Dutch Council of State explores options for the future of the euro

Gepubliceerd op 8 november 2017

As an internationally-oriented economy, the Netherlands has a major interest in the euro. The Netherlands would benefit from a self-evident irreversibility of the euro. To this end, better compliance with European fiscal rules and agreements on structural reforms is needed. Improvements agreed previously, such as the banking union, need to be completed as well. Greater democratic accountability is called for. Additional steps may improve resistance to shocks, and better exploit the monetary union's economic potential.

So states the Advisory Division of the Dutch Council of State in its advice issued at the request of the Dutch House of Representatives concerning the future of the monetary union. In this report, it maps out the advantages and disadvantages of various possible developments. The Advisory Division also puts forward proposals to improve the enforcement of European rules and agreements. This study will help to prepare the Netherlands for the discussion concerning the future of the euro.

Monetary union in Dutch interests

"In monetary terms, the currency union has brought a great deal of stability," says the Advisory Division. The purchasing power of the euro is stable, and does not lag behind that of the guilder, the former Dutch currency. The euro is also a 'hard' currency in relation to other currencies. The open and internationally-oriented Dutch economy has an interest in continuing the monetary union. The euro allows 60% of Dutch trade to be conducted without any exchange rate risk. The disintegration of the monetary union, or a country leaving, would result in huge economic and political costs, bringing about great uncertainty. The Netherlands benefits from the "self-evident irreversibility of the euro".

The euro is a credible currency, but has failed to meet all expectations

The euro has had positive economic consequences for the Netherlands, but less so for the eurozone as a whole. Contrary to expectations, the euro countries have only converged to a limited extent. Although the crisis also hit countries outside the monetary union, problems in the eurozone were intensified by deficiencies in the design of the monetary union. Action has since been taken to address many of these shortcomings, leading to a stronger monetary union. Nevertheless, there is still doubt as to whether the monetary union will be resilient enough in the face of new crises, and whether it is able to provide the economic and social perspectives needed to ensure long-term public support for the euro.

Exploring the various options

In the report, the Advisory Division assesses possible options for the future of the euro on the basis of economic, political and institutional consequences, and Dutch interests. If the monetary union is to remain viable in the long-term, it is in any case necessary to complete the banking and capital markets union, once problem loans and government debt on bank balances have been dealt with in a satisfactory manner. But this will still not address the shortcomings with respect to democratic accountability, nor improve compliance with rules and agreements. To achieve this latter goal, in a 'decentral' option the member states would be given greater responsibility, in combination with stronger market discipline. In a 'central' option, enforcement of agreements could rest with an independent European supervisory authority, in combination with greater cooperation between member states. Each option has advantages and disadvantages, and the Advisory Division's report outlines the possibilities to limit the risks for the Netherlands.

Far-reaching extension of risk-sharing, in the form of a European budget or eurobonds, is less appealing from the Dutch perspective so long as there are major structural differences between countries. However, financial incentives designed to reduce these differences through structural reforms may well strengthen the monetary union. The risk of problems in member states having negative consequences for the entire eurozone must be limited. To this end, a financial safety net to provide temporary financial support under strict conditions is desirable. A European Monetary Fund could serve this purpose. This would allow the ECB, which is currently forced to act as a safety net on too many occasions, to have a more limited remit.

There needs to be greater democratic accountability to maintain public support. An alternative to a bigger role for the European Parliament could conceivably be to establish a commission within the European Parliament to focus on the eurozone, or to form a eurozone parliament. The Dutch parliament can also better anticipate the European decision-making process. In the longer term, the double mandate could be reintroduced, whereby a few members of parliament are also European representatives, to improve the cohesion between decision-making in the two institutions.

More information

Read the summary and conclusion of the Advisory Division's advice on the future of the euro.

Read the full text of the advice on the future of the euro here (pdf, 3.3 MB).