The Five Presidents' Report in Perspective
Welcome to the first Newsletter of the European Political
Strategy Centre, the European Commission's in­house think
tank. A key preoccupation in the early days of our tenure has
been the aftermath of the economic and financial crisis. This
is why we have been delighted to intellectually accompany
the Five Presidents' Report that puts forward actionable ideas
on how to strengthen the euro and make the Economic and
Monetary Union (EMU) more resilient to future asymmetric shocks. Against
this backdrop, we decided to make the Report the focal point of this first
EPSC Newsletter, which gives us an opportunity to share some of our core
activities as well as feature opinions from peers in the think tank community.
On behalf of the entire EPSC team, I hope you will enjoy this first edition
and also choose to follow us @ECThinkTank.
Ann Mettler Head of the European Political Strategy Centre
Introducing the Five Presidents' Report
If the Juncker presidency could be called 'the last chance
European Commission', this is certainly the case for
thorough reform of the EMU. That was why it featured
firmly in President Juncker's 10 Political Priorities (see also
the accompanying analytical note) and eventually led to the
Report of the Five Presidents presented in June this year,
with European Commission President Juncker in the lead,
closely cooperating with the Presidents of the European
Council, Donald Tusk, the Eurogroup, Jeroen Dijsselbloem,
the European Central Bank, Mario Draghi, and the European Parliament,
Martin Schultz.
The Report sketches out how progress should be made on four fronts:
towards a genuine Economic Union, towards a deepened Financial Union,
towards an integrated Fiscal Union and towards a democratic Political
Union. The starting point is that 'all four Unions depend on each other':
progress in one area is only feasible if others move in parallel, and 'short­
term measures will only increase confidence if they are part of a larger
process'. Extra emphasis is put on ownership and legitimacy of the EMU
institutions and their output: 'increasingly joint decision­making and eventual
public risk­sharing demand stronger democratic participation and
accountability'.
For a succinct overview, see the press statement on the launch of the
Report and the Commission's follow­up package on implementing Stage 1.
Background and timeline: The Evolution of EU Economic Governance in
Historical Context.
The EPSC and EMU Reform
Deposit Insurance
Within the European Commission
the follow­up to the Report
started immediately, with the
EPSC contributing. The order of
the most pressing proposals was
implicit in the Report itself and
the turmoil around Greece over
the summer added even more
emphasis to some of them: a
genuine European Deposit
Insurance Scheme (EDIS), for
instance, on which the EPSC has
done analytical work as part of
our special Five Presidents'
Report Series.
Single Resolution Fund
Another vital issue is the need for
a bridge financing mechanism for
the Single Resolution Fund
(SRF). The SRF, financed
incrementally by bank
contributions, will only become
operational next year and fully
funded by 2024. Therefore an
agreement on a bridge financing
mechanism is necessary to
ensure that enough money is
available if a bank needs to be
unwound and SRF financing is
not sufficient. Options on how to
achieve this are outlined in this
.EPSC paper
Banks and Sovereigns
Cutting the 'doom loop' between
banks and public debt was at the
heart of the crisis and will persist
as long as bank balance sheets
remain overwhelmingly exposed
to their own sovereigns.
Currently, regulatory treatment of
government debt actually
contributes to the trouble, so this
EPSC paper analyses how the
necessary diversification of
government debt portfolios can
be operationalised.
Structural Reform
In line with the Commission's
work on revamping the European
Semester, the EPSC published
Strategic Notes on integrating the
Euro Plus Pact into the EU
framework, improving the
indicators and hence the
performance of the Europe 2020
strategy and strengthening the
.Social Dimension of EMU
Think Tank Reactions
'Surtout, le rapport
reconnaît que, pour
que la zone euro
fasse plus que
"survivre" et qu'elle
" prospère", il est
nécessaire de
partager la
souveraineté des
Européens au sein
d'institutions
communes
reposant sur des
mécanismes de
légitimité et de
responsabilité
politiques
suffisamment forts.
Paradoxalement, le
débat sur la
dimension politique
et démocratique de
la réforme des
institutions
européennes est
absent dans de
nombreux Etats
membres.'
'A smart move,
cautious on
substance and
ambitious on
process. A clear
and specific three­
stage roadmap
may be the report’s
most crucial
element. It provides
the EMU reform
process with a
structure. Putting
short­term
measures in the
context of a long­
term agenda is
essential.
[However,] the
report fails to
discuss 1)
improvements to
the European
Stability
Mechanism’s
governance and
accountability and
2) measures to
deal with a
sovereign default in
the euro area.'
'The report includes
the design of a
common
stabilisation
function to improve
the available
cushioning of large
macroeconomic
shocks. This
proposal echoes an
idea first put
forward by CEPS…
It consists of
creating a fund that
would work as a
common
reinsurance
scheme for national
unemployment
insurance
programmes. The
advantage of the
scheme is that it
promises to
stabilise
consumption by
paying
unemployment
benefits, without
burdening the
public finances of a
country facing a
crisis.'
'While one can
criticise the timeline
for not being
ambitious enough
from an economic
and social point of
view, the report is
probably realistic in
terms of the
political willingness
to move forward.
The idea to prepare
a White Paper with
concrete next steps
is also a sign of
realism. The report
rightly makes
finalising banking
union a priority.
The main elements
missing to date are
a proper backstop
to the single
resolution fund and
an adequate
system of deposit
insurance.'
'If both the
proposals [to
complete the
banking union]
make headway, the
result would be a
more integrated
and resilient
Eurozone banking
system and would
go a long way
towards breaking
the ‘doom­loop’ in
which problems in
the banking system
cause problems for
public finances
(think of Ireland,
Spain and Cyprus),
or problems in
public finances
cause banking
fragility (Greece).
But agreement will
be hard to reach for
the same reasons
as before... Wish
the Five Presidents
luck; they will need
it.'
'Given the limited
political appetite for
further integration,
it is important to
focus reform efforts
on where they are
needed the most.
The report contains
some important
proposals, such as
a strong emphasis
on completing the
banking and capital
markets unions.
But two key
aspects are
missing: a more
activist ECB in
order to prevent
future shortfalls in
demand, and
strongly counter­
cyclical fiscal
policies at the
national level.'
EPSC Events and Roundtables
Economic Governance
In parallel with the thinking on
further institutional reforms of
Europe's Economic and Monetary
Union, the EPSC organised an
event in June on Charting a
Course for Better Economic
Policy in the EU, building on a
'virtuous triangle' of structural
reforms, investment and fiscal
responsibility.
Competitiveness Councils
Further work has focused on the
proposal to instate or improve
national Competitiveness
Councils to track governments'
performance. An internal seminar
featured high­level
representatives of
Competitiveness Councils and
Commission officials working on
concrete proposals, with Peter
Praet, executive board member
and chief economist of the ECB,
.as keynote speaker
Boosting Resilience
The related subject of resilience,
understood as the capacity to
withstand, adapt and recover
from crises and shocks, was the
theme of an EPSC/Joint
Research Centre event on
Building a Resilient Europe in a
Globalised World. It included
Vice­President Valdis
Dombrovskis, in charge of the
euro and social dialogue, as
speaker in the closing plenary
session.
What the Experts Say
Dr. Agnès Bénassy­Quéré
Dr. Hendrik Enderlein
Chairperson, French Council of
Economic Analysis
Associate Dean and Professor,
Hertie School of Governance
'A Chicken­and­Egg Problem'
'Preparing for the Next Storm'
'Essentially, the Report tries to
solve a chicken­and­egg
problem: on the one hand, it is
more and more apparent that
institutions need to be changed to
make the euro work politically
and economically. However, an
ill­functioning euro economy
makes it difficult to persuade
people to vote in favour of more
integration. Hence, the
governance of the euro needs to
be fixed first. On the other hand,
'Let's be blunt: in its current setup
the euro is unlikely to survive the
next major crisis. Ad hoc quick
fixes have prevented the ship
from sinking in the storm, but
every reasonable boatman would
review the stability of the ship
before continuing the journey.
What I like most about the Five
Presidents' Report is the precise
roadmap and the clear definition
of intermediate goals. Many
be fixed first. On the other hand,
it is not possible to fix the euro
area in the short term without
some vision of what we are
aiming for in the medium term.
Hence the strategy in three
stages: "deepening by doing",
"completing EMU" and finally
"deepening EMU". This strategy
is sensible to the extent that the
different steps are taken
simultaneously, i.e. that we do
not wait until 2017 to think about
the second and third steps.
The Report also addresses a
"collective action problem".
Today, the euro area looks like a
collection of small countries
which all consider the rest of the
world as given. This is especially
apparent in the case of
competitiveness policies.
Reducing unit labor costs makes
sense within a monetary union for
those countries which have
deviated upwards, but a general
cut in unit labor costs does not
make sense, since it will be
erased by nominal exchange­rate
appreciation. Hence national
policies concerning nominal unit
labor costs should be designed
relative to the rest of the euro
area, not relative to the rest of the
world, and some countries should
accept to adjust upwards.'
of intermediate goals. Many
proposals on how to complete
EMU have already been made.
Now, the much bigger questions
are (i) what is the right
combination of proposals? and
(ii) how do we get implementation
done? I think we need a parallel
move towards more sovereignty­
sharing and more risk­sharing in
a context of enhanced economic
convergence. In a monetary
union, full national sovereignty
over economic and fiscal policies
is fiction. But the belief that a
monetary union could work
without a functioning risk­sharing
mechanism (for example in the
area of bank deposits) is a fiction
as well. We don't need a
European Super State or a true
Federation, but just a few
additional integration elements
that will ensure the euro can
survive another big storm. I would
start by completing the Single
Market, by transforming the
European Stability Mechanism
into a full­fledged European
Monetary Fund under direct
democratic control and by
completing the Banking Union.
Finally, we need to recognise that
the common interest of the euro
area is much more than the sum
of national interests. So let's work
on how to give a face to that
common interest and create the
position of a European Finance
Minister.'
The EPSC Newsletter highlights the work of the European Political Strategy
Centre (EPSC), the European Commission’s in­house think tank, as well as
reactions from think tanks and academia. The views expressed are those of
the authors and do not necessarily correspond to those of the European
Commission.
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