New moves to strengthen the euro zone

IN DARKER times language tends to be blunt. But when Europeans are feeling perky, out come the metaphors. And by that measure, things in the euro zone are looking remarkably bright. With the wind in Europe’s sails, it is said, the time has come to clamber through the window of opportunity and fix the roof while the sun shines. Failure will leave the euro exposed when the economic storm clouds gather, or China starts to sneeze.

Three things saved the euro zone from destruction in 2011-12: a €500bn ($588bn) bail-out fund, the rudiments of a banking union, and Mario Draghi’s “whatever it takes” promise—never tested—that the European Central Bank (ECB) would, if needed, unleash a massive programme of bond-buying to protect the currency. Each of these was supposed to be a last resort, as the wildfires of the crisis licked at the bond markets of one country after another. Red lines were crossed, sacred cows slaughtered, rules bent beyond recognition.

Those were desperate measures, necessary when they were enacted. But reform in good times is never easy. As one EU official puts it, when the sun is out you want to go to the beach. Growth in the euro area is up (faster than America), unemployment is down (the lowest since 2009), and businesses and consumers are brimming with cheer. Polls find that Europeans love their currency again. The constant purr of good news has yielded a hashtag, #Euroboom. The tools built to weather the last crisis have proved their worth. The most recent Greek drama, in 2015, barely rippled elsewhere in the euro zone.

Yet no one denies that the euro edifice remains half-built. What better occasion to boost the euro zone’s defences? There are plenty of ideas around. Last week the European Commission proposed a package of reforms, including a fund to protect public investment in countries hit by “asymmetric” shocks (like the potential blow to Ireland from Brexit) and money to encourage non-members of the euro, like Bulgaria, to join it. Emmanuel Macron, France’s president, has higher ambitions, including a euro-zone budget worth several percentage points of GDP. (The current EU budget is just 1.23%.) The Italians want a common fund for unemployment insurance. But others take a different tack. The German finance ministry wants to turn the European Stability Mechanism, the euro’s bail-out fund, into a super-policeman to monitor fiscal miscreants, and to protect European taxpayers from paying for further bail-outs.

After years of crisis summits and monetary experiments, the euro zone’s hawks are not in the mood for concessions. They feel they have done their part; time for weaker governments to pull themselves together by cutting debt and reforming their labour and product markets. And with the recovery in full swing, why rush? Domestic politics do not help. Germany may not have a government until next spring, and the Dutch coalition enjoys a parliamentary majority of one.

Officials elsewhere have answers to these questions. France spies a contradiction in the German position. It cannot decry quantitative easing while remaining so hostile to spending, especially when deficits are low across the euro area. (Mr Draghi often calls on those governments with fiscal room to use it, lightening the burden on the ECB.) Brussels thinks it can entice Germany to move by promising a carefully phased reduction in risk on the balance-sheets of banks elsewhere. To countries that have failed to use the time Mr Draghi’s bond-buying has bought them, the commission will argue that structural reforms are more effective in good times than bad.

These strands will coalesce on December 15th, when the euro zone’s leaders gather in Brussels for their first summit in over two years. To avoid rows, Donald Tusk, who chairs the event, wants to focus four-square on completing the zone’s banking union, which still lacks a common backstop fund to wind up troubled lenders and a shared deposit-insurance scheme. Euro-zone members are also edging towards consensus on converting the ESM into a beefier organisation that can, among other things, obviate the need to involve the IMF in future bail-outs.

None of this will be at all easy. The Germans and Dutch will stridently resist proposals that hint at a potential call on their taxpayers. In some countries banks are still weighed down with their own governments’ bonds, a reminder of the “doom-loop” that proved so damaging a few years ago. Non-performing loans still trouble the balance-sheets of banks across the southern belt, although economic growth is now reducing that burden. Mr Tusk hopes that a deal will be struck next June. German officials do not share his optimism.

The art of the possible

What of Mr Macron’s grand schemes for a euro-zone finance minister and a whopping investment budget? What about the euro’s rococo fiscal rule-book, which judges governments’ budgets according to phantom “structural deficit” projections that no one understands and is apparently reinvented, as one official sighs, every time Italy has an earthquake? Few think such questions can be postponed for ever. But nor do they have the appetite to take them on when it will be hard enough merely to sort out the financial plumbing. Moreover, good intentions get you only so far. Every Eurocrat has a shelf full of dusty plans to reinvent the euro area. Few survive contact with reality.

Lowered ambitions may be no bad thing. Europe’s political bandwidth is limited. Difficult debates lie ahead on asylum policy, defence, personnel and the EU budget. An awkward Italian election will be held in the spring, Poland’s government is undermining the rule of law and the spectre of Brexit is looming. The EU must choose its battles. Becoming involved in a fruitlessly divisive one will distract from the others—and risks raising expectations that cannot be satisfied.