle the 

European debt crisis and contain its impacts on their economies, 

east Asian countries could consider developing three categories of 

policy — at the national, regional and global levels.

Asian responses

1. National level policies

At the national level, emerging economies must be vigilant about 

short-term capital flows. To prevent short-term capital flows from 

disturbing the Korean financial markets, for instance, the Korean 

government has decided to reintroduce some types of short-term 

capital controls, while at the same trying as much as possible to 

avoid any violation of free-market principles. In particular, a bank 

levy on non-deposit foreign currency liabilities has been introduced, 

to minimise the risk from short-term cross-border capital flows. 

Many other countries are trying to do similar things.

Moreover, some emerging economies like China, Brazil and Russia 

have shown interest in helping the crisis-hit European countries 

through investment in European government bonds. This is espe-

cially due to the requests by some countries (including Spain and 

Italy) to countries holding large volumes of foreign reserves (such 

as China) to buy their sovereign bonds. However, China’s attempt to 

154

tie such financial aid to trade concessions (the designation of it as 

a ‘market economy’) was ill received by many European countries 

as a ‘menacing act of policy leverage’ (Wall Street Journal (2011)). 

The purchase of European bonds by one single country can in this 

regard be neither sufficient to stabilise the threatened European 

countries nor politically feasible.

2. Regional-level approaches

Some groups of non-European countries could collectively invest 

funds in the eurobonds or sovereign bonds of European countries. 

There are two possible groups that might provide such collective 

support, the first being the China–Japan–Korea (CJK) bloc, and the 

second including two Asian countries (Korea and Singapore) and 

two Latin American countries (Brazil and Mexico).

(1) China–Japan–Korea bloc

At the regional level, China, Japan and Korea could consider working 

to strengthen east Asian financial cooperation. So far east Asian 

monetary and financial cooperation has been limited to internal 

issues, and been based on the ASEAN+3 framework as exempli-

fied by the establishment of the Chiang Mai Initiative (CMI). This 

financial cooperation can, however, be further extended to include 

the taking of common positions or actions regarding global finan-

cial issues. The financial cooperation between China, Japan and 

Korea could moreover be strengthened, and in this framework the 

trilateral cooperation secretariat between China, Japan and Korea, 

established in September 2011, will be an important vehicle for 

increasing the countries’ cooperation related not only to regional 

issues but also to the global economic recovery. The leaders of the 

three countries have also reaffirmed their commitment to work 

together to deepen overall cooperation, at the ASEAN+3 summit 

meeting in Bali, Indonesia on 19 November 2011.

From this perspective, one important agenda item that will bind 

Korea, Japan and China together will be common action to help 

resolve the current European crisis. One such measure could be 

an announcement of their intent to invest in the eurobonds issued 

by the EFSF or by other important European member countries, 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT155

which would help to boost market confidence. Given that Japan is 

already one of the largest investors in eurobonds, and that China 

has already committed itself to such investment, it is high time that 

these three Asian countries move together to assist Europe. And 

because these three countries have huge accumulations of official 

foreign reserves, they also need to invest their reserves abroad. 

Until now, however, their main overseas investments have been in 

US treasury bonds (see Table 1), and so they could decide to diver-

sify their overseas reserve investments and hold more European 

government bonds.

Table 1:  Foreign reserves and US treasury bonds held by the CJK (billion USD)

International reserves  
(July 2011)

US treasury securities 
(August 2011)

3 245

1 168

311

1 137

936

32

China

Japan

Korea

Source: IMF

As a matter of fact, Asia as a whole is the most important investor 

in the European government bond market (see Figure 1).

Figure 1:  Geographical breakdown of purchasers of eurobonds issued by the EFSF 
(EUR 3 billion on 22 June 2011, with 5-year maturities)

4 %

4 %

5 %

8 %

33 %

Source: EFSF

Asia-Japan

Asia-ex Japan

Euro zone

Rest of Europe

UK

North America

Middle East

22 %

24 %

156

It is important to note in this regard that, among Asian countries; it 

is not China with the world’s largest volume of foreign reserves but 

Japan, which is thus the most important Asian investor. There are 

two reasons for this. First, apart from the official foreign reserves 

owned by the government sector, private investors in Japan have 

a huge pool of savings which they are eager to invest abroad, while 

the private sector in China does not have sufficient savings and 

still needs more capital from abroad. Further, private investment in 

countries like China is prevented because of capital controls. Sec-

ondly, Japan has an exceptionally low interest rate, so that the cur-

rent yield on eurobonds (5 %) is already quite attractive enough to 

induce Japanese investment. Given the current appreciation of the 

Japanese yen, massive purchases of the euro accompanied by sell-

ing of the yen also helps to mitigate appreciation pressures on the 

yen. To a lesser extent, Korea, with the second largest institutional 

investment market in Asia, is also eager to invest abroad. This is not 

the same case for China.

(2) Korea–Singapore network with Brazil and Mexico

Some Asian countries could collaborate with countries of other 

regions to help increase the firepower of the EFSF. During the 2008 

global financial crisis, Korea, together with Brazil, Mexico and Sin-

gapore, concluded swap arrangements with the US Federal Reserve 

in amounts of USD 30 billion each. The total support available from 

these four countries was thus USD 120 billion. They could theoret-

ically have invested up to USD 120 billion in the European rescue 

fund. (The problem, however, is that a country like Korea needs to 

protect itself from eventual capital outflows, which explains why 

Korea has devoted such great efforts to accumulate as much for-

eign reserve holdings as possible.)

One important pre-condition, however, is that a swap between the 

ECB and the central banks of these countries would need to be set 

up first, if the need were to arise. For Korea, for instance, invest-

ment in eurobonds could be facilitated by its strengthened finan-

cial position thanks to its two recent swap agreements with Japan 

and China. In October 2011, in the face of the European debt crisis 

escalation, Korea and Japan agreed to expand their currency-swap 

arrangement further to USD 70 billion. Later, in the same month, 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT157

Korea and China agreed to double the size of their won–yuan swap 

arrangement, from the existing USD 26 billion to USD 56 billion. 

A future possible swap between Korea and the ECB would certainly 

help Korea to invest more substantially in European government 

bonds.

No matter what groups of countries are ready to support European 

countries, however, there is one important barrier to investing in 

European bonds. The European government bond markets are not 

yet completely unified; they are fragmented, and thus as a whole 

can thus never be compared to the US treasury bond markets. 

Under these circumstances, it is needless to say that European 

countries  should  focus  their  efforts  on  creating  a consolidated 

eurobond market.

3. Global-level cooperation and the G20

At the global level, the Korean government has been emphasis-

ing the need to establish a global financial safety net ever since it 

began participating in meetings of the G20, which has emerged as 

the world’s premier economic forum since the 2008 global finan-

cial crisis. Indeed, the strengthening of the IMF’s financial resources 

and financial instruments are outcomes of the G20 summit meet-

ing hosted by Korea in 2010, in Seoul. And so, if the IMF creates 

an external rescue fund or a special vehicle to support the EFSF 

or European Member States, it is very likely that Korea and some 

other emerging G20 countries will contribute substantial amounts 

of their huge levels of foreign reserve assets to it (see Table 2).

Many emerging G20 countries, including Russia, Brazil and China, 

have shown interest in providing financial resources to help sta-

bilise the European debt crisis, but they have all required as a pre-

condition that European countries put their own houses in order first 

before relying on external funds. However, if the Greek debt crisis 

is not contained quickly by the European countries themselves, and 

if larger European countries such as Spain and Italy face economic 

crises, the IMF and G20 countries will be forced to support these 

European countries regardless, in order to prevent propagation 

of their crises to other countries and regions. In this regard, it is 

im portant to strengthen the financial support capacity of the IMF, 

158

Table 2:  Foreign reserve assets of emerging G20 countries (August 2011)

Foreign reserves (USD)

Argentina

Brazil

India

Indonesia

Mexico

Russia

Saudi Arabia

South Africa

Turkey

Korea

China

Sum

49

354

322

124

138

545

445

49

95

311

3 245

5 677

NB: The data for Mexico and Saudi Arabia are as of July 2011 and December 2010, respectively.

Source: IMF

as its existing financial resources are quite insufficient for coping 

with the European debt crisis. In addition to the chances that it will 

give them to increase their quotas in the IMF, the financial contribu-

tions to the IMF of emerging G20 countries will also be of benefit 

to them since they can still be counted as belonging to their own 

official foreign reserves. And with these considerations in mind it is 

expected that the IMF will eventually increase its financial firepower 

up to USD 1 trillion.

Conclusion

The EU will eventually manage to contain its debt crisis. The history 

of European construction over the last 50 years shows that there 

have been many such periods when Europe has been hit by severe 

economic  or  political  crises.  European  countries  have  always 

overcome these crises, however, through enhanced cooperation 

and collaboration. This is in fact one important lesson to be drawn 

from the European integration process, and in this sense Europe 

can be expected to also overcome the Greek crisis. It will of course 

take a considerable time for the crisis-hit countries to overcome 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT159

the crisis, because the real cause of the current economic problems 

in southern European countries is the loss of their intern ational 

competitiveness. They are at the same time unable to rely on what 

would be an easy solution to this problem, currency devaluation, 

since they have all adopted the single euro currency. They will 

instead need to reduce their public and private spending, which will 

certainly dim the hopes for an early European economic recovery. In 

this regard, the financial support of Asian and other non-European 

countries will be crucial in helping Europe to overcome the crisis 

more easily and quickly.

References

European Financial Stability Facility, ‘Frequently asked questions 

on European Financial Stability Facility,’ August 2011 (available at 

http://www.efsf.europa.eu/about/publications/index.htm).

