The Council of State identifies the effects of non-compliance with rules and agreements in the eurozone

However, the financial crisis that took place between 2008 and 2013 also exposed significant vulnerabilities. Today, the monetary union is clearly in better shape than it was ten years ago, thanks to the many measures implemented since then.

So states the Advisory Division of the Council of State in a report it has issued at the request of the Dutch House of Representatives. In spite of the improvements already applied to the monetary union, vulnerabilities can and must be reduced further, especially in the event of an economic downturn in the eurozone. To achieve this it is necessary for risks to be borne more by the private sector– and not exclusively by the public sector– through completion of the Banking Union and making significant progress towards a single European Capitals Market. Furthermore, enforcement of the fiscal rules and agreements and structural reforms must be improved.

Questions put forward by the House of Representatives

The questions put forward by the Dutch House of Representatives related to the consequences of non-compliance with rules and agreements in the EMU, and policy options regarding a situation in which multiple Member States and banking systems find themselves in difficulty. In the report weaknesses in present arrangements are identified and proposals are presented for strengthening the EMU framework. It also presents proposals for addressing these bottlenecks. This report is a follow-up to the report on the future of the euro the Advisory Division published in November 2017, also at the request of the House of Representatives.

Risk sharing via the private sector

The risks faced by banks have decreased considerably over time. However, banks and governments are still too intertwined. This constitutes a risk in the event of a crisis situation, because public money may be required to defuse the crisis. If private market parties play a greater role in sharing the risks and thus absorbing shocks, the need for public intervention is reduced. This is the approach already adopted in other monetary areas, such as the United States.

To facilitate private risk sharing, the European Banking Union must be completed and a single European Capital Market must be created. This strengthens market discipline with regard to financing by governments and banks.

Enforcing rules and agreements

The report also states that compliance with the rules and agreements made in the SGP, and in particular the requirements regarding government debt, must be improved. Countries should focus more on a multi-year strategy for debt reduction and structural reforms. The corresponding rules must be simplified, and assessment and compliance made more transparent. Therefore, it is recommended that the different roles of the European Commission be separated more distinctly. This could be achieved, for example, by having a type of independent planning bureau assess Member States' forecasts. It is also recommended that the position of the European Fiscal Board be strengthened.

More information

Read the full text (in Dutch) of the Advisory Division's report here. The report begins with a summary and conclusion.