Analytics, Economics, EU – Baltic States, Legislation, Modern EU

Current widespread frustration at the US “America First” policies rekindled hopes in the EU as a defender of the liberal world order. French President Emmanuel Macron proved that one can win an election with a pro-European message, an idea that most other centrist politicians in Europe seemed to have given up on. Finally, the UK’s PM, Theresa May’s botched election in the UK highlighted the vicissitudes inherent in the Brexit process.

Suddenly, the EU began to look no longer like a sea of problems but like a haven of stability: “we are witnessing the return of the EU rather as a solution, not a problem,” as European Council President Donald Tusk put it recently.

But is the EU really rising like a phoenix from the ashes of its multiple crises and conflicts? Despite some progress, not a single one of the structural problems besetting the EU has been resolved. The union’s passport-free Schengen Area and the eurozone remain fair-weather constructions not robust enough to cope with major asymmetric shocks. The EU’s geopolitical neighborhoods in the East and South remain turbulent and full of risks and uncertainties. Even the new driver of ambition for Europe (in the decline in U.S. interest to play the role of the main guarantor of the international order) brings as many threats and challenges as opportunities.

There is a risk that a complacent Europe may take its eyes off the various concrete challenges facing it. While EU leaders are justified in feeling confident to set new ambition policies for the EU, those goals need to be based on a solid understanding of the EU’s vulnerabilities and a realistic assessment of its potential.

Without such a reality check in political economy for all the EU member states, the current European euphoria might be short-lived and give way to another descent into pessimism and despondency. 

Vital EU’s political economy issues

Whereas globalization has brought great opportunities and benefits, significant parts of the European population have lost out from this process. High unemployment, stagnating wages, and rising inequality have added to citizens’ alienation. The sense that the prevailing economic arrangements are profoundly unfair to ordinary people, and that their children will end up poorer than themselves, is driving many people toward extreme political choices.

http://carnegieeurope.eu/2017/07/13/eu-is-not-out-of-danger-zone-pub-71528

EU Commissioner P. Moscovici underlined in the Peterson Institute for International Economics, Washington DC (end of April 2017), that the year 2017 has been both the EU’s economy fifth year of recovery (GDP growth is at the level of 2% during 2017-18) and “Europe’s pivotal year” (with wide investment gap in Europe and over 9% unemployment in eurozone and high private and public debts.). He mentioned, for example, the importance of politics (or political economy, in the words of P. Moscovici) in resolving EU problems. “Reversing socio-economic divergence in the eurozone is the prerequisite to ensuring the sustainability of the EU’s single currency and to containing rising populism which is a common challenge to all European countries”, he argued.

He made a strong statement underlining the importance of political economy: “the incomplete governance of the eurozone has produced or contributed to economic divergence rather than convergence between and within its members. And this divergence has in turn fuelled populism, which still has its roots in economic discontent. There is cultural discontent, but the cultural discontent comes from the economic discontent”. As to the common currency issues, former Commission President Jacques Delors said more than 20 years ago that “the euro protects but it does not stimulate”; it is still very true even to-day.

Source: http://europa.eu/rapid/press-release_SPEECH-17-1056_en.htm

The EU’s realities are such that lack of confidence frees people to start spending; several sectors of economy are under pressure: construction, retail and real-estate sectors with an improving outlook for ailing European banks, whose investments in those sectors continue to weigh them down.

Problems in the EU are growing:  a two-speed eurozone has emerged, with regional clusters of excellence (for example in southern Germany, Austria, Luxembourg, parts of the Netherlands, Flanders in Belgium, or northern Italy) and areas that are now clearly lagging behind. The legacy of the economic crisis – i.e. ballooning public debts, aging infrastructures, the erosion of public services, the degradation of human capital – is both pro-cyclical and unevenly distributed in the eurozone.

If this situation persists, argued P. Moscovici, it would be hard to be optimistic about the prospects for the euro over the next five-to-ten years. Therefore his message is that the member states and the EU’s institutions need to address political economy issues quickly and decisively.

