Olivier Marty and Damien Ientile / Nov 2020
Paolo Gentiloni, European Commissioner for the Economy. Photo: European Union, 2020
Notwithstanding the ambitious financial packages agreed to in March and July to counter its effects, the current economic crisis emphasises an old phenomenon; namely, the widening gap between the original concepts and rules of the main economic policies of the European Union, and the current practice. This raises several problems; it limits the legibility and credibility of the economic and financial framework of the EU, corrodes its legitimacy, and hampers cohesion between member states. In this context, we think it is now appropriate to reassess the EU economic architecture and impart it a renewed legitimacy at the highest level.
The original concepts and principles of the main EU economic policies are called into question
The issue has been most evident within monetary policy: the financial and Eurozone crises (2007-2012) and the current downturn have propelled the European Central Bank (ECB), formerly an orthodox institution, into largely unchartered waters. The institution is now acting to directly support member states’ public finances, in contradiction to the Treaty, and also circumvents the day-to-day activities of private financial institutions. Whilst this has been effective in curbing short-term financial instability risks, its impact on growth and inflation is disputed. Furthermore, the current monetary policy creates long-term financial stability risks and ostensibly fuels divisions amongst central banks and nations.
A similar observation is made when considering the EU fiscal rules: the original ‘Maastricht criteria’ aimed at controlling the public deficit and debt levels have previously received widespread criticism, from both the public and academia alike. As the financial crisis took hold in 2008, the rules evidently could not apply and later, amidst the Eurozone crisis, returning to fiscal orthodoxy proved to be a mistake. Consequently, in the current downturn, the rules have quite rightly been suspended so that member states have substantial leeway to react to a potential shock. It is unrealistic to expect a return to the original fiscal criteria over the medium term.
When assessing the EU multi-annual budget, characterised by both a modest volume (just over 1% of EU GNP) and a dated structure (with most funds going to agriculture and cohesion policies), the fact that it is neither designed to respond to large economic shocks, nor to invest proportionately in important economic sectors (such as energy and the environment, research and development, and digital infrastructure) cannot be overlooked. This was obvious in the aftermath of the previous crises, and now again more so than ever, as member states agreed to create a €750bn recovery package to address the impact of the current crisis and to safeguard the Union’s economic potential.
Competition policy is another domain where many pre-existing rules are being queried. Lingering disagreements amongst member states on the rationale for state-aid rules had come to the fore, and the Commission eventually loosened their application during the current crisis. This decision seems justified, however in practice it grants member states a free hand in providing subsidies to bolster ailing businesses, which may distort the internal market and will likely lead to widening economic imbalances.
For its part, the EU trade policy has also been questioned, given the most recent disruption to global supply chains in strategic industries, whilst concerns have resurfaced on the negative impact of free trade on jobs and the environment in the context of growing protectionist tensions globally.
In view of the current issues, a relegitimisation of the EU economic policies is desirable
Our point here is not to argue that policymakers erred in bringing about changes. On the contrary, we believe that most were largely inevitable, and furthermore necessary, in order to absorb the seismic economic shocks that have pummeled Europe for over ten years now. Rather, we wish to stress that the now blatant divergence between the original principles and current economic practices is problematic; it discredits the EU economic framework as a whole, hampers its legibility, fuels renewed tensions amongst member states and, paradoxically, revives risks of macroeconomic and social divergences. It is now also more difficult to design a roadmap for European economic and fiscal policies over the long-term.
In view of this, there are technically four options on the table. The first - and simplest - being to turn a blind eye to the situation and thus citizens’ concerns, which cannot be deemed satisfactory. Other options argue that the latest inflections of the main EU economic policies are all law-based, or that a legal framework can be adapted so as to have everyone abide by the rules. However, these options would not address the underlying issues, namely the lack of genuine consensus. We would therefore argue that it is time to critically reassess and, where appropriate, amend the principles ruling the main policies in question.
The current context may in fact be helpful. For one thing, severe crises - whether political or economic - are typically moments to reconsider existing intellectual paradigms. The energy and environmental transitions also act as a powerful lever to induce transversal changes. Moreover, most of the existing economic policies (monetary, competition and trade, and the EU fiscal rules) are currently being reexamined at a technical level by the relevant EU institutions, without really allowing for political appropriation or democratic debates. Lastly, a ‘Conference on the Future of Europe’ will soon be launched, although its practical organisation and content, and how it will involve civil society, remain unclear.
Imparting a renewed legitimacy to the EU economic framework would not necessarily imply full-scale changes. In most cases, the original underpinnings of each policy remain valid. For instance, the economic rationale for free trade, fair competition, the ECB’s independence, and the requirement to control debt and public spending sustainability, is very clear. What is needed is a more ambitious EU budget, a flexible – and eventually less unorthodox – monetary policy, new discretionary and stringent fiscal rules, and a systematic defense of the level playing field with respect to trade with global partners. This will not be an easy or quick fix – but it will form part of the agenda for a stronger, more legitimate, and sustainable Europe!