MILAN – The future of the European Union may not officially be on the ballot in the upcoming elections in the Netherlands, France, Germany, and Italy, but the results will go a long way towards determining Europe’s fate.
Anti-EU sentiment is more widespread than ever, as demonstrated by the feverish campaigns of right-wing populist insurgents like Geert Wilders in the Netherlands and Marine Le Pen in France. But there are also signs of support for revamping and reinventing the EU – a message being espoused by the likes of France’s Emmanuel Macron and Germany’s Martin Schulz.
Any pro-EU campaign, to be convincing, must address the problems stemming from the euro. Adopted by 19 of the EU’s 28 member countries (27, after Brexit), the common currency has become a major source of disillusionment with European integration. Though the euro crisis, in its most acute form, is over, the eurozone remains a fragile construct. In the event of renewed volatility, doubt about its survival could easily return.
At the root of the common currency’s fragility are flaws in the Maastricht Treaty framework, which dictates that eurozone members maintain a common monetary policy and individual fiscal policies that conform to shared fiscal rules. But the mere existence of fiscal rules has proved insufficient to guarantee compliance, and there is no enforcement mechanism at the EU level to ensure adequate fiscal discipline.
Unless this changes, there will always be the risk that weaker members will accumulate unsustainable debts, forcing stronger members to choose between providing politically untenable transfers and allowing members to exit, creating instability that could bring down the entire project. A victory for pro-European forces in the coming elections could provide the opportunity – perhaps the last opportunity – to pursue the changes to the Maastricht Treaty that are needed.
Those changes will not be easy to carry out. Europeans will need to accept a fundamental shift in the basis of the eurozone’s legitimacy, moving beyond a simple commitment to rules-based economic governance to accept the kind of discretionary approach taken by an authority with democratic legitimacy.
Without political union, the adoption of a rules-based approach to governance is understandable. It aligns with the logic of central-bank independence: unelected policymakers are committed to a straightforward set of rules, such as targeting a particular inflation rate, against which they can be held accountable. But that logic hasn’t worked for the eurozone, where concrete rules have proved inadequate to prevent pressure for redistribution that voters do not support.
Now that this has become apparent, some advocate a greater role for the market in enforcing discipline. Proposals for a new sovereign-lending framework that allows for orderly restructuring reflect this reasoning.
One proposal calls for the European Stability Mechanism to adopt a system similar to that of the International Monetary Fund, in order to prevent lending to insolvent countries and force reprofiling or restructuring after a certain debt threshold is crossed. Such an approach would make the EU’s “no bailout” rule more credible and avoid placing an excessive burden on monetary policy.
But it would be naive to believe that such a scheme would solve the problem. Fear of contagion would always be justified in a monetary union, where the externalities of a debt crisis in one country always risks infecting the rest of the union. Given this, a framework based exclusively on market mechanisms would be prone to instability.
This is not to say that a market-driven debt-restructuring framework has no place in eurozone reform. It does, and so does a set of simple common rules. But, to support a shared fiscal stance and achieve a better mix of monetary and fiscal policy, a third component is needed: an independent federal fiscal authority focused on creating risk-sharing mechanisms. Such an authority would need a small budget and some discretionary power, in order to be able to adjust its approach in response to events.
Of course, if such a system were perceived to be undermining member states’ sovereignty it would not be politically feasible. Its critics would need to be convinced of its democratic legitimacy. Without full political union, that could be achieved with an emphasis on transparency, independence, and a much larger role for the European Parliament, possibly in coordination with national parliaments.
After all, the central issue facing Europe is not sovereignty, as the right-wing populists claim, but democracy. (With integrated markets, full national sovereignty is an illusion.) What Europe needs today is a treaty that expands democratic legitimacy at the EU level. Preserving national sovereignty based on institutions designed for the far less integrated European economy of the nineteenth century is a recipe for failure. Lucrezia Reichlin, a former director of research at the ECB, is Professor of Economics at the London Business School.
By Lucrezia Reichlin