Is the European Union an unacknowledged success?

Analisi - 29/06/2017

A few weeks ago, the Treaty of Rome celebrated its 60th anniversary but in a relatively modest way. This is hardly surprising as the EU’s tainted image has weighed more than the successes it has notched up since 1957. Nevertheless, that could change in 2017 according to a recent report from the Pew Research Centre. It says favourable views of the EU have been gaining significant ground compared to 2016 in most leading countries. (English version)

The EU and its institutions overcame an unprecedented crisis in 2010-14 but the future looks uncertain. The UK’s exit looks like a failure for the Union and will deprive it of a major player. And exit talks will inevitably be difficult and complex. In recent years, elections throughout Europe have shown that a large number of Europeans have a sceptical, and sometimes openly hostile, view of the Union. In fact, the polarisation between sovereignist and pro-European views has even become a fundamental feature of political debates in most member countries.

An assessment of the Union today necessarily reflects the numerous problems it has had to deal with in the last 10 years. The 1992 Treaties were not designed for such shocks and European institutions have had no choice but to complete and/or invent rules. The last two European commissions were hardly models of inspiration and imagination simply because circumstances dictated concentrating on the European project’s short term survival rather than its long term future.

1. Diagnosis

The European Commission, Council and Parliament are often seen by the general public as remote institutions with hazy roles and complex and technocratic workings. Rather than strengthening its structures, the Union chose to expand membership. In particular, the decision to move from 15 to 25 member states in 2004, though no doubt based on principle, actually ended up harming the EU’s image and making management of the crisis more complex. 

Disillusions in Europe are nothing new but mounting support for Euro sceptical parties shows that they have risen sharply. In recent years, geopolitical issues and migratory pressures have been partly to blame as has the social cost which is still being paid in many countries. The management of the Greek crisis was particularly damaging. EU institutions have, sometimes justifiably, been criticised for not protecting European citizens from the impact of globalisation.

2. The conditions needed to help Europe advance

With the UK preparing to leave, the need to relaunch the European project has never been more important. And, despite the prophets of doom, Brexit seems to have galvanised public opinion and forged a remarkable unity of purpose among the EU’s 27 member countries over which principles and priorities to stress in the ongoing discussions with London. At the same time, Donald Trump’s election, and the subsequent geopolitical uncertainties, have generally cooled Atlanticist fervour in Europe and led to calls to look again at that ever-recurring notion, the European defence initiative. In addition, political and economic conditions have not been as favourable in 10 years. 

Progress in Europe has always depended on strong Franco-German cooperation



For both the initial six-nation Community and the 28-member Union, progress in Europe has always depended on strong Franco-German cooperation. In 1992, Jacques Chirac’s RPR party split over the Maastricht treaty referendum. In 2005, François Hollande’s Socialist Party was torn apart by the referendum on ratifying the European constitution. Both men went on to become President but these events seemed to have traumatised them; so much so, that they approached any subsequent major European initiative with extreme caution. But now that Emmanuel Macron is President, and his strongly pro-Europe party firmly in charge in the French assembly, a new chapter has been opened. Of course, a major Franco-German initiative is unfeasible before September’s Bundestag elections but Angela Merkel has already indicated that she would be ready to talk about reinforcing the eurozone "if the conditions were right". This is a big change compared to Berlin’s rigidity in recent years. 

The creation of a Franco-German working group was announced in May. Its mission is to make suggestions on how to further eurozone integration and its brief includes budgets and tax, coordination of economic policy and how institutions work. A meeting of the relevant French and German ministers is scheduled for July 13 and could reach decisions on investments. 

But Berlin’s confidence and willingness will depend on France first making concrete progress over reforming its government finances. If Paris succeeds, it will have more weight in the talks. France and Germany have always had different conceptions about Europe. This is down to deep-seated cultural differences and diverging assessments of long term prospects such as each country’s demographics.