Thus, there are clear signs that the overall dynamic in the eurozone is far from perfect: e.g. Italy's public debt is twice that of Germany; Germany's current account surplus is twice the eurozone average while country’s unemployment is half the eurozone average. And with this economic and thus social divergence, policy preferences are also becoming more and more polarized, both within and between the member states.

“This seems to indicate that European (and the member states) economic governance is not producing the right policy mix; partly because of the lack of the right policy tools”, noticed the Commissioner.

He mentioned that during the crisis, eurozone governance was strengthened significantly: the EU established the European Stability Mechanism as a precious politecon’s tool; the EU started to create the Banking Union, with a single supervisor, with a new framework for bank resolutions, and strengthened prudential regulations. Besides, the EU also significantly strengthened the coordination of economic and budgetary policy as part of the general EU’s political economy guidelines.  

Reforming EU’s Economic and Monetary Union: 3 pillars

The EU and the member states need solid “governance architecture and tools”, which would actively foster convergence within the eurozone and allow to act in the general interest of the member states and the citizens, underlined P. Moscovichi.

Thus, more cohesive eurozone must rest on three pillars:

- First, a fully-fledged Banking Union in perspective, to ensure that the banking sector in the eurozone is reliable and that non-viable banks are resolved without recourse to taxpayers' money and with minimal impact on the real economy. The Commission is working with the member states on further risk-reduction and risk-sharing measures to strengthen the Banking Union. This work proceeds rather slowly and sometimes painfully because the EU wants to strike the right balance between responsibility and solidarity among the states.

- The second pillar is stabilization and convergence tools. Convergence is very important both for the member states and the EU in general with the fiscal capacity for the euro area. This work has been going on in the EU for years (at least from 2013) refining the convergence’s concept. Therefore the concept is presently much more mature than it was in the aftermath of the crisis. It is now a matter of right political choice in the EU and the member states.

- The third pillar: enhancing democratic accountability. Decisions affecting the EU citizens’ wellbeing cannot be made behind closed doors by a bunch of finance ministers, said the Commissioner. Still quite often Commission’s meetings are held in secret. These decisions must be based on a sense of general interest within the euro area; they should be subject to stronger democratic oversight and accountability mechanisms. In this matter, the European Parliament must be at the heart of efforts to strengthen the legitimacy of eurozone decision-making.

The Commissioner expressed his strong belief “that we need a minister, or a High Representative for Economy and Finance in the eurozone”, who could (as is the case for the EU’s external policy), be at the same time a member of the Commission and chair of the Council, i.e. the Eurogroup. He advocated for a Commissioner who at the same time chairs the Eurogroup, which would be the right way to handle things. 

Danger of “centrifugal dynamics” in EU

The declaration adopted by 27 EU leaders on the sixtieth anniversary of the Rome Treaty in March 2017 contained a beautiful phrase: “our Union is undivided and indivisible”. However, it seems that this phrase is far from the realities: the EU member states have rarely been as divided as they are at present.

http://www.consilium.europa.eu/en/press/press-releases/2017/03/25-rome-declaration

In addition to the bitter North-South divide over eurozone governance, there is now an East-West division over burden sharing and solidarity in hosting refugees. The forthcoming negotiations on the EU’s next multiyear budget framework have already shown tough fights between net payers and net recipients about the size of structural funds, as well about budgetary shortfall arising from Brexit.

Democratic values and the rule of law, once supposed to be the common foundations of the EU, have become controversial due to illiberal policies in Hungary and Poland. And the wish of some old member states, led by France and Germany, to deepen integration if necessary in the framework of smaller groups of member states raises fears in other countries of becoming second-class European citizens.

Sharp clashes of interests and disputes have always been part of the EU’s experience, and overcoming them through painstaking technocratic negotiations has always been one of the union’s strengths.

