What ails Europe and what should be done about it

- a few thoughts -

All eyes in Europe are riveted on the migrants/refugees’ crisis, which has come as

another major shock following the financial crisis and the euroarea troubles of recent

years. The migrants/refugees’ crisis and the euroaria troubles have revealed the fragility

of the Union, which, for many, is likely to be a shock in itself. More than worrying is the

pretty low response capacity of the Union to such shocks. Can the Union pull itself

together, can it reengineer itself? Below is a reading of the Union’s turmoil and avenues

for policy action are outlined.

 

Some premises for analysis

 

The Union is going through the most critical period in its history; it is facing an

existential crisis, as former Council president, Herman van Rompuy, put it. Its roots are

economic and financial, linked with a deep euroarea crisis, demographics, over-debt (

debt-overhang) and, frequently, inadequate leadership and governance. “Regaining

citizens” (to paraphrase Etienne Davignon insightful observation, that “we have lost the

citizens”), hinges on redeeming what the EU means for Europe and on better policies at

the national and European levels; it also relies on politicians being more honest and truth

telling about problems and challenges.

The European Project needs to be explained better to citizens, in the light of what it

has brought about after the end of the second world war and the new challenges facing

Europe. This demarche is a must in order to make more clear what this project means for

the peace and economic wellbeing of EU member states in a world of tremendous change

and facing by huge challenges. But for this demarche to be successful policy-makers in

Brussels and national capitals have to tackle the “democratic deficit”. Unless this id done

legitimacy of decision-making will be an increasing challenge in the Union; citizens have

to sense and see that they have a say in the policy-making process at both the national

and the EU/euroarea levels.

When it comes to policies, the Union needs to strike more of a balance between

public governance and market forces; the neo-liberal bent of the past decades has to be

addressed and redressed, especially during a period of extreme duress for most citizens

and rising inequalities.

The Union needs both more responsibility and solidarity. These aims and policy

dimensions should be practiced both internally, in the member states, and in the EU,

among member states.

There are no quick fixes for dealing with the deep weaknesses of the Union. The

“Five Presidents’ Report” opens new vistas and could be seen as quite far-reaching

regarding euroarea reform. But this is only a starter and is not devoid of conceptual

contradictions. For instance, it alludes to a “fiscal capacity”, but this is envisaged only

after structural convergence would have reached a high level in the euroarea; this looks

like a catch-22 problem for the governance of the euroarea. Asymmetric shocks is a huge

challenge and dealing with it cannot be put off until structural convergence will have

taken place. The fracture between North and South in the euroaria may even deepen in an

environment of very feeble economic growth and major uncertainties, in spite of ongoing

structural reforms (which, by the way, are time consuming).

 

The euroaria crisis

 

The fate of the EU depends on the fate of the euroarea. The latter has a poor design

and improper policy arrangements, as the “Five Presidents’Report says in a

straightforward manner; in addition, it is not an optimal currency area, which has favored

a growing cleavage between North and South. The Greek debacle is only the tip of the

iceberg. Unless the euroarea reforms its institutional and policy arrangements in a

profound way it would be hard to see it survive, which would cripple the EU itself fatally.

In spite of a new arrangement last Summer, which has prevented a Grexit (for the time

being), the Greek drama continues. This imbroglio will keep pressure on the Union. And

without debt relief Greece will continue to sink.

Germany is right to emphasize the need for rules to be observed. But rules need to be

embedded in an appropriate institutional and policy setup, which is not the case currently.

And policy incrementalism has shown its limits in helping the euroarea reform itself.

The Banking Union is far away from being the exit from overall troubles. Joint

institutions and policies that fit a monetary union are badly needed. A “fiscal capacity” is

a must in order to deal with asymmetric shocks, and a collective insurance scheme has to

complete the Banking Union.

Some member states’ insistence on rules needs to be complemented by fiscal

integration and strong policy coordination; the latter asks for joint bodies including a sort

of an “executive” and “legislative branch” for the euroarea; these would take the euroarea

in the realm of political integration be it a longer term endeavor.

A less fortunate idea would be to change the rules of the game in the eurorea and

have countries entering and exiting depending on their economic performance. Such an

euroarea would no longer be credible, entailing a lot of uncertainty, and the euro itself

would be a crippled currency. A country could/should get into insolvency (as it can

happen in the US), but not be forced out of the euroarea; it should be prodded to

undertake structural reforms, which may be quite painful, while the joint “fiscal capacity”

and other new policy arrangements should mitigate the pains for its citizens.

Policy coordination in the eurorea asks for more symmetrical burden sharing when it

comes to adjustment. It does not pay, ultimately, for Germany to run enormous external

surpluses, which dampen aggregate demand in the euroarea and makes adjustment harder

for deficit member states.

New Member States, which are outside the euroarea and our bound by Treaties to join

it, should do it provided, first, they achieve a substantial amount of structural

convergence and, second, the euroarea reforms itself decisively.

 

Economic growth policies

 

It is hardly realistic to think that European economies could embark on the growth rates

of previous decades. Demographic change, an overwhelming debt overhang (on average,

about 250% of GDP, both private ad public, in euroarea), the poor functioning of the

euroarea, and too little investment handicap, inter alia, Europe. However, there are ways

to make economies less fragile and likely to achieve reasonable growth rates, be these

rates lower than during the precrisis two decades. There is need to invest more (The

Juncker plan is, arguably, insufficient), to improve the quality of public goods

(education), to pay more attention to R&D and make the Union more attuned to the

digital world, and to defy the current deflationary bias of the euroarea by changing its

functioning.