 

But the principles Germany defends do not preclude a certain sense of pragmatism. Angela Merkel has, in fact, often bowed to particular circumstances in recent years and gone on to embrace change. Without the financial crisis, she would never have allowed the European Central Bank to adopt a form today that is radically different from that described in the Treaties. There are some in Germany who regret these changes but the ECB is one of the rare European institutions to have risen to the occasion in recent years. 

Looking beyond Franco-German cooperation, European leaders are fully aware that sticking to the status quo would be a direct threat to the EU’s future.

3. The economic situation is now more favourable

The eurozone grew by 1.9% in 2015 and 1.7% in 2016. Our economic research department expects it to grow by 1.7% this year and by 1.8% in 2018. Car sales, construction, investment and advanced indicators have all been recovering. The EU is the world’s biggest exporter and is largely benefiting from the ongoing upturn in emerging countries. 

 

There are still doubts over Greece and Italy but countries like Ireland, Spain and Portugal, which were all badly hit by the European crisis, have made structural progress. Budgetary policy has shed much of the austerity bias seen in previous years and budgets in some countries like the Netherlands have even contributed to growth. Even Germany is now arguing for a more flexible approach and increasing government spending (although it refuses to address the issue of its budget surplus). 

Meanwhile, monetary policy is still strongly biased towards harnessing liquidity and low interest rates to underpin growth. Although the ECB has reduced its government and corporate bond buying from EUR 80 to 60bn a month, it has extended the programme to 2018 at least. And as a result of its efforts over the last 5 years, financial tensions have practically evaporated and interest rates have fallen back. Commercial banks have posted the most remarkable performance: although they still have high levels of non-performing loans, they have largely cleaned up balance sheets and returned to their traditional role of funding the economy. After the 2016 alert, even Italy’s banking problems now look under control.

In conclusion, the EU is enjoying a period of confidence. Unemployment is admittedly still high but it has fallen from a peak of 11% to 8% and, for the eurozone, from 12% to 9.5%. And in a sign of a slow recovery, household confidence levels are now flirting with pre-crisis highs and company confidence levels have also recovered. In any case, the economic and financial situation is no longer a source of concern which makes one less obstacle in the path of European reforms.

4. The Euro's strauctural weaknesses

Even if the EU represents more than the eurozone, the single currency and its challenges play a major role across all member countries. The introduction of a banking union is not yet perfect but it has addressed one of the zone’s most criticised failings. The creation of a sole banking supervisory authority (2014) and a banking resolution procedure -along with the introduction of deposit guarantees and the European Stability Mechanism- have all reinforced the single currency and the stability of Europe’s financial circuits. And even the ECB’s foremost detractors recognise that it rose to the challenge during the European crisis. 

Euro sceptics agree that some progress has been made but claim that currencies are not just about technical aspects. The euro’s fundamental weakness derives from the EU’s lack of budgetary coordination, a notion which does not even feature in the treaties. The 2012 Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), and the 2013 Franco-German agreement in principle on budgetary cooperation produced no concrete results. 

Today, there are several possible ways of introducing controls on government finances at the European level. The procedure could involve the European parliament or an ad hoc institution. The UK was opposed to these solutions. Germany is closer to accepting them but firmly against a solidarity clause which would mean it picking up the bill for other countries’ budgetary misdemeanours. Creating a European finance minister is possible providing he or she defends budgetary discipline. As for eurobonds or debt mutualisation, Italy’s current financial situation makes it a tricky subject to broach.

5. Moving towards more integration

The Treaties revealed their institutional limits during the financial crisis. As a result, governments focused on national solutions at the expense of the EU. But the inadequate nature of the Treaties actually resulted in often improvised mechanisms and even the creation of EU institutions. Banking supervision and the financial stability fund are examples of Europe’s capacity to react when a situation requires strong action. 

Harmonising personal taxation will be easier than doing so for companies



These arrangements need to be topped up with budgetary coordination and that, logically, should entail fiscal coordination or, at least, closer tax regimes. France is in favour and Spain recently suggested common economic governance including a fiscal and financial union. That would be a major milestone on the road to European construction but harmonising personal taxation will be easier than doing so for companies. Ireland, Luxembourg and the Netherlands have long adopted very different tax systems to other EU member countries. As tax competition is entrenched in Europe we can expect some countries to resist change. However, as with banking confidentiality, gradual changes could be introduced ahead of total tax convergence. 