Moon, W., ‘Whither economic integration in east Asia?’ Paper pre-

sented at the seminar Korea and Europe: At the Crossroads, organ-

ised by GSIS, Seoul, 2010.

National University, and GEM, Sciences-Po, held in Paris on Octo-

ber 18. Moon, W., ‘International monetary order after the global 

financial crisis: an implication for Asian monetary cooperation,’ 

Korean–German Economic Review, 2009.

‘China’s European trade fumble’, Review & Outlook Asia, Wall Street 

Journal, 20 September 2011.

VII. 
Closing session

Jan Truszczyński
Marco Buti
Fritz Breuss
Etienne Davignon
Dusan Sidjanski*

(*apologised for his absence; text distributed to participants)

162

Jan Truszczyński
Director-General for Education, Training, 
Culture and Youth of the European 
Commission

Ladies and gentlemen, let us move to our 

closing round. We have three particularly 

distinguished  speakers:  Mr  Marco  Buti, 

Director-General for Economic and Finan-

cial Affairs at the European Commission; 

Professor Fritz Breuss from WU Vienna; and 

Viscount Etienne Davignon.

We will start with Director-General Marco 

Buti, who just led the panel some moments 

ago  and  now  wishes  to  share  with  you 

some final remarks, observations, thoughts, 

and ideas.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT163

Closing remarks

Thank you very much Jan. We are on a fire-

fighting  mission,  not  only  every  day  but 

every moment of the day. Often, for obvious 

reasons, we are fighting like ‘pompiers’ and 

perhaps do not pay attention to the broader 

picture. This is perhaps an occasion to lift 

the  eyes  from  the  ground  and  look  for-

ward. One has to acknowledge that, as has 

always been the case in the past, European 

integration has really been forged during 

periods  of  crisis;  the  leaps  forward  have 

been made when the threats were greater.

We are now in one of those periods. Momen-

tous changes are taking place, and the fire-

fighting  is  going  hand-in-hand  with  wide 

fundamental reforms. Obviously, one can 

turn the case on its head. I think that we are 

going to be in relatively good health in the 

longer term. The firefighting is for that; now.

What is the task at hand?

Maro Buti
Director-General for Economic and 
Financial Affairs at the European 
Commission

I think the task at hand now is to break the vicious circle between 

the sovereign debt crisis, financial banking and stress and economic 

activity. At the moment we have this vicious circle and we need 

a circuit breaker, or several circuit breakers. This is the challenge in 

the very short term.

Then there is a challenge in the medium to long term, and here in 

economic terms, this is related, in my view, to the nature of the cri-

sis I alluded to in my previous intervention. This is not an ordinary 

crisis. It is not only a deep one, it is a crisis leaving a long-lasting 

legacy. So the scars in the economic tissue are going to be quite 

deep and long lasting. In the economic literature, this has been 

essentially driven by Kenneth Rogoff and Carmen Reinhart, who 

164

have analysed the effects of financial crises in the past, and what 

you have here following the financial crisis is the need for a delev-

eraging of the private sector, and on the public sector it will lead to 

a period of subdued growth for a while. If one looks at the current 

recovery it is more moderate than it has been in the past. Obviously 

this is not a fatality. It means that we have to devise our policies so 

that we can tackle these long-lasting and deep-rooted problems.

To summarise, what we need is that we cannot afford here to have 

a separation between the firefighting in the very short term and 

what needs to be done in the medium to long term. We cannot afford 

to say that now we are not bothered about growth in the longer 

term. From an economic policy perspective, we have to combine the 

two. This is very clear, and also the markets have realised that and 

they are pushing for that. What one has seen in the last year is that 

credit-rating agencies are looking at the spreads and the attention 

has shifted back and forth between fiscal consolidation and putting 

public finances in order. When countries have taken measures to 

reign in budget deficits, the markets haves said yes, but where is 

growth coming from? So there is a need here to combine the short 

term with the medium to long term. For the medium to long term, we 

know what needs to be done for Europe; there is no surprise here. We 

have put forward and analysed this for many years. From this point 

of view the crisis has not changed fundamentally. The same priorities 

remain as those which were identified before the crisis. But what the 

crisis has done is that it has made all these changes more urgent.

For the medium to longer term, we have the agenda of Europe 

2020, and the Commission has come out two days ago with the 

kick-off of the second European semester with the annual growth 

survey, where we indicate the priorities that should be pursued in 

the next 12 to 18 months, and these are the classic recipes that we 

have advocated for several years to boost potential growth, struc-

tural reforms boosting productivity and so on and so forth.

As  part  of  the  systemic  response,  there  is  also  the  institutional 

dimension. We have clearly realised that we are much more intercon-

nected than we thought. I think as economists we have responsibility 

here. When in the pre-crisis period we had to address the spillover in 

other countries, our models gave relatively little impact. So these are 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT165

not standard macroeconomic models. The crisis has shown the degree 

of interpenetration that we have on the global level, and I mentioned 

before the extremely high correlation of growth across the globe and 

the fact that we cannot count on the decoupling of any sort. But in 

particular with the euro area the degree of interconnection is very 

high and the fact that a small country like Greece can have systemic 

implications for all the others clearly points to the need to have a sys-

temic response, and part of the systemic response is the reform of 

economic governance which we are pursuing right now.

The  Commission  has  come  forward  a  few  weeks  ago  with 

a roadmap for growth and stability. It has essentially four points 

dealing with the Greek problem and with other vulnerable countries. 

Secondly it is building credible firewalls by strengthening mech-

anisms.  The  third  point  is  that  it  is  strengthening  the  banking 

system, both in terms of recapitalisation and in terms of access to 

funding. Finally to reform and deepen economic governance.

The crisis helps to focus attention and helps to overcome redlines 

and to remove resistance that has been there for decades. What we 

have been able to achieve in the past 2 years is actually extraord-

inary at the level of the management of the Union and the euro area. 

Again, once we will be beyond the tunnel of the crisis and we have 

to put all our energy now in the next weeks leading to the European 

Council on the 9 December. But once we will be out of the tunnel of 

the crisis I think that we will be left with an institutional architecture 

which is considerably stronger than what we had before.

We have been fighting for decades to strengthen the coordination 

and the supervision of financial markets. The Council and the Par-

liament have adopted a supervisory package with the supervision 

of the European authorities for the creation of a European sys-

tem. Again it is not the final step or the final solution, but it is very 

important progress in making sure that we have better control of 

financial markets and so we will spot future crises much earlier. On 

this there was a full blockage for many many years; we could not 

talk about that. But the crisis has helped to remove this.

Second, we have reformed the Stability and Growth Pact. In the 

past this pact had the problem of enforcement and a new reform 

166

that is going to be implemented as soon as it comes into force in 

mid December, has strengthened very substantially the enforce-

ment mechanism of the pact.

We have adopted a new so-called ‘excessive imbalances procedure’. 

In the past we have put exclusive attention on the public finances. 

There is an issue of internal imbalances within the euro area which 

has to be tackled and will be dealt with this new surveillance.

We have come out today with proposals on strengthening the budg-

etary surveillance and strengthening the surveillance for vulner-

able countries. There are two proposals for the euro area under 

Article 136, which is the one new article in the Lisbon Treaty which 

allows stronger coordination of euro area countries. And we have 

come forward with a Green Paper on eurobonds which puts for-

wards ideas and makes an assessment of pros and cons of moving 

to eurobonds. In this stage of the crisis there has been quite a lot 

of reaction; we knew it was controversial, but we knew also that we 

had the right and the duty to put forward ambitious proposals. We 

are going to have a short period of consultation on that and we will 

draw up the concrete proposals later on.

As I announced in my previous speech, we are going to come out 

before the end of the year with a communication with proposals 

of a roadmap towards a unified representation of the Union and 

a euro area in global form.

This was just a brief picture of what is ongoing, and if one takes 

a bit of distance from the urgencies of everyday and compares 

this to the kind of system of surveillance and coordination that 

we had before the crisis, I think this is a very important change. 

Even if we are only in this period, trapped in intergovernmental 

temptations with directorates and countries taking the lead and 

not always being very supportive of la méthode communautaire 

which has allowed us to progress over the last 50 years. What 

actually comes out here is a considerable strengthening of Euro-

pean institutions and I think we are going to be better equipped to 

deal with the forthcoming problems and the very formidable chal-

lenges with a new institutional architecture than we were before 

the crisis.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT167

Jan Truszczyński

Thank you Mr Buti. It is comforting to hear that in all this firefight-

ing we are not losing sight of the wood for the trees. We are able to 

look further afield and consider solutions, not only consider but also 

propose solutions, to create a better and more efficient architecture 

for the future.

We now move to our next speaker, Professor Fritz Breuss, who is at 

the Business Institute für Wirtscahftsforschung. Beyond his aca-

demic research in this institute focusing on the field of European 

economy, where he leads the academic unit on European economy, 

he has been visiting professor overseas at Berkeley. He has also 

been visiting professor elsewhere in Europe, including at Cam-

bridge University, but his main base is Vienna and his main subject 

remains European integration. He has kindly agreed to give this 

conference speech to us.

168

Euro crisis as a chance for 
a restart of the European Union

Fritz Breuss
Professor at WU Vienna

If the euro survives the EU 
will also survive

Economic and monetary union (EMU) of the 

EU with the single currency euro is the most 

ambitious  integration  project  in  Europe 

after the customs union and the single mar-

ket. A single market only functions properly 

if all Member States can participate under 

the same rules of the game. Also the elim-

ination of exchange rate uncertainties is 

an  important  ingredient.  This  ambitious 

project,  however,  came  to  a halt.  Out  of 

27  EU  Member  States  only  17  countries 

are members of the eurozone. EU’s single 

market, therefore, is split into two blocks, 

in a group of countries with the euro and 

countries which can still disturb the single 

market  by  devaluating  against  the  euro. 

