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Five years after the financial crisis broke out, the euro zone is still mired in economic stagnation or contraction, while most of others are recovering at various speeds.
How to revive growth in Europe was a major concern in this year's spring meetings of the International Monetary Fund (IMF) and World Bank, which began Friday. Many scholars and officials agreed it was requisite to complete the architecture of monetary union.
Soft spot of world recovery
In its World Economic Outlook report, the IMF said the world economy was undergoing three-speed recovery, with the euro area representing the group that lagged behind.
Unacceptably high unemployment and high debt burdens in public and private sectors were the serious headache of European policymakers.
The IMF expected the eurozone economy to fall by 0.3 percent this year, a more pessimistic forecast than last year, when it calculated a contraction of 0.1 percent.
What's worse, the downward risk has now spilled over from the peripheral to the core eurozone economies. France, Italy and Spain are all expected to contract this year, leaving Germany the only major eurozone economy on the growth track.
The unitary currency zone has fallen to be the weakest point of the global economy. The once growth engine of the world now depressed demand and then the potential for expansion in other countries, as the world has developed from inter-connective to hyper-connective.
The IMF also said the euro zone posed the greatest threat to a recovery in the global economy, citing "the fallout from events in Cyprus" and political stalemate in Italy, as well as "vulnerabilities" among its weaker members.
"No one should expect that Europe will deliver high growth rates for years," said German Finance Minister Wolfgang Schaeuble on Friday in Washington.
Institutional development in need
Many economists have long before pointed out the design defect of the euro zone -- it is only a monetary union but not a fiscal one -- which is believed to be the underlying reason of prolonging the European debt crisis. American economist Nouriel Roubini even predicted the demise of the euro zone at the beginning of the crisis.
Over the past year, European policymakers have taken important reform steps. At the national level, many governments have undertaken substantial adjustments and structural changes.
At the regional level, important progress has been made, with the announcement by the European Central Bank (ECB) of its Outright Monetary Transaction program and the establishment of the European Stability Mechanism.
Now it is time to establish a banking union, David Lipton, IMF first deputy managing director, said at a Saturday afternoon seminar named Toward Stronger Eurozone: Fostering Growth and Completing the Architecture of EMU (European Monetary Union).
The banking union requires the ECB to unify the 17 supervisors as a single regulatory authority. It also needs to be equipped with a resolution mechanism which can deal with the mess when a bank that runs business in multiple countries folds like the case in Cyprus.
The third necessary component is a common backstop working as an insurance against abrupt shocks to the system.
"Any monetary union would benefit from common fiscal capacity to address asymmetric shocks," said Ramon Fernandez, director general of the Treasury and Economic Policy Directorate in the Ministry of Economy and Finance of France.
He was also optimistic about the banking union, saying it is possible to reach an agreement by June on a common resolution framework.
Joerg Asmussen, a member of the ECB executive board, said "sharing sovereignty in Europe means gaining, not loosing sovereignty." Power transfer in this process is to pool sovereignty rather than giving it up, he added.
But Adam Posen, president of the Peterson Institute for International Economics, cautioned that a "single supervisory mechanism doesn't replace the need for good principles, i.e. capital buffers and clear rules."
The United States has the Federal Reserve as the top banking industry supervisor, but it alone cannot prevent crisis from happening, he noted.
Europe is a complicated place and the euro zone has 17 separate interest priorities. As Asmussen pointed out, "fragmentation reduces scope for the ECB to reduce rates and compromises the monetary policy transmission mechanism."
Building up a banking union is far from enough to ensure Europe's recovery and future financial and macroeconomic stability. Institutional development still has a long way to go, but it is the necessary step for Europe to get out of pain and stagnation.
