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European Union: Focus On Developing The Euro Area

27.06.2018Comments are closed.

Dr Mojmir Mrak, a full-time Professor and the Jean Monnet Chair on “Economic Policies of the EU”, University of Ljubljana and visiting professor at Wirtschafts Universität (WU), Vienna.

The European Union (EU) confidently overcame turbulent events such as the global financial and migrant crises and Brexit. The European economy is growing and the steady economic environment calls for more decisive steps to ensure longstanding stabilisation of the euro area.

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As a distinguished professor of economic policies of the EU, which main challenges facing the EU would you stress at this moment?

The EU and the euro area are, indeed, faced with a whole set of challenges. Some can be classified as traditional ones, such as competitiveness or climate change, while others are more recent in origin, such as the consequences of the financial and migrant crises, as well as Brexit. These challenges can also be looked at as being external or internal. Among the external challenges, political problems in the EU environment should be mentioned specifically, especially those in Ukraine and the Arab world. There are also unstable relations with two large neighbours, Russia and Turkey, as well as the changing relationship with the USA under President Trump. Among the EU’s internal challenges, i.e. the challenges associated with relations among EU members, one can easily notice the growing north-south divide as an outcome of the financial crisis as well as an east-west divide in the context of the migrant crisis. Last but not least, Brexit has contributed new dynamics to the relationship between euro and non-euro area EU members.

The European economy is currently stable. Which steps should be taken to prepare the Union for possible future crises?

You are right. The political situation in the EU is today more positive than it was a year or two ago. On one hand, this is a consequence of political developments while, on the other, the outcome of Brexit for the EU today seems less dramatic than was the case immediately after the referendum. The strengthened economic performance has also contributed its part to the improved overall sentiment in the EU. In fact, the EU and its euro area have before them a window of opportunity that allows them to put their EU house in order, but this window will not remain open for long. In my view, the reform of the EU area will have to be based on the principle, “let us together do a smaller number of projects better”. This, in fact, means that in certain areas EU members will have to cooperate even closer than in the past. Typical examples are cooperation in the security and monetary areas. While in some other areas where strengthened cooperation is not absolutely necessary, member states should in the future have greater sovereignty in running their policies. I, for example, do not see a major conceptual problem if segments of certain economic policies, including the common agricultural policy, are partly renationalised.

Which kinds of reforms for a more stable euro area are needed? What is the desired outcome of these steps?

In recent years, economic governance of the euro area has substantially strengthened. In contrast to the pre-crisis period, today we have a more robust crisis prevention mechanism and also have a crisis resolution mechanism that was entirely missing at that time. So, yes, the euro area is today better prepared for the next crisis than it was 10 years ago, but its governance is this is still far from complete. What is absolutely needed for a functional euro area is a fully operational banking union with all three of its core pillars. Further on, the euro area member states will have to decide what type of fiscal union they are ready to embark on, i.e. with or without fiscal transfers, as well as what type of a standardised procedure for debt restructuring they are ready to put in place. Finally, they will have to either strengthen the European Stability Mechanism or transform it into a full-fledged European Monetary Fund.

Which important obstacles can policymakers expect during this process?

Since the next stages of the euro area reforms will involve major risk-sharing issues, it is realistic to expect the biggest problem will be how to achieve a new balance of responsibility/solidarity. I would not be surprised if the most difficult political decisions are only made at the time of a new crisis erupting. Experience namely shows that these kinds of political decisions are only possible in circumstances where there is no alternative.

Can we expect all EU countries to adopt the euro as their official currency in the future or is this scenario becoming less likely? What are the reasons for this?

Personally, I do not expect that we will soon see a situation that all members of the EU will also become part of the euro-area. On the other hand, however, there is one relatively strong argument that may increase their appetite for this path. Brexit namely even further reduces the relative importance of non-euro area members within the EU. In circumstances that the euro area will de facto become the core of the EU reforms, non-euro area EU members may feel, rightly or wrongly, increasingly isolated from the centre of the decision-making. In these circumstances, they might become more willing to enter the monetary union.

Which highlight of the ongoing academic year would you like to emphasise?

When talking about EU issues, Brexit clearly tops the list. Closely associated with this are discussions about the EU and the euro area’s future as well as the beginning of the negotiations on the post-2020 EU budget.

Read more in the FELU’s Yearly Review 2016/2017.


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