Due to the unfolding debt problems in some Member States of the 

eurozone in the aftermath of the global financial and economic cri-

sis as of 2008/09 one can hardly expect a fast expansion of the 

eurozone. On the contrary, one could rather expect a downsizing of 

the eurozone if the problems of indebtedness and the absence of 

competitiveness in the periphery countries cannot be solved quickly.

A breakdown of the eurozone would imply a bad setback for the 

perception of Europe in the world. The euro is the ‘face of Europe’. 

Returning  to  the  national  currency  muddle  would  marginalise 

Europe and the EU in the international political and economic power 

play (globalisation). The EU’s single market could no longer deliver 

its full integration potentials. Therefore all efforts are welcome 

which eliminate the constructional flaw of EMU, which was revealed 

mercilessly by the crisis in 2009. More Europe is needed — not only 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT169

in the monetary policy, but also in the area of economic and fiscal 

policy (fiscal union). In this spirit the euro crisis could be a chance 

for a restart of the EU via a reform of the EU Treaty.

If one airily names the sovereign debt crisis in the eurozone as 

a ‘euro crisis’ one should not forget that we do not have a ‘crisis 

of the euro’. An obvious piece of evidence is the fact that the euro 

exchange rate vis-à-vis the US dollar did not ‘crash’ when the Greek 

crisis broke out in May 2010. In contrast, since then it fluctuated 

within a band of USD/EUR 1.30 to 1.50.

The ‘construction flaw’ of the eurozone

EU’s EMU has been grounded on the wrong principle, namely on the 

idea of ‘one market, one money’ (this was the title of a comprehen-

sive study commissioned by the European Commission in 1990). Nor-

mally, monetary unions function on the principle ‘one country, one 

money’. History tells us that there was no functioning monetary union 

based on a union of independent states. A bad omen for EU’s EMU is 

the famous undertaking of the ‘Latin Monetary Union’, which existed 

from December 1865 until 1914 or until December 1926. Greece was 

also a member of that monetary union, which in the end failed.

The  European  Union  is  —  according  to  the  judgement  of  the 

German  Federal  Constitutional  Court  (Bundesverfassungsger-

ichtshof) — only a ‘union of states’ (Staatenverbund). Therefore, 

the Eurozone, with its 17 Member States, works on the basis of an 

asymmetric economic policy architecture. In contrast, the US’s eco-

nomic policy acts symmetrically. In EMU the centralised monetary 

policy goes along with a decentralised economic (fiscal) policy. For 

the time being, EMU therefore consists only of the ‘M’, monetary, 

but not yet of ‘E’, an economic union. In order to have a functioning 

monetary union, in the end it would need a ‘political union’ (which 

could not be realised in 1998 because of the British veto) and lastly 

the ‘United States of Europe’ (USE).

Lessons learned from the crisis

Since 2009/10 the EU’s EMU has undergone its most severe crisis. 

It is not so much that the euro is in danger, but that some Member 

170

States  of  the  eurozone  are  at  the  brink  of  national  insolvency 

because of indebtedness and lack of competitiveness. The con-

struction flaws of EMU and its policy design have been revealed 

crystal clear by the crisis in the eurozone, triggered off by the stark 

indebtedness in some periphery states of the eurozone in the after-

math of the Great Recession as of 2009 and due to the drifting 

apart of competitiveness between the Member States. The great 

shock of the crisis taught us what we must improve in economic 

governance in order to be able to cope better with future shocks 

and to give the eurozone a chance to survive.

The following policy areas exhibit imperfections/weaknesses and 

lack of adequate policy instruments.

• 

‘European business cycle’: Despite the hope at the beginning of 

EMU we still lack such a thing. However, a common European 

cycle would be a prerequisite for a functioning common mon-

etary policy working with a single interest rate for all Member 

States of the eurozone. The single nominal interest rate in the 

eurozone  translated  into  different  real  interest  rates  due  to 

diverging inflation rates in the Member States. This lead to mis-

allocation of capital. In those countries (in the periphery or in the 

PIIGS — Portugal, Ireland, Italy, Greece and Spain) which had 

to adjust their high interest rates to the lower eurozone level at 

entry into EMU the low interest rate policy lead to wrong signals 

to investors and consumers in the private and public sectors and 

hence to misallocation and to an unnatural indebtedness.

Since 1999, the diverging capacity to adjust to the needs of a single 

currency (the loss of the instrument of depreciating their national 

currencies) lead increasingly to a drift apart of competitiveness 

(measured by unit labour costs relative to average eurozone values 

or real exchange rate). The countries of the former hard currency 

or DM bloc in core Europe — in particular Germany and Austria — 

improved  their  competitiveness  whereas  the  PIIGS  lost  theirs. 

Before the start of EMU the latter countries always corrected the 

weaknesses in their current accounts by depreciating their curren-

cies against that of the hard currency bloc. Unfortunately, the PIIGS 

did not learn how to cope with the new situation of a single cur-

rency — they were not ready to depreciate ‘internally’, i.e. to adjust 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT171

wages to the development of productivity (productivity-oriented 

wage policy).

•	

Centralised	fiscal	policy	(fiscal	union):	It	would	be	important	to	

have a stronger centralised fiscal policy at EU level as pendant 

of the already centralised monetary policy. Up to now the ‘cen-

tralised fiscal policy’ was only emulated or simulated via the 

coordination exercises of the Stability and Growth Pact (SGP). 

These efforts were not credible — not least because it was not 

respected, even by France and Germany in 2003/04, and cir-

cumvented twice by data manipulations in Greece; in addition 

its violation was never sanctioned. Hence, hitherto the SGP was 

not binding and inefficient.

On 13 December 2011, in order to improve economic policy govern-

ance, the ‘six-pack’ (with five regulations and one directive) was put 

into force. Three regulations and one directive aim at reforming the 

SGP (SGP III); two regulations deal with the surveillance of macro-

economic imbalances.

(a)  SGP  III:  On  23  November  2011  the  European  Commission 

proposed,  in  addition  to  the  legal  foundation  of  a  stronger 

surveillance of fiscal policy in EU Member States under SGP 

III (better ex ante control; direct supervision of the dynamic of 

public debt; rules for improving the statistics of nation state 

budgets;  quasi-automatic  sanctions),  two  new  regulations: 

one for a stronger monitoring of national budgets for Member 

States in the excessive deficit procedure (EDP); and the other 

on the strengthening of economic and budgetary surveillance 

of  Member  States  experiencing  or  threatened  with  serious 

difficulties with respect to their financial stability in the euro 

area, i.e. countries under the ‘rescue umbrella’ receiving financial 

as sistance from the EFSF (European Financial Stability Facility), 

the ESM (European Stability Mechanism) and/or the IMF.

These measures are based on the Lisbon Treaty and hence are 

rules within the ‘Community method’ which are welcome as a good 

step further to improve ‘economic governance’. However, they are 

only — even so — a tighter ‘simulation’ of a centralised fiscal policy 

at EU level employed up to now.

172

(b)  EIP: In addition, the ‘six-pack’ provides for the first time two 

regulations which explicitly deal with the hitherto rarely con-

sidered macroeconomic imbalances. Since 1999 these imbal-

ances (measured by unit labour costs relative to the eurozone 

average) have grown steadily greater. The big winners of this 

competition race (Germany and Austria) within the eurozone 

stood face to face with the PIIGS as competition losers. The 

fact of the drifting apart of competitiveness in the eurozone 

(or the non-converging towards a ‘European business cycle’) 

can also be seen as a falsification of the endogenous ‘optimum 

currency area’ (OCA) theory. This theory postulated that after 

the introduction of the euro the intra-eurozone trade would be 

intensified and hence would contribute to the harmonisation of 

the European business cycle.

The  Commission  monitors  the  aberrations  of  competitiveness 

within the eurozone under the excessive imbalance procedure (EIP) 

using a scoreboard with a set of indicators identifying and monitor-

ing imbalances (e.g. current account, real exchange rates or relative 

unit labour costs, etc.).

The EIP is no more than a copy of the EDP as part of the SGP. 

Whether  sanctions  against  Member  States  with  high  current 

account surpluses (Germany and Austria) will ever be imposed is 

an open question. In principle, current account imbalances should 

be treated symmetrically. Surpluses and deficits are imbalances. In 

courtesy to countries with current account surpluses the Commis-

sion defines as imbalances only current count balances outside the 

range of – 4 % and + 6 % of GDP. Therefore, Germany would not 

(yet) be subject to sanctions.

A single market for government bonds

One of the great challenges today is to calm down the financial 

markets and to convince the rating agencies, as well as to recover 

the trust into government bonds of eurozone Member States. Last 

but not least, the task is to mitigate the spread of government 

bonds of eurozone Member States, which have increased dramat-

ically since 2008. As a target they should shrink to values which 

we saw during the ‘fair-weather period’ of the eurozone, namely 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT173

during 1999 to 2007. In this phase we had practically a ‘virtual’ 

government bonds market in the eurozone. The spread of 10-year 

government bonds vis-à-vis Germany was very small because the 

investors believed — contrary to the ‘no-bailout’ clause of Art-

icle 125 TFEU — that in case of troubles the euro area Member 

States would mutually guarantee each other’s debts. In addition, 

Basle II (and also Basle III) classified government bonds as risk free; 

regardless of which Member State issued them. Earlier we stated 

the ‘construction flaw’ of the eurozone in the lack of a European 

statehood (like the USA). The governments of its Member States 

issue bonds (for which they alone should provide a guarantee) in 

effect in a ‘foreign currency’, the euro (which is issued by the ECB). 

