Eurozone ponders best path to ‘GEMU’

In the rich lexicon of Brussels acronyms, a new treasure has entered the vocabulary since June: GEMU.

It stands for Genuine Economic and Monetary Union, a term used in the conclusions of the last two European Union summits in a tacit acknowledgement that the single currency created by the 1992 Maastricht Treaty was flawed and woefully incomplete.

It also signals that Europe’s leaders are starting to shift their focus from fingers-in-the-dike crisis management to save the euro to a longer-term process of building a more robust, storm-resistant architecture for the currency area.

The aim is to bolt onto the existing governance structures more binding fiscal discipline, common banking supervision and resolution, more effective economic policy coordination and greater democratic oversight of euro zone policymaking.

The battle over the nature of a revamped GEMU will be a long and incremental affair.

“We are not looking at a ‘big bang’ moment for the eurozone, a sudden mutation that would transform it into a completely different beast,» European Council President Herman Van Rompuy, who is leading the reform exercise, said last week.

At least three competing visions of the future are in play and the central battleground is the trade-off between more financial burden-sharing and more pooling of sovereignty.

For the sake of simplicity, let’s call the alternatives NOMU, OLDMU and NEWMU, although in typical EU style, the outcome is likely to be a muddled combination of all the options.


German Chancellor Angela Merkel, Europe’s most powerful leader, wants more central control over national budgets and economic reforms, with a small new eurozone «solidarity fund» to reward compliance and cushion the impact of painful changes.

Merkel has doggedly opposed any sharing of the debts and liabilities of eurozone governments or their banks, whether by a debt redemption fund, common eurozone bond issuance, a common bank deposit guarantee or retroactive direct recapitalization of bailed-out banks by the eurozone’s rescue fund.

Her public position on the euro’s future can best be described as NOMU – no mutualisation. It is shared by the Dutch and Finns, fellow AAA-rated north European creditor countries.

Finnish Prime Minister Jyrki Katainen sees it as a moral issue. «In Finland, people ask ‘is it right that we have to pay the bill come from other countries’ politicians’ mistakes’. It’s easy to understand that it isn’t fair.”

Merkel has not ruled out the possibility of common eurobonds in the distant future at the end of a long process of fiscal and economic integration. Many EU officials believe she will be more open to burden-sharing solutions after next September’s German general election.

But for now she wants far stricter discipline up front, symbolized by Germany’s proposal for a euro zone «Sparkommissar» – a super-commissioner with the power to veto national budgets.

Bundesbank board member Andreas Dombret couched the German stance in quasi-religious terms, telling an audience in Dublin that a eurozone banking union must not «cover past sins», for example by taking on some of the Irish government’s bank debt.

“Anything else would amount to a fiscal transfer.”

However, many analysts believe Merkel will have to take some bigger step towards fiscal transfers or debt mutualisation to win French acceptance of more intrusive EU supervision of national budgets and economic reforms.

“NOMU won’t fly with France,» said Jean Pisani-Ferry, head of the Bruegel economic think-tank in Brussels. «I don’t think the Germans will manage to impose a right of veto on budgets without a trade-off for euro bonds.

“This may be what Angela Merkel wants, but it’s not what she will get.”


Not all Germans take such a black-and-white view. The Berlin government’s council of economic advisers has proposed creating a temporary redemption fund that would issue common euro zone bonds to help countries pay off their excessive debt stock beyond the EU treaty limit of 60 percent.

This could be dubbed OLDMU – mutualising legacy debts and liabilities.

It would help heavily indebted countries such as Greece, Italy and Ireland, but also potentially France and Germany, to get back to a sustainable debt level over 15 to 20 years, while each country would remain liable for its own new borrowing.

French President Francois Hollande embraced this version of common eurozone bonds, which some experts see as compatible with recent German constitutional court rulings because it does not create permanent transfers.

One EU official joked that this was a Catholic approach – granting sinners absolution – which would not work in mostly Protestant northern Europe.

Another form of OLDMU would involve allowing the eurozone’s permanent rescue fund, the European Stability Mechanism, to inject capital directly into banks that have been rescued by bailed-out governments in Ireland and Spain.

That would permit Dublin and Madrid to remove the bank debt from their state balance sheets, making it easier for Ireland to return to capital markets next year, and for Spain to retain market access without requiring a sovereign bailout.

However, Merkel has so far ruled out either a debt redemption fund or retroactive direct recapitalization of banks.


An alternative approach favored by many economists and the more federalist politicians would be to focus on pooling new borrowing by creating a common eurozone debt agency that would issue bonds on behalf of member states up to a permitted quota.

Governments would either be banned from issuing debt above that limit, or would have to do so on a national guarantee, ensuring they would face market discipline.

This NEWMU option – mutualising new liabilities but not legacy debts – is favored by the executive European Commission but has been explicitly ruled out by the German constitutional court and would hence require Berlin to change its Basic Law.

It would also create a permanent handicap race, where some countries had lead in their running shorts due to the burden of old liabilities for sovereign and bank debt.

Cleaning up Spanish banks hit by a burst real-estate bubble is set to cost some 4 percent of gross domestic product – not a huge addition to the national debt unless liabilities spiral.

But Ireland’s taxpayers have taken on liabilities equivalent to 40 percent of GDP, a massive burden that will weigh on the economy for a generation unless EU authorities provide some relief.

The EU official, who requested anonymity because he is not authorized to speak in public, calls NEWMU a very Protestant road to salvation. Every country starts with its original sins.


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