Is the eurozone stormproof? On deepening and strengthening the EMU

September 25, 2017 - nr.105
Summary

Foreword

On 6 October 2016, the Advisory Council on International Affairs (AIV) received a request from the Minister of Foreign Affairs for an advisory report on the further development of the eurozone, one of the key issues in the current process of European integration. The request referred to a report entitled ‘Completing Europe’s Economic and Monetary Union’ drawn up by the President of the European Commission in close cooperation with the President of the Euro Summit, the President of the Eurogroup, the President of the European Central Bank and the President of the European Parliament (the Five Presidents’ Report). It sets out steps that need to be taken to improve economic governance of the eurozone and ultimately bring about financial and fiscal union.

Although steps have already been taken to strengthen the eurozone, the government nevertheless understands the need to carefully weigh up the options available within the current treaty frameworks to strengthen economic and monetary union (EMU). The government stated that it would appreciate receiving an advisory report on this issue from the AIV, based on the following questions:

  1. What steps can be taken within the limits of the current treaty framework to strengthen governance of the EMU in order to promote growth and the ability to absorb shocks in individual member states and the EMU as a whole?
  2. What steps can be taken within the limits of the current treaty framework to promote real economic convergence within the eurozone?
  3. Can the Advisory Council explain the implications of the individual steps in questions 1 and 2 for the Netherlands’ economy and financial interests?
  4. To what extent can the individual steps aimed at strengthening governance of the EMU and promoting real convergence influence political and economic cooperation at a wider EU level, with member states outside the eurozone – e.g. regarding decision-making on and the integrity of the internal market?

This advisory report has been prepared on the basis of these four questions. It is structured as follows. The introduction briefly recounts the economic and financial crisis of 2008/2009, the subsequent euro crisis of 2010/2012 and the measures taken in response. It also asks whether the measures taken and planned will be sufficient to withstand another crisis. Three possible scenarios are outlined: a gradual, step-by-step strengthening of the EMU,1 a ‘great leap forward’ and an exit scenario. The AIV calls in this advisory report for a gradual, incremental strengthening of the EMU but does not rule out the possibility of one of the other scenarios occurring.

Chapter I considers whether the eurozone has experienced the intended economic convergence in recent years. The AIV concludes from empirical research that this has not been the case; the eurozone has undergone divergence rather than convergence, with the northern and the southern euro countries experiencing considerable differences in their economic development. In answer to question 2, chapter I then looks at potential economic solutions for achieving economic convergence in the eurozone in the years ahead.

Chapter II considers the creation and strengthening of the financial union, the most important parts being the banking union and the capital markets union. The AIV puts forward several proposals to further strengthen the financial union – proposals that it believes will benefit citizens and businesses not only in the Netherlands but across Europe.

Chapter III looks at monetary stability and the measures already taken to strengthen it. It concludes that although the measures were essential, they will probably be inadequate for withstanding a future crisis. The AIV therefore proposes measures to further strengthen monetary union and outlines a pathway to a European Monetary Fund. This chapter also discusses the possible withdrawal of one or more countries from the eurozone. The AIV considers this scenario neither likely nor desirable but it cannot be entirely ruled out.

Chapter IV presents measures to strengthen fiscal union, something the AIV also believes is necessary. It looks at the fiscal stabilisation function for the eurozone, a fiscal capacity and various ways to achieve it. The AIV thinks such proposals deserve serious consideration and should not be summarily dismissed. This is especially true in the light of Emmanuel Macron’s recent election as President of France, as the Franco-German duo may resume their role as the driving force behind further European integration. Plans to further strengthen the eurozone will probably feature prominently in this context.

Chapter V considers governance of the eurozone, which also requires further strengthening, in the AIV’s opinion. In response to the first question in the request for advice, this chapter sets out proposals for doing so, partly along the lines suggested in earlier AIV advisory reports on this issue.

In response to question 3, these chapters, especially chapter I, also consider the potential implications for the Netherlands’ economy and financial interests of the individual steps set out in response to questions 1 and 2, and their implications for political and economic cooperation at a wider EU level, with member states outside the eurozone (question 4). Question 4 is considered only in passing, however, as the AIV believes it has lost most of its practical relevance on account of the UK’s announcement that it will leave the EU.

This advisory report was prepared by a committee consisting of Professor A. van Staden (chair) and Ms F.A.W.J. van Esch, Professor S.C.W. Eijffinger, M. Krop, Professor C.W.A.M. van Paridon, A. Schout and C.G. Trojan (members). The committee’s executive secretary was A.R. Westerink, assisted by M.L.I. van Laake (trainee). C.W.J. Devillers and J. Nuijten were involved in the preparation of this report as civil service liaison officers from the Ministry of Foreign Affairs.

