William De Vijlder, Research Analyst at BNP Paribas, suggests that without a doubt, the Economic and Monetary Union needs to be strengthened as in 2017, the European Commission’s report underscored the need to improve its resilience to shocks.
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“Plus, everyone agrees that the current cyclical environment is propitious for entering discussions on strengthening EMU: it is best to repair the roof when the weather is nice.”
“Yet opinions still diverge widely over the best path to follow.”
“Simplified to the extreme, the debate boils down to a single question: should we give preference to risk reduction (in which case, potentially fragile countries pay the price) or to risk-sharing between countries (countries in good health help the others)?”
“The question might seem simple, but it is very hard to find common ground, especially since calling on solidarity means reducing the autonomy of economic policy. Eventually, reduced autonomy could become politically unacceptable, which would open the door to moral hazard as countries fail to respect previous commitments.”
“In conclusion, Eurozone summits come and go, each filled with high ambitions but no real progress. This might be grudgingly acceptable when the sky is blue, but we will live to regret the lack of progress when the economic horizon becomes more threatening. We are not there yet, of course, but the recent dip in confidence indicators is a good reminder that growth will not always be as strong as it is today.”
“Consequently, we should make it a priority to reach an agreement on helping countries hit hardest during cyclical downturns. At the same time, it is crucial not to ease up on risk reduction efforts, especially since that is what will build confidence against the moral hazard trap.”
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