This contradiction explains the current scepticism of international 

investors vis-à-vis government bonds of unstable Member States 

of the eurozone.

Crisis or stability funds

In ‘fair-weather periods’ the ‘no-bailout’ clause fulfilled its purpose. 

When the big crises (sovereign debt shock after the global financial 

and economic crisis 2009) hit the EU and the eurozone there were 

no instruments to face the crisis. After the Greek crisis broke out in 

spring 2010 one had to act ad hoc — also with the help of the IMF 

which already had such instruments to manage crises in developing 

countries. ‘Rescue umbrellas’ had to be opened which ended in the 

EFSF and lastly in the ESM. Three countries (Greece, Ireland and 

Portugal) are already under the ‘euro rescue umbrella’ in one way or 

another: Greece with bilateral credit actions of the partner Member 

States of the eurozone; Portugal and Ireland with a common rescue 

package involving loans by the EFSF, the EU (EFSM — European 

Financial Stabilisation Mechanism) and the IMF.

What would neat solutions look like?

Two years of rescue efforts barely mitigated the euro debt crisis; it 

did not appease the financial markets, and we still have no definite 

solution for the sovereign debt crisis. This poses the question: how 

long we can delay neat solutions by simply ‘muddling through’ the 

crisis. The sovereign debt crisis in the eurozone, triggered off by 

the Greek shock in May 2010, revealed the problem of different 

174

velocities. The financial markets act fast and drive the policy before 

it. On the one hand, there were no crisis instruments at hand on the 

basis of the ‘Community method’. Therefore, at every new crisis 

summit the Heads of States or Government had to decide ‘inter-

governmentally’. The solutions were ad hoc (‘rescue umbrellas’) 

because no instruments were at hand or because solutions were 

restricted by the rules of law of the Lisbon Treaty. The crisis showed 

that the Lisbon Treaty entered into force on 1 December 2009 and 

is already obsolete in areas regulating EMU. A reform of the EU 

Treaty — or a ‘restart of the EU’ — is urgently needed in order 

to get neat solutions for a frictionless functioning of EMU, also 

in times of a crisis. Only with such ‘neat solutions’ would the EU 

approach the ideals of ‘one country, one money’.

The following legal barriers must be broken down or regulated in 

a new EU Treaty in order to get a functioning EMU.

•	

Fiscal	union:	The	initiated	foundation	of	a	‘fiscal	stability	union’	

(fiscal union) by the euro area Heads of State or Government 

at the summit of 9 December 2011 — based on a proposal 

by Merkel and Sarkozy — will be enshrined in a ‘new fiscal 

compact’, for the time being only an intergovernmental treaty. 

Because of the British veto these new fiscal rules could not be 

realised by a reform of the EU Treaty. A stronger centralisation 

of national fiscal policy at EU level (stronger policy coordin-

ation) should be achieved by new fiscal rules: stricter budg-

etary controls; stronger intervention into national budgetary 

law; debt breaks in the Member States of the eurozone, imple-

mented at constitutional or equivalent level; and ‘automatic’ 

sanctions.

However, this process of ‘fiscal policy centralisation’ is optional 

because the new fiscal compact runs outside the EU Treaty and 

hence is again an example of crisis management outside the ‘Com-

munity method’.

Unfortunately, in the ‘Merkozy’ proposals, no provision is allowed 

for the implementation of a system of ‘fiscal federalism’ like in the 

USA and in Canada. With such a system business cycle imbalances 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT175

between Member States of the eurozone could be mitigated by fis-

cal compensation. Again such a mechanism would need a reform 

of the EU Treaty. Nevertheless, the planned ‘fiscal union’ is a step 

in the right direction. I would transform the asymmetric economic 

policy design of EMU towards a more symmetric one which would 

then resemble more those of the USA. With this step we would 

gradually add the ‘M’ (monetary union) also the ‘E’ (economic union) 

and would become a true EMU.

•	

The	ECB 	receives 	enhanced 	competences 	as 	‘lender 	of 	last	

resort’ (LLR): This would need changes to Article 123 TFEU. 

Today the ECB is only allowed to buy government bonds on the 

secondary market to stabilise the bond market. It could already 

now do this with more rigour and credibility to signal to the 

financial markets that it is able to stabilise the bond market at 

any time. For the time being it fulfils the LLR function only vis-

à-vis banks. Nevertheless, the ECB is the only institution which 

is able to react to a crisis very quickly. See for instance its pol-

icy change in December 2011 to prevent the current banking 

crisis in Europe. With non-standard measures it provided the 

European banks with liquidity with a maturity of 3 years by 

a longer-term refinancing operation (LTRO).

The sovereign debt crisis, starting on the periphery (Greece, Ire-

land and Portugal), spilled over more and more to the core of the 

eurozone. This initiated a capital flight, also in France and Italy. The 

balance of this capital flight by printing money by national central 

banks should be regulated, similar to the procedures in the USA 

within the Fed system (Hans-Werner Sinn). In the USA, regional cen-

tral banks must pay their special money printing with gold-covered 

bonds. Such an American way could be arranged within the Euro-

pean System of Central Banks (ESCB).

•	

A	single	sovereign	bond	market:	The	current	large	spreads	of	

government bonds of Member States in the eurozones will be 

narrowed only if confidence of financial markets in sovereign 

bonds even from peripheral countries is restored. Maybe we are 

able to come back to such small spreads as in the ‘fair weather 

period’ of the eurozone (1999–2007).

176

Eurobonds

‘Eurobonds’ — in whatever variant — could be an instrument to 

harmonise the sovereign bond market in the eurozone. Because 

they imply a mutual guarantee between Member States of the 

Eurozone, a change to the ‘no-bailout’ clause (Article 125 TFEU) 

would be necessary. Beyond these legal restrictions, at the moment 

eurobonds are hardly enforceable politically because they would be 

unfair to stable countries. Triple-A countries which currently pay 

low interest rates on government bonds would have to pay higher 

interest rates because the indebted crisis countries drive up the 

average interest rate level for eurobonds. In Germany, for example, 

the interest rate for eurobonds would be higher by 2 to 3 percent-

age points than that for German bonds, which would increase the 

burden for the national budget by EUR 40–60 billion.

Logically, eurobonds are only feasible in combination with a real 

‘fiscal union’ or when a ‘European finance minister’ is installed. 

Eurobonds are only credible for international investors if they are 

issued and guaranteed by an EU institution instead of — as the 

practice is now — by Member States of the eurozone. The ‘rescue 

umbrellas’ of EFSF and ESM are only an emergency solution.

EMF

It is thinkable that the permanent ESM — in the far future — could 

be transformed into a ‘European Monetary Fund’ (EMF). However, 

this  would  also  entail  a change  to  the  EU  Treaty  because  this 

implies a mutual guarantee of Member States and, currently, would 

therefore be an infringement of the ‘no-bailout’ clause. Further-

more, the EMF would not only be applicable to the Member States 

of the eurozone but to all 27 EU Member States.

Downsizing of the eurozone: My wish would be a new Article 50a 

TFEU which would allow one Member State zone temporarily to exit 

the eurozone for the purpose of economic recovery. Currently only 

the withdrawal from the EU and hence also from the eurozone is 

governed by Article 50 TFEU. With such a new Article 50a one could 

resize (downsize) the eurozone according to the criteria of the OCA 

theory.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT177

Because this is excluded from current EU law and also politically 

not welcome, we must keep alive artificially the politically desired 

‘large’ EMU with 17 Member States by embarking into a ‘transfer 

union’ (EFS/ESM). From an economic point of view — and taught to 

us by the crisis in the eurozone — a ‘small’ EMU would be optimal, 

and such an EMU would also be sustainable in times of a crisis. 

Such a small EMU would be a competitive ‘core Europe’ consisting 

of homogeneous economies. Misallocations would be minimised. 

Interestingly, such a ‘core Europe’, consisting of some six Member 

States, would also contain those countries of the current eurozone 

with a triple-A rating.

The euro will also survive with the ‘transfer union’, but will be more 

costly and inefficient than a ‘core Europe’ solution.

•	

‘Exhausting’	the	existing	Lisbon	Treaty:	Before	we	enter	into	

tedious negotiations about the chances of the EU Treaty which 

are not easy and time-consuming when it comes to ratifica-

tion (see the last veto by Great Britain), one could ‘exhaust’ the 

rules of the Lisbon Treaty. This is exactly what the European 

Commission is doing with the implementation of the ‘six-pack’. 

One could also think of crisis solutions à la Schengen, i.e. with 

the  instrument  of  ‘enhanced  cooperation’  (see  Article  326 

ff. TFEU).

Political collateral damage from the 
sovereign debt crisis

The EU, and the eurozone in particular, also slipped into a crisis of 

democracy due to the ‘euro crisis’. On the EU level the crisis inter-

governmental management by the Heads of States or Government 

marginalised the European Parliament and the European Commis-

sion, and at national level many governments of the eurozone col-

lapsed because of the burden of debt stabilisation which was too 

big for them to manage.

Division of the EU and of the Eurozone: In the EU we already have 

areas of a division of integration or forms of a ‘flexible integra-

tion’ like Schengen and EMU, but the current crisis will intensify this 

split in the EU up to a constellation of a ‘two-speed Europe, or two 

178

Europes’ (as in a headline from The Economist recently). The best 

example was the summit of the European Council (8 to 9 Decem-

ber 2011) where the veto of Great Britain prevented the attempt to 

reform the EU Treaty. As a compromise solution the planned ‘fiscal 

union’ will be regulated in an intergovernmental ‘new fiscal com-

pact’. There are many other political breaking lines.

•	

Eurozone	versus	non-eurozone:	The	eurozone	carries	on	head-

ing to a  new institutional set-up, the countries of the non-

eurozone fall behind. The latter also do not help in the current 

‘rescue operations’ for Greece, Ireland and Portugal.

