5.3 The major reform proposals of recent years

5.3 The major reform proposals of recent years

We have collected some proposals that have been discussed in recent years. The origins of many reform ideas are now hard to trace. Because many proposals have changed over time and old and new proposals are regularly discussed or dropped out, the list may be incomplete. What all proposals have in common is that they involve the transfer of money from north to south. Almost all of them have so far failed due to resistance from the north. The confidence that the southern countries will keep their promises in the ever recurring "money against reform" trade-off has evaporated. The northern Europeans have rightly also lost trust in Brussels' capacity to be able to push through reforms in the south and therefore reject an additional transfer of power to a centralised body.

But it is quite possible that they will give in when the next crisis hits in order to save the south and tell their voters the tale of convergence one last time.


Reform proposal 1

There's supposed to be a eurozone budget. This budget, known as fiscal capacity, is intended to correct so-called "distortions" in the euro zone. This budget probably flows in its entirety from northern to southern Europe. It is to be adopted as an intergovernmental treaty for the realisation of existing goals laid down in the EU treaties in order to avoid constitutional difficulties. When Macron proposed this budget, he had in mind an amount equal to "several points of GDP". This idea is off the table. According to the current state of affairs, at least a two-digit billion euro sum per year could be materialised. This should probably become part of the general EU budget. Since the finance ministers have so far been unable to reach an agreement on this issue, its implementation remains open.


Reform proposal 2

Another Commission plan was presented to the committees of the European Parliament. This entails a new budget, known as the European Investment Stabilisation function. This budget is intended to cushion so-called asymmetric economic shocks. However, the Commission is not interested in the scientific definition of an asymmetric shock in this draft law, which requires comparisons between countries or regions. This project serves quite simply to redistribute resources in the event of any economic downturn. The Commission wants to start by providing the budget with €30 billion, which it will borrow. This project would be the first step towards direct borrowing by the European Commission and would then hardly be controllable. Mario Draghi described this sum and the eurozone budget on 26 November 2018 in the European Parliament as "first steps". It is unlikely that this law will be passed by the European Council.


Reform proposal 3

The Commission has submitted a draft law to the European Parliament proposing a reform aid programme. This programme is intended to support countries that implement growth-friendly reforms and thus alleviate the adjustment difficulties. In theory, it may not be a bad proposal, but it is to be feared that the states will carry out reforms only in return for payment. Moreover, here again, a transfer from north to south is likely to take place. After all, the funds of 25 billion euros, although comparatively small compared to other pots, are to be saved in other areas over seven years.


Reform proposal 4

A fourth plan by the Commission has been discussed time and again for a number of years. These are sovereign bond backed securities (SBBS), in other words: "Esbies". This concept is intended to bundle parts of the old debts of the euro area states. It is hoped to achieve greater security and lower interest rates for parts of the debt burden in this way. The underlying economic questions are quite complicated.

While officially there would be no joint liability , there would probably be some kind of implicit liability. The euro system works in a similar way. The markets would probably assume that the strong states would not want to risk a partial failure of the package solution out of a fear for their reputations and would therefore ultimately assume overall liability. Esbies are therefore a step towards the hidden mutualisation of debt. In addition, there are a number of other economic side effects. The German SPD is very committed to this idea in the European Parliament. Fortunately, this concept is unlikely to be adopted by the European Council.


Reform proposal 5

Talk about a "European Unemployment Insurance" has been ongoing for years. Unemployment rates are very high, especially in the south and are a burden on the social security systems there.  Due to the poor education systems in many countries and the difficulty of integrating cultural minorities within education systems, especially in France, such a system could be expected to present the north with very high costs over the long-term and provide significant relief to the south.


Reform proposal 6

The so-called "EU own resources" are often discussed in the EU. This refers to the call to transfer the right to levy taxes to the EU. Since tax law is one of the core competences of national States, they are vehemently opposed to the idea of the Centrists. The EU is trying to propose such taxes as EU own resources, a concept that is considered to be more citizen-friendly. Taxes on plastics, CO2 or financial transactions, for example, have come under discussion.


All these proposals and some others have so far failed because of the northern European States, which are clinging to their old dream of direct responsibility. It is easy to prove that this dream has long since turned into a pipe dream. Political institutions already account for a higher proportion of Italy's national debt than Italian banks. (see Chart 38)

Chart 38: The ECB holds more Italian government bonds than private banks.

Only one single initiative, the European Banking Union, has so far been partially implemented. But it, too, is still incomplete. The third pillar of the Banking Union, the joint deposit insurance scheme, EDIS, has not yet been adopted.

The discussion on the Banking Union will be of crucial importance in the coming months. Immediately after the European elections, new proposals are to be presented by the working group set up by the heads of government and the Juncker Commission in December 2018.very effort is being made to keep this extremely important project out of the election campaign.  But why is the Banking Union so important?


List of references for the used photos and chart: