Today the European Commission is taking another step in the ongoing process of building a more stable and prosperous Economic and Monetary Union. The current strong economic performance is proof that a lot has been done already. But it is also a good opportunity to complete the architecture of the euro area.
The measures we are presenting today will:
support Member States in their work towards more resilient economies,
strengthen EU-level shock-absorption and crisis-management mechanisms,
and support the process of convergence, both within and among Member States.
These measures form part of an inclusive approach to complete the Economic and Monetary Union, based on three principles:
unity of the European Union, being open and transparent to non-euro area countries,
and democratic accountability.
The best way to prepare for a crisis is to prevent it by building resilient economies. This requires structural reforms to modernise our economies, and there are already many positive initiatives in Member States. So today we are putting forward two proposals to help them keep up the pace of reforms:
First, we are proposing to create a reform delivery tool to support the reform commitments of EU Member States. The tool would be based on multiannual reform commitment packages negotiated between Member States and the European Commission, with measurable milestones. It would be a demand-driven mechanism, but Member States with excessive macroeconomic imbalances would be invited to present such reform commitments.
The Reform Delivery Tool would seek to support a broad range of reforms, including product and labour market reform, tax reforms, or the development of capital markets, to name a few examples. Before 2020, this system could be tested in a pilot phase, by offering Member States the choice to draw from the performance reserve of the European Structural and Investment Funds. In this way, these funds could support reforms rather than specific projects.
Second, we are proposing to increase the budget of our Structural Reform Support Programme to €300 million until 2020. This programme provides willing Member States with technical support to design and carry out structural reforms. And it has proved very popular. The budget for 2018 can only cover a fifth of the demand from over 20 Member States.
To prosper, the euro must be open and inclusive. We have seen in the past how ambitions of integration and prosperity have fuelled reform and convergence. We should support by all means the efforts of EU countries that wish to take a journey to joining the euro.
Upon request, these countries could receive support for reforms that help them prepare for membership and prosper once inside the euro area. In the short term, we propose to do it via a dedicated work stream in the structural reform support programme. For after 2020, we will propose to do it via a dedicated convergence facility.
But no matter how much we strengthen our resilience, economic shocks can still hit us. Once they do, we depend on a strong crisis management toolbox to prevent them from spreading and imposing long-term damage on our economies. This happened in the euro area once before, so we cannot allow it to happen again.
In the short run, increasing private risk-sharing through financial markets is the most immediate priority for making Economic and Monetary Union (EMU) more shock resilient. For this, we need to complete the Banking Union and achieve a true Capital Markets Union. In fact, the more private risk sharing we can achieve, the less public risk sharing we need in the EMU.
But the public sector also has a role to play. Markets cannot be expected to smooth large shocks alone. And – as happened during the crisis – governments can temporarily lose the ability to fund themselves on public markets, which creates the need for a lender of last resort. That is why today's package also sets out two proposals for measures in this regard:
First, we propose to build on the success of the European Stability Mechanism, or ESM, by turning it into a European Monetary Fund. The ESM has proven decisive in helping to preserve the financial stability of the euro area. By providing financial support to euro area Member States in distress, it has allowed them the fiscal space necessary for reforms and recovery to take place. Turning the ESM into a European Monetary Fund would help tackle any future crises more efficiently, and with greater democratic oversight.
As part of our efforts to complete the Banking Union, we propose that this new European Monetary Fund provides a common backstop for the Single Resolution Fund. A common backstop would serve to underpin its credibility by acting as a lender of last resort in case of serious bank crisis. It would reinforce confidence in the banking system and therefore actually make it less likely to be called on. The backstop would be fiscally neutral over the medium term, as all disbursements by the fund would be recouped from the banking sector.
Second, going towards the next Multiannual Financial Framework, we are proposing ideas for a stabilisation function. The aim is to improve the ability to deal with large asymmetric shocks, which means large shocks that hit only some Member States but not others. While national budgets should stay the main instrument for economic adjustment, there are certain cases when such a shock can remove or drastically reduce the fiscal space to act. This function would be intended for the euro area, but open to all who wish to participate.
What the Commission envisages is a stabilisation function which can support investment levels. Investment is often cut first from national budgets in times of strain, with detrimental effects on longer-term productivity and growth. The European Investment Protection Scheme would work with loans and possible limited grants. It should not create new permanent budgetary transfers. To ensure that it does not reduce incentives for sound economic and fiscal policies, there would be strict pre-defined eligibility criteria. Only Member States complying with the EU surveillance framework before the large asymmetric shock would be eligible for access.
As an additional element to provide macro-economic stabilisation, there could be a temporary increase in co-financing or pre-financing of European Structural and Investment Funds. This would allow the Member States hit by a crisis to sustain the levels of EU co-financed investment with more limited budgetary means. This approach has already been successfully used in Greece. This would ensure that investment levels are sustained when they are most needed. This proposal implies no new permanent transfers, as it would remain within national envelopes.
Finally, today's proposals aim at strengthening democratic accountability, by integrating the substance of the Treaty on Stability, Coordination and Governance into the Union legal framework. Sound public finances and fiscal buffers are important to make economies resilient to future shocks. Fiscal rules, such as those in the 2012 treaty, have helped define and enforce them. The current proposal does not affect the Stability and Growth Pact rules.
We have also outlined in a Communication ideas for a European Minister of Economy and Finance in the medium-term perspective.
To conclude, since the crisis hit us we have come a long way. We had to fix the boat in full storm, but now we are sailing in calmer waters. The current recovery gives us a good chance to build a prosperous economy on stable foundations also for the future. Today's package is a step towards this goal.
So we look forward to a constructive and vibrant debate on the steps forward within the framework of the Leaders' Agenda, starting with the Euro Area Summit on 15 December.