•	

‘Merkozy’	versus	the	residual	Eurozone:	Within	the	eurozone	

there is a special split between ‘Merkozy’, i.e. between France 

and Germany, who push ahead with proposals for reforming 

EMU, and the residual, mostly small Member States — the lat-

ter only can rubber-stamp what ‘Merkozy’ proposes.

(1)  Variable speeds: The crisis also revealed the different ‘speeds’ 

by solving financial problems and political solutions at EU and 

national level. The financial markets (which are very fast) kick 

the policy (which is slow because it has to take into consider-

ation democratic (parliamentary) rules).

In  case  of  crisis  management,  therefore,  the  fast  method 

of ‘intergovernmentalism’ has priority over the ‘Community 

method’, which is in the foreground in normal times (see EFSF/

ESM, Euro Plus Pact, fiscal compact, etc.).

(2)  Probability of political implementation: In the course of the 

euro  crisis  the  general  scepticism  vis-à-vis  the  EU  and  the 

euro has increased in many EU Member States. This poses the 

question whether the population in any Member State is willing 

to accept large chances in the EU Treaty. In Finland, the polit-

ical party of the ‘True Fins’ won at parliamentary elections in 

April 2011 17 % of the vote, compared to only 4 % in 2007. In 

Austria the Freedom Party (Strache) are fuelling worry about 

the euro rescue measures with the slogan ‘Our money for our 

people’ (Unser Geld für unsere Leut).

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT179

(3)  Crisis of democracy and of the European welfare state: During 

the  euro  crisis  since  early  2010,  the  governments  or  prime 

ministers in at least five Member States of the eurozone have 

had to resign: Estonia, Greece, Ireland, Italy and Slovakia. In 

Greece and Italy the professional politicians were overwhelmed 

in view of the challenges of stabilising their indebted eco nomies. 

Therefore they were substituted by ‘expert governments’ (with 

economists). In a transitional period they should stabilise the 

national budgets with austerity measures and at the same time 

manage  to  stimulate  economic  growth.  After  that,  ordinary 

politicians elected by the people will take over again.

In the context of stabilising the budgets, more and more cuts 

are targeting outlays for the welfare state (social programmes). 

Anyway, the very generous European ‘social model’ is at stake. 

However,  we  know  at  least  four  different  social  models  in 

Europe: the Nordic, the Continental, the Anglo-Saxon and the 

Mediterranean models.

Conclusions — EU and eurozone in 10 years

If we manage to create the ‘fiscal union’ (with stronger controls on 

national budgets, debt brakes and eventually by installing a ‘Euro-

pean finance minister’) initiated at the December 2011 summit, we 

would be well prepared for future debt crises. In 10 years’ time, 

the ‘new eurozone’, which will probably be comprised of more than 

17 Member States, could be transformed into a ‘true EMU’ with also 

a functioning ‘E’, i.e. also an economic union. Then one would also 

have new crisis tools like eurobonds, a European Monetary Fund; 

a more engaged ECB and an ESCB similar to the Fed practice in 

the USA. Long- and short-term interest rates would mirror the true 

creditworthiness of countries; financial markets would act as a real 

corrective in case of indebtedness and misallocation of capital.

In addition, if the peripheral countries with weak competitiveness 

realise (mentally and politically) that an adjustment to a single cur-

rency (internal depreciation) is urgently necessary, it would make 

sense that the EU stimulates economic growth in these countries 

with its new growth programme ‘Europe 2020’. As a good Euro-

pean, one would then generate hope that instead of all troubles 

180

we would be able to present with the euro the ‘face of Europe’ as 

a proximate entity of Europe in the world. The euro will survive also 

with the ‘transfer union’, however at higher costs and less efficient 

than with a eurozone consisting only of ‘core Europe’.

Jan Truszczyński

Professor Breuss, thank you very much for your contribution. I lis-

ten to it carefully and it seems to me that you knew in your short 

contribution how to discuss all the main problems which we face. 

Whether, when and in what form we will solve these problems — 

at once or step by step — this question remains, of course, open, 

but this conference contributes significantly to finding the answers.

Now, let me announce with particular pleasure our third speaker for 

this round, a speaker who does not need an introduction. Nonethe-

less, it is my pleasant duty to tell you that Viscount Davignon, with 

his time-honoured and distinguished career as a European diplo-

mat, European politician and European businessman, remains one 

of the thinkers driving forward European integration and European 

thought. I think that we can all be honoured to have him here with 

us, and I myself am very much looking forward to the thoughts he 

will be sharing with us today.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT181

Closing remarks

I  will  do  my  best  to  bring  out  what  has 

changed and what has not changed.

There is a permanent red threat in the Euro-

pean Union: we are always surprised when 

what we have forecast happens. I cannot 

remember  for  how  many  years  we  have 

been forecasting that if you do not have 

a better balance between monetary issues 

and economic issues, a degree of dis cipline 

and  a  combination  of  implementation, 

things will be difficult. And now things are 

really  difficult,  so  we  are  surprised.  The 

annoying thing is that we are also surprised 

by  things  we  had  not  anticipated  or  not 

anticipated quickly enough.

Personally, I see one really major change 

compared to other crises which we usually 

manage to get out of. As Mr Buti said, we 

usually leave crises better than we went 

into them. This time, the major difference is 

that the market has been invited within the 

debate. Markets have always been there 

but they have never played the same type 

of role as they play today. Let me give you 

three examples. The markets did not see 

Etienne Davignon
Belgian Minister of State; former President 
of the International Energy Agency; former 
President of the Société Générale de 
Belgique; Chairman of Brussels Airlines, the 
Compagnie Maritime Belge, CRS Europe, 
the Palais des Beaux-Arts, ICHEC Brussels 
Management School, the Bilderberg Group, 
the P-H Spaak Foundation, Egmont-Royal 
Institute for International Relations and 
Friends of Europe

the financial crisis of the United States happen, they did not antici-

pate it. The markets, literally, had to wait for the consequences of 

the banking crisis to suddenly discover that sovereign states are, 

from an investor’s point of view, in the same position as any other 

power. That was completely new. Secondly, sovereign debt was the 

secure investment of banks. How did you use with tranquillity part 

of the money that savings have brought to you, put in something 

that was not highly attractive from the revenue point of view, but 

had very liquid risk. Now, this situation has changed. The third 

182

element which has come about is that the timing and the necessity 

to react in time are completely different between what democracies 

can do and what markets want. I deliberately use the word ‘demo-

cracy’ because for me democracy is still something important. The 

leaders of our countries are not necessarily stupid and they don’t 

necessarily do what they shouldn’t.

So, I am speaking about democracy. This is completely different 

and I will give you one example, the example of the EFSF. If one 

year ago anyone had prognosticated that de facto you could draw 

up 17 bilateral treaties, get them ratified by a parliament and get 

a new set of instruments, everyone would have said that was com-

pletely impossible. It was done in 3 months. What did the markets 

say? The markets said on the morning of the decision ‘this goes in 

the right direction’ and in the afternoon ‘they won’t do it’. So we 

are confronted with a formidable double gap of credibility in the 

implementation of what is decided. And that is what we need. We 

need the combination of credible measures to offset the absence 

of trust on what has been decided, simultaneously we must decide 

on firefighting.

So, let us see which instruments we have to deal with that. Here we 

draw a comparison with the instruments we had before the existence 

of the monetary union. The one formidable difference is that the 
institutional powers of the eurozone are completely different from 
the institutional powers of the Union as a whole. This of course cre-

ates an enormous problem of the credibility on what the European 

eurozone’s ministers and Member States decide. I will not go into 

the debate about ‘la méthode communautaire’ and the intergovern-

mental approach because it produces no solutions to this problem 

today. We have to do what we must with the tools that are avail-

able to us. We have to do it in such a fashion that at the end of the 

day, the institutions will in any case be strengthened. And how does 

that happen? There are a number of avenues through which this can 

be done. Nothing would be worse than having an ideological debate 

today over ‘la méthode communautaire’ in comparison to what prag-

matically you can do, because there is nobody to give you an answer.

When I hear ‘treaty change’ one part of me is delighted: at last 

we have found out what the structural failures are, at last we will 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT183

be logical with what our purpose is, and we will have the institu-

tions we need to meet our purpose. Then I stop and look, and I see 

that this brings out two fundamental debates, both fundamental 

debates that we have never solved. The relationship between the 

17 and the 27 is at the heart of this issue. We have always known 

that the consequences of having a monetary union meant that 

Member States had more commitments than those who were not in 

the monetary union. More necessary commitments, and also more 

instruments which give credibility to these commitments. That’s 

a formidable problem.

The second problem is that we have never had a treaty change 

except the very small one we made in order to meet the Council’s 

concerns. The problem is that when you start with a treaty change 

(I personally have seen quite a few and some of them quite use-

less) it becomes a shopping list. Everyone adds what he would like 

to have. If you are in a crisis, you are not in a discussion on what it 

would be nice to have, but you are in a discussion on what it is nec-

essary to have. What you need to have is by definition a selection of 

priorities, and when I hear ‘treaty change’ I’m extremely concerned. 

When you add the consequences of the mismatch between the 

democratic timetable and the market’s timetable, then I’m afraid 

that, to take Mr Buti’s comparison of getting out of the tunnel, we 

will find that in the middle of the tunnel there is something which 

does not allow us to get out. Suddenly, in the middle of the tunnel, 

you find an iceberg and you bump into it. Then it is difficult to go 

back and certainly not possible to go further, so be careful with the 

metaphors.

