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Italy’s Pier Carlo Padoan calls for ‘political union’ to save euro

Financial Times - 07/26/2015

Intervista al ministro Padoan di James Politi pubblicata sul Financial Times

Italy’s finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move “straight towards political union” is the only way to ensure the survival of the common currency.

Pier Carlo Padoan’s comments reflect how the tortured and dramatic negotiations that led to this month’s deal on a third bailout of Greece have triggered a round of soul-searching about the future of monetary union across European capitals.

“The exit and therefore the end of irreversibility is now an option on the table. Let’s not fool ourselves,” he said in an interview in his central Rome office. “If we want to take that risk away, then we have to have a different euro — a stronger euro.”

Italy and France have traditionally been among the most forceful backers of deeper European integration but other countries are sceptical about supporting a greater degree of political convergence.

“Some believe that the way it works is more or less fine with minor adjustments. I think this is not enough,” Mr Padoan said.

Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered.

“To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy,” Mr Padoan said. “And this fiscal policy must respond to a parliament, and this parliament must be elected. Otherwise there is no accountability.”

The Italian finance minister — a 65-year-old Roman who served as former chief economist of the OECD — is confident this is the right path for the eurozone, but he is not certain it is a winning battle. Many eurozone governments, including Italy, are facing pressure from people who are increasingly sceptical about the merits of existing European economic integration, let alone the possibility of more to come.

“This is the challenge. The citizens want to know whether they get a job or not and whether their kids will get a job or not. The European institutions must be able to say, ‘Yes, the chances of you guys getting a job are stronger than without having Europe’,” he added.

Mr Padoan said that a debate over further eurozone integration had already begun in recent meetings of finance ministers, although the vast majority of their time was spent debating the Greek bailout. But he said the talks would pick up in September. When that process is launched, he said it would be important to balance out concerns about “moral hazard” — a priority for Germany and others — with the need for more “risk-sharing”.

“You need sticks, but also carrots, in the way monetary union evolves, to increase the attractiveness of staying together”.

Mr Padoan said he hoped that such a plan would even gain the backing of countries such as the UK, which is outside the euro but might still benefit from “a strong monetary union”. But he delivered a stern warning to eurosceptics in eurozone countries that they should have no illusions about the consequences of leaving the common currency.

“There would be disruption, capital flight, loss of confidence, bankruptcies,” he said. “So, you would have a structural cost additional to the immediate cost, which could be huge. So, it would put the country back or sideways.”

For all the relief in Rome that a deal was finally reached to avoid a Greek exit, Mr Padoan argues it should be seen as a watershed moment for the continent. The crisis exposed the dramatic impact of “dissatisfaction” with Europe both in Greece and across Europe, including Italy, he said.

“In the near future there could be governments based on majorities which are dissatisfied with Europe and therefore could be requesting that any specific country may leave the eurozone, not just because it’s in a desperate situation like Greece, but because they think this is a more viable solution to their problems,” Mr Padoan said.

“The bottom line is that Europeans who want to make progress in European integration must clearly admit that the existing monetary union is an incomplete mechanism which needs to be strengthened.”