How to re­new the Euro­pean project

Financial Mirror (Cyprus) - - FRONT PAGE -

The French pres­i­den­tial and leg­isla­tive elec­tions ear­lier this year have in­stilled new hope in the Euro­pean in­te­gra­tion project, by rais­ing the prospect of deeper Franco-Ger­man co­op­er­a­tion. And yet some forms of co­op­er­a­tion, not least shared-li­a­bil­ity schemes, would be a mis­take. As long as mem­ber states have sovereignty over fis­cal and eco­nomic pol­i­cy­mak­ing, France and Ger­many should fo­cus their ef­forts on mak­ing the eu­ro­zone it­self more re­silient.

French Pres­i­dent Em­manuel Macron has started to pur­sue ur­gently needed re­forms to boost eco­nomic growth, and it is cru­cial that he suc­ceeds in this ef­fort. France is suf­fer­ing from high struc­tural un­em­ploy­ment and low po­ten­tial growth, and its pub­lic fi­nances are un­sus­tain­able in the medium term. Im­prov­ing this state of af­fairs will re­quire fac­tor- and prod­uct-mar­ket re­forms, to­gether with deep re­duc­tions in pub­lic-sec­tor deficits.

From France’s stand­point, there is no bet­ter time than now to im­ple­ment eco­nomic re­forms. Al­though the eu­ro­zone is show­ing signs of a solid eco­nomic re­cov­ery, the Euro­pean Cen­tral Bank is feel­ing in­creas­ing pres­sure to ta­per its ul­tra-ex­pan­sion­ary mone­tary poli­cies. Macron’s gov­ern­ment thus has no time to lose, es­pe­cially given that eco­nomic re­forms can take time to de­liver re­sults, and the next elec­tions are al­ways just around the cor­ner.

In light of this small win­dow of op­por­tu­nity, the last thing France needs is more joint in­vest­ment schemes, as some have pro­posed. Eco­nomic growth re­quires not just cap­i­tal in­vest­ments, but also a busi­ness en­vi­ron­ment where in­no­va­tion is en­cour­aged and re­warded. And at any rate, it wouldn’t make sense for France to rely on other mem­ber states for in­vest­ments. How can France claim to have re­stored its past grandeur if it is ask­ing for Ger­many’s help?

Be­yond im­ple­ment­ing do­mes­tic re­forms, France can still work with Ger­many to send a pow­er­ful mes­sage in sup­port of Euro­pean in­te­gra­tion. But as both coun­tries seek ar­eas where they can co­op­er­ate, they must be care­ful to avoid poli­cies that would threaten the eu­ro­zone’s long-term sta­bil­ity.

Un­for­tu­nately, some pro­pos­als cur­rently be­ing dis­cussed would do pre­cisely that. For ex­am­ple, es­tab­lish­ing a shared eu­ro­zone-level bud­get or un­em­ploy­ment-in­sur­ance regime would, at this stage, sow the seeds of fu­ture con­flicts. It is in­con­ceiv­able that na­tional pol­i­cy­mak­ers, see­ing to their coun­tries’ own in­ter­ests, would pre­vent th­ese ar­range­ments from mu­tat­ing schemes.

To avoid dis­tri­bu­tional con­flicts that would only poi­son the Euro­pean project, any in­sti­tu­tional re­form that is pro­posed in the name of Franco-Ger­man co­op­er­a­tion should have to pass a strict sus­tain­abil­ity test. Euro­pean pol­i­cy­mak­ers must en­sure that there is con­gru­ence be­tween the power to make de­ci­sions and the li­a­bil­i­ties as­so­ci­ated with any de­ci­sions that are made. It would be naive to think that mem­ber states will not off­load the costs of their choices onto other mem­ber states if given the chance.

And be­sides, there are many other ar­eas where France and Ger­many can strengthen co­op­er­a­tion and give new mo­men­tum to Euro­pean in­te­gra­tion. To de­ter­mine where to fo­cus their ef­forts, French and Ger­man lead­ers should keep three re­lated prin­ci­ples in mind. First, any joint en­deavor must re­spect di­ver­sity. The cen­tral strength of the Euro­pean

into

per­ma­nent

asym­met­ric

trans­fer project is that it unites its mem­ber states in pur­suit of peace and pros­per­ity. But this re­quires a rich reser­voir of ideas, not a sin­gle, uni­fied ap­proach.

The sec­ond prin­ci­ple is sub­sidiar­ity, which holds that de­ci­sion-mak­ing should be de­cen­tralised when­ever pos­si­ble. This en­sures that lo­cal and re­gional pref­er­ences are con­sid­ered along­side the ef­fects of eu­ro­zone-wide har­mon­i­sa­tion and economies of scale.

The last prin­ci­ple is con­gruity, to en­sure that de­ci­sion­mak­ers are ac­count­able for the out­comes of their de­ci­sions. This means that as long as Euro­pean elec­torates in­sist on re­tain­ing sovereignty over fis­cal and eco­nomic pol­i­cy­mak­ing, shared li­a­bil­ity will be a pipe dream.

With th­ese prin­ci­ples in mind, France and Ger­many could take joint ac­tion on a va­ri­ety of is­sues, such as cli­mate change, the refugee cri­sis, and counter-ter­ror­ism. Co­or­di­nat­ing ef­forts on th­ese fronts would re­vi­tal­ize the in­te­gra­tion process and con­trib­ute to Europe’s long-term sta­bil­ity and pros­per­ity.

On eco­nomic pol­icy, France and Ger­many should look for ways to for­tify the eu­ro­zone and com­plete the sin­gle mar­ket. The priv­i­lege that gov­ern­ment debt en­joys un­der cur­rent bank­ing reg­u­la­tions should be elim­i­nated, and an in­de­pen­dent bank­ing reg­u­la­tor, sep­a­rate from the Euro­pean Cen­tral Bank, should be es­tab­lished within the eu­ro­zone. Be­yond that, it is time to start phas­ing in a vi­able sovereignin­sol­vency scheme for the bloc.

All of th­ese ini­tia­tives could be im­ple­mented si­mul­ta­ne­ously with do­mes­tic re­forms in France. But there is a risk that they will take a back seat to other pro­pos­als, such as shared-li­a­bil­ity schemes. To avoid this pit­fall, pol­i­cy­mak­ers should con­sider the roots of the eu­ro­zone’s low growth po­ten­tial, which is not a re­sult of in­suf­fi­cient sol­i­dar­ity, but of in­di­vid­ual mem­ber states ab­ne­gat­ing their na­tional re­spon­si­bil­i­ties. Rather than pro­vide a cure for th­ese prob­lems, shared li­a­bil­ity would make them worse.

Pro­po­nents be­lieve that more shared li­a­bil­ity could pave the way for in­di­vid­ual re­spon­si­bil­ity. But that is an il­lu­sion. Once in place, a shared li­a­bil­ity scheme would re­duce the in­cen­tives to de­liver on struc­tural re­forms. And among Ger­man vot­ers, noth­ing could un­der­mine sup­port for the Euro­pean project more than yet an­other set of bro­ken prom­ises.

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