Then you come to the fundamental political issue. What is needed 

to get a credible consensus? A credible firefighting, a credible dis-

suasion, a credible managing of the dominos, and the need for the 

medicine to be not worse than the crisis. If you look at this very 

clearly, a few fundamental elements emerge. I will make my obser-

vations without having a ranking of different elements because, in 

my view, you need all of them. The first one is the Member States. 

The Member States do not have a credible programme to put the 

house in order in relation to what has been excessive, and the 

absence of structural reforms. Then, no market will believe any-

thing because there will always be a scenario where what has to be 

184

saved goes beyond the means of those who would like to save it. 

Therefore, it starts with Member States. With Member States are 

we in a position which makes that impossible? I believe no. It is per-

haps the one element on which I am less pessimistic. Why? Because 

public opinion is fundamentally worried, afraid of what it has, afraid 

of what will be and quite conscious that the risk of the status quo is 

much greater than the pain of the change.

If you look at the three last events in Greece, Italy and Spain, it 

goes in that direction. The voters in Spain know that the new major-

ity they have given a mandate to will have to do what is necessary, 

and what is necessary is not very different from what was neces-

sary the day before the elections. Mr Monti, who I expect would 

have been here if Mr Napolitano had not had other ideas for him, 

would be saying things which are reasonably comparable to what 

I am saying. There is also the combination that fright leads to hope. 

Is that enough to get things done? No. Is it enough to start? Yes. The 

Greek situation, with the final approval of the party which is still the 

minority party in Greece of voting for the measures, is the indica-

tion for that. That vote having occurred, there were not more people 

who went out on the streets than before. But will it last?

Can the Member States do this alone? The answer is no and I’m 

not speaking about finances and help and so forth. I am speaking 

about what they need to do to convince their people that what they 

are doing is going in the right direction. And here they need the 

European Union, in particular the Commission, and the Commission 

today has more powers than it had before. These are powers of the 

institution and for the last 2 weeks we have been seeing the Com-

mission using its instruments. And that is a good thing, indispens-

able for Member States, because here you must look to the back to 

the creation of the monetary union.

The monetary union was the perspective. To get the monetary 

union, states have to put the house in order, and a number of Mem-

ber States had to put their houses in order. I take two simple exam-

ples, my own country and Italy, and we did it. We would never have 

done it if there hadn’t been that perspective. People accepted it 

because they knew what the political, financial, economic and social 

consequences would be if they were left out of the monetary union. 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT185

So you absolutely need the intervention, and I use the term of the 

institutions of the Union because it gives a quality guarantee which 

nobody else can give today. You know the rating agencies and so 

on. What guarantee can they give? When I look at the difference 

of the spread between countries which are triple A and countries 

which are not triple A, all that has disappeared. The markets have 

decided what risk they are ready to take or not take.

The combination of the institutions and the Member States is very 

important. Firstly, because if that does not exist, you do not have 

a basis  for  anything  else.  Second  question:  firewalls,  interven-

tion, ECB, eurobonds and so on and so forth. All of this represents 

a technical answer to a fundamentally political question: Is there 

a degree of mutualisation which is the consequence of the mon-

etary union? On the one hand, if you have a monetary union, you 

cannot take your decisions on your currency. If you have a mon-

etary union, you cannot do that, but then what does the monetary 

union bring to you if you are in trouble? So the fact, leaving aside 

that it is of mutual self-interest to do it, is that it is structurally part 

of the system. We have begged the crucial question: ‘what condi-

tions have to be created for the Member States of the monetary 

union to accept this type of mutualisation?’ I have not gone into 

the details of what it can be but this is the crux of the matter, when 

I look at my different fundamental points.

It is necessary for the European Central Bank and the countries 

which are in excess to be sure that the mutualisation is not the dis-

appearance of the responsibility of the concerned parties. That is the 

crux of the political debate. Yes, but if we do this that means that my 

first point, Member States before, after and during, do not have to do 

what they want to do because they are secure. They are secure to an 

extent which the markets will not believe, but the way in which they 

are secured is credible and feasible. And it is fascinating to see how 

the questions of political unification have come back on the table.

For an old observer of European affairs and sometimes even an 

actor, it is fascinating to see that political union was a politically 

incorrect word to use. When you said that monetary union will lead 

to political union, you were speaking the language of the anti-Brit-

ish Europeans, ‘you see they are going to do it’. And what did the 

186

pro-European say? ‘No, no we are not going to do it’. This is not 

a caricature, this is the reality of what came across in the media, in 

the seminars and all these fascinating things that we do together.

Today one speaks of political union as part of the guarantee that 

the mutualisation will not be misused. You see Monsieur Juppé on 

television saying that the economic governance of Europe has to 

have some sort of federal content and he is a historical Gaullist. 

Having known the General, I don’t think he will recognise himself 

in an element of federalist financial affairs. Was he shot down 

after having said that, either in his party or outside his party? The 

answer is no, so again, that is where I totally agree with what my 

two colleagues on the platform have said. The depth of the crisis 

has allowed for the reopening of boxes which have been shut for 

a long time. Is it enough to open them? The answer is no. But in the 

gloom and pain it is important to see where the perspectives are 

and where the debate is on what are the political requirements.

Third point: directoire. It is clear and certain that if you want to 

achieve one and two, it is totally impossible for the other countries 

to believe that they are governed by one or two countries and not 

by the institution. This is not a forecast, it is a certainty. Will people 

not do intelligent things for bad reasons? The answer has always 

been yes. But the political exasperation which is very close to being 

high is something one has to take into account for a conjunctural 

reason and for a structural reason. The conjunctural reason is that 

the Franco-German proposals have not worked. If you apply for 

a post, you must show your credentials and if your credentials are 

bad you won’t get the post. If your credentials are good, maybe you 

will. Today it has not worked, period. So it is very important that 

what comes out of 8 December is something which includes the 

participation of everybody, but the domination of no one.

I have lived the Franco-German relationship in my active career 

since 1961. It has never been what people have written about it 

and what it was. Let me take three very simple examples of what 

are the legends of the European Union. The friendship — and I use 

the word friendship rather than political understanding — between 

Giscard and Schmidt started when both of them were no longer in 

office. This is a fact. Let me mention an anecdote.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT187

We were holding a summit in Brussels. The summit was supposed 

to start at half past nine and at a quarter to ten the French and the 

Germans were not there. So the interpretation was ‘they are having 

a “colloque singulier” and they will only come when they will agree’. 

Knowing what had been the preparation of the meeting I was rather 

worried, because I thought that it may be that they were only going 

to come at 6 o’clock next morning. So what did I do? I went out and 

I asked the security people to tell me where the French and German 

delegations were. The French delegation was in its car outside the 

French embassy; the German delegation was stopped, for those 

who know Brussels, on the Avenue de Tervueren. What were they 

waiting for? They were waiting to be sure that the other one got 

there first, because both of them wanted to arrive last. That is the 

indication of true friendship, total trust!

It has always been a fact that if the system is blocked and if there 

is an agreement between the French and the Germans, the system 

is not blocked but the decisions are not necessarily taken. Neces-

sary but insufficient, and that is what we have to deal with. This is, 

of course, made more complicated, not by the existence of a chair-

man of the European Council, but by the fact that it is the European 

Council which is the place of all final decisions. That means that the 

preparatory structure on questions like this, on which the credibility 

of the measure is as important as the measure itself (because that 

deals with implementation) is properly prepared.

And again, I’ve lived through the evolution of what was the most sig-

nificant powerful preparation structure for years and years. It was 

what we now call the General Council, basically foreign ministers. It 

changed with the modification of the domestic position of foreign 

ministers. When they were the number two of their governments it 

worked; when they were only involved in foreign affairs, it was more 

difficult. Since one discusses diplomatic issues at the ministries of 

foreign affairs, it is much nicer to discuss what will happen if Mr 

Putin gets re-elected as president and so on and so forth. You can 

have a nice intellectual conversation, whatever you say will change 

nothing and it is much less difficult than solving proper questions.

So  it  moved  towards  the  finance  ministers  with  a very  signifi-

cant unnoticed change. The preparation of the finance ministers 

188

followed the same procedure as the preparation of the ministers 

of agriculture, outside Coreper. Coreper, with all criticism you can 

level at it, was a preparatory structure where people knew what 

the remaining questions were which could not be settled without 

running into political difficulties. So the finance ministers became 

the most important element of the Union. I’m not saying the budget 

ministers, but the finance ministers. And since this crisis, because of 

the domestic political consequences of this crisis, the finance minis-

ters don’t have the political legitimacy to deal with these questions 

without prime ministers and heads of governments.

So what happens then? I’m told from time to time at the finance 

ministers’ discussions (I’m speaking about the euro; I’m always 

referring to the 17 eurozone countries when I’m speaking of the 

finance ministers) what happens is that somebody says at some 

time ‘very interesting question but “Die sind Chefs Sachen”’. Finish 

the discussion, it goes up in all senses of the term, it goes upstairs 

and continues to go up. This means that the methodology which will 

be used for implementation of new measures is of a very crucial 

importance. It can be pragmatic if you don’t have the time to make 

it legal, but it has to go in the direction that it will become legal 

at a given point. We always had inside the Union what the French 

call ‘la ligne de pente’. We couldn’t get it immediately, but the first 

decisions we took meant that unavoidably it would end up where it 

should end up. And the best example of all is Schengen.

Schengen started with an intergovernmental structure but as time 

went by, to make this structure efficient, it was organised in such 

a way that it became a Union structure. As a result of the debate 

between intergovernmental and ‘la méthode communautaire’ every 

time, and I have no memory of any exception, every time when 

people are really serious and really want something to happen, the 

only structure which they trust or distrust less is the institutional 

Union structure. Member States don’t trust each other, I’m not sure 

they trust the institutions but they trust the institutions more than 

they trust each other. And when they are decided to do something 

that is the way it goes.

