What ails Europe and what to do about it

#CriticalThinking

Picture of Daniel Dăianu
Daniel Dăianu

President of the Romanian Fiscal Council, former member of the European Parliament, former Romanian finance minister and Trustee of Friends of Europe

Visionary and effective leadership has become a scarce commodity in the EU. Ever-fewer governments are capable of delivering what they pledge during election campaigns, and fewer politicians still have the guts to speak honestly about the new economic and social environment. This enhances mistrust among citizens and poisons relationships within the EU, which is seen by not only a few as the cause of troubles. Credible leaders have to underscore the importance of the EU, to moderate people’s expectations about economic growth, combat racism, xenophobia and chauvinism, and foster EU identity and common policies.

The European Project hinges on better explaining to citizens what the EU means for the peace and economic wellbeing of member states. But for this démarche to be successful, policymakers in Brussels and national capitals have to tackle the “democratic deficit”, or the legitimacy of decision-making will be an increasing challenge for the many critical measures the EU must initiate. For example, the European Parliament has to be more visible in domestic political debates, where MEPs don’t currently matter much. This is a nuisance if we think that the fate of the Union hinges on “more Europe”. It may be useful to hold joint committees of MEPs and MPs to bridge national and European legislatures. On top of this, a ‘Council of the Wise’ should be set up to advise EU institutions on issues of utmost concern, including its reform. This group of people should produce its own report to guide the future of Europe.

The idea of having countries enter and exit the euro depending on their economic performance entails enough uncertainty to cripple the currency

There will be no quick fixes for dealing with the deep weaknesses of the Union. The Five Presidents’ Report could be quite far-reaching regarding eurozone reform, but is not devoid of conceptual contradictions. For instance, it alludes to “fiscal capacity” but only envisages this for after a high level of structural convergence is reached. Asymmetric shocks cannot be ignored until structural convergence has taken place. The eurozone’s North-South fracture could deepen in an environment of very feeble economic growth and major uncertainties, in spite of ongoing structural reforms.

The Greek debacle is only the tip of the iceberg, and the Banking Union is far from being the solution to all our troubles. Unless the eurozone profoundly reforms its institutional and policy arrangements, it is hard to foresee its survival. The end of the euro would then fatally cripple the EU itself. While Germany is right to emphasise the observation of rules, those rules need to be embedded in an appropriate institutional setup, which is not currently the case. The rules need to be complemented by fiscal integration and strong policy co-ordination; the latter asks for joint bodies including an executive and legislative branch that would take the eurozone into the realm of political integration. Policy co-ordination demands more symmetric burden sharing. It does not pay for Germany to run enormous external surpluses that dampen aggregate demand in the eurozone and make adjustment harder for deficit member states.

The idea of having countries enter and exit the euro depending on their economic performance entails enough uncertainty to cripple the currency. A country in insolvency should not be forced out, but should be prodded to undertake structural reforms while the joint “fiscal capacity” mitigates the pains for citizens. In any case, new members should only join the eurozone provided they achieve a substantial amount of structural convergence and its functioning improves considerably.

It is hardly realistic to think that Europe’s economies could rediscover the growth rates of previous decades. But there are ways to make economies less fragile and likely to achieve reasonable growth, be it lower than the pre-crisis decades.

We need to invest more. The Juncker plan is arguably insufficient to improve the quality of education, pay more attention to R&D, modernise infrastructure, and make the Union more attuned to the digital world. The EU’s single market should rely on a revamped conceptual framework – some of it outlined in the Monti Report of 2010. However much we praise competition as a driver of entrepreneurship and economic dynamism, there are power asymmetries and market abuses in the EU that need to be seriously addressed. The financial crisis has bared the flaws of a paradigm that takes for granted that markets always know better, that systemic risks are not significant, that “light-touch regulation” is fine, and that unethical business conduct is rare.

If we accept, as a working assumption, that deeper integration is the way forward, a more balanced policy paradigm is needed. When member states are asked to relinquish more of their sovereign prerogatives, what would then be lacking from the national-level policy mix has to be compensated by an enlarged and more diversified set of supranational tools – this is like a subsidiarity principle operating in reverse. In the eurozone, this could include such measures as a “collective unemployment insurance scheme”. Unless this is done, fragmentation and nationalist tendencies will gather force, and the Union will be constantly battered from inside. Muddling through would be the optimistic outcome, but a slow demise is equally possible.

We need to invest more. The Juncker plan is arguably insufficient to improve the quality of education, pay more attention to R&D, modernise infrastructure, and make the Union more attuned to the digital world

Big business has to show its social responsibility more convincingly, if it actually operates any. There has been a rising number of financial scandals that foment hostility towards companies and what’s perceived as their reckless profit-maximisation at the expense of society. Tax evasion and avoidance have turned into a big policy issue in the Union, and blame has to be assigned to the connivance of not just a few member states. Unless big business changes its conduct and becomes more ethical, ever-more hostility will encroach on people’s minds. This requires a strong middle class, equitable income distribution and a sense of trust and fairness among social and political actors. Relatedly, the Transatlantic Trade and Investment Partnership (TTIP) has to serve society as a whole, and the citizens have to see direct benefits. It is hard to argue that democracy can be solid when people at large feel that they do not benefit from the policies bestowed on them.

Looking more to the EU’s global interactions, climate change is a huge world-wide priority. Purely economic logic is not a help in devising proper policies for coping with climate change. The EU has to embark on very close co-operation with the other big players in the global economy in this respect.

Most urgently, perhaps, is devising a better CFSP approach towards the disorder in the Arab world and the present massive flow of refugees to Europe. The approach should not be ad hoc, it should tackle the roots of the problem including the blatant mistakes made by western countries in the region. It is true that ageing in Europe is a formidable challenge and that immigration can help improve demographic trends at home. But to hail the current massive flow of refugees as the solution to demographic strain at home is to miss the security policy conundrum many governments are facing. As Donald Tusk, the president of the European Council has emphasised, the borders of the EU must be protected.

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