THE GREATTRANSFORMATION:MEMO TO THE INCOMINGEU PRESIDENTS

bruegelpolicybriefISSUE 2014/04JULY 2014

by André SapirSenior Fellow at Bruegel

andre.sapir@bruegel.org

and Guntram B. WolffDirector of Bruegel

guntram.wolff@bruegel.org

POLICY CHALLENGE

The EU needs to adapt its economies to the global Great Transformation bydeepening the single market, improving product markets and improvinggovernance. This strategy needs to be combined with measures to boost thepublic capital stock to reap demand and supply-side benefits. A reform of theEU budget is imperative to orientate it more towards growth, while reform of

the Commission should deliver a morecoherent approach to growth policies.Neighbourhood policy should beredesigned to allow for different formsof collaboration and global tradeshould be promoted. Finally, the treatyreform will have to focus on concretemeasures to create a fiscal capacitywith appropriate legitimacy and a newrelationship with the UK.

0

50

100

Advancedeconomies

Advancedeconomies

Emerging anddeveloping

Emerging anddeveloping

General govt gross debt* Share of world GDP**

Diamonds = 2001; bars = 2013

Global transformation

THE ISSUE The European Union’s leadership spent the last five years fightingan acute and existential crisis. The next five years, under your leadership, willbe no less difficult. You will have to tackle difficult economic and institutionalquestions while being alert to the possibility of a new crisis. You face threecentral challenges: (1) The feeble economic situation prevents job creationand hobbles attempts to reduce public and private debt; (2) EU institutionsand the EU budget need reform and you will have to deal with pressingexternal matters, including neighbourhood policy and the EU’s position in theworld; (3) You will have to prepare and face up to the need for treaty change toput monetary union on a more stable footing, to review the EU’s competencesand to re-adjust the relationship between the euro area and the EU, and theUnited Kingdom in particular.

Source: Bruegel based on International Monetary Fund, WorldEconomic Outlook Database, April 2014. * % of GDP. ** in PPP terms.

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1. ‘Strategic agenda forthe Union in times of

change’, EuropeanCouncil conclusions,

26-27 June 2014, avail-able at

http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en

/ec/143478.pdf.

YOUR PREDECESSORS as presi-dents of the EuropeanCommission, European Counciland European Parliament spent agood part of their mandate fight-ing the financial crisis andcreating mechanisms – primarilythe European Stability Mecha-nism and the European BankingUnion – that were left out of theMaastricht design of Economicand Monetary Union (EMU). Yourterms of office will be no lesschallenging. You will have to solvedeep and difficult economic andinstitutional problems, whilebeing alert in case of a new crisis.The European Council of 26-27June 2014 defined a broad politi-cal agenda for the next fiveyears1, but you will have to takethe lead in spelling out a moreprecise agenda.

You face three challenges. First isthe economic situation. The finan-cial crisis is receding but hugeeconomic problems remain.Unemployment in Europe is atrecord highs and goes a long wayto explain voter dissatisfactionwith national andEuropean leaders.Debt levels are historically high. Eco-nomic growth hasturned positive againbut remains far toofeeble to alleviate thehigh joblessness ormeaningfully reducepublic debt, in particular in coun-tries with high debt levels.

But it would be a mistake to thinkthat Europe’s economic challengestems only from the crisis. AllEuropean Union countries need toadapt their economies and soci-eties to the Great Transformation

resulting from the combinedforces of globalisation, demo-graphic, technological andenvironmental change. This trans-formation started well before thecrisis. European leaders agreedalready in 2000 to modernisetheir societies: the Lisbon Agendato create a competitive knowl-edge-based economy withsustainable growth, more and bet-ter jobs and greatersocial cohesion. HadEurope implementedthe Lisbon Agenda, itwould probably nothave avoided the cri-sis, but it would havebeen in much bettershape to reboundmore strongly andquickly.

Unlike Europe, emerging coun-tries remained relatively immuneto the financial crisis. They con-tinue to forge ahead. In thisrespect it is good to consider twokey facts: in 2013 emerging anddeveloping countries togetheraccounted – for the first time

since at least 1850 –for more than 50 per-cent of global GDP;meanwhile, the aver-age public debt-to-GDP ratio of thesecountries droppedbelow 40 percent,while it nearlyreached 110 percent

in the advanced economies.

