I recently published a letter to the editor of Politico.eu Here is the longer version of the text.
Mário Centeno, Eurogroup President and socialist Finance Minister of Portugal, has recently
summarised the reforms that the Eurozone needs.
The region has been able to survive the near deadly crisis of the recent years thanks to moderate
risk pooling and most of all thanks to the “unconventional” monetary policy of the ECB. This,
however, is no longer sufficient, especially if some of the risks of a global slowdown, for example
the collapse of international trade or an incipient Iran crisis, will materialise.
As both academics and EU institutions have remarked for years, even if usually in a selective
manner, the Eurozone needs a common “budget that can protect investments in times of crisis”, “a
full-blown European deposit insurance”, “greater risk-sharing” both in the private and public
sectors, and a way for “the vast amount of savings generated in the Eurozone [to] be invested back
into the area”, to use Centeno’s words.
Not only does he consider all these elements, but Centeno significantly adds the necessity for a
Eurozone safe assets which, beside finally stabilizing financial markets, would contribute to
enhancing the euro’s international role. This is not a matter of Continental pride, but of sharing in
the US dollar’s “exorbitant privilege” of financing itself with low risk and at low or no cost.
However, Dr. Centeno ignores a crucial missing element to the current Eurozone architecture:
democratic debate and legitimacy.
A self-deceptive narrative across the area has it that the main obstacle to more risk sharing,
including the issuance of common safe bonds, is the lack of trust among countries. The real trouble,
however, is not that Eurozone governments do not trust each other. It is that some governments
want something, and others want something different.
Their electorates, in turn, are not increasingly attracted by anti-EU and nationalist movements only
because of the profligate Southern Europeans’ resentment against the greedy Northerners. Despite
their toxic threats to liberal democracy and the unfeasible or counterproductive policy solutions,
many populist movements at the periphery of the Euro-area raise a legitimate issue: the need to
democratically discuss the institutional architecture and the main economic policy strategy of the
The populists often criticise austerity because it did not lead to a reduction of debt as a share of
GDP. This, however, has never been its main aim. Even outside of the Eurozone, the EU as a whole
has collectively aimed at exiting its crisis through an exports led growth. Austerity is a crucial
element here because the difference between a government’s revenues and expenditure (net public
lending) is a major determinant of a country’s net exports. Actually, the so-called structural reforms
aim at the same goal purportedly by reducing labour costs and thereby improving firms’ price
competitiveness on international markets. And incidentally, by making it easier to borrow from
abroad, a Eurozone common bond would impede this strategy.
The approach has indeed worked: the Eurozone as a whole now has a sizeable surplus in the current
account of its balance of payments (thus in the economists’ jargon exporting unemployment to the
rest of world – and apparently president Trump has taken notice) and most Eurozone countries
exhibit levels of GDP higher than before the crisis. The downside, as is well known, are growing
poverty even among the full time employed, widespread precarity for the middle classes, and
persistent unemployment and underemployment in the Eurozone periphery.
In strictly economic terms, the need for Eurozone reform arises precisely because this export-led
growth strategy can only be successful, if we can at all call the current situation a success, as long
as the rest of the world grows healthily and demands a growing value of goods and services from
the Eurozone. This may not be the case in the near future.
However, from a wider perspective the Eurozone needs reform also because most of its citizens are
not aware of the rationale of this strategy, if they knew they may have preferred a different (for
example investment-led) one, and anyway they have a right to voice. The Eurozone needs this
political divergence to be open and transparent.
Real power resides today in the governments’ hands, whether in the Eurogroup or within the
European Council, while the expectation is still that it should be Parliaments to set the general
economic policy agenda. Until we agree on a renewed social contract, nationalists will always be
able to denounce the undemocratic character of some institutions. Governments represent at most
the electoral majority of a country, and by barring minorities from even listening to the Council’s
and the Eurogroup’s discussions, the current Eurozone architecture violates the “no taxation without
As it turns out, Dr. Centeno’s political family, the socialdemocrats, have so far lost more than
anyone else from this situation.