American economists argue the problem is that the currency is not backed by a federal state. In the USA, a state which is hit by recession automatically pays less tax to the central government, without this having any influence over federal spending it receives.
Conversely, the current crisis paralyses European states, who have no recourse to a federal authority. And as an unemployed Greek or Spanish can not really go to Bavaria to find employment, national borders become de facto prisons for countries in difficulty.
When the State of California is in crisis, depositors in the national bank Wells Fargo are not threatened, because they are protected by federal guarantees. Many are now demanding a European Banking Authority which could undertake the twin roles of supervising and recapitalising troubled banks.
But there are a couple of problems with this. First, you do not buy an insurance policy after the fire. To Germany, the proposal of a banking union is like asking German taxpayers to recapitalize Spanish banks.
Secondly – this is the biggest obstacle – it is unclear what the “federal” authority is in the euro area. The Constitutional Court in Karlsruhe is forbidden from depossessing the Bundestag of its budegtary power in favour of institutions which are not “democratic”. What is the precise meaning of the term?
If we refer to recent decisions of the Constitutional Court, this is constructed in terms of one man one vote. The European Parliament, according to this definition, is not democratic, because officials are elected in national constituencies that do not meet the rules about demography and representation. Moreover, the European Parliament is not confined to the euro area, but the Europe of 27. In short, there is not a democratic watchdog that could regulate the power granted to a body, for example, to recapitalize a distressed bank.
The immensity of the task seems daunting. None of these problems is insurmountable, however. In keeping with the example of the banking union, we can first agree on the fact that it will emerge once the national banks have been adequately recapitalized. This solves the first problem, we clean up after the fire first, then we create a federal authority to restore systemic coherence in the European project. About democratic control, there must be a proper institution for the euro area. The Germans are considering a new Chamber, composed of national parliamentarians.
It is also possible to imagine other formulas. MEPs in the euro area may well be elected on transnational lists, while others would choose their representatives according to the usual domestic constituencies. A parliament of the euro area could then meet as necessary, to form committees devoted to topics concerning the Euro area and vote on their reccommendations. The process will be long and complex. It will not suffice to reach an agreement with Germany on a new institutional framework, it will also be necessary to reach a compromise on the constitutional principles that will guide the founders’ common policies.
Do we have the luxury to engage in this new approach, at a time when the crisis requires quick decisions? This obviously will be no substitute for short-term decisions which must be taken on the debt and the conduct of fiscal policy. But the announcement that an ambitious approach has been initiated, with a clear timetable, would have a significant effect. The paradox of financial markets is that they can go into a spin when left to themselves, but they are also perfectly capable of anticipating a distant calendar, provided it is credible. It is still possible to overcome the crisis at the top, if we show that we have understood the problem.