Can the Union avoid a breakdown? Daniel Dăianu is Professor of Economics at the National School of Political and Administrative Studies, Bucharest, a Member of the Board of the National Bank of Romania, a former Finance Minister of Romania, former MEP and a CASE fellow The menace of Brexit, which is to be decided in a June referendum in the UK, compounds enormously the pressure on a European Union which is transfixed by the migrants/refugees crisis. This crisis has come as another huge blow following the financial and the euro area turmoil of recent years. The migrants/refugees’ crisis and the euro area troubles have underlined the fragility of the Union, which, for not a few, is a shocking revelation in itself. More than worrying is the pretty low response capacity of the Union to such headwinds. Can the Union pull itself together, can it find a way out of the whole mess? Below is a brief reading of the Union’s travails and many-sided policy imbroglio; it blends the immediate huge threat, which is posed by the migrants’ crisis and that can cause a breakdown of the Union in the near future, with structural challenges which are of economic and financial origin in the main. The context: a bunch of major crises The European Union is going through the most critical period in its history; it is facing an existential crisis, as several of its top officials have emphasized. Its roots are economic and social, financial, and security related. The economic and financial roots are linked with a deep euro area crisis, the follies of finance, over-debt (debt-overhang), demographics, and inadequate governance. The increasing security threats are related to the growing turmoil in the Union’s close vicinities, in the Arab world in particular, to geopolitical risks (a questioned order in Europe after Crimea’s annexation by Russia and other events in Ukraine), and, not least, to terrorism and cross-border crime. Brexit and tackling the migrants’ crisis are the fundamental policy issues in 2016, apart from the constant task to fight terrorism. Hopefully, the UK’s referendum will keep this big EU member state inside the Union. And finding a workable solution to containing the migrants’ flow is also a must for the sake of averting a dissolution of the Union. When it comes to economic and social issues, ‘regaining citizens’ (to paraphrase Etienne Davignon insightful observation, that “we have lost the citizens”), hinges on redeeming what the EU means for Europe. It depends also on better policies at the national and European levels. In this regard, 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, especially during a period of extreme duress for most citizens and rising inequalities; and a thorough reform of finance has to go on. There are no quick fixes for dealing with the Union’s economic deep ailment. The Five Presidents’ Report opens new vistas and could be seen as quite far-reaching regarding euro area 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 should have reached a high level in the euro area; this looks like a catch-22 problem for the governance of the euro area. Asymmetric shocks are a major challenge and dealing with it cannot be put off until structural convergence will have taken place. The fracture between North and South in the euro area 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 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. The migrants’ crisis With the benefit of hindsight one can argue that the migrants’ crisis has been in the pipeline for quite a while. The lack of a common immigration policy, botched interventions abroad that have misfired, the human disaster in Syria, permeable EU frontiers, and the diminishing cohesion and trust among EU member states have all, inter alia, brought about this crisis–quite likely, more threatening than the euro area crisis. It is true that aging in Europe is a formidable challenge and that immigration can help improve demographic trends at home over the longer run. There are also humanitarian concerns and the very values of democratic Europe which commend certain actions and support a vision. But to hail the current massive flow of migrants/refugees as the solution to demographic strain at home, in Europe in general, is to underestimate 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. Schengen turning, de facto, into a limbo state reflects the inability to deal with this crisis otherwise. It is also ironic that Greece, which is a very weak economic link of the Union is expected to operate as a key outpost in the effort to control borders. 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 public/economic policies. Otherwise we will see failing EU policies repeatedly. The EU needs to have a more clairvoyant international aid and development policy. The EU needs to cooperate more closely with and to help countries where refugees are hosted. Turkey is clearly first inter pares. There are also Arab countries which need support. The sooner the war in Syria ends the better, and the Union has to play a significant role to this end. Finally, the flow of refugees from internal war-torn Libya has to be under control. And if there is need for money to achieve all this and in view of a highly strained EU budget, a ‘security/solidarity EU tax’, be it on a temporary basis, does make sense; a German proposal (a gasoline special tax) would serve such a purpose. Brexit It is good that the EU leaders have reached a compromise deal in the end. But what matters now is the outcome of the June Referendum in the UK. The EU needs the UK for many reasons. It has one of the largest European economies, the City is a world financial hub, British excellence in R&D is a yardstick for European science and technology, the UK is militarily and technologically of prime interest to EU foreign and security policy and, not least, this country matters considerably for the balance of power inside the EU and, in Europe, in general. That the compromise reached on February 19th in Brussels may create a risky precedent and could become a harbinger of other troubles down the road is not to be dismissed lightly. But the EU needs the UK and many Britons would, probably say, that their country is safer inside the Union than outside. If the UK citizens decide to take their country outside the EU, the latter would be dealt a terrible blow in the most difficult period of its existence. The euro area crisis The fate of the EU depends on the fate of the euro area. 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 euro area 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 situation 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 euro area 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 euro area; these would take the euro area in the realm of political integration be it a longer term endeavour. A less fortunate idea would be to change the rules of the game in the euro area and have countries entering and exiting depending on their economic performance. Such a euro area 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 euro area; 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. If a country decides to leave the euro area, for various reasons, it would open a completely new chapter in the euro area crisis, it would create new uncertainties. Policy coordination in the euro area 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 euro area and makes adjustment harder for deficit member states. New member states, which are outside the euro area and are bound by Treaties to join it, should do it provided, first, they achieve a substantial amount of structural convergence and, second, the euro area reforms itself decisively. Reconsidering the Single Market logic The Single Market (which sees the EU as a whole) would better 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). The reform of finance has to go on and adequate regulation and supervision of financial markets (including shadow banking) should be implemented; this should rely on stronger capital and liquidity requirements, the taming of casino-type activities, and the introduction of a sort of Glass-Steagall legislation–as several reports commissioned by the European Commission have alluded to, although not clearly enough. 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 euro area 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. It is hardly realistic to think that European economies could achieve, on average, the growth rates of previous decades–for the foreseeable future at least. Demographic change, an overwhelming debt overhang (on average, about 250% of GDP, both private and public, in the euro area), the poor functioning of the euro area, 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 pre-crisis 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 euro area by changing its functioning. Business and ethics Big business has to show 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. And radical ideas, on the left and the right sides of the political spectrum will continue their 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 Effective leadership has become a scarce commodity in the EU. It is fair to mention that hard times complicate policy-making, but the fact is that 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. The European Project, as a European public good, 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 when they are facing huge challenges. But for this demarche to be successful policy-makers in Brussels and national capitals have to tackle the ‘democratic deficit’. Unless this is done, the 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/euro area levels. 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. Politicians need to be more honest and truth telling about problems and challenges. 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. 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 needed reforms. 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, a common intelligence policy, have to be strengthened (a joint energy policy would bolster common security policy as well). The Union has to develop more consistent, effective policies for tackling conventional and non-conventional threats, including cyber warfare 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. As Donald Tusk, the president of the European Council has emphasized, the borders of the EU must be protected. Otherwise, quite soon, we may no longer talk about protecting the Union’s frontiers, but of national borders only (this is already happening to a certain extent). These thoughts are strictly personal and should not be attributed to the institutions the author is affiliated with.
If we accept 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