The committee consulted a number of experts to prepare this report. Their names are listed in Annexe III. The AIV is very grateful to them for their input.

The AIV adopted this advisory report on 7 July 2017.

Conclusions and recommendations

In its request for advice on the further development of the euro of 6 October 2016, the government asked the AIV to weigh up the options available within the current treaty frameworks to strengthen the EMU, in particular steps aimed at strengthening governance of the EMU in order to promote growth and the ability to absorb shocks in individual member states and the EMU as a whole, and in order to promote real economic convergence within the eurozone. The government also asked the AIV to explain the implications of these steps for the Netherlands’ economy and financial interests. Finally, the government asked the AIV to examine the extent to which the individual steps could influence political and economic cooperation at a wider EU level, with member states outside the eurozone.

The AIV found that the various measures taken to strengthen the European currency union since the euro crisis of 2010-2012 had certainly strengthened governance of the eurozone and improved the financial and economic situation in the euro countries. But the progress made will be insufficient to prevent a new euro crisis. There are doubts about the ability of the eurozone and the EMU in a broader sense to take decisive action in a crisis. Decision-making will be complicated and frustrated by the many actors with poorly defined tasks and responsibilities. To improve governance of the euro, competences urgently need to be defined more precisely and the responsible common institutions must be allowed to do their work impartially. The semi-established banking union and capital markets union should also be completed without undue delay.

However, confidence must first be restored within the currency union. It has been shaken in the recent past by the inadequate enforcement of the agreements reached in Maastricht (1991) and Amsterdam (SGP, 1997) regarding a shared and common responsibility for the euro. Not all decisions on the accession of countries to the eurozone were taken with the necessary care. Partly as a result, certain euro countries have inadequately respected their undertakings to keep public finances within the treaty limits (budget deficit of not more than 3% of GDP and public debt of not more than 60% of GDP) or to strengthen and converge their economies. Oversight of the euro countries was also lax. The European Commission was particularly negligent in this respect, although it can be partially excused owing to the lack of support it received from the larger member states.

All these aspects of the euro architecture were starkly revealed by the financial and economic crisis of 2008 and the subsequent euro crisis, and placed extreme pressure on the single European currency. Amid the cacophony as to whether solidarity or solidity should have priority, a financial assistance facility was established and subsumed under a separate ESM treaty in 2012. It offered countries in difficulties, such as Portugal, Ireland and Greece, shelter from the storm on the financial markets so that they could put their finances in order. But this has not eliminated the difficulties faced by all countries with excessive deficits and debts. Some, such as the Netherlands, have resolved their problems largely on their own. Others have been too busy looking at what other countries were doing to do much themselves. Economic divergence has been reduced since 2014 but we cannot yet speak of convergence. All manner of repair and reinforcement work has been initiated, including the introduction of the European Semester.

The fact that calm has returned to the eurozone since 2012 has more to do with the financial markets’ confidence that the ECB will not let the euro fail no matter what (and has therefore stretched its mandate somewhat), and that Germany is in effect guaranteeing the currency, than with their belief in the euro system’s own self-healing ability. A further recovery in confidence among the euro system participants is of prime importance in strengthening this ability and the euro’s resilience to crises. This will also be necessary to deepen the EMU, to truly stabilise the euro in the long term and to make the currency a desired instrument of European integration. Despite the ‘euro neuroses’ of recent years, popular support for the euro is growing in the eurozone (and even in EU countries that have not yet adopted the euro as their currency).

Can confidence in the eurozone be increased? Yes, without doubt, and for the following reasons:

  1. The wave of euroscepticism has peaked. After the Brexit referendum and the outcome of the US election, it seemed inevitable that continental Europe would be consumed by national populism, but the tide turned within a few months. The economic and sociocultural breeding ground for populist movements has not yet disappeared but the recent outcome of the political process in France points to a change in the political climate. It offers the prospect of a new European élan. Emmanuel Macron, a social liberal, was elected President on a platform of structural reform of the French economy and in-depth investment in European cooperation. He is specifically eying the functioning of the eurozone. If he succeeds in restoring political and economic dynamism to France, this could also be of great importance to Europe. Germany, which increasingly stood without its traditional ally, France, during the euro crisis, would in any event welcome France’s return to the European stage, almost irrespective of the outcome of the upcoming German elections. France and Germany are expected to significantly step up their dialogue in the coming months and to propose new initiatives after 24 September. Regardless of their specific substance, fresh momentum in the Franco-German relationship could make a significant contribution to restoring confidence in Europe and within the euro area. It could trigger a breakthrough in the eurozone’s ‘north-south conflict’ and the Southern European member states’ acceptance of the need for structural economic reforms. The Northern European member states must in turn be willing to tackle structural imbalances in their own economies, thereby stimulating a recovery in the eurozone’s overall balance. There are no guarantees that confidence will be increased but these new relations definitely present an opportunity.
     
