Friday, October 31, 2014
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Europe’s Two-Speed Future

PARIS – For three years, the euro crisis has threatened not only to unravel the eurozone, but to bring down the entire European Union with it. Although the pressure from financial markets has moderated, for now, a long-term resolution to the crisis remains an existential priority for the EU.

In today’s highly competitive global economy, European countries’ relatively small size, aging populations, and excessive indebtedness, combined with a lack of energy resources and insufficient investment in research and development, mean that their high living standards and generous social-welfare states are in jeopardy. Individually, they cannot compete with emerging markets; they need a strong EU to face the challenges posed by globalization.

But the eurozone’s architecture – in which monetary policy is centralized, but budgetary and economic policies are left up to individual governments – is not viable in the long term. Although Europe’s leaders have made some progress on institutional reform, the measures taken so far will not lead to real convergence of economic and budgetary policies, or to genuine economic union. As a result, they will fail to reassure financial markets.

Given that treaty change is politically unfeasible, establishing a “two-speed Europe” – in which a core group of countries pursues deeper integration more quickly than the rest – is the EU’s best option for reaching the level of cooperation needed to escape the crisis intact. This can be accomplished in two ways.

The first option would be to progress de facto toward a two-speed EU without establishing further legal commitments. Eurozone countries, together with others willing to join the euro in the future (the “eurozone plus”), could simply decide to use the legal means already available to increase cooperation.

Ideally, this cooperation would take place within the EU’s institutional framework. If all eurozone members participated, Article 136 of the Treaty on the Functioning of the EU could be used to support their action.The scope of this provision – which says that, “the [European] Council shall…adopt measures specific to [euro] Member States,” and that “only [euro] Member States…shall take part in the vote” – is wide. In addition, Article 138 would allow unified representation of the eurozone in the International Monetary Fund and the World Bank.

The group could then extend cooperation to three other policy areas:

·         Minimal harmonization of tax laws (such as a common basis for assessing corporate taxation) and social policy (such as further liberalization of national labor markets to encourage labor mobility);

·         Common policy measures on immigration, linked to labor-market needs;

·         Closer judicial cooperation – again aimed at encouraging mobility – in civil matters with cross-border implications, specifically concerning contracts and family law.

The group could also take some measures outside the EU framework. Indeed, if all eurozone countries did not participate, such outside cooperation would be crucial, given that Articles 136 and 138 would no longer apply. This could include measures to strengthen the European Stability Mechanism and the Euro Plus Pact (designed to enhance economic policy coordination among member states), de facto cooperation within the Bretton Woods institutions, and voluntary approximation of national laws in certain areas.

Participating countries would have to decide whether to commit to a common set of policies, or to reserve the right to opt in on a case-by-case basis. Cooperation on matters related to the EU’s Economic and Monetary Union (discipline and solidarity) should be obligatory. The involvement of most, or all, current and future eurozone countries would enhance the group’s coherence, making it easier to win public support for cooperation in other areas.

Pursuing this option would require that the decision-making process be legitimate. In the Council, as in all cases of “enhanced cooperation,” only participating members have the right to vote. In the European Parliament, by contrast, all 27 EU members participate in the decision-making process, even concerning measures that will affect only the 23 “eurozone plus” countries (the 17 eurozone members and the six that have agreed to the Euro Plus Pact) – a method that could pose a political problem. In any case, national parliaments should become involved in order to enhance the legitimacy of decisions.

The second option would imply an international agreement, in addition to the EU treaties, which would legally bind participating countries, enabling them to commit to establishing a genuine economic union, and to define the organs and rules that will govern their cooperation.

Such a treaty would take time to be negotiated, ratified, and implemented. But a clear, precise announcement of the decision to pursue it, together with a bold European Central Bank policy in line with its recently announced bond-purchasing program, might be enough to convince both financial markets and EU citizens that a lasting solution is within sight.

The eurozone’s path to genuine economic union will be fraught with political and institutional challenges – from determining substantive areas of cooperation to protecting the rights and interests of all EU countries and safeguarding the unity of both the internal market and foreign relations. But navigating that path is the EU’s only option.

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  1. CommentedLucas Klostermann

    In the second paragraph the article provides a problem statement, the rest of the article however doesn't articulate how the proposals would provide a solution to those problems.
    I would like to see proposals for new EU policies or stronger instutitions accompanied by an analysis based on underlying goals; what do I want to achieve for EU citizens and why do proposed measures work in that direction. Too often policies or institutions seem to have become goals in themselves.

  2. CommentedDanny Cooper

    One important institution to reform is the central bank. For a strong economy you need an efficient and effective system of monetary policy implementation. Under the current monetary system this is not being done because the monetary transmission channel between the central bank and the economy is blocked. So instead of depending on banks to pass on lending just modify the central bank so it deals directly with the public. Heres an explanation of how such a proposal could work: internationalmonetary.wordpress.com

  3. CommentedJoshua Ioji Konov

    Just to bring some reality to this manuscript... in the US as well in China and Japan the whole system of economics has been evolving from a pro-debt as a main economic agent economics into a pro-inflation as a main economic agent economics, the Quantitative Easing and numerus Stimulus and Fiscal packages show this new direction, whereas the EU has been stuck on its trickle-down debt related position that have underperformed or even not performed at all, all we can see the results in EU. The rich countries as Germany impose their debt related policies to the rest for no questions they are the debt holders, however the slow down in recession EU finally will impact everyone member economy. http://joshuakonov.wordpress.com/

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