EMU 2.0?

BRUSSELS – For a year, European policymakers have been busy fixing bugs in the design of Economic and Monetary Union (EMU). As with defective software, they have introduced successive new versions of EMU at a frantic pace – only to discover remaining vulnerabilities shortly afterwards. After two summits in March, however, European officials claim to have produced an enhanced, bug-free version. Can we trust them this time?

Answering that question starts at the origin of all of EMU’s troubles: crisis-prevention. Before 2010, it was almost entirely based on surveillance of budgetary deficits, which was conducted within the framework of the Stability and Growth Pact (a procedure for broad economic surveillance existed as well, but lacked political traction). The crisis revealed major enforcement problems with this framework, but also major design problems: no light ever flashed red to indicate that Ireland or Spain was in danger.

The new regime will take into account the debt/GDP ratio (removing Italy’s ability to maintain its outsize debt burden) and implicit liabilities (for example, a country with an oversized banking sector will have to confront potential rescue costs). Decisions on sanctions will be streamlined by a “reverse majority rule,” under which a European Commission recommendation for decision is considered adopted unless rejected by a majority of the member states’ ministers. All of this is encouraging.

A second positive sign is the recognition that not all crises are rooted in a lack of fiscal discipline; it is now agreed that financial and macroeconomic stability also matter. But the new policy framework looks somewhat unclear. There will be no less than three different, partially overlapping, European procedures – for budgets, macroeconomic imbalances, and financial stability. Clumsy intergovernmental processes risk blurring priorities, confusing policymakers, and exhausting civil servants.