How Euro Area Deepening Can Reduce the Risk of Brexit

Un approfondissement institutionnel de la zone euro, sans grand changement des traités, pourrait permettre à l’Europe d’avancer vers une "union de plus en plus étroite", comme le prévoit le traité de Lisbonne, et à David Cameron de montrer à son électorat eurosceptique que la Grande-Bretagne jouit d’une plus grande liberté de manœuvre que les Etats du "noyau dur", explique Daniel Schwarzer, du German Marshall Fund.

While British Prime Minister David Cameron is travelling Europe from The Hague to Paris, from Warsaw to Berlin to kick off negotiations on Britain’s relationship with the EU, German and French political leaders are working behind the scenes on how to deepen the euro area. In a recently leaked joint letter addressed to European Commission President Jean Claude Juncker, French President François Hollande and German Chancellor Angela Merkel argue for a deepening of the euro area without a change of the EU Treaty. This leaked letter was widely interpreted as a rebuff to Cameron, telling him there will be no treaty change to accommodate British interests to renegotiate the EU — or at least, British membership — ahead of the British referendum planned for 2017. But the Franco-German initiative is actually more about the risk of Grexit (a Greek exit from the euro area) than Brexit (a British one from the EU), and it might even help Cameron, if only indirectly.

It is true that Paris and Berlin have made their reservations about treaty change clear and they did so well before the leaked letter. The motivation behind this Franco-German initiative, though, is not about the U.K.. It is about the euro area, which still faces serious fragilities : in political, economic, social, and financial terms. This is as much a question of policy as it is of architecture. With regards to policy, the euro area struggles to get some of its most badly hit regions and countries back on track for economic growth, employment, and sustainable public finances. On questions of architecture, the governance mechanisms for economic and budgetary policy coordination are not nearly robust enough, and the overall governance set-up lacks democratic legitimacy. Moreover, there are good arguments to complete the Banking Union and to equip the monetary union with stronger tools to manage financial crises and a fiscal capacity.

All this has been known for a while, and yet the political process to improve the governance set-up of the euro area has stalled for almost two years. In summer 2013, when the European Central Bank announced its “we’ll do what it takes” policy of buying potentially unlimited amounts of sovereign bonds (known as the Outright Monetary Transactions program), markets calmed down and policymakers relaxed. They no longer saw a pressing need to pursue the process of deepening the euro area further, which has already advanced so much that it touches upon sensitive questions of sovereignty, EU interference, financial solidarity, and risk sharing.

In 2015, two factors combined to bring renewed impetus to the debate on euro area deepening. The show-down with Greece on its debt payments and the non-negligible danger of a Grexit is one factor. The other is the new EU leadership with an entrepreneurial Commission president deeply familiar with all the core weaknesses of the currency union after spending eight years chairing the Eurogroup (the meeting of finance ministers of the euro area).

At the European Summit on June 24-25, 2015, a second report on euro area deepening by the four presidents of the European Commission, the euro area, the European Central Bank, and the European Council will be presented. The first one, “Towards a Genuine Economic and Monetary Union” contained far reaching suggestions for further integration in the field of financial, economic, and budgetary policy as well as proposals how to improve democracy and legitimacy. This time around, in particular following the Franco-German initiative, it is less likely that this report will simply be shelved like the previous one was two years ago. Although a big leap forward with a substantive transfer of competencies is unlikely, the eurozone will make moves to grow closer. The risk of a Grexit is accelerating these dynamics, firstly, because the conflict with Greece has pushed the others closer together and strengthened joint perceptions about governance deficiencies, and secondly, because euro area countries know they may have to restore credibility and strengthen the euro if it is to survive a Grexit.

Cameron can but watch this happening from the margins of the EU. It is now clear that there will be no big treaty revision and no intergovernmental conference that would simultaneously debate a deepening for the euro area while loosening the U.K.’s membership. Cameron’s claims that he will renegotiate and change the EU are illusionary.

While the new Franco-German initiative is not targeted at Cameron, it could politically suit him. If the political deepening of the euro area moves ahead, Cameron will be able to argue at home that the U.K. is much less integrated into the EU than the core countries are — currency-wise, institutionally, politically, and also in terms of risk sharing and financial solidarity. So while Cameron might not be able to reshape the EU according to British ideas, a Franco-German reshaping of the euro area could help him rebrand British EU membership by default.