FLORENCE/ANN ARBOR – The eurozone has reached a crossroads. European policy prescriptions have proven inadequate, and there is no consensus on the right balance of fiscal consolidation and economic stimulus – or on how much fiscal solidarity a functioning monetary union requires.
Disagreement over Eurobonds exemplifies the European Union’s current dilemma. Overstretched sovereign borrowers on the eurozone periphery argue that issuing government securities backed by all eurozone countries is the only way out of their “debt trap.” But, without common economic governance, northern Europeans contend, mutualization of debt would encourage free-riding by debtor countries.
In fact, both sides are right. So, in order to neutralize moral hazard, northern European countries seek a guarantee that their profligate peripheral neighbors maintain discipline, reflected in steps taken toward greater Europe-wide governance of national fiscal policies. Indeed, EU leaders are focusing on more European rules to discipline national governments.
But, even if fiscal discipline is achieved, it will not be enough to fortify the monetary union. Indeed, a country’s fiscal position depends on its broader economic environment and, in particular, on its trade balance. A monetary union cannot comprise only states running trade surpluses; hard times demand costly transfers.
Moreover, a system that focuses almost exclusively on EU rules imposed on its member countries to guarantee a well-functioning monetary union is politically unsustainable. Either national democratic processes will prevail, rendering the rules ineffective, or the rules will be strictly enforced, and the limits that they impose on national political systems risk plunging democracy itself into crisis.
German Chancellor Angela Merkel is correct that “more Europe, not less” is the only solution. But this requires even more than she is willing to concede.
In fact, the way out of the euro crisis is a New Deal for Europe, with governance at its heart. Europe’s transfer union must give way to a genuine fiscal union, which implies EU resources and policies that are sufficient to correct the monetary union’s inevitable asymmetries.
Consider the United States, the world’s most well-known, and arguably most successful, currency union. It became an “optimal currency area” only in the 1930’s, when the federal government gained the power to ease asymmetric shocks, for example, by conducting fiscal transfers.
To be sure, Europe’s New Deal would not require a US level of governance. But certain powers are crucial, including an effective unemployment-insurance system, meaningful Europe-wide policies that create positive incentives for national governments, and structural transfers from the EU to member states linked to those policies. To accomplish this, Europe needs its own resources, funded by taxes levied on EU-related economic activity and bonds guaranteed through the EU budget.
The New Deal’s second crucial ingredient is politics. While European governance will naturally take on more political relevance, as politics follows power and money, Europe’s leaders must take an active role. Political decisions and institutional changes must be salient to voters in Europe-wide elections.
To this end, European parliamentary elections must be augmented by a genuine electoral competition for President of the European Commission. This would give the position real political capital, provide legitimacy to EU spending, and catalyze a fundamental shift in citizens’ perceptions of integration. Rather than arguing for or against Europe, political contestants would debate contrasting visions of Europe.
To reach that point, however, Europeans must acknowledge that their house is on fire. If the EU’s member countries do not act together to put it out, it will only spread – consuming the common currency and threatening the European project of “ever closer union.” Only a true political and fiscal union can legitimate the level of interdependence and solidarity that a monetary union requires.
European leaders, when told that what is needed is also politically impossible, should remember that in the past saving Europe required making the impossible possible. Indeed, they should summon the spirit of Jean Monnet, an EU founding father who saw opportunity in every crisis. Just as Monnet forged ahead in the dire conditions of post-war Europe’s ravaged economies and societies, so today’s leaders should take advantage of the current crisis to establish a New Deal for Europe – and a new vision of Europe’s future.