  2. That opportunity will be strengthened by the wind of change blowing through Brussels. One outcome of the EU’s recent ’existential crisis’, including euroscepticism, is that the European Commission has now adopted a more ‘listening’ attitude and acknowledged that European cooperation can be approached from a variety of angles. This process of dialogue and discussion with the member states, the European Parliament and civil society has so far produced an openly formulated White Paper on the Future of Europe and reflection papers on the opportunities and threats of globalisation, the social dimension of Europe and, more recently, deepening the economic and monetary union. The EMU reflection paper wisely makes a distinction between short-term improvements in the EMU (before 2019), partly on the basis of decisions already taken, and measures that may be taken in a later phase (up to 2025) to complete the architecture of the euro edifice. In the current changing climate, the paper paves the way for democratic discussion and decision-making on the future of the euro . The present AIV advisory report draws on several of the suggestions made in the reflection paper (without necessarily adopting them).
     
  3. The above reasoning is reinforced by the economic recovery. Technically, economic recovery in the EMU area began nearly five years ago but not many EU citizens noticed. It began slowly and its reach was fragmented. Furthermore, some countries, and some population groups, benefited more than others. But it has spread far more widely in the past two years and is becoming more noticeable in more parts of the eurozone. The economy is now growing and employment is increasing throughout the eurozone. The outlook for the next few years is also encouraging, even for countries in an ESM programme. This opportunity could be squandered of course by continued irresponsible public spending, but the more favourable climate can also be used to invest in a stronger economic order and greater equilibrium in the eurozone as a whole. The European and national debate should address these issues.

In general there are three ways of looking at the further development of the EMU: pessimistically, optimistically and realistically.

The first begins by assuming that the political, institutional, socioeconomic and cultural/social differences among the euro countries are irreconcilable. That they are so great that some countries should not have been admitted to the euro in 2002. And that the crisis has exacerbated them to such an extent that they are now insurmountable. In other words, some counties should abandon the euro and reinstate their national currencies in order to restore their national revenue models and create new opportunities for national prosperity. An optimist would see a great deal of potential in such a hypothetical exit, whereas a pessimist would be more likely to expect a country leaving the euro to go from bad to worse and the exit to destabilise the eurozone as a whole. The AIV is inclined to take the latter view.

The second, optimistic approach assumes that the euro is a currency without a state and the arrangement can only work in the long term if the EMU evolves towards a political union. In other words, a stable, crisis-resistant euro needs the creation of certain ‘state functions’ at European level to ensure that the entire euro area forms not only a monetary union but also a genuine economic union. This would entail, among other things, a federalisation of budget policies, fiscal policies and social policies, and, of course, a governance structure that encompasses both the European and the national dimension, including the necessary democratic legitimacy. An optimist would see many compelling reasons for such a centralisation of powers and also many opportunities. A pessimist (realist?) would see storm clouds on the horizon.

The third, realistic approach is more pragmatic. This approach, too, requires strengthening the euro and continued European integration in this regard. It differs from the second approach in that it does not entail a ‘great leap forward’ but a gradual, step-by-step approach. Stabilisation of the euro is a far longer process in this scenario but could ultimately arrive at the same result as the second. The idea behind this approach, however, is that it would enjoy support and enough lifebelts would be available to mount an emergency euro rescue. A pessimist would fear for the euro’s survival in an emergency. An optimist would opt for pragmatism in combination with an exit option.

The AIV is an advocate of the third approach: a gradual, step-by-step strengthening of the EMU. This option forms the backdrop to the measures proposed in this advisory report to further strengthen the EMU’s various components. Regarding the feasibility of these further steps and measures, the AIV looked not only at the existing treaty framework, as suggested in the request for advice, but also, where necessary, outside it. It also looked in passing at two other approaches. If the Franco-German duo launches new initiatives regarding the euro (and broader European integration) in the coming months, it is conceivable that they will include elements of the second approach. The Netherlands should be prepared for this if it wishes to bring any influence to bear. In this connection, this advisory report explores a number of aspects of deeper fiscal union. In the longer term, one or more euro countries may fail to meet the budgetary discipline and economic convergence requirements to such an extent that they would be better off leaving the eurozone, either temporarily or permanently. The necessary contingency plans for such a withdrawal should be made now.

