The Eurozone and the Other EU Members

 

WEEKLY COMMENT 12-03-2015

By Barry Edwards

The Eurozone and the Other EU Members

 

The biggest problem within the EU is the simple fact that you have 19 countries in the Eurozone and 9 countries with their own currencies. All these countries can trade with each other as if they were in their own country but the 19 have a special arrangement to merge their economies while the 9 others do not. It would seem that this is a classic mismatch and likely to fail unless a proper agreement is decided about how they will interact with each other. That means what rules apply to the 19 that do not apply to the 9 and will it mean that the 9 are forced to accept whatever the 19 decide whether they agree or not.

On Wednesday (11 March), the European Parliament supported the European Commission’s push to accelerate structural and fiscal reforms demanded by the EU of each Member State, every year, under the so-called ‘European Semester. This is an assessment process for all EU countries to enforce conformity of the government fiscal budgets of each country to prevent a recurrence of the financial crisis we have just experienced. You can read the statement issued if you click on the link below;

http://www.euractiv.com/sections/euro-finance/parliament-backs-commissions-reform-push-eu-countries-312829?utm_source=EurActiv+Newsletter&utm_campaign=388699ed34-newsletter_daily_update&utm_medium=email&utm_term=0_bab5f0ea4e-388699ed34-245800221

This statement is a reconfirmation of the Maastricht treaty terms and conditions with some real punch if country members do not conform. At that time the Euro was created but the arrangements to explain how those that did not join were never set out although it was obvious there would be different conditions for those that did not join the Eurozone. This has never been discussed properly by the political establishment and, in my view, has been the major cause of the dissention in the UK and other non-Eurozone members.

Another analytical note has recently been released ‘Preparing for Next Steps on Better Economic Governance in the Euro Area’ which is clearly only discussing the Eurozone development process and not all EU member countries. You can read that note if you click on the link below, it is 9 pages long;

http://ec.europa.eu/priorities/docs/economic-governance-note_en.pdf

The note summarises all the new institutions that have been set up since the financial crisis and is a discussion document for all Eurozone members in preparation for a meeting arranged for June this year. At the end of the document are the specific points they wish to discuss which are listed below;

In this respect, this Analytical Note is intended to start a discussion process that will feed into a forward-looking report by the Four Presidents, in the preparation of which all Member States will be closely involved and which could in particular address the following questions:

  • How can we ensure sound fiscal and economic positions in all euro area Member States?
  • How could a better implementation and enforcement of the economic and fiscal governance framework be ensured?
  • Is the current governance framework – if fully implemented – sufficient to make the euro area shock-resilient and prosperous in the long run?
  • To what extent can the framework of EMU mainly rely on strong rules and to what extent are strong common institutions also required?
  • What instruments are needed in situations in which national policies continue – despite surveillance under the governance framework – to go harmfully astray?
  • Has the fiscal-financial nexus been sufficiently dealt with in order to prevent the repetition of negative feedback loops between banks and sovereign debt?
  • How could private risk-sharing through financial markets in the euro area be enhanced to ensure a better absorption of asymmetric shocks?
  • To what extent is the present sharing of sovereignty adequate to meet the economic, financial and fiscal framework requirements of the common currency?
  • Is a further risk-sharing in the fiscal realm desirable? What would be the preconditions?
  • Under which conditions and in which form could a stronger common governance over structural reforms be envisaged? How could it foster real convergence?
  • How can accountability and legitimacy be best achieved in a multilevel setup such as EMU?

Clearly it is important that the Eurozone improves its structure and financial controls to give it similar status to other international currencies. The non-euro members are expected to conform where they think it is appropriate but conduct their economies in accordance with the ‘European Semester’ mentioned above. As the Eurozone countries gradually create the institutions to manage the entire area superseding national control, the non-members will find they have become similar to the European Free Trade Association (EFTA) group having to accept Eurozone rules and regulations without any input. This situation is likely to happen whether any member leaves the EU or not.

Therefore, a two tier EU member status will occur unless proper account is taken of the different financial circumstances that the non–euro operate under which will make them different from the EFTA group. Leaving the situation as it is without a proper arrangement being agreed will ultimately lead to confusion and defections from the EU.

At the moment, it appears that no one has a solution to this problem which is why it is not discussed. This will almost certainly lead to a slow drifting apart by the non-euro countries who will find that the Eurozone federal status tends to create exclusion from some of the major important decisions that do affect the EU. In my opinion this is the real problem and it is uncertain how some of the non-euro members will react. Like any club it is required that you obey the rules if you wish to remain a member, it seems the EU club has a dilemma to solve if all members are going to unite and believe they have all the privileges that other members enjoy. I would be interested to hear your views on this matter if you wish to comment.

That’s all for this week, more observations next week.