Completing the Economic and Monetary Union: Wisdom Come Late?

This paper provides a critical stocktaking of the debate on completing the Economic and Monetary Union (EMU) and an evaluation of the main reform priorities to strengthening its institutional architecture. In response to the sovereign debt crisis, reforms of the EMU have resulted in significant progress towards greater integration, as best epitomised by the establishment of the European Stability Mechanism (ESM) and the first two pillars of a Banking Union. In addition, the fiscal governance framework has been overhauled, with stricter rules and more powers at the supranational level to affect national budgetary policies. Because of these reforms, as well as of other policy measures at the national level, risks in the sovereign and banking sectors have been substantially reduced. The paper argues that major advances in risk reduction have not been matched by parallel progress in risk sharing: this asymmetry leaves the EMU incomplete and vulnerable. The paper contributes to the debate in three main ways: it examines the reforms proposed for the ESM, evaluates the role of a European Deposit Insurance Scheme—Banking Union’s missing third pillar—and reviews the case for establishing a central fiscal capacity for countercyclical manoeuvre. The paper emphasises that making progress in each of these architectural components of the EMU would go a long way toward closing the gap between risk sharing and risk reduction and ensuring the longer-term viability of the EMU.