Efficiency and equity: Implications for a new pattern of European integration

We need some form of deeper Eurozone integration, to mutualise and share risks.

Former Senator of the Italian Republic, Professor at the College of Europe and at the Sapienza University
04/07/2017

Over the last few months the wind has positively changed in Europe. From the fear of an irreversible crisis in the face of the advance of populists, we have moved to a widespread perception that a European counter-offensive is on the way.

 

But more caution is needed on the future of the European Union. Many problems remain to be addressed and all are difficult. With Brexit and the new Trump administration, the external context has profoundly changed. It is clear that Europe cannot stand still. It must change to mark a major break with the past.

The proposal of the Progressives should be to revive and build a more flexible EU

As to the direction, a first agreement between the member countries, at least France, Germany, Spain and Italy, is on the way towards a differentiated speed Europe in which not all countries must participate from the beginning to all advances in integration.

With this perspective, the proposal of the Progressives should be to revive and build a more flexible EU, a multi-speed Europe, which is able to generate – as in the past – a sort of virtuous circle made of high efficiency, high equity and high solidarity among member countries.

Among the most important challenges are three: common defence and security, common immigration policies, and better governance of the Euro area. Defence and external security are certainly the most favourable ground for member countries agreement, due to the current convergence of goals and policy tools in many EU countries. If Europe has in the past subcontracted its security to the United States, it is today widely recognised that Europeans have to take on more responsibility for their defence. A step by step journey but with firm initiatives to move immediately.

There is also a remarkable common interest and purpose of action among the major EU countries on immigration issues. A possible compromise is in this case made particularly relevant by the domestic tensions and populist challenges created in every country by the migratory waves and the related problems.

The greatest challenge is, however, about the third issue, namely the European economy and the governance of the Euro area, since it is needed a strong discontinuity with the past to pursue the three goals of higher efficiency, solidarity and equity.

First of all to increase the real and potential growth of the Euro area and provide adequate job opportunities, in particular for young people. The Euro area is in its third positive year of economic recovery but growth distribution is very unequal across the EU countries. This divergent pattern is not sustainable. Higher and balanced economic growth should be restored. In this regard the ECB’s non-conventional expansionary monetary policy (QE) is positive but not enough. It must be backed up by other measures and policies. Certainly, more could and should be done to speed up and intensify ongoing reforms at country level. But they can bring positive effects only in the medium and long-term. To enhance their positive effects, policies supporting aggregate demand – like expansionary fiscal policies by using the so called ‘fiscal stance’ of the EU – should be put in place. And this is not being done today.

The European Monetary Union has changed in recent years but it is far from being completed. The current unfinished EMU structure is extremely fragile.

In addition to fiscal policies, an important contribution to higher growth of the Euro area may come from the revival of investments so to increase both countries’ aggregate demand and supply capacity. Today public investments could easily be funded in the present era of negative or very low interest rates and could contribute even to reduce the national debts of countries by generating additional income, production and employment.

But to implement these new policies a change in the institutionalised settings is needed. The European Monetary Union has changed in recent years but it is far from being completed. The current unfinished EMU structure is extremely fragile and is exposing the euro area at risk of future severe disruption. We need some form of deeper Eurozone integration, to mutualise and share risks, from a proper banking union to a common fiscal capacity. There are some areas where member countries are facing common risks –a sort of public goods or collective action problem – and require a common Eurozone or European approach. The creation of a kind of Eurozone fiscal capacity or budget should have two main functions: investment into future and macroeconomic shock absorber.

In other terms, we need to foster inclusive growth in Europe, by combining more efficiency and more equity at the same time.

Finally, the revival of growth should not be done in purely quantitative terms, but that growth should also be fair. One shouldn’t repeat the same patterns of exclusion and income inequalities made in the past two decades. In other terms, we need to foster inclusive growth in Europe, by combining more efficiency and more equity at the same time. To have an inclusive growth one should create benefits for all segments of a country’s population, so to generate a fair distribution of the growth opportunities. Various policies (labour policies, welfare and social mobility measures, redistributive fiscal policies) can contribute to it.

To conclude, we need policies to bring European economies back to robust growth, associated with more efficiency, solidarity and fairness to regain the trust of citizens to Europe and the European integration process. It is also very clear that a more efficient, social and equitable Union can only be achieved through a strengthening of the democratic and representative institutional mechanisms in Europe. This link between short term and long term issues should be based on a common strategic vision. This would show European citizens that Europe is not part of the problem but can be a fundamental part of the solution.

 

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