The Sovereign Behind the Euro

Abstract

The euro is widely believed to be a currency without a sovereign state. To make the euro a stable currency, many commentators recommend a move to a federal fiscal Europe by issuing eurobonds or levying European taxes. By contrast, we argue in this paper that the EU and the euro area member states are the joint sovereign behind the euro. The EU is not a state, but has evolved into a democratic polity of states and citizens, in which the sovereignty is shared and pooled. Consequently, the euro should be regarded as a currency beyond the state. For the euro to have a stable sovereign, however, further political and fiscal reforms are needed. First, some, albeit limited, fiscal sovereignty needs to be shared under a credible stability mechanism operating between member states. The donor countries ought to sign up to a stability fund of sufficient size. The recipient country will have to accept temporarily suspension of sovereignty over the control over its economic policies (conditionality). Next, political decision-making should be sped up. While sufficiently large amounts should be assigned ex ante to the stability fund, releases by the fund must be made by Qualified Majority Voting (QMV) rather than by unanimity.