Dec 6, 2017 | 19:15 GMT

4 mins read

Europe: The EU Commission Reopens Old Debates About a New Europe

Forecast Update

In Stratfor's 2017 Fourth-Quarter Forecast, we said that EU members and institutions would spend the final quarter of the year debating plans to reform the bloc, including plans to create a European Monetary Fund. The reform proposals presented by the European Commission today confirm that forecast. 

After weeks of speculation, the European Commission unveiled its plans for the future of the European Union. On Dec. 6, the institution presented a series of proposals that included, among other things, plans to create a stronger and more coherent monetary union. The European Commission can only present ideas — approval is ultimately in the hands of national governments and the EU Parliament — but it expects member states to spend the next 18 months discussing the plans and for several of them to be implemented by mid-2019. Implementation, however, won't be easy. Some countries will probably criticize the proposals for granting too much control to supranational EU institutions and others will be critical of plans to share financial risk among countries.

The commission's boldest proposal is to turn the European Union's permanent bailout fund, the European Stability Mechanism, into a European Monetary Fund (EMF). The new fund would have a lending capacity of up to 500 billion euros ($590 billion) and would be charged with assisting eurozone countries in financial distress and with helping to bail out failing banks. And while the European Stability Mechanism is an intergovernmental body managed by members of the eurozone, under the proposed plan the EMF would be part of the EU legal framework. Germany may resist the proposal, out of fear that making the EMF an EU institution would politicize it.

Germany would like the EMF to be as independent as possible. In the past, the German government has criticized the EU Commission for being too lenient with countries in southern Europe that failed to meet the bloc's fiscal targets. Germany and other northern European countries are concerned about granting financial assistance to southern EU member states without gaining more oversight of their fiscal policies. To allay these concerns, the EU Commission says that an existing intergovernmental treaty that commits governments to keeping a balanced budget should be incorporated into the formal EU rules. The commission also proposes that key EMF decisions be unanimous, which would give Germany veto power.

Among the commission's other proposals is a plan to use the EU budget to support structural reforms in EU countries, assist countries during financial crises, and help non-eurozone countries join the currency area. According to the commission, these new functions should enter force in 2021. But this proposal, too, will be controversial: Southern EU members will probably support expanding the European Union's functions and spending, but northern members — which shoulder much of the union's financial burden — will probably oppose it.

The commission also proposed creating a European Minister of Economy and Finance, who would also act as vice president of the European Commission and president of the Eurogroup. According to the commission, the minister would provide important oversight to EU decision-making on financial and economic issues. But the commission admits that member states would have to reach a common understanding on the exact functions of this new minister.

The European Commission is taking advantage of the temporary power vacuum that has been created in Europe by Germany's extended coalition talks, hoping that by presenting its proposals now they will gain more traction. EU leaders will discuss the future of the bloc at a summit on Dec. 14-15, and the commission wants to influence their discussions. Those talks will weigh the goals of the commission's proposals — to better prepare the bloc for financial crisis and reduce its dependence on external institutions such as the International Monetary Fund — against their potential problems — such as granting more power to the European Commission and increasing risk sharing among eurozone countries.

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