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Re-Winning Europe

MADRID – The European Parliament election revealed the full extent of voters’ frustrations, discontent, and lack of confidence in both the European Union and their national governments. The EU’s institutions will now confront a legislature marked by growing disaffection, while rising Euroskepticism is bound to have a profound impact on national policies. If the EU is to retain public loyalty, it must listen up and proceed to action. A program of strategic priorities is in order.

No doubt, the economy must come first. Much progress has been made on new instruments of integration, such as the European Stability Mechanism (ESM) and the banking union. But much more remains to be done.

The incoming European Commission must boldly stimulate economic growth and employment, so that southern European countries can reconcile their deficit- and debt-reduction goals with policies targeting growth. Ultimately, only the latter will allow for long-term fiscal sustainability. The Commission must also launch active labor-market policies to reduce unemployment, above all for young people. The recovery of dynamism, demand, and consumption depends on its success.

No pro-growth policy is as important as stimulating public and private research and development. The EU should, for example, allow R&D spending (and some spending on active labor-market policies targeting young people) to be left out of member states’ deficit accounting. This principle has been applied to aid to the financial sector; it is no less appropriate for investment. And, on the revenue side, Europe needs a minimum of fiscal homogeneity, at least in terms of corporate taxation, in order to avoid a race to the bottom.

Now that the worst of the euro crisis seems to have passed, it is also vital to fix the deficiencies in the monetary union’s institutional design. The progress made on the banking union is important, but two key components are still needed: first, a true rehabilitation of the European banking system to ensure that credit flows resume throughout the eurozone, while averting deflation; and, second, debt mutualization to protect vulnerable countries from market gyrations. The European Central Bank’s role is fundamental for both, as well as in continuing to promote growth (both through expansionary monetary policy and by facilitating market access for countries whose financing still depends on the ECB’s implicit guarantee).

But Europe must address more than just the economy, for the world will not stop and wait. The opportunity to reconsider European foreign policy is clear. And, here, Europe’s vision should center on the challenges confronting its three neighboring regions.

Europe’s eastern neighborhood is marked by the crisis in Ukraine. Following Russia’s illegal annexation of Crimea, and further Russian revanchism in eastern Ukraine, relations with Putin’s Kremlin need to be reconsidered. Geographic proximity, historical ties, and energy dependence make Russia a key partner for the future of Europe, but Putin’s foreign policy poses a direct challenge to European security and unity.

Meanwhile, Europe’s southern neighborhood is still caught up in a highly uncertain process of sociopolitical transition. In some cases – such as Tunisia – the process has been successful; elsewhere, as in Syria, the course of events has been discouraging, to say the least.

To some extent, Europe seems to have abandoned the Mediterranean’s southern shore, compensated in part by flows of economic aid from the Gulf countries. For the Arab world, which was previously reluctant to display such solidarity – witness Palestine, where European money sustains basic services – this is a welcome novelty. Nonetheless, it will be difficult for North Africa to recover without greater EU involvement.

Europe’s third neighborhood – and the most difficult to manage – stems from interdependence, which makes the entire world Europe’s neighbor. Economic, political, and social ties, not geography, determine this neighborhood’s ever-shifting borders, within which are Europe’s most important partners, from the United States to China to other emerging countries and non-state actors. Managing them requires a clear position in favor of global governance and effective multilateralism at all levels.

For Europe, interdependence is strongly correlated with energy security. Making progress toward an energy union is crucial and should be one of the new Commission’s main objectives. A common energy policy must be based on the single market and collective planning of investment, while also accounting for the mix of sources and purchases from third parties.

This presupposes not only truly EU-wide regulation – which is, at present, excessively intergovernmental due to the design of the EU’s Agency for Cooperation of Energy Regulators – but also more infrastructure, including electrical lines and gas pipelines, connecting member states to one another. This will require more rapid execution of the Trans-European Energy Networks (TEN-E).

Moreover, the EU should contemplate centralizing the purchase of energy from third parties, as proposed by Polish Prime Minister Donald Tusk. At the very least, greater transparency in individual member states’ third-party purchases is needed. For example, today purchase contracts between companies in various member states and Russia’s state-owned gas giant Gazprom are confidential.

In this process of energy integration, the banking union offers clues about how to secure common interests and maintain a balance among the EU’s main institutions – the European Commission, the European Parliament, the European Council, and the ECB. Such concerns should also guide the new Commission in the design of a common migration policy, one that not only silences the xenophobes, but that also gives coherence to the border-free Schengen Area – one of Europe’s greatest achievements.

The EU’s institutions need to revitalize themselves and recover the support of Europe’s citizens. They must demonstrate their efficiency, capacity to innovate, and ability to invigorate the continent with renewed dynamism and drive. Setting the right priorities is the first, critical step.

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