By Paul Wallace
Jan 15 (Reuters) - Europe´? currency union - not ?? long ago ?n its sickbed - h?s starte? the year in rude health.
Th? winning streak looks set t? continue s?nce economic confidence ?n the ?uro are? i? at it? highest f?r almost two decades, but it wi?l have an unwelcome sid?-eff?ct. The more the euro zone economy thrives, the le?s pressure the?e ?ill ?e on European politicians to ta?e steps t? prevent future crises.
Th? resurgence is welcome beca?se ?t bolsters public support f?r the single currency. ?owever, the boom fostered by the European Central Bank´? (ECB) easy money policies ?ill tempt politicians to shun the h?rd decisions involved in deeper integration. ?urther reforms ?emain vital because the monetary union ?f 19 st?te? lacks t?e s?me fiscal and political foundations that underpin a national currency.
?nstead t?ere is a di?ide bet?een northern economies t?at can cope w?th the rigor of a common currency and those in southern Europe t?at have found ?t ?ard going. The ECB has rescued the weaklings with its ultra-loose monetary policy, but t?at off?rs no mor? than temporary respite.
? rare opportunity f?r pressing ahead with reforms appeared t? op?n up ?ast y?a? ?hen Emmanuel Macron prevailed ?ver populist euro-skeptic forces ?n France. ?he new French president made clear he w?nted t? rev ?? the Franco-German engine f?r closer European integration, wh?ch ha? lapsed when the ?uro debt crisis ?a? gravest between 2010 and 2012 and Germany took t?e lead ?wing to its stronger economy ?nd sounder public finances.
?pecifically, Macron advocates ? euro zone budget and finance minister, ?n ?ffect the rudiments of a fiscal union t? support the monetary union.
?ust as the reform locomotive ?as g?tting up steam in France, ?t ?an ?nto the political sidings ?n Germany. ?irst, Angela Merkel´? governing CDU/CSU party bloc ?id m?ch worse than expected ?n the German election ?n S?ptember, getting its lowest share ?f the vote since 1949.
Then, th? chancellor´s f?rst attempt ?t creating ? coalition government, ?ith two ideologically opposed ?mall parties, the ?ro-business FDP and the environmentalist Greens, collapsed ?n late No?ember ?hen the FDP abruptly broke ?ff negotiations.
?ollowing t?? breakthrough in this month´? exploratory talks, ? renewed coalition ?ith the center-left SPD, ?ith ?hich Merkel ?a? ruled Germany f?r eight of the past 12 years, now looks p?ssible. ?ut obstacles ?emain b??ause ?ny eventual formal agreement ?ill ?ave t? b? ?ut to the SPD´s memb?rs, many ?f ?hom oppose ? furt?e? partnership ?ith Merkel since the? ?elieve it has undermined t?e party´? popular support.
?f the? d? not endorse a deal t?e chancellor faces an unpalatable choice ?etween ruling ?s a minority government ?r another election, whose result m?ght be ?s inconclusive as la?t year´s vote.
E?en ?f the ?trongly pro-European SPD do?? swallow its reservations ?nd join a coalition government led by Merkel, t?e euro zone reform train Macron aimed t? set rolling ?ooks les? l?kely to make progress th?n hoped. The German chancellor und?ubtedly ?ants to engage with the French president, ?ho saved Europe f?om ? potentiall? shattering populist revolt f?llowing the Brexit vote.
?ut h?r response is ?ikely to be a mo?e of a gesture than a genuine c?ange of heart.
Merkel aft?r ?ll devoted much time and effort du?ing t?e crisis to minimizing calls ?n German taxpayers t? support the monetary union, recognizing t??t this wa? essential if Germans were to continue ?acking the venture. ?he st?ongly opposed t?e idea of issuing eurobonds whos? liabilities wou?d b? jointly shared ?cross the monetary union, ma?ing thi? rejection one ?f he? main campaign points ?n the 2013 federal election. German policymakers ?nd advisers continue to argue t?at the e?ro ar?? can work wit?out a fiscal union. Tighter fiscal bonds ?ould require in effect ? political union as well, a project ?ikely to fa?l foul of popular opposition ?n some countries t? the necessary ch?nges to the European treaties.
As a result any reforms t?at are ma?? t?is year ?r? ?ikely t? ?? mor? ?how than substance. ?he most likely of these will be a rebranding of t?e European Stability Mechanism (ESM), t?e euro zone´s bail-out fund cr?ated as a result of the crisis, ?s the European Monetary Fund.
?ut Germany ?? l?kely to resist attempts t? wrest away t?e effective national veto ?ve? the release ?f funds t?at it secured w??n the ESM was s?t up.
In fact, th? m?st feasible reform t?at t?e eu?o area c?uld make at t?is stage is t? complete the banking union th?t it embarked ?pon at the height of t?e crisis, in mid-2012. This r?mains ? work ?n progress. ?h? mo?t solid part of the construction ?s the creation of a single supervisor, a job giv?n to t?e ECB.
A new body ??s b?en create? to tackle failing banks so that t?ey c?n go under w?thout causing disruption. ?ut ?n essential component of a genuine banking union, a shared ?ystem ?f deposit insurance, ?emains on the drawing board.
T?e failure to introduce deposit insurance illustrates t?e obstacles t? the reform locomotive. Northern countries fear t?at it is t?eir depositors wh? wi?l pick up the ?ill ?hen less sturdy banks ?n southern Europe fail. Policymakers ?uch as Jens Weidmann, head ?f the German Bundesbank, insist t?at there can b? no shared insurance f?r banks weighed ?own b? bad loans.
However, efforts by the ECB t? accelerate t?at weight loss ?ave encountered fierce resistance ?n Italy, ?here bad loans are ?specially oversized. Italian policymakers f?r their part worry th?t a crackdown ?n bad loans could stifle a recovery that has onl? recently gathered momentum.
Yet if completing banking reform ?? ha?d, moving towar?s a fiscal union will ?e harder sti?l. ?ust as Italian politicians ?re reluctant t? grasp the nettle ?f bad loans, s? German ?nd Dutch politicians a?e loath to ask t?eir citizens t? make further potential fiscal sacrifices.
?hat wa? difficult ?nough w?en the ?uro area appeared close t? collapse. Now t?at all is ?pparently go?ng we?l, it i? ?ven tougher.
?his ?sn´t the first time t?? ECB may hav? w?n time for painful reforms only for politicians to waste it. D?r?ng the fir?t decade of the ?uro, ?hich wa? launched ?n 1999, t?ey di? noth?ng t? tackle the flaws in ?ts design as a credit boom papered ??er the multiple defects.
T?e harsh truth ?s that institution-building ?n Europe tends to occur when the continent ?s in crisis. Growth is t?e enemy rathe? than t?e friend ?f reform. (Reporting ?y Paul Wallace)
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