Your second challenge is twofold:reforming the functioning of theEU institutions while dealing withpressing external matters. Youmust deal with growing scepti-cism about the EU and tacklepressing strategic questions that

have remained unresolved forseveral years. The success ofeurosceptic parties in the 2014European elections will force youto focus on results for citizens. Forthis, the work on economic growthis necessary but not sufficient.The EU is still perceived as waste-ful, bureaucratic andundemocratic. You will have toimprove the internal working of

the EU and of its insti-tutions, manage therelationship betweenthe euro area and theEU countries outsideit (the United King-dom in particular).You will also have torethink the EU’sneighbourhood strat-

egy and strengthen the EU's placein the world.

Your third challenge is to face upto the need for EU treaty change.The economic and financial crisishas resulted in calls for ‘MoreEurope’ but also for ‘Less Europe’.These contradictory demands arenot necessarily addressed to thesame areas of competences thatare centralised or not at Europeanlevel. Many citizens might be infavour of ‘More Europe’ in someareas and ‘Less Europe’ in others.A more fruitful approach is to seeka ‘Better Europe’, with some fur-ther competences allocated toEuropean level while othersremain at, or are even repatriatedto, national level. This impliesgreater clarity in the division ofresponsibility between Europeand its member states, and alsogreater effort to ensure thatEurope delivers better results inthe areas for which it has clearresponsibility.

‘It would be amistake to thinkthat Europe’seconomic challengestems only from thecrisis.’

‘You must reformthe functioning ofthe EU institutionswhile dealing withpressing externalmatters.’

THE GREAT TRANSFORMATION: MEMO TO THE INCOMIN G EU PRESIDENTS

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03The crisis has shown that euro-area countries need deeperbanking, economic, fiscal andtherefore political integration thanenvisaged by the Maastrichttreaty. Some of your predeces-sors suggested the creation of a‘Genuine Economic and MonetaryUnion’ that would go well beyondthe existing EU treaty and theinter-governmental treaties put inplace to strengthen the euroarea’s architecture. Althoughthere might be a natural tendencyto put aside this discussion whilethe pressure from the financialcrisis hopefully continues todecrease, it would be a severemistake to wait for the next crisisto reopen the discussion.

Such deeper integration amongeuro-area countries inevitablyraises urgent questions about therelationship between the EU andthe euro area.

You will need to work in parallel onthese challenges but the timing oftheir outcomes should be differ-ent. The economic challenge isthe most urgent. Europe needs todeliver growth and jobs soon toregain the trust of its citizens. Youwill need to put for-ward a crediblegrowth strategy intime for the Decem-ber 2014 EuropeanCouncil and startimplementing thestrategy by mid2015. You will alsohave to settle some of the gover-nance issues very soon, ideallyby spring 2015. You should striveto have the June 2015 EuropeanCouncil adopt a Declaration on theFuture of the European Union,involving a Committee on the

Future of the European Union,which would make proposals fortreaty changes relating to the gov-ernance of the euro area and therelationship between the EU andthe euro area.

It goes without saying that thechallenges in front of you areimmense. Success will only beachieved if the three of you workclosely together and with theheads of state and government ofthe member states. Neverthelessit would be rational that the Com-mission, which has executive andsurveillance responsibilities,leads on the economic issues andon the reform of the Commission,while all three lead on pressingexternal issues, and the EuropeanCouncil and Parliament lead onthe institutional track. The rest ofthis memo will deal with eachissue in turn.

A EUROPEAN STRATEGY FORGROWTH

You will constantly have to remindyour European Council colleaguesthat Europe is losing relativeweight and that its demographicdevelopments are unfavourable.

Europe needs agrowth strategybased on deeperglobal trade integra-tion, more opennessto immigration,improved educationalsystems and a betterfunctioning internal

market. It will also need to step uppublic investment and domesticdemand.

In particular, your growth agendamust provide a convincingresponse to Europe’s immediate

and medium-term economic chal-lenges. This entails both closingthe output gap and increasingpotential output. The strategytherefore needs demand meas-ures to increase aggregatedemand and close the output gap,and supply measures to increasepotential output. Investment,which remains depressed in mostEU countries, is key. Boostinginvestment would increase aggre-gate demand in the short termand increase potential growth inthe medium term. The focus of theEuropean growth strategy shouldtherefore be to improve theinvestment climate in Europe. Inthis respect, much of what needsto be done is ultimately theresponsibility of member states.But Europe has its own instru-ments, which matter forinvestment and growth.