My fourth and last point is on the volatility that we are witnessing 

today. We have managed with great efficiency to create a situation 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT189

by which we are obliging people to do things which they should not 

do in the present time. Let me explain briefly. After the financial crisis 

and the banking crisis, three issues: one issue on which progress has 

been made, regulation and not simply coordination. In any EU deci-

sion when you see the word coordination used it means that people 

did not agree but they are not ready to say so, so they say ‘we will 

speak about it’. Coordination is ‘speaking about it’ but not having the 

instruments of decision-making and implementation. We have that 

progress and the other progress is that one had to create the condi-

tions by which banks could be saved, so that the solidity of the banks 

was greater than it was before. So the simple answer to that was ‘we 

must see to it that the ratio between what the bank lends and what 

its own assets are become higher’, recapitalisation and so on.

However, all that was discussed at the time when sovereign debt 

was not at risk. Now that sovereign debt is at risk you have a funda-

mental problem in banks. They won’t recapitalise on the market if 

they have to meet the ratio and they cannot increase their capital. 

What do they do? They decrease the lending of the assets they hold 

and now because of the accounting rules, sovereign debt is held in 

the same fashion as any other debt, with this extraordinary situ-

ation that you suddenly ask yourselves: what is the market value 

of a sovereign debt?

I’m always astonished that nobody writes about that. If the regula-

tion says that someone who has bought sovereign debt in the Euro-

pean monetary union zone should not have it in the books at the 

price of the redemption of the debt, you are deciding that sovereign 

debt is not safe. And so the banks are stuck. Who is selling today? 

It’s not the hedge funds and so on and so forth. The people who are 

selling today are those who are deleveraging their balance sheet 

and they deleverage their banking with what they can. And you see 

pension funds and so on and so forth which cannot take the risk 

of knowing that you might have to decide that the market value of 

a debt is something which has to be evaluated by the market. The 

market can decide what it wants to do on the secondary markets, 

what it sells and resells, at what interest rate you can buy. That is 

clear, but the underlying value which is guaranteed by us and which 

normally has the solidity of the monetary union, you are forcing the 

banks and the insurance companies to do that.

190

Something has to happen on that issue because you have, in terms 

of what is the overall balance, little movement on the markets. 

When you have little movement on the markets, small volumes cre-

ate formidable differences. That is what we are seeing today and 

then you say the consequence is that we will all have to borrow at 

7 % and growth is 1 %. So it’s clear we are going bankrupt and if we 

are going bankrupt let’s go out and drink champagne and not worry 

about it. This is really my fourth point. One has to see what one can 

do to eliminate the vicious circle in which we are. Should banks be 

more solid? Yes. The way in which in accounting rules the sovereign 

debt of a monetary union is not dealt with as with sovereign debt 

of any other country, because you are borrowing in euros and not in 

another currency, is not a currency risk, it is a substantial risk. We 

will continue to have the problems we have.

These are my four points. If one can do something about these four 

points, next year we will be here, speaking about the same thing. 

If not, next year we will be here but we will not be speaking about 

the same thing.

Jan Truszczyński

I shall pick up exactly where Viscount Davignon left on the theme of 

today. I think that the points and insights that he offered during his 

speech resoundingly confirm how good it was for President Barroso 

to choose this particular subject for this year’s conference: Euro-

pean economic governance in an international context. And more 

than that, how good it was that the organisers of the conference 

decided to approach Viscount Davignon, asking him whether he 

would be available to share his thoughts with all the Jean Monnet 

professors present here today. I do not know what the subject of 

next year’s conference will be, but of course there will be a confer-

ence next year, and I can only hope that the subject chosen for that 

exercise will be as of much interest as the subject today.

I  thank  you  once  again  for  your  participation  and  for  all  the 

thoughts that you have shared with others during this event.

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT191

The European Union and the 
eurozone: is an end to the  
crisis in sight?

Message  from  Dusan  Sidjanski  (read  by  Bruno  Boissiere)  on 

21 November 2011

The European Union and the eurozone are in need of political will, 

solidarity and a new form of federalism. At a time when the con-

tagion is spreading and markets and speculators are attacking 

one country after another, the European Union and the eurozone 

in particular need a global, united response based on the rules and 

instruments already in place and which bear witness to a great 

project. A holistic solution which includes eurobonds, the central 

role of the Commission, the Franco-German partnership and the 

European  Parliament,  in  line  with  the  recommendations  of  the 

Council of Heads of State and Government. This strong message, 

which reflects the author’s own beliefs, is for the citizens of Europe, 

the markets and the entire world and must be publicised as soon 

as possible after the European Council of 9 December 2011. The 

shared European sovereignty of the 17 eurozone states, and, if pos-

sible, of the 27 EU Member States, must gain the upper hand over 

the markets. The European Union’s future is at stake.

The financial crisis is the most serious threat to the European 

Union since the failure of the EDC. In just one year, it has gradu-

ally spread through the eurozone, without sparing other Mem-

ber States of the European Union. The measures taken thus far 

have not worked. The European Financial Stability Facility (EFSF) 

and its successor, the European Financial Stabilisation Mech-

anism (EFSM), have not been equal to the challenge, despite the 

increase in its resources to EUR 1 000 billion following long nego-

tiations which managed to overcome German resistance to the 

idea. The slow pace of negotiations between France and Germany 

and the insufficient means to tackle the public debts of Italy and 

Spain, not to mention those of France or even Germany, should 

192

be mentioned. This is the original flaw in this intergovernmental 

mechanism.

The evidence is clear: austerity in line with the German model cuts 

growth and the purchasing power of German exports, while push-

ing up unemployment and the dissatisfaction of citizens, encour-

aging them to take to the streets in violent protest. Furthermore, 

the crisis has led to several technocratic governments taking office. 

The outlook is bleak: growth down and the threat of a widespread 

recession; diverging trends, in particular interest rates for borrow-

ers which are twice as high in France as in Germany, and three 

times as high or more in Spain and Italy, not to mention the usuri-

ous rates charged in Greece!

Budget cuts hit certain groups hard, such as the middle and lower 

classes, pensioners, and the social, health and culture sectors in 

particular.  At  the  same  time,  austerity  cuts  public  investment, 

which also leads to cuts in private investment and a contracting 

economy. This, in turn, reduces the ability to honour public debt. Yet, 

despite these measures leading to recession and aggravating the 

crisis in society, the German government is insisting on sanctions 

which should be applied automatically — according to the CDU con-

ference — and the possibility of bringing states that do not respect 

the Stability and Growth Pact before the Court of Justice.

Should we not concentrate without delay on trying to extricate our-

selves from the crisis, rather than obsessing about sanctions? More 

on positive measures rather than punitive measures or those to 

facilitate a voluntary exit from the euro without the need to leave 

the EU? Though we need to address these issues when it comes to 

revising the Lisbon Treaty, it is more pressing to start with meas-

ures to help us stop the negative spiral and start the spillover.

Let  us  look  at  the  evidence:  all  the  decisions  made  so  far  as 

a response to the markets have ended in failure, to the extent that 

the crisis is spreading and intensifying. It’s a general observation 

that certain states have taken a long time to recognise.

Admittedly,  structural  progress  has  been  made  and  regulatory 

frameworks adopted by the Council and the European Parliament 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT193

on a proposal by the Commission. For example, the six Community 

bodies to supervise the banks and the insurance industry, systemic 

risk and securities. As many instruments to support financial activi-

ties and prevent crises. However, even these measures are not able 

to stop the current crisis spreading.

The crisis has exposed both the deep de facto solidarity and the 

inextricable  interdependence  of  the  economies  of  the  Member 

States. Other issues have also been revealed: the shortcomings 

of the Lisbon Treaty, intergovernmental drift and the ambiguous 

role of the Franco-German alliance. With the shock of the crisis 

have come introversion, national selfishness and the egoism of 

the financial institutions, populist reactions and a growth in euro-

scepticism, posing a threat to our values and democratic traditions, 

the European model and promises of federalism.

I was struck and dismayed by what Madame Lagarde said at the 

start of the Greek crisis, placing the emphasis on the loan granted 

and the profit made by France: borrowed at 2.5 % and lent at 5 %, 

a sign that solidarity is giving way to gain. More worrying is the spat 

between the German and Greek media using stereotypes to express 

the reluctance to help a ‘lazy and wasteful people’. This lack of 

economic solidarity has damaged the European spirit, and to the 

financial cost has been added a psychological cost, at the expense 

of the rapprochement of peoples. This negative image of Greece 

has spread through the media and the public, to the great detri-

ment of European spirit and identity. Whilst the economic damage 

can be repaired fairly quickly, attitudes die hard and, according to 

Denis de Rougemont, are the most tenacious obstacles to European 

integration.

The ineffectiveness of the intergovernmental method, taking us 

backwards rather than forwards, has been demonstrated. End-

less negotiations have eventually led to minimal compromises, the 

domination of the strong and the formation of a kind of ‘executive 

board’ comprising Germany and France, because of their economic 

weight, to the detriment of the other members of the eurozone, as 

well as a kind of hegemony which is the antithesis of one of the 

principles of federalism, all accompanied by a reversal of demo-

cracy in the EU. Indeed, the intergovernmental method is a step 

194

back to the days when decision-makers ignored the European Par-

liament. Unlike the Commission, which is alone accountable to the 

European Parliament, the European Council and the Council do not 

answer to it. With the Commission’s role marginalised, the insti-

tutional balance is skewed in favour of government institutions, 

with the inherent risk that the general European interest will be 

neglected under the pressure of domestic policy and democratic 

control will be avoided.

