Europe’s re­form op­por­tu­nity

The Baltic Times - - COMMENTARY -

Her­man Van Rom­puy , Fabian Zuleeg and Ja­nis A. Em­manoui­lidis

The Eu­ro­zone cri­sis is far less dan­ger­ous now than dur­ing its peak years of 20102013. Growth has picked up across the Euro­pean Union, and 5 mil­lion jobs were cre­ated be­tween 2014-2017.

But the EU bank­ing union re­mains in­com­plete, Greece and the Ital­ian bank­ing sec­tor are fac­ing chal­lenges, and the af­ter­shocks of the Euro cri­sis could still un­der­mine the EU’S sta­bil­ity – or even threaten the com­mon cur­rency.

Bar­ring the worst-case sce­nario of pop­ulist vic­to­ries in the French elec­tion this May and the Ger­man elec­tion this Septem­ber, Euro­pean lead­ers should seize the op­por­tu­nity later this year to pur­sue more am­bi­tious, but prag­matic, re­forms.

As a first step, pol­i­cy­mak­ers will need to ac­knowl­edge that they still lack ef­fec­tive pol­icy-co­or­di­na­tion tools. Although the Euro­pean Se­mes­ter cre­ated a broad frame­work for co­or­di­na­tion, it has failed to ef­fec­tively im­prove com­pet­i­tive­ness, growth, or em­ploy­ment across all EU coun­tries. At the same time, in­vest­ment re­mains too low through­out the Eu­ro­zone, and es­pe­cially in coun­tries that need to stage the largest re­cov­er­ies. The “Juncker Plan” for tar­geted Eu-wide in­vest­ments can be a part of the so­lu­tion, but it will not be enough.

To be sure, these eco­nomic prob­lems will re­quire so­lu­tions at the na­tional level; but they have also been per­pet­u­ated by com­mon pol­i­cy­mak­ing fail­ures. For ex­am­ple, ap­proved Eu­ro­zone re­forms have been im­ple­mented far too slowly; and ad­di­tional struc­tural re­forms are not in the pipe­line.

There is also sig­nif­i­cant pol­icy di­ver­gence among EU Mem­ber States, be­cause some do not trust oth­ers to ful­fill their in­di­vid­ual obli­ga­tions. One camp, led by Ger­many and the Nether­lands, be­lieves that na­tional gov­ern­ments are obliged, first and fore­most, to de­liver on agreed re­forms, while re­spect­ing com­monly agreed rules. France and South­ern Euro­pean coun­tries, by con­trast, ar­gue that gov­ern­ments need more flex­i­bil­ity to de­cide on fis­cal and struc­tural re­forms, and that gov­ern­ments with greater fis­cal lee­way should help to ad­dress cur­rent im­bal­ances by in­creas­ing their pub­lic ex­pen­di­tures.

Be­cause na­tional gov­ern­ments are po­lit­i­cally ac­count­able to their own cit­i­zens, they of­ten lack in­cen­tive to in­crease co­op­er­a­tion at the EU level. This dis­con­nect is now ham­per­ing fur­ther Eco­nomic and Mon­e­tary Union (EMU) re­forms. Fol­low­ing up on its re­cent White Pa­per on the Fu­ture of Europe, the Euro­pean Com­mis­sion, for its part, in­tends to of­fer ad­di­tional pro­pos­als for EMU re­form in the first half of 2017. One hopes that it will fur­nish an am­bi­tious agenda. It is clear that the Eu­ro­zone will need far bet­ter co­or­di­na­tion to en­sure its long-term sus­tain­abil­ity.

To­ward that end, Euro­pean lead­ers need to take a prag­matic first step to re­build the trust needed for more sub­stan­tial pol­icy in­no­va­tions in the fu­ture. The ini­tia­tive must come from France and Ger­many, the mon­e­tary union’s two largest economies, while also in­volv­ing other Euro coun­tries. Af­ter their elec­tions this year, France and Ger­many should is­sue a joint pro­posal that re­flects con­cerns about col­lec­tive re­spon­si­bil­ity, in­di­vid­ual flex­i­bil­ity, and EU sol­i­dar­ity.

For starters, a Francoger­man pro­posal should al­low for more fis­cal flex­i­bil­ity, but within a strict frame­work. The EMU should have a “golden rule” for pub­lic and so­cial in­vest­ment, with a clear def­i­ni­tion of such projects and a mech­a­nism for as­sess­ing their va­lid­ity. In ex­change for greater flex­i­bil­ity on pub­lic and so­cial spend­ing, fis­cal rules should be ap­plied more strictly to all re­main­ing ex­pen­di­tures, and should in­clude the use of sanc­tions when nec­es­sary. ex­pand­ing the scope if the ini­tia­tive is suc­cess­ful.

A Franco-ger­man re­form pack­age that in­cludes these pro­pos­als would im­prove Eu­ro­zone eco­nomic and pol­icy con­ver­gence and co­he­sive­ness. With a stronger EMU, the EU could re­main open, while also pro­vid­ing more pro­tec­tion for its cit­i­zens. More­over, this plan leaves sig­nif­i­cant de­ci­sion-mak­ing power at the na­tional level – even as it en­cour­ages In­traeu­ro­zone co­op­er­a­tion – and builds on ex­ist­ing gov­er­nance pro­vi­sions.

This plan would con­sti­tute a sub­stan­tive first step to­ward more fun­da­men­tal re­forms at a later time. But it will de­pend on fa­vor­able, proeu­ro­pean elec­tion out­comes in France and Ger­many, and on Euro­pean lead­ers’ will­ing­ness to com­pro­mise and take cal­cu­lated short-term risks.

Shoring up the project of Euro­pean in­te­gra­tion will re­quire a com­pre­hen­sive po­lit­i­cal deal. But, Euro­pean lead­ers must not miss their up­com­ing chance to start putting in­te­gra­tion back on track. Oth­er­wise, the Eu­ro­zone’s cur­rent weak­nesses will un­der­mine the sus­tain­abil­ity of the EMU it­self, by gen­er­at­ing un­con­trol­lable costs that all EU coun­tries will have to pay.

Her­man Van Rom­puy, a for­mer Pres­i­dent of the Euro­pean Coun­cil and for­mer Prime Min­is­ter of Bel­gium, is Pres­i­dent of the Euro­pean Pol­icy Cen­tre. Fabian Zuleeg is Chief Ex­ec­u­tive at the Euro­pean Pol­icy Cen­tre. Ja­nis A. Em­manoui­lidis is Di­rec­tor of Stud­ies at the Euro­pean Pol­icy Cen­tre.

fabian zuleeg is Chief Ex­ec­u­tive at the Euro­pean pol­icy Cen­tre.

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