There are many areas where integration can move forward. CAP reform is a chance to overhaul the farming model. Structural funds, energy issues and infrastructure are just some of the areas where the EU has room to act and reinforced integration will make projects much more coherent. However, the EU is no longer leading the way in environmental standards. 

The 2014 European Fund for Strategic Investments (EFSI), the so-called Juncker plan, has been extended to 2020. Its success proves that the EU is capable of setting up tools to underpin integration. Its financial resources have been raised from EUR 315 to 500bn. The European Investment Bank (EIB) has a key role in financing the fund.

6. Are we heading towards a two-speed Europe?

By moving towards various integration levels, the EU Commission and Council of Ministers have acknowledged that the Union is composed of countries with different economic models, productivity levels and labour costs. The risk that small member states will be unhappy is a real possibility but overall coherence should not end up being compromised. In any case, reinforced eurozone governance will increase the gap with EU countries that are not concerned. In what is still a disparate grouping, it would be counterproductive to impose a single set of requirements.

Such a shift in the rules would help sidestep the obstacle of unanimous voting in the European Council. This Treaty rule only covers the Council’s exclusive decisions but it is undeniably complicated. In contrast, European parliament decisions are subject to qualified majority voting.

7. External relations

As the world’s biggest exporter, the EU’s commercial policy will be a key proposition for its future. The Commission recently released a discussion paper that reflects shifts in the European doctrine on dumping, government subsidies for export countries, reciprocity on public procurement and social and environmental issues. The same concerns have led to criticisms of non-EU companies like Google and Apple which appear to have flouted, or sidestepped, European competition rules.

8. Is Federal structure possible?

Managing a grouping which is as complex and varied as the EU requires a specific model. Despite many shared interests, arbitration will be needed to settle conflicting viewpoints. Is a federal structure a realistic option? In practical terms, a federal structure would demand member countries to abandon too much of their sovereignty and Germany has made no secret of its reluctance. 

However, the situation has changed. Faced with the UK’s exit and the Trump administration’s attitude, the EU is at a crossroads and must assert itself both inside and outside the union. Despite some agreements over cooperation, defence has so far been only a marginal theme. But the Union’s internal and external security, and how this fits in with NATO, must be reconsidered. At another geopolitical level, the EU’s migration policy has clearly reached its limits.

The Union’s institutions need to change the way they work. The Treaties showed their limits during the crisis but they also revealed flexibility when there was a willingness to interpret them in this way. In that respect, sentiment in the EU has changed and transformism is after all embedded in the European project. This would be a first step before tackling the complex and uncertain procedure of modifying the Treaties.


The EU must be reinvented

The euro crisis triggered a barrage of criticism: the European project was doomed to failure, monetary union would collapse and so would the EU itself. But the EU has proved more resilient than expected and can even look like a model of stability. Even so, sticking to the status quo is not a lasting option.

Since the European Coal and Steel Community (ECSC) was set up in 1951, the EEC and subsequently the EU have often been forced by recurrent crises to reinvent themselves. Now that the EU’s legitimacy is under attack, it must go through a complete overhaul.

60 years of European construction have brought numerous benefits to Europeans. But arguably the biggest problem is still finding a way to explain this to them in simple terms. The European project is essentially political. This is a force which helps it proceed past every stage but it is also its weakness as Europeans themselves have to define the project’s future shape.

That means the EU first and foremost needs a political initiative but it can only succeed if the EU is seen to be more efficient and it will only convince people if their grievances are listened to. The EU has to show that it is tool for solidarity and protection as well as a single market and an area of free movement. A social Europe is logically one of the values underlying European construction.

Public opinion in the EU will be won back by concrete achievements but, looking beyond the successful Erasmus programme, also by the EU’s cultural efforts to re-enchant the European ideal.

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