The New Italian Government Is a Much-Needed Wake-Up Call for the EU

Under the shadow of the newly-formed populist government in Italy, the German Bundestag’s EU Committee held an expert hearing on Eurozone reform on Monday. The focus of the hearing was on the European Commission’s proposals for the completion of the Economic and Monetary Union. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW), Mannheim, was one of the experts invited to the hearing. He assesses the Commission’s proposals.

“The Commission’s proposals for reforming the Eurozone have a systematic imbalance. The creation of a European Monetary Fund and new financial instruments among other policies to safeguard the European Banking Union are intended to foster European solidarity. At the same time, provisions that convincingly commit countries to implementing reforms and sustainable financial policies are conspicuously lacking. The forming of the new populist government in Italy is therefore a wake-up call that couldn’t be coming at a better time for the EU. The euro is in great need of a comprehensive reform package that combines new financing instruments with reliable rules for dealing with uncooperative Member States.

Specifically, the three following elements need to be added to the Commission’s proposals: First, banks should finally be forced to reduce their exposure to their respective national governments. Secondly, the Eurozone needs to develop an insolvency system for Member States. Thirdly, a truly independent Fiscal Board needs to be set up to monitor countries’ compliance with EU public debt rules. Only if these three elements are present, can the Commission’s euro reform proposals be seriously considered. Anything else is naive and would make blackmail attempts from populist governments the norm in the Eurozone. This would not stabilise the euro in the long term, but rather destroy it.”

For further information please contact:

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail friedrich.heinemann@zew.de