Before proposing ways to bring about the required economic convergence in the eurozone (question 2 in the request for advice), this report first considered whether economies have converged or diverged in recent years. The empirical studies cited in the report are fairly unambiguous in their conclusions. Since 2000 and the introduction of the euro, and especially since 2008, economies have diverged rather than converged. The figures analysed mainly show a growing disparity between Northern and Southern Europe. On the basis of four indicators (GNP growth, unemployment, current account balance and per capita GNP), the northern countries fared better than the southern ones during the period studied and especially since 2008. The AIV therefore concludes that there has been little convergence in the eurozone in recent years.

How can economic convergence be promoted in the coming years? To answer this question the AIV drew on, among other things, an ECB publication that outlines three conditions for promoting long-term eurozone convergence and strengthening the EMU’s resilience to negative shocks. The three conditions are:

  1. macroeconomic stability;
  2. greater economic flexibility in the eurozone countries concerned (i.e. those lagging behind);
  3. higher total factor productivity (TFP) growth.

So far, these economic conditions have clearly not been met, or at least not sufficiently. Policy within the eurozone in the coming years must therefore be directed at satisfying these conditions, which are considered in detail in the report. Countries such as the Netherlands and Germany will also have to take steps, such as setting up more investment programmes and stimulating domestic demand by ensuring that wage increases stop lagging behind the increase in labour productivity. In answer to question 3 in the request for advice, such steps have implications for the Netherlands’ economy and financial interests. For example, the volume of Dutch exports is likely to fall due to higher labour costs, but there will also be positive effects connected with Dutch consumers’ increased purchasing power.

In addition to the economic conditions and factors mentioned above, other factors play an important role in economic convergence. They include an efficient banking system as part of the financial union. To this end, effective banking surveillance is a prime requirement. The AIV understands that capacity problems and lack of information on local circumstances have led to national supervisors still having a significant say in the exercise of European banking surveillance. The AIV believes the balance of surveillance between the ECB and national supervisors should be shifted towards the former.

Despite the establishment of the Single Resolution Fund, the AIV notes that a common backstop is still required to complete the financial union. This will certainly be the case until the fund reaches its target level, but even then it still may not be able to carry out major support operations. The Commission noted in its recent reflection paper on deepening the EMU that a common backstop is also necessary for the Single Resolution Fund and the European Deposit Insurance Scheme. In the context of the road map to complete the banking union, the creation of special lending facilities is the first step towards this goal.

Given the great importance to financial stability of a Deposit Insurance Scheme at European level, the AIV calls for the vigorous recapitalisation of banks with weak balance sheets in order to restore them to health. This will necessitate enhanced European surveillance and compliance with the agreements made on the composition of the Single Resolution Fund.

The AIV thinks that further steps are necessary for businesses to benefit in full from the potential advantages of a capital markets union. A harmonised legal framework is needed to facilitate cross-border capital flows and ensure that financial sectors are not impeded by national borders. Differences in national legislation currently hinder transnational investments and undermine efforts to create a level financial playing field in the EU.

The slow implementation of European financial union, especially the banking union, is one of the main reasons why the eurozone is still insufficiently prepared to withstand the next crisis. Although the leading role that the ECB now plays in the surveillance of major banks is a large step in the right direction, national supervisors have retained a strong voice in banking surveillance, and not only in relation to smaller banks. This harbours risks, especially in light of the relatively low capital buffer requirements. Another concern is the obstacles thrown up in creating the Single Resolution Fund. The AIV, too, sees this fund as an important instrument for increasing stability in the financial system. Progress can only be made if a limited group of financially strong countries are not disproportionately exposed to the risks of weak banks. The same applies mutatis mutandis to the creation of the Deposit Insurance Scheme.

Monetary stability, it can be concluded, has improved considerably in recent years. Nevertheless, the AIV has doubts about the monetary system’s resilience to very serious economic shocks in the longer term, as in 2009/2010. One reason for this is the untenably high sovereign debts of Greece and Italy.