Climate change is also a huge policy issue. And as Pope Francis has made so clear, bold

action is needed to forestall human driven disaster, that could bring about the extinction

of human race. Pure economic logic is not a help in devising proper policies for coping

with climate change. The EU has to embark on close cooperation with the other big

players in the global economy in this respect.

 

Reconsidering the Single Market logic

 

The Single Market (that regards the EU as a whole) should rely on a revamped

conceptual framework –some of it outlined in the Monti Report of 2010. However much

we praise and value competition as a driver of entrepreneurship and economic dynamism,

there are market failures and power asymmetries in the EU, which need to be seriously

addressed. The financial crisis has indicated the flaws of a paradigm that takes for

granted that markets always know better, that systemic risks are non-significant, that

“light touch regulation” is fine, that business unethical conduct is quite rare.

The Single Market policies should heed the lessons of recent decades, which teach

that increasing income inequality, “winners take all” competition, harm economic growth

over the longer term (OECD and IMF studies are quite telling in this respect).

If we accept, as a working assumption, that deeper integration is the way forward for

the EU in order to cope with current and future challenges, a more balanced policy

paradigm is badly needed. To the extent member states are asked to relinquish more of

their sovereign prerogatives, what would be lacking in the policy mix at the national level

has to be replaced by an enlarged and more diversified tool and policy box at the

supranational level; in the euroarea this would take the form, for example, of a “collective

unemployment insurance scheme”. This logic could be seen as a “subsidiarity principle

in reverse”, and would fit a motion to a more integrated EU.

Unless this is done, fragmentation and “nationalizing” tendencies will gather force,

and the Union will be constantly battered by internal shocks and conflicts among member

states; muddling through will be the hopeful scenario, and fading away/demise would be

the bad outcome.

 

Business and Ethics

 

Big Business has to show more convincingly its social responsibility mission, if it

actually operates. There has been a rising number of scandals in finance, in other

industries, which foment hostility toward business companies and their perceived

reckless profit-maximization behaviour (short-termism at the expense of society’s

stakeholders’ interests). Tax evasion and avoidance has turned into a big policy issue in

the Union and blame has to be assigned to the connivance of not a few member states in

this regard. Big business has to change its conduct, be more ethical. Unless this happens,

even more radical ideas will encroach on peoples’ minds, which may be inimical, in the

end, to checks and balances, to democracy. The latter relies on a strong middle class, on

an equitable income distribution and on a sense of trust and fairness among social and

political actors. When mistrust and animosities abound, the social fabric is torn apart and

democratic politics are impaired. More authoritarianism in public and political life would

be on the rise.

The Investment and Trade Pact with the US has to serve society as a whole; citizens

have to see benefits of this pact. If it will not happen, more hostility toward business will

be invited in the EU.

 

Politics in the Union

 

Visionary and effective leadership has become a scarce commodity in the EU. Ever

fewer governments are capable of delivering what they pledge during election times. And

few politicians have the guts to speak honestly about the new economic and social

environment. This enhances mistrust among citizens and poisons the relationships in the

EU –which is seen by not a few as the cause of misery. Credible leaders have to

underscore the importance of the EU, to moderate people’s expectations about economic

growth in the new environment (the “new normal”), combat racism, xenophobia,

chauvinism, and foster EU identity and common policies.

Politicians need to pay attention to “fairness” when they formulate public policies;

wherever fairness is forgotten the road to social turmoil is nearing rapidly. In addition, it

is hard to argue that democracy can be solid when social cohesion is damaged, when

people at large feel that they do not benefit on policies bestowed on them, or that costs of

adjustment (austerity) are not evenly distributed.

At the same time, however, policies in the EU need to consider that unrestrained

globalization and declining competitiveness of not a few member states is a recipe for

“inward looking” proclivities of citizens and national governments. Likewise, Europe

cannot harbour whoever flees areas of much distress around the world. A wise balance

has to be found in this respect between solidarity, humanitarian concerns, and

pragmatism, common sense in economic policies. Otherwise we will see failing EU

policies repeatedly. The EU needs to have a more clairvoyant international aid and

development policy.

The European Parliament has to be more visible in domestic political debates. MEPs

do not matter much in domestic politics, which is a nuisance if we think that the fate of

the Union hinges on “more Europe”. It may be useful to create joint committees among

MEPs and MPs, be they under the guise of task forces, which should create bridges

among national and European legislatures. MEPs should attend meetings of national

parliaments periodically.

A Council of Wise people should be set up to advise EU institutions on issues of

utmost concerns, including the reform of its settings. This group of people should

produce its own report on the future of Europe, which should complement the

“Five Presidents’ Report”.

 

Security policy

 

Common foreign and security policies have to be strengthened, as it has to happen

with energy policy as well. The Union has to develop more consistent, effective policies

for tackling conventional and non-conventional threats, including cyberfare and

terrorism.

Devising better policies for dealing with the disorder in the Arab world, with the

massive flow of migrants/refugees is a must; it should not rely on ad hoc measures only

and it should tackle the roots of the problem including blatant mistakes made by western

countries in their foreign policies, in the Arab world included. It is true that aging in

Europe is a formidable challenge and that immigration can help improve demographic

trends at home. But to hail the current massive flow of migrants/refugees as the solution

to demographic strain at home is to miss the policy conundrum many governments are

facing, which is, not least, related to security concerns. One should not mix up a possible

opportunity over the longer term with existing policy trade-offs and enormous security

concerns. As Donald Tusk, the president of the European Council has emphasized, the

borders of the EU must be protected.

Ps. These thoughts are strictly personal and should not be attributed to the institutions the

author is affiliated with.