European monetary union presents a paradox. On the one hand, despite three years of continuous battering and pounding, the euro still exists. On the other, the crisis has revealed serious ﬂaws in the governance of the Euro Area and it has become clear that the old system of managing the euro macroeconomy is not sustainable. This article attempts to explain this apparent contradiction and how to resolve it.
Europe’s technocratic ways of dealing with the euro crisis reinforces the issues of democratic legitimacy and risks popular rejection of the entire policy project. Therefore, a different approach is needed. Voluntary policy coordination between governments is failing due to collective action problems. A federalist leap to an economic government for the Euro Area would solve this problem.
Fiscal policy must allow some space for discretion and the policy choices must be authorised by the European Parliament, representing all citizens and not only national parliaments. European monetary union will only be able to function effectively if it can work with a political authority that is capable of acting without delay in a crisis and can rely on the democratic acceptance of its decisions by European citizens.
One key to avoiding future crises is more efﬁcient banking surveillance by the European Central Bank, complemented by transferring power and regulation over bank resolutions and deposit insurance to the European level.