However, argued Carnegie Europe group, three aspects of the current situation seem new and problematic. First, the number of controversial issues is higher than before. The EU and in particular its main crisis-management forum, the European Council, are not good at “multi-tasking”. Big challenges tend to monopolize leaders’ attention and crowd out all other concerns. The current proliferation of problems and disputes could therefore easily overstretch the EU’s negotiating capacity and result in delays and blockages.

Second, the dividing lines in a number of areas coincide: on refugee burden sharing, structural funds, multiple-speed integration, and access to social services for EU workers abroad, the same old and new member states are pitted against each other. These dividing lines point to a deepening rift between the old-EU founding states and some Central and Eastern European countries that joined in 2004 and 2007. In the past, the EU often overcame divisions through broad cross-cutting package deals. But if the disputes become heavily politicized and aggravated by Euroskeptic and illiberal policies in some countries, the situation might become difficult to manage.

Third, several years of crisis have eroded solidarity among the member states, and populists have reduced governments’ space for making compromises. Trust among the EU member states and institutions has declined: many countries seem to be going through a phase of re-nationalization. Governments prioritize direct national interests and are reluctant to share further powers at the European level. Leaders are confused and divided about the future course of European integration: “the old federalist vision of the EU is dead, but no new narrative has replaced it”, argued the Carnegie Europe group.

http://carnegieeurope.eu/2017/07/13/eu-is-not-out-of-danger-zone-pub-71528

Issues of EU’s flexibility

To cope with the growing diversity among EU member states and expand the room for maneuver for individual governments but still allow for deeper integration when necessary, the EU will need more flexibility.

That includes the possibility of smaller groups of states moving forward. Without enough flexibility, centrifugal forces could tear the EU apart. But if the union has too much flexibility, solidarity and cohesion among the member states will disappear.

“Multiple speeds” scenario is therefore inevitable, but as negative reactions particularly in Central Europe have shown, it can also be highly divisive. There is a need for strong safeguards to ensure that differentiation does not result in fragmentation or “different classes” in the EU’s membership.

The EU should aim for as much unity as possible and as much flexibility as strictly necessary. Variable speed needs to remain a measure of last resort. Narrower groups of countries should remain open for other member states to join later on the basis of objective criteria. And the EU needs to preserve a strong common foundation that serves the interests of all members. The Union will therefore have to protect the integrity of the single market: with its free movement of capital, goods, labor, and services, and further develop its legal and institutional bases.

Without doubt, the EU is regarded by most experts to be in good shape presently; however, improvements are in a considerable extent psychological due just to better economic outlook in the future. Creating new confidence in the “EU project” could be short-lived if the EU leaders and those in the member states cannot see the seriousness of the remaining external and internal challenges.

It is better that the Union’s leaders should turn this confidence into positive energy to develop realistic strategies to tackle these problems. Both the EU and the member states need the political economic drive to move forward and re-discover the sense of direction to progress.

In this regard, the EU and the member states will have to deliver better results on at least two fronts:

- First, the EU’s integration process must better protect its citizens; it doesn’t mean economic protectionism. European citizens need to feel secure: socially and economically, including other security issues (e.g. preventing terrorist attacks, refugee crisis, etc.). Thus, the benefits of globalization must flow to all parts of society: presently most people feel that they are the losers of globalization and that they are ignored by politicians. In this situation, it is impossible “to beat populism” and Europeans feel vulnerable in a globalization process that does not distribute extra points of growth fairly.

- Second, the EU must become more accessible and democratic being response to those who falsely urge voters to “take back control”, a motto for various populists. Transparency, exemplarity, robust parliamentary oversight procedures must be developed, regardless of the issue under discussion: either the legislating on the single market in the EU or on agriculture in the member states.

Taken together, these elements may help fight the descent into populism in Europe, which is very much a political priority for the Commission and a political economy agenda in the member states. Ideological and political confrontation between populism/Euroscepticism and pro-European trends is still going on; the dominant feature of European politics today seems to be its great volatility.