Europe’s responsible solidarity

By AzerNews

By Enrico Letta
Prime Minister of Italy

Next year will be crucial for the European Union. EU citizens will elect a new European Parliament, which will vote for a new president of the EU Commission. There will be a new president of the European Council and a new high representative for foreign and security policy as well.

This change of top EU personnel represents an ideal opportunity to debate what Europe stands for, and how to create a more stable, integrated, and prosperous union - one based on solidarity, interdependence, and enlightened self-interest.

Over the past few years, Europe has made extraordinary progress in responding to the financial crisis. But the future of Europe's Economic and Monetary Union (EMU) depends on three crucial components: greater economic convergence, greater openness within the single market, and greater resilience to asymmetric shocks. Achieving these goals does not depend on (further) technical discussions, but on forging a new political consensus in favor of a more supranational approach.

First, greater economic convergence within the EMU requires a stronger framework for the coordination of member states' economic policies. Indeed, the new European Semester -­ the EU's annual round of policy advice and surveillance of member states - is one of the main advances made in response to the crisis.

This system reflects the principle that "economic policies are a matter of common interest." A proposal now stands to extend ex ante coordination to major economic reforms and to introduce some form of binding contractual arrangements between EU institutions and member states, which would ensure that the reforms Europe needs can be delivered.

But these reforms are often complex and painful to implement. Some require financial investments that are not possible in a period of fiscal retrenchment, and some place too high a demand on voters' patience. While EU citizens are ready to accept the sacrifices needed to reinvent their economies, they need to see a payoff on the horizon.

So, if we are serious about the need to support structural reform in member states, greater surveillance and policy coordination must be matched by a system of limited and targeted financial incentives. These incentives can expand the range of options for governments struggling with fiscal consolidation and provide a signal to the European public that the EU is a partner supporting their countries' reform efforts.

Second, a better EMU needs a real single market, which is Europe's best means of restoring growth and righting internal imbalances. But, so far, progress toward the abolition of Europe's remaining trade barriers has been slow, and signs of resurgent economic nationalism are spreading throughout the continent.

So far, we have liberalized national markets on the assumption that private companies would merge and integrate across borders. But this has resulted only in a patchwork of interlocking national markets, rather than a true single market, which is one reason why the EU lacks industries of a true continental scale. For example, the EU has roughly 100 operators in the telecoms sector; the US has just five, and China has only three.

The solution cannot be a simple discussion of new directives or regulations. A new approach is needed. Only if we give up our national reflexes will we be able to move the single market to its next stage of development.

Finally, a better EMU should be more resilient to asymmetric shocks. Ideally, this requires some form of risk-sharing and financial solidarity. Here, the EU is not starting from scratch; important steps were taken during the crisis. The European Financial Stability Facility, the European Stability Mechanism, and the European Central Bank's "outright monetary transactions" scheme are all forms of collective insurance.

Yet every move toward greater financial solidarity among member states has met with resistance and fueled a growing divide between debtor and creditor countries. Solidarity in Europe cannot be construed as a moral obligation of some to help others; there simply is no sense of community in the current EMU that could support permanent fiscal transfers from one region to another. But this does not mean that Europe needs to abandon the search for better ways to pool its strengths. Solidarity can also be interpreted as enlightened self-interest, a form of reciprocity from which everyone benefits in turn - without permanent transfers.

Viewed from this perspective, it might be possible to create a fiscal capacity for the EMU, at least initially, that could provide the financial incentives for implementation of major reforms at the national level, expanding later to other stabilization functions and perhaps issuing bonds to support public productive investments at the EU level. Such a fiscal capacity would be based on the principle of budgetary neutrality over time.

The EMU's old architecture and its political foundations have been shaken. We must build a new economic edifice atop new political foundations. A purely intergovernmental approach will not work. Common EU-wide solutions are necessary, although they require member states' willingness to pool a greater share of their sovereignty.

This might be tricky, given today's general disenchantment with Europe. But offering a clear prospect of a better and fairer EU is the best way to mobilize public opinion and face down anti-European political forces ahead of next year's European Parliament election.

Copyright: Project Syndicate