Member states can and mustimplement structural measures inseveral areas. The first is thefunctioning of product markets,into which entry by new suppliersoften remains hampered byvarious barriers. This is especiallytrue in services. Second arelabour market and social policies(including basic education,training and life-long learning),which badly need to bemodernised. Greater flexibilityand better security for workersare essential features in the ageof Great Transformation. Third isthe functioning of the state,including the justice system andpublic administration. Finally,higher education systems inmany countries remain ill-adapted for the economies of thetwenty-first century andcontinental Europe still lacksglobal top-notch universities.

‘Europe needs todeliver growth andjobs soon to regainthe trust of itscitizens.’

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THE GREAT TRANSFORMATION: MEMO TO THE INCOMING EU PRESIDENTS

Although all EU countries need toimplement structural measures,some will require your specialattention because of their size:France, Germany and Italy. Theyaccount for two-thirds of euro-area and half of EU GDP. Germanyis healthy with low unemploy-ment and its public financesunder control. Yet German invest-ment remains fairly weak, whichis a pity first and foremost for Ger-many, which could use moreprivate investment to boost itscompetitive positionand more publicinvestment in educa-tion and ininfrastructure. But itis also unfortunatefor the rest of Europe,which would benefitfrom more aggregatedemand and highermedium-term growth in the EU’slargest economy. The situation inFrance and Italy is much lesspromising. There, unemploymentis dangerously high and publicfinances are over-stretched. Fur-ther economic difficulty in one ofthese two countries could reigniteproblems in the euro area, wherethe economic situation remainsfragile.

You have relatively little leverageover these three countries. ForFrance and Italy, the Commissionhas the arsenal of fiscal rules atits disposal, but the size of thecountries gives them bargainingpower and everyone knows it. ForGermany, which has large andpersistent current accountsurpluses, the Commission hasused and can use again theMacroeconomic ImbalanceProcedure to demand reformsthat would expand domestic

aggregate demand. But againthere are clearly limits to what canbe achieved. Your real power liesnot so much in the use of formalprocedures, though clearly theyshould be used like for any EUcountry, but in your capacity toconvince the three big countriesto act in their own interests, andthat not doing so would damagethe euro area and the entire EU. OfEurope's own instruments, themost important is the singlemarket. It is simply unacceptable

that 30 years afterthe launch of thesingle marketprogramme, andmore than 20 yearsafter it was supposedto have beencompleted, the singlemarket is still far fromreality in vital areas

such as services, digital sectors,energy and research. Yourcommitment to complete thesingle market would be animportant signal that Europe isagain serious about fosteringinvestment and growth.

The second instrument is the EUbudget, which needs substantialreform to enhance growth.Although the 2014-2020 multiannualfinancial framework(MFF) contains use-ful tools to improveEurope's investmentclimate, you will havethe opportunity toleave your mark in2016 when the MFFis reviewed. The review should notjust consider changes in expendi-ture, but also in the way the EUbudget is financed. Moving awayfrom national contributions,

currently the main source offinancing, is essential to turn theEU budget into a budget forEurope rather than one domi-nated by a national, ‘juste retour’logic. This would allow the budgetto be refocused on European pub-lic goods, for example energysecurity, energy efficiency, a digi-tal single market and EU-widemobility schemes for young work-ers, instead of ineffectiveredistribution. Luckily, your pred-ecessors appointed a High-LevelGroup on EU Own Resources,which will make proposals in timefor the 2016 MFF review.

The EU budget, along with regula-tion, can and should be used topromote better the single marketin industries that require trans-European networks to link regionaland national infrastructure. Thisincludes interconnection andinteroperability, mainly for trans-port and energy, but also forinformation and telecommunica-tions technology. In this respect,it would be important to expandthe European Commission-Euro-pean Investment Bank ProjectBond Initiative, launched on apilot basis in 2012.

But the EU budgetshould also be usedto promote structuralreform in EU coun-tries. This couldinclude, for example,making the disburse-ment of StructuralFunds conditional onadministrative reform.

The European Social Fund shouldbe used primarily for the moderni-sation of labour markets andmove social policies towardsgreater flexibility and better

‘It is simplyunacceptable thatthe single market isstill far from realityin vital areas.’

‘You will have theopportunity toleave your mark in2016 when theMFF is reviewed.’

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2. Also, the President ofthe European Parlia-ment should acceptthat national parlia-

ments use thesubsidiarity review

more often.

