Euro will ‘muddle through' but completion of economic and monetary union ‘unlikely' by 2025, say Lords

Those are two of the main findings of a Lords report out today.

The Lords EU Committee report, ‘Whatever it takes': the Five Presidents' Report on completing Europe's Economic and Monetary Union, also concludes that the euro, despite its flaws, is likely to ‘muddle through' because of the investment of political will in its success.

The report also finds that longer term EU plans, calling for a eurozone treasury and a eurozone budget, are not only speculative but face significant challenges in coming to fruition. The five Presidents' more ambitious plans would be extremely constitutionally significant and require treaty change.

It is uncertain how these plans for a ‘fiscal union' would develop but it is important that democratic accountability structures or processes support these mechanisms. Ultimately, eurozone countries will have to agree on the level of fiscal and political integration they are comfortable with.

The Lords report also says that the proposals for a Capital Markets Union would not only benefit the UK, but also serve as a vital shock absorber in periods of a downturn.

Should the eurozone be strengthened to achieve greater fiscal and political integration, it will be vital for the UK and the other non-euro area Member States to protect their position.

The focus of the House of Lords EU Financial Affairs Sub-Committee investigation was the Five Presidents' Report, as well as the subsequent European Commission Communication, which outline the next stages of achieving economic and monetary union.

Commenting on the report, Baroness Falkner of Margravine, Chair of the Committee, said:

"Our committee report broadly welcomes the proposals set out in the Five Presidents' Report to achieve financial and fiscal integration, by, among other things, ensuring better adherence to fiscal rules and putting a financial risk reduction agenda in place. While we identify challenges that must be overcome, we believe that there is sufficient political will to ensure that the euro survives.

“The report considers risk reduction as a crucial element to achieving consensus on risk-sharing, through the pooling of funds. Risk-sharing, for instance through the creation of a fiscal stabilisation mechanism, is more controversial and is likely to be a longer-term goal.

“Elsewhere, the report welcomes progress on the Capital Markets Union, which, as a means of enhancing private risk-sharing, could prove not only useful across the European capital markets as a buffer against financial sector shocks, but could also be a vital boost to the UK financial services providers.

“While we found that the plans for strengthening eurozone institutions, such as the Eurogroup, are currently very speculative, we feel that it is vital that the UK keeps a watchful eye on how these plans develop, and that the UK should do everything in its power to ensure that its position is maintained.  The report notes that any major developments would require treaty change and therefore the UK would be well placed to ensure that its interests are preserved.

“The report also finds that because treaty change would be required to achieve significant integration within the eurozone, and many Member States would have to hold referendums, the target to achieve those plans by 2025 is ambitious.”

Key findings

Economic convergence
The report found that the impetus towards economic convergence is laudable, as a means of encouraging policy-making discipline, and ensuring a common goal for the eurozone countries but we conclude that national interests may prevent much progress in the near future.

Risk
We welcome the risk reduction agenda across the 'financial union' and ‘fiscal union' as this is a key step that might achieve the necessary political buy-in before further forms of risk sharing take place. Risk-sharing is likely to take place through a ‘fiscal union', however, the Five Presidents' Report does not define it precisely and our witnesses provided a wide variety of possible interpretations.

Capital Markets Union
We note the benefits from a Capital Markets Union (CMU) to the UK through its role as Europe's financial services hub. We also consider that CMU could help to stabilise the EU economy by acting as a “shock absorber”. But we are clear that private risk sharing through CMU is beneficial but not a panacea for any banking crisis, and we are not likely to see a full Capital Markets Union any time soon.

Democratic accountability and eurozone strengthening
We note that there is a move towards rationalising the role of the eurozone on the global stage, at the IMF and elsewhere, but conclude that it will not of itself ensure democratic accountability and may conflict with ensuring accountable decision-making at national level.

The plans to strengthen the eurozone, including proposals for a eurozone treasury, are currently very speculative. It is for the eurozone countries to decide the structures and processes needed to support further integration. We urge that the creation of any new accountability structure, whether a eurozone treasury, finance minister or otherwise, is accompanied by a clear mandate from eurozone citizens.

Impact on the UK
We urge the Government to remain alert to the impact that a formalised Eurogroup might have on the UK and on the City. We note that any move to create a eurozone parliament or treasury would require treaty change, which would have to be agreed by all 28 Member States, including the UK. This would also provide an opportunity to entrench the February renegotiation deal in EU law.

Baroness Falkner of Margravine, the Committee Chair, has recorded a YouTube video setting out some of the Committee's key recommendations.