'Whatever it takes': the Five Presidents' Report on completing Economic and Monetary Union Contents


The Five Presidents’ Report, published in June 2015, seeks to sustain the momentum of economic reforms put in place in response to the financial and euro sovereign debt crisis. It also proposes longer term solutions to achieve sustainable economic, financial and fiscal union by 2025, while bolstering democratic accountability. It raises the question of whether eurozone countries will move towards integration primarily by sharing risks or whether they will put the emphasis on better adherence to discipline. The evolution of integration will depend on the balance reached between risk reduction and risk-sharing measures. In either case, greater integration will require democratic accountability. All these measures will be problematic and time consuming. Nevertheless, we believe that significant political will exists to enable the euro to survive for the foreseeable future.

The Five Presidents’ Report also proposes, albeit in broad terms, fundamental changes to the eurozone institutional structure, which would have implications for the position of the UK. However, treaty change would be needed for many of the proposed changes and so the UK, if it remains in the EU following the 23 June referendum, should stay closely involved to ensure that there is no threat to the integrity of the Single Market and that the outcomes are, as far as possible, in the UK’s interests. A White Paper, developing the five Presidents’ more ambitious proposals, will be published in 2017. As a thriving eurozone is in the interests of all EU members, including the UK, we look forward to its publication with interest.

The EU has made limited progress in reconciling the decisions made at national level with the requirements of assuring economic and fiscal stability at the European level. In recent years, fiscal rules have been strengthened, and coordination and surveillance enhanced. However, adherence to and implementation of the Stability and Growth Pact and other measures are unsatisfactory. Despite progress in recent years, the fiscal rules are, on the one hand, still prone to be pro-cyclical and, on the other, subject to political influence at the domestic level. We identify an inherent tension between strong enforcement and Member State ownership of reforms.

The Five Presidents’ Report suggests some limited reforms aimed at strengthening existing structures. We welcome the creation of an advisory Fiscal Board but are sceptical that it will be effective without buy-in at Member State level. The right incentives also need to be put in place to allow Member States to view domestic fiscal policies as a matter of common interest. The Report also proposes the creation of Competitiveness Boards in each euro area Member State. We consider that these may have an insufficient effect in the countries where they are most needed.

The Report also launched the next stage of Banking Union. Although the UK is not currently a participant, strong links between UK and eurozone banks mean that measures to complete Banking Union are relevant to the UK. We support these efforts, but Banking Union remains incomplete and the bank-sovereign link is not fully broken. The proposed third ‘leg’ of Banking Union—common deposit insurance through a European Deposit Insurance Scheme (EDIS)—could serve as a useful addition to the Banking Union architecture but it is no panacea. In the short term, Banking Union is unlikely to be achieved without resolving the differences between the ‘risk reducers’ and ‘risk sharers’.

Regardless of whether EDIS proceeds as envisaged we continue to support the establishment of a common backstop to the Single Resolution Fund. In addition, one of the real tests for the creation of a ‘Financial Union’ is whether the new financial supervisory and resolution structure is sufficiently robust to cope with future financial instability. We strongly support efforts to develop a Capital Markets Union (CMU) as a key tool to enhance private risk-sharing, but note that its effectiveness may be limited in a crisis. The CMU initiative is moving slowly and contentious issues such as tax and insolvency need to be tackled. CMU is a project for the whole EU, and not just the eurozone, and the UK stands to benefit through its role as a financial markets hub.

The Five Presidents’ Report offers no clear definition of ‘Fiscal Union’, even though it will be a key area for discussion during the preparation of the White Paper. We were struck by the variety of interpretations of ‘Fiscal Union’ advanced by our witnesses. It can encompass many and various degrees of fiscal pooling and shared decision-making. Some form of fiscal stabilisation that responds to cyclical and asymmetric shocks is sensible but future discussion needs to focus on the degree. It is clear however, that any fiscal pooling or a system leading to permanent transfers in one direction will not be politically feasible in the short term. Sharing fiscal or financial risks, under a ‘Financial Union’ or ‘Fiscal Union’, which would involve greater decision-making or the pooling of national funds at the European level, will require appropriate mechanisms of democratic accountability.

The Five Presidents’ Report provides some suggestions to enhance democratic accountability but is light on detail. The Report envisages the strengthening of the Eurogroup and the creation of a eurozone treasury but does not elaborate. Such a proposal could extend to the creation of a eurozone Finance Minister, at the head of a new institution disposing of a budget voted by a eurozone parliament. On the other hand, reform could be more limited. While it is for the eurozone countries themselves to determine the appropriate level of integration, the Government should remain alert to any changes and ready to act to protect the UK’s interests. Treaty change would be necessary to create any new institutional structure: should the UK remain a member of the EU the process of treaty revision would also provide an opportunity to entrench the February 2016 renegotiation settlement in EU law.

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