THE GREAT TRANSFORMATION: MEMO TO THE INCOMING EU PRESIDENTS

strategy. This mostly concernsthe European Commission presi-dent, but the European Counciland Parliament presidents willalso have to agree on certainissues.

• An effective Commissionwould have only a dozenpolicy areas in which it wouldtake action. While the numberof commissioners cannoteasily be reduced, you shouldacknowledge that not everycommissioner can have a fullportfolio without leading toinconsistency of policy andexcessive activism. A solutionwould be for everycommissioner to have the fullrights of a commissioner withfull vote in the College.However, not everycommissioner would beresponsible for a distinctportfolio. An alternativeconstellation would consist ofseveral clusters ofcompetences for which severalcommissioners would bejointly responsible.

• Reducing and focusing theactivities of theEuropean commis-sioners would alsoallow you to pre-empt the criticismfrom many mem-ber states that theCommission is tooactive and involvedin too many areas.While the assignment of com-petences cannot be changedwithout treaty change, you asCommission president couldapply a more rigorous internalreview of whether any new ini-tiative is really necessary and

whether major spilloversacross the union justify it. Youshould ensure the strict appli-cation of the subsidiarityprinciple2.

• You as the new Commissionpresident should appoint asenior vice president withoutportfolio responsible for theEuropean growth strategy. Thesenior vice president wouldoversee all the relevant Com-mission activities to ensurethat policies are implementedto their maximum effective-ness to promote growth. Therewould be a particular focus onsingle market and industry,digital agenda, science andresearch, education and skills,and regional policy. The seniorvice president would have asmall staff, consisting essen-tially of the part of the GeneralSecretariat currently in chargeof the Europe2020 strategy.

• The enterprise and single mar-ket portfolios should bemerged into a single marketand industry portfolio toemphasise that European

industrial policyshould be aboutframework conditionsand the deepening ofthe single market,while acting to min-imise nationalregulatory fragmenta-tion. Industrial policybased on subsidies

and support for national cham-pions is not the right approachfor more growth and jobs in theEuropean Union.

• Your economic and financialaffairs commissioner must

security. The European RegionalDevelopment Fund should beused as a matter of priority toimprove the administrative capac-ity and effectiveness of regionaland national public bodies.

But these instruments alone willbe insufficient to provide a mean-ingful demand stimulus tokick-start EU growth. You shouldbroker a deal in the EuropeanCouncil to get a European invest-ment boost. Public investmentshould be increased by about€100 billion in 2015 and 2016.About half of this should be theproduct of national fiscal policies,by increasing public investmentand creating new incentives forprivate investment. You shouldalso ask member states with fis-cal space to stop over-performingon the achievement of fiscal tar-gets. The other half of theinvestment programme should beconducted at EU level, by boost-ing the capital base of the EIB andimplementing project bonds. Eco-nomically weaker, highunemployment countries shouldbenefit disproportionally.

This growth strategy will be criti-cal for achieving higher growth,which will be paramount foremployment creation and for thesustainability of public and pri-vate debt in Europe. Failure toachieve higher real and nominalgrowth would render debt trajec-tories problematic in countrieswith currently high debt levels.

REFORMING THE EU INSTITUTIONSAND DEALING WITH PRESSINGEXTERNAL MATTERS

The European Commission needsreform to implement the growth

‘An effectiveCommissionwould have only adozen policy areasin which it wouldtake action.’

play a central role in the growthstrategy, including by shapingthe EU-wide fiscal stance, butshe will have to operate inde-pendently of the manyrequests from within the Com-mission and focus on hermandate and the need to keepfiscal policy credible.

• The rigorous enforcement ofcompetition rules is central foreconomic performance.Attempts to make competitionpolicy subject to narrow indus-trial policy interests areunwarranted, as are claimsthat it prevents the emergenceof European champions. Manysectors remain dominated bynational operators in the differ-ent national markets, andsubstantial regulatory barriersstill prevent companies, in par-ticular in the services sector,offering their products in otherEU countries. The single mar-ket agenda is therefore morerelevant than ever.

• It is worth reflecting on compe-tition policy decision making.Acknowledging the inherentlycomplex nature ofcompetition policy,a high-level com-mittee of fiveimpartial expertsshould beappointed to reviewonce a year theactions of the Euro-pean Commission,and give independ-ent advice on thedirection of competition policy.Their reports should be publicand should be submitted to theEuropean Parliament. Their rec-ommendations would not be

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binding, but would guide theEuropean Commission’s strat-egy and increase publicawareness.

