The ability of EU governments to follow a coordinated and unified approach to tackle the multiple crises which are hitting Europe is at the lowest level in the last 20 years. The impasse in managing the inflow of migrants and the high bill paid to the UK government in the attempt to avoid Brexit risk destroying two fundamental pillars on which the EU is based.
On the one hand the lack of a common approach in coping with the migrant crisis could end up in the abandoning of Schengen, thus the free movement of people between most EU countries, while the huge concessions made to the UK in terms of limiting foreign workers’ welfare benefits including child benefits considerably undermines the free movement of workers. The impact of these two crises could have consequences going well beyond the direct effect of the sovereign debt crisis in 2011. However it is clear that the poor management of that crisis has opened up Pandora’s Box, giving voice and power to short-sighted and individualistic approaches, reinforced by the disaffection of the people regarding the EU.
Against this backdrop a scenario where several countries will decide to follow-up on the costs of an incomplete currency union and of an uncooperative European Union, whether or not these costs are actually higher than the benefits, becomes increasingly likely. This will lead to the fall of the Euro and the deconstruction of the EU. The way to address this problem and avoid a slow, painful and counterproductive dismantling of the EU would be an enlightened plan capable of triggering a wide and open debate pushing national governments and citizens towards understanding the need for deeper and effective integration, especially in the Eurozone. Unfortunately, the current plan on the table to move towards further integration of the Euro area is very disappointing in this respect.
The EU lacks the ambition required to have people on its side
Such a plan, presented in July 2015, is named the Five President Report since it arises from a joint agreement between the Presidents of the Commission, the ECB, the European Council, the Eurogroup and the European Parliament. The Five President Report represents more than a step back compared to other documents with the same purpose, published since the start of the Euro-crisis. The timeline for completing the Eurozone is now shifted to a faraway future. All envisaged and however limited steps to complete the Eurozone are planned to be finalised at the latest by 2025, while all concrete and crucial decisions are not expected to be even discussed before 2018. The introduction of some hybrid instruments going in the direction of a larger Eurozone Budget was previously planned to be introduced as of 2014, including the ability to borrow on the financial markets (some kinds of Eurobond). This gave rise to different technical proposals to design, for instance, an unemployment benefit scheme at EU level which, although insufficient, would have represented a first important step towards more common budgetary and expenditure capacity. Unfortunately this scheme is now definitively off the table due to the opposition of key actors, most notably the German government.
The Five President Report addresses the issue of a Eurozone Budget by ambiguously defining it as “fiscal stabilisation function”. It does not provide any description about the features of this instrument, making explicit only the differences from what an effective and EU Budget would look like, reassuring hard-liner national governments that in any case it will imply no fiscal transfers. By excluding even limited transfers across regions of a federal area, as is for instance the case in the United States, India, China, Brazil and Germany, such instruments will have no stabilisation function or at best will be ineffective to foster an adjustment both in those countries struggling with economic stagnation and in countries experiencing large and unsustainable current account surpluses.
It is interesting to notice that all countries but Germany (thus including the Netherlands and Finland, two countries which are usually on the hard line versus EU integration) have so far experienced serious economic difficulties since the start of the crisis, showing that the current uncooperative approach is much more harmful for all EU citizens than fiscal transfers. In addition, a common Budget should be capable to help finding a solution for common challenges such as, for instance, providing financial support to manage the current wave of migrants thus avoiding the current shameful spectacle where national governments are negotiating about the limited number of people they are willing to help. At the same time, by financing at least part of national unemployment and welfare schemes, an EU Budget could soften the tensions arising from the free movement of workers within the EU, both in terms of public finances than in terms of the so-called “brain drain” problem. A solution to limit fiscal transfers to the minimum could be found by financing the enlarged EU Budget by common sources, as for instance a carbon taxes, a financial transaction tax, a wealth tax and a share of the national corporate tax given that the revenue arising from the latter, are no-longer strongly related to domestic territories in an integrated and globalised market and only provide scope for large corporation to avoid paying taxes. The reference to other instruments to finance EU common goals, such for instance green investments, has also disappeared since the Five President Report does not mention at all any form of Eurobonds. Essentially, the president of the main European Institutions do not even attempt to convey any progressive and ambitious vision about the elements needed to create a well-functioning European Monetary Union. They just align their agenda to the current short-sighted reluctance of several national governments to understand the risk of the nationalistic approach and move towards stronger and effective integration.
The time for technical shortcuts is over
The Commission presented on 21 October a package of measures aimed at implementing the short-term set of proposals of this plan. As expected, they are unfortunately characterised by verbose headlines and low substance. The only positive aspect of the package is the European Deposit Insurance Scheme which aims at reinforcing the banking union through the creation of a common European fund assuring protection to bank deposits which are now only covered by national schemes. In the short term the package calls for the introduction of two further technical bodies: the national competitiveness boards and the European Fiscal Board. This follows the well-known path of outsourcing crucial policy choices to technical “independent” bodies to increase the pressures on national policymakers to implement a pre-defined set of structural reforms, which at best can have only a limited impact, in opposition to the courageous and alternative policy strategies which would be strongly needed.