Regarding the macroeconomic imbalance procedure, the AIV concludes that it is complicated and has so many shortcomings that in practice it cannot bring about the necessary structural reforms. In an ideal world, countries with budget surpluses would encourage investment and those with budget deficits would make structural reforms. To date, neither has happened. Nevertheless, the AIV is not without hope that, with the recent election of President Macron, France and Germany can reach agreement based on a mutual exchange of interests.

Regarding budgetary surveillance and enforcement, the AIV believes above all that they should be the responsibility of the European Commission and subject to review by the European Court of Justice as part of secondary legislation. The AIV believes leakage to intergovernmental structures in this field would be undesirable.

In response to question 1 in the request for advice regarding the options for strengthening EMU governance, the AIV refers in its advisory report to, among other things, the importance of strengthening accountability and democratic control by both national parliaments and the European Parliament. The AIV also proposes that the Vice-President of the European Commission for the Euro should be the permanent president of the Eurogroup. Other proposals to strengthen EMU governance are detailed in the report and also included in the recommendations.

With regard to a possible fiscal capacity, the AIV, along with the European Commission, the ECB, the European Parliament and several European countries, thinks that serious consideration should be given to proposals to create such a capacity. It must be made clear that the fiscal capacity will complement healthy national budgetary policy, not replace it. In other words, a fiscal capacity may not lead to permanent one-way financial transfers between countries.

Regarding the influence of the individual steps proposed by the AIV for political and economic cooperation at a wider European level, with member states outside the eurozone, the AIV touches upon this question (question 4 in the request for advice) only in passing in its report. In the AIV’s opinion, this question lost most of its practical relevance when the UK announced its intention to leave the EU.

Recommendations

On the basis of the analysis in the advisory report, as reflected in the above summary and conclusions, the AIV makes the following recommendations.

Strengthening the governance of the EMU

  1. The effectiveness of the governance of the EMU, especially as regards crisis management, should be strengthened. To this end, the AIV recommends that the permanent president of the Eurogroup be appointed chief negotiator of ESM assistance programmes. The ministers of the euro countries must give the president a wide mandate so that he can carry out his duties efficiently.
  2. As suggested in the AIV’s advisory report of April 2014, the Vice-President of the European Commission for the Euro should be appointed permanent president of the Eurogroup in due course. This would be comparable with the position of the High Representative for the Common Foreign and Security Policy. The appointment procedure could be the same as that for the Commission president: nomination by the European Council and approval by a majority of the European Parliament. This ‘double hat’ arrangement would strengthen the European Parliament’s control function, as the Commission is tasked under the ESM mandate with supervising compliance with and implementation of assistance programmes, without undermining the national parliaments’ control function.
  3. Regarding budgetary surveillance, the AIV recommends that the final opinion on compliance with EMU obligations remains (?) at the political level, i.e. with the ministers, who, by reverse qualified majority, can oppose the Commission’s recommendations (article 7, Stability Treaty). This does not mean that the Commission should act purely mechanically and should not have discretionary power to decide on the presence of exceptional circumstances within the meaning of article 3, paragraph 3 of the Stability Treaty. In the AIV’s opinion, it means that the Commission’s assessment should not be influenced by the clout of the member state concerned. An autonomous service should be established within the Commission to ensure the objectivity and independence of economic analyses.
  4. The AIV calls for the close involvement of national parliaments in controlling support operations for countries in acute financial difficulties (programme countries). After all, national funds are being transferred and guarantees are being given that are backed up by national taxpayers. The AIV therefore recommends that national parliaments periodically express an opinion, based on independent reports, on whether programme countries’ are using emergency credit effectively.
  5. In the context of creating the capital markets union as a vital part of the financial union, the AIV recommends that the position of the European Securities and Markets Authority be strengthened so that it can operate as an effective watchdog for the implementation of European financial rules. In its current, predominantly coordinating, role, it cannot sufficiently ensure the predictability necessary in this field. Transaction costs are unnecessarily high because of the uncertainty about how member states implement the rules.

Promoting real economic convergence

  1. To promote real economic convergence in the eurozone, euro countries that are lagging behind in terms of economic growth and employment should take measures to increase competition on goods, services and capital markets. They should also reduce the rigidities in their product and labour markets. To this end, the AIV recommends that a best efforts obligation be introduced at the highest political level, i.e. at the level of the heads of state and government of the euro countries.
  2. To support economic reforms in the southern euro countries, the Netherlands, together with Germany, should play an active and incentivising role in establishing investment programmes and the like and stimulating domestic demand by ensuring that wage increases stop lagging behind the increase in labour productivity.