Fortunately,  every  time  that  rules  need  to  be  drawn  up  and 

enforced, a return to the Community method is inevitable. Once 

pushed aside, the Commission is now making a strong comeback 

to ensure balance between the large and the not so large Member 

States and to take into account the various national interests. Since 

Mr Barroso’s speech on the state of the Union and certain new ini-

tiatives, the Commission has been throwing itself once again into 

the role of leader, once wrested from it by Germany and France. We 

know the result.

Can Europe struggle out of the crisis? There is no magic bullet. Hope 

and confidence can re-emerge only as part of a European ‘New 

Deal’. The progress made so far, which has been insufficient, must 

be backed up intensively by three measures needed without delay: 

the use of eurobonds, stepping up the crucial role of the ECB along-

side the Commission and the adoption of an institutional frame-

work for the eurozone.

Proposed by Jacques Delors and Tommaso Padoa-Schioppa, the 

idea of eurobonds is becoming increasingly popular with govern-

ments, economic actors and public opinion. The German govern-

ment and the ruling coalition partners are divided, whilst exporters 

are making their voices heard. The President of the Federation of 

German Wholesale, Foreign Trade and Services (BGA), Anton Börner, 

takes the view that ‘we need eurobonds with a German stamp. We 

have to take tough measures in the eurozone: a constitutional curb 

to ban excessive deficits, a modernised administration, greater 

labour market flexibility, massive investment in training. And we 

mustn’t shy away from the possibility of raising taxes. Any solu-

tion apart from eurobonds would cost us more in the long run.’ In 

turn, Finance Minister Wolfgang Schaüble, a veteran Europhile, is 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT195

against the adoption of eurobonds as long as member countries 

continue to run their own budget policy. Economic governance and 

a European coordination of national budgets, in other words a form 

of budgetary federalism, supplemented by the close coordination of 

fiscal policies, the first step towards fiscal federalism. Once these 

requirements are met, eurobonds would be feasible.

The Commission has proposed ‘stability bonds’ which would facil-

itate  borrowing  at  lower  interest  rates.  A  breakthrough  which 

should be accompanied by the issue of eurobonds to fund European 

infrastructure, research, education and innovation projects or job-

creating industrial programmes.

One proposal from France was to extend the role of the ECB to 

make it more like the Fed or the Bank of England, to make it the 

lender of last resort, providing resources to the European Stability 

Mechanism. The German veto was not slow in coming, the fear 

of inflation being ever present. The system would be based on 

eff ective governance by the Commission, acting within general 

guidelines set out by the Council of Heads of State and Government 

of the eurozone. The leadership council will be chaired by Herman 

Van Rompuy who, in line with the institutional logic, is President of 

the European Council. For reasons of balance, a European finance 

minister,  vice-president  of  the  Commission,  would  be  called  to 

chair or co-chair the Council of Finance Ministers of the eurozone. 

Progress  in  the  creation  of  institutional  structures  could  be 

achieved in the context of ‘enhanced cooperation’. These are some 

measures to help to consolidate the eurozone whilst integrating it 

seamlessly with the single market and the European Union. Time 

is pressing, as the markets respond quickly and the crisis deepens 

and spreads. A global challenge warrants a prompt, comprehensive 

reply. The future of the European Union and, to a great extent, 

the future of the world economy, depend on the survival of the 

euro. This is a warning to the markets and an urgent appeal to the 

European institutions, the governments of the Member States and 

European citizens.

Annex

Programme of the Global Jean Monnet Conference

198

Programme of the Global Jean Monnet Conference

European economic governance in an international context

European Commission, Directorate-General for Education and Culture,  

Jean Monnet programme

Charlemagne building — Alcide de Gasperi room

Brussels, 24 to 25 November 2011

Thursday, 24 November 2011

08:15 

Registration of the participants

09:15–10:15 

Opening session

Moderator 

 Mr Jan Truszczynski, Director-General for Education, Training, Cul-

ture and Youth at the European Commission

Opening speeches 

Mr José Manuel Barroso, President of the European Commission

 Ms Androulla Vassiliou, Commissioner for Education, Culture, Multi-

lingualism, Sport, Media and Youth

Ms Anni Podimata, European Parliament

10:15–10:30 

Coffee break

10:30–11:00 

Scene setter — Keynote speech

 Mr Robert Mundell, Nobel Prize Economics; University Professor of 

Economics at Columbia University; father of the theory of optimum 

currency areas

Session 1: 

 Safeguarding the stability of the euro area and the enhanced 

instruments for crisis intervention

11:00–13:00

Chairperson 

 Mr Edward Scicluna, Member of the European Parliament and Vice-

Chair of its Committee on Economic and Monetary Affairs; Professor 

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT 
 
 
199

of Economics at the University of Malta; former Director of the Cen-

tral Bank of Malta; former Chairman of the Maltese Financial Ser-

vices Authority

Lead interventions 

 Mr Roberto Gualtieri, Member of the European Parliament and its 

Committee on Constitutional Affairs; Rapporteur on the setting-up 

of a permanent stability mechanism for the euro countries

 Mr Nikolaos Baltas, Jean Monnet Chair at the Athens University of 

Economics and Business

Mr Daniel Gros, Director of the Centre for European Policy Studies

Mr Guntram Wollf, Deputy Director of Bruegel

Session editor 

 Mr Eric Le Boucher, Director of Enjeux-Les Echos, Paris; former Edi-

torialist of Le Monde

12:30–13:00 

Debate

13:00–14:30 

Standing lunch

Session 2: 

 Reinforced fiscal and macroeconomic coordination and surveil-
lance: economic aspects

14:30–16:00

Chairperson 

 Mr Josep Borrell, former President of the European Parliament; 

President  of  the  European  University  Institute;  former  Spanish 

Minister for Public Works, Transport, Environment, Housing and Tel-

ecommunications and former Spanish State Secretary for Finance

Lead interventions 

 Ms Elisa Ferreira, Member of the European Parliament and its Com-

mittee on Economic and Monetary Affairs; Rapporteur on the pre-

vention and correction of macroeconomic imbalances; Lecturer of 

Economics at the University of Porto

 Ms Laurence Boone, European economist at the Bank of America 

Merrill Lynch; former chief economist at Barclays Capital; former 

economist at the OECD

 
 
 
 
200

 Mr Sylvester Eijffinger, Jean Monnet Chair of European Financial and 

Monetary Integration at the Centre for Economic Research at Til-

burg university; President of the Tilburg University Society; Member 

of the Panel of Economic and Monetary Experts of the European 

Parliament’s Committee on Economic and Monetary Affairs

 Mr Paul J. J. Welfens, Jean Monnet Chair at the Institute of Macro-

economic Theory and Politics of the University of Wuppertal; Presi-

dent of European Institute for International Economic Relations

Session editor 

Mr Detlef Fechtner, EU Correspondent of Börsen-Zeitung

15:30–16:00 

Debate

16:00–16:15 

Coffee break

Session 3: 

 Strengthening the governance of the European area: political 

and institutional aspects

16:15–18:00

Chairperson 

 Mr José-Maria Gil-Robles, former President of the European Parlia-

ment; President of the European University Council for the Jean 

Monnet programme; Jean Monnet Chair and Director of the Jean 

Monnet  Centre  of  Excellence  at  the  Complutense  University  of 

Madrid; President of the Jean Monnet Foundation

Lead interventions 

 Mr Nikolaos Chountis, Member of the European Parliament and its 

Committee on Economic and Monetary Affairs

 Ms Amy Verdun, Jean Monnet Chair, Director of the Jean Monnet 

Centre of Excellence and Chair of the Political Science Department 

at the University of Victoria

 Mr José María de Areilza, Jean Monnet Chair and Dean of the IE 

University Law School

Session editor 

 Mr  Pierre  Lemoine,  executive  publisher  and  editor-in-chief  of 

Europolitcs

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT 
 
 
 
201

17:30–18:00 

Debate

19:30–22:00 

 Conference dinner at Husa President Park, Boulevard du Roi Albert II, 

44-1000 Brussels

Friday, 25 November 2011

Session 4: 

 The EU and global macroeconomic governance (G8, G20, IMF)

09:00–11:00

Chairperson 

 Mr Enrique Barón Crespo, former President of the European Parlia-

ment; Jean Monnet Chair at the Universidad de Castilla La Mancha; 

former Spanish Minister for Transport, Tourism and Communications

Lead interventions 

 Mr Marco Buti, Director-General for Economic and Financial Affairs 

at the European Commission

 Ms Olga Butorina, Jean Monnet Chair in Economics and Head of the 

European Integration Department at the Moscow State Institute of 

International Relations in Russia

 Mr Dai Bingran, Jean Monnet Chair and Honorary Director of the 

Jean Monnet Centre for European Studies at Fudan University; Sec-

retary General of the Chinese Society for EU Studies

 Mr Woosik Moon, Jean Monnet Chair in Economics at the Graduate 

School of International Studies of Seoul National University, Korea

Session editor 

 Mr Stanley Pignal, Brussels correspondent of the Financial Times

10:30–11:00 

Debate

11:00–11:15 

Coffee break

11:15–12:45 

Closing session

Moderator 

 Mr  Jan  Truszczynski,  Director-General  for  Education,  Training,  

Culture and Youth at the European Commission

 
 
 
202

Closing speakers 

 Mr Fritz Breuss, Professor at WU Vienna

 Viscount Etienne Davignon, Belgian Minister of State; former Vice-

President of the European Commission; former President of the 

International Energy Agency; former President of the Société Géné-

rale de Belgique; Chairman of Brussels Airlines, the Compagnie 

Maritime Belge, CRS Europe

12:45–14:00 

Standing lunch

EUROPEAN ECONOMIC GOVERNANCE IN AN INTERNATIONAL CONTEXT