National competiveness boards will have the role of independent advisers calling for measures to increase competitiveness. Competitiveness indeed, seems the real founding value of this Monetary Union, where countries compete each other on export and investment. Without the possibility to devaluate the currency and without a common budget, it is unfortunately not so far from reality that the increase in relative competitiveness with respect to EU partners is the only tool left to Eurozone countries to cope with difficult economic circumstances. The gloomy corollary is that, according the current EU vision, increasing competitiveness is translated into the so-called “internal devaluation policies” aimed at reducing prices, wages and public expenditure. Many economists warn that these policies are harmful and ineffective since they destroy internal demand, weighing on the weakest groups of the population and fueling deflation, which is detrimental to debt reduction. Although competitiveness is a very wide concept, it is highly unlikely that national competitiveness boards will push for a rather different strategy based on a forward-looking approach to competitiveness based on sustainable investments and on the transition towards a low-carbon emission economy.
The European Fiscal Board, composed of five experts, will issue non-binding advice on fiscal policy. First of all, this new body is quite pointless since the Commission already address fiscal recommendations to comply with the rule of the Stability and Growth Pact. Nevertheless, an intriguing function assigned to the fiscal board would be to focus on the aggregate Euro area fiscal policy, the one stemming from the sum of national fiscal policies. Policy recommendations in this respect might potentially be highly controversial if addressed to single countries. For instance Germany could be explicitly asked to use its margin for manoeuvres to spend more in order to contribute to the internal demand of the Euro area and thus, to reduce its huge current account surplus. However, the non-binding nature of this advice and the need to be consistent with the very stringent rules of the Stability and Growth Pact reduce the impact and the effectiveness of this tool. Leaving aside these technical aspects, in the current institutional framework it is inconceivable that the Commission, which is an hybrid between a political and a technical body, refrains from taking the responsibility for issuing controversial advice, assigning this task to a purely technical body. A strong role of the Commission it is a necessary condition to increase the credibility and the political cost for those national governments reluctant to act to ensure a symmetrical adjustment between surplus and deficit countries.
In any case, optimal economic policy decisions which can be left to technicians do not exist, as shown by the mistakes made in the last five years with the obsession for austerity. Although political pressures have played a key role in shaping the strategy followed in the past, the lack of a democratic process has led to no accountability for the bad results produced. Sufficient room for manoeuvres have to be left at political level, to decide on the appropriate policy strategy, of course on the basis of an evaluation of the different advises from technical experts. A stronger role to debate and concretely influence the decision on the Euro area economic policy should be assigned to the European Parliament. This is crucial to ensure democracy and accountability, not least towards a Euro area Finance Minister, whose proposal for his creation, has recently arisen in the debate, including the concrete possibility to examine and modify the suggested policy mix through an open and transparent process when it is not delivering, as it has been the case in the last five years.
However, the section of the package which is appealingly titled “Effective democratic legitimacy, ownership and accountability” is disarming in its idea of a democracy simply based on dialogues between the executive powers and the elected assemblies, which in practice are left without any concrete power to influence the decision-making process. According to this conceptualisation of democracy, ownership and accountability are only ensured by the freedom of expressing opinions and conveying non-binding recommendations to the different executive agencies. In this framework the European Parliament would enjoy the same (or in practice even less) power than the national competitiveness boards on key policy decisions.
The time for far-reaching political choices has arrived
In sum, much more is needed in the short-time to solve the current flaws of the architecture of the European and Monetary Union. Unfortunately these empty proposals, the infinite and unproductive debate on what should be done which is never done, the reiteration of measures which have already proved ineffective and unproductive, will only increase the number of people who think that the EU cannot be reformed. This will strengthen more or less extreme, but in any case dangerous, nationalistic sentiments, which are already gaining ground across Europe. Indeed Cameron’s claims, the different red-lines imposed by Germany, the eastern European countries’ refusal to cooperate towards the refugee crisis, the decision to restrict asylum rights by Nordic countries, the arguments put forward by Marine Le Pen in France and Matteo Salvini in Italy: they all have in common favour of national populism and short-term interest on the back of a more effective and structural EU-wide approach. However, the terms of the debate, which were before masked by claiming that the cause of the crisis was to be found in the irresponsible economic conduct of southern EU countries, are now clear. They refer to the ancient fight between the national states and supranational federal entities.
One option would be to come back to fully sovereign nation states, although it should be made clear that full sovereignty in domestic policy making does not exist in the era of globalisation, free capital movement and free and unregulated markets, leading to tight competition between national countries, no matter whether this implies a race to the bottom in welfare, social rights and levels of inequality. The other option would be to preserve the multiple opportunities that the European Union could grant in a variety of fields, including not only economic considerations, but also preserving the European social model, ensuring high social standards, promoting a powerful common foreign policy, allowing free movements of ideas, arts and culture – just to mention a few. However, to achieve all that, the Eurozone in particula, has no alternative but to progress towards a real confederation of states, where fully democratic and accountable political bodies are responsible for taking decision over a defined set of competences clearly assigned to the supranational level.