Further proposals to strengthen EMU

  1. To complete the banking union, the AIV recommends that the proposals made in the Five Presidents’ Report be adopted in order to open up a credit line from the European Stability Mechanism (ESM) to the Single Resolution Fund to serve as a common backstop. The AIV equally supports the idea that this facility should be budget neutral in the medium term, i.e. it should not be funded from the member states’ public finances. This means that any assistance provided by the ESM must later be reimbursed by contributions from the financial sector. The AIV also calls for an increase in the capital buffers of financially vulnerable banks.
  2. Regarding monetary stability, the AIV recommends that the speed and scope of ESM interventions be increased, including during a preventive phase. To this end, the creation of a rapid response facility, a special fund guaranteed jointly by the euro countries, could be of great value. The AIV further recommends that the ESM be gradually transformed into a European Monetary Fund (EMF) in due course. Ultimately, this EMF, as a Union institution, would be integrated into the EU’s legal framework along the lines of the European Investment Bank (EIB).
  3. Regarding the ongoing debate on the introduction of a separate fiscal capacity for the eurozone, the AIV believes that such a capacity could, in principle, increase the EMU’s resilience to shocks. The AIV recommends that further proposals for fiscal union be assessed against a number of principles: (1) the euro countries’ undiminished responsibility for sound national budget policies, (2) the temporary duration of budget support to countries that are not yet able to implement anticyclical budget policies, (3) a strict definition of asymmetric shocks, (4) the fiscal capacity may not be used to finance public services that benefit all EU member states, and (5) effective democratic control.

Withdrawal from the eurozone

  1. With regard to a possible withdrawal from the eurozone, the AIV recommends that the responsible monetary authorities draw up exit scenarios by way of contingency planning so that the advantages and disadvantages are more clearly understood in the political debate. Although a withdrawal may be inevitable in certain circumstances, anticipatory measures would contravene the principle laid down in the treaties that the monetary union should include all member states (with the exception of the United Kingdom and Denmark) as soon as feasible. The Treaty on the Functioning of the European Union therefore includes provisions for the member states that are not members of the eurozone (article 140 ff, TFEU). However, should the Treaty at some point in the future differentiate between member states based on their degree of integration, a clause could be included to regulate both the enlargement and any necessary contraction of the eurozone.
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1 Under treaty law, all EU member states are also EMU members. In practice, however, ‘EMU’ commonly refers to the countries that have introduced the euro. The non-euro countries in the EU participate in the EMU in so far as they have committed themselves to complying with certain basic rules, such as guaranteeing the independence of their central banks and coordinating their economic and monetary policies with those of the euro countries.
Advice request

Professor J.G. de Hoop Scheffer
Chairman of the Advisory Council on International Affairs
P.O. Box 20061
2500 EB The Hague

Date      6 October 2016

Re          Request for advice on deepening EMU

Dear Professor De Hoop Scheffer,

The further development of the eurozone is one of the key issues in the current process of European integration.

The report entitled ‘Completing Europe’s Economic and Monetary Union’ drawn up by the President of the European Commission in close cooperation with the President of the Euro Summit, the President of the Eurogroup, the President of the European Central Bank and the President of the European Parliament (the Five Presidents’ Report) sets out the steps that need to be taken to improve economic governance of the eurozone and ultimately bring about financial and fiscal union. The government has expressed its views on the report and the associated proposals in various responses (Parliamentary Papers 21501-20, nos. 996 and 1051).

Steps have already been taken to strengthen the eurozone, and the European Commission is preparing measures for the longer term on the basis of the Five Presidents’ Report. The government sees no reason to take major steps towards further integration of the eurozone. Nevertheless it understands the need to carefully weigh up the options available within the current treaty frameworks to strengthen economic and monetary union. The government would appreciate receiving an advisory report on this issue from the Advisory Council on International Affairs (AIV) next spring, based on the following questions:

  1. What steps can be taken within the limits of the current treaty framework to strengthen governance of the EMU in order to promote growth and the ability to absorb shocks in individual member states and the EMU as a whole?
  2. What steps can be taken within the limits of the current treaty framework to promote real economic convergence within the eurozone?
  3. Can the Advisory Council explain the implications of the individual steps in questions 1 and 2 for the Netherlands’ economy and financial interests?
  4. To what extent can the individual steps aimed at strengthening governance of the EMU and promoting real convergence influence political and economic cooperation at a wider EU level, with member states outside the eurozone – e.g. regarding decision-making on and the integrity of the internal market?

I look forward to receiving your report.

Yours sincerely,

Bert Koenders
Minister of Foreign Affairs

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