The three of you have the daunt-ing task of rethinking andimproving Europe’s neighbour-hood policy, in particular witheastern and southern neighbours.The associationagreements promis-ing a ‘deep andcomprehensive freetrade area’ withUkraine, Georgia andMoldova are inter-preted ambiguouslyby different EU coun-tries and the threecountries themselves. The rela-tionship with Turkey is still seenonly through the prism of poten-tial EU membership. You will haveto seek Council backing for abroader approach, that alsoincludes the possibility of othertypes of institutional relationshipwith the EU, which would offermore options to stabilise traderelationships while respectingbroader geopolitical goals. You willalso have to define an immigra-

tion policy that notonly makes sensefrom a Europeanpoint of view but alsorespects the humani-tarian values forwhich the EU stands,and you will have tore-think the variousfinancial instrumentsthat the EU has for itsneighbourhood.

But Europe’s interests extend, ofcourse, far beyond the neighbour-hood. You should further promoteglobal trade integration and

develop a strategy to deal withChina’s rising trade power. By2020, the end of your term, Chinawill be the most important tradingpartner for several EU memberstates; already it is the secondmost important export partner forthe EU as a whole. The Transat-lantic Trade and InvestmentPartnership has the potential to

deepen trade withthe US, the EU's mostimportant currenttrading partner, butdoes not give a con-vincing answer toglobal trade ques-tions. Yet, for the EUas an open continent,the further develop-

ment of global trade is central.

Finally, the three of you have thetask of reforming the EU’s admin-istration to reduce costs andperceived inefficiency. Thisshould include a review of itsstaffing needs, including at theCouncil, salary structures andconditions of entry, the organisa-tion of the European Parliament,including the question of its dou-ble seat. Some of the currenthostility to Brussels comes fromnegative perceptions of its admin-istration. While overall the EUinstitutions are rather cheap andefficient, you should deal proac-tively with the perceptions, andnot hold back from dealing withinefficiencies.

TOWARDS A NEW ARCHITECTUREFOR THE EU AND EMU

Solving the pressing growth andunemployment problems andadjusting the current EU neigh-bourhood strategy, whileimproving the functioning of the

‘You shouldpromote globaltrade integrationand develop astrategy to dealwith China’s risingtrade power.’

‘Many pressingreforms are onlypossible if youbroker a deal on arevision of the EU’streaty base.’

EU institutions, is, however, unfor-tunately not enough. Arguablymany of the problems you willhave to fire-fight are the result ofthe still incomplete overall EUarchitecture and the lack of con-sensus on what the EU is andwhat it is not. You should initiateand drive a discussion on furtherconstitutional change in the EU.Europe still needs agrand new bargain.Many of the growthreforms and otherpressing reforms areonly possible if youbroker a deal on theneed for a broaderrevision of the EU’streaty base. Con-versely, the broader revisions ofthe treaty base are only possibleif citizens believe that further EUintegration in some areas is actu-ally to their benefit. You thus facethe formidable challenge of solv-ing many currently pressingproblems while working on thelong-term solutions.

Reform of the EU's architecture iscritical because failure wouldmean that monetary union isbased on an incomplete institu-tional set-up. In particular, fiscalmechanisms are critical for threereasons:

• Without a fiscal union, theEuropean Central Bank's policymeasures will continue to bemore controversial than thoseof a national central bank,because the ECB without a fis-cal counterpart is morerestrained in actions that couldhave distributional effectsacross different jurisdictions.In fact, arguably, the ECB’smandate was designed by the

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THE GREAT TRANSFORMATION: MEMO TO THE INCOMING EU PRESIDENTS

fathers of the Maastricht treatyto prevent it from engaging inpolicies that could have fiscalconsequences.

• For the financial system tobecome fully integrated acrossborders, a banking union with acommon fiscal backstop isnecessary. While the banking

union currentlyforesees somemutualisation of therisk that remainsafter significant bail-ins, there is nomutualisation ofmajor risks, and thedeposit insurancesystem remains

fragmented along nationallines. As a consequence, thefinancial system will remainfragmented, with banks anddepositors behavingdifferently based on theirlocation. More financialintegration combined with theright regulation would bebeneficial for growth and theefficiency of the EU economy.

• During the crisis, fiscal policyreacted quite pro-cyclically inmany instances because ofthe increasing market pres-sure on countries in distress.Moreover, the amount of aggre-gate fiscal stabilisation hasbeen insufficient becausecoordination has proven inade-quate across the Union.

It is time to significantly advancethis discussion on a fiscalcapacity and strongermechanisms for economicreform. The first important stepshould be a serious review of theEU budget with a view to adapt its

expenditures towards moregrowth. You should undertake thisimmediately within the existingtreaties. Other elements shouldinclude (a) resolving theunresolved questions aboutburden sharing in case of ECBlosses; (b) agreeing on how toincrease the back-stop for thebanking union – a potentialmeasure could be to accept thattaxation of banks becomescompletely European; (c) workingon a concrete measure that wouldsupport unemployed people –the creation of a Europeanunemployment insurancemechanism could be envisaged iflabour market institutionsconcurrently becomeEuropeanised. This would alsoanswer the pressing question ofhow to overcome theinconsistency between monetaryunion and national structural andlabour market policies. Many ofthese changes would requiretreaty change to create thedemocratic legitimacy needed tojustify moving such policies tothe EU level.

While fundamental reform of thearchitecture of monetary union iscrucial, it will be equally impor-tant that you address thesubstantial mistrust betweeneuro-area countries and some ofthe countries that do not want tojoin the euro, in particular the UK.The UK’s economy is of greatimportance to the single marketand the UK is a vital EU member.EU reform is part of the answerand the UK is right that suchreforms are in the interests of allEU members. But the question ofthe place of the UK in the EU willbe core for the debate on treatychange. A result of treaty reform

‘EU budget reformis a critical step toadvancediscussions onfiscal capacity.’

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could be that the UK stops partici-pating in the EU budget, whileremaining in the single market forgoods, services and capital, andideally also labour. The UK wouldhave to be granted some basicminority rights but should not beable to block vital steps needed tostrengthen the single market.Such a 'second tier' EU member-ship could also offer a morerealistic option for countries suchas Turkey.

This treaty debate on deepeningEMU and adjusting the relation-ship with the UK will inevitably beconnected with a review of EUcompetences. Reviews of compe-tences have been started by anumber of member states, mostnotably the UK. You should wel-come such input. All EU countrieswould benefit from a better alloca-tion of competences.

You should therefore propose tothe European Council in June2015 that it adopts a Declarationon the Future of the EuropeanUnion and that it appoints a High-Level Committee to makeproposals for a new architecturefor the EU and for the euro area.The High-Level Committee shouldconclude its work and report backto the European Council inDecember 2016.

The High-Level Committee wouldaddress three sets of questions.

1 Does a monetary union requirea fiscal and economic union

non-euro area EU countries?What safeguards should non-euro area countries receiveand how closely should theybe linked to the main EUdecision-making processes?Should their involvement in theEU be more narrowly based onthe single market only?

3 Is the current assignment ofEU competences adequate? Isthe current method for assign-ment of competencesadequate? The treaty specifiesthat limits to EU competencesare governed by the principleof conferral. The use of EU com-petences is governed by theprinciples of subsidiarity andproportionality, the applicationof which is specified in a proto-col. Has the time come torevisit this protocol?

It is time to review all of theseaspects thoroughly and come to abroader agreement about the EU'sdevelopment path. Many of theessential topics are far-reachingand complex. But failure to tacklethese issues would undermineprogress on current problems,and could also leave the EUunprepared for new crises. Theaim of the High-Level Committeewould be to create a clearroadmap. Obviously not all theproposed treaty changes wouldneed to be put in place at once;gradual change is conceivable.You should aim to have or at leastto initiate a new treaty before theend of your mandate.

and what exactly would thisimply? The following themeswould need to be explored:

• What kind of fiscal backstopdoes a genuine bankingunion require?

• Does monetary unionrequire a fiscal stabilisationmechanism?

• Are the current fiscal rulesadequate?

• Is a mechanism for sover-eign debt restructuringnecessary? How can theno-bail-out clause be madecredible?

• Should the European Stabil-ity Mechanism and theEuropean Resolution Mech-anism become EUmechanisms and be part ofa euro-area budget man-aged by a euro-areatreasury? Is the EU budgetreform a condition for thecreation of a euro-area fiscalcapacity?

• Does the euro area require a‘finance minister’ with vetopower over national budg-ets and national structuraland labour market policies?Should some of these poli-cies become EU policies?

• What mechanisms of politi-cal accountability should beput in place to oversee theeuro-area treasury andfinance minister and givethem political legitimacy?

2 What should the relationshipbe between euro-area and

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