After the French presidential election in May of 2017, which saw the decisive victory of Emmanuel Macron over Marine Le Pen, a sigh of relief could be heard in all European capitals and Brussels headquarters: the worse had been avoided, the European Union (EU) would survive. A visibly rejoiced European Commission President Jean-Claude Juncker would even go on declaring on 13 September 2017 that “the wind” was “back in Europe’s sails”. A little more than a year later, the gentle breeze has turned, once more, into a fierce tornado.
Weakened by a decade of economic crisis and shaken by the awakening of populism, the European project actually faces four disintegrations: the Brexit, democratic disaffection, monetary and financial fragmentation, and territorial dislocation. If EU Member States want to escape those looming risks, they must, as they always have in the last five decades, reinvent Europe in order to save it.
To begin with, after 60 years of continuing enlargement, the EU will face its first shrinking when the UK leaves at 11 pm (UK time) on Friday 29 March, 2019. It probably means that any significant progress in European defense integration will be stalled for the foreseeable future. Yet, this European disintegration is the most favorable for the EU, as it provides remaining member states a golden opportunity to rethink the terms of their alliance and finally spell out what exactly they plan on achieving together. What they should do according to us is to address the other three disintegrations before they are out of hand.
Regarding monetary union, the worse has been avoided since the critical intervention of the European Central Bank (ECB) in July 2012 to save the euro and the chaotic but eventually stabilizing summer of 2015 (when Greece almost exited from the euro area [EA]), but very little has been actually changed in the EA governance since 2008. Different initiatives including those unveiled by Emmanuel Macron in La Sorbonne on 26 September 2017 have not (yet?) delivered any concrete or decisive result.
The overall prospect for the economic performance of the EU might be the sign that the region is finally exiting the “great recession” that started a decade ago. But the issue has been in the past not with the (misleading) average performance of EU and EA member states but with divergence between them. And this remains unaddressed.
Even more concerning: if “the wind” is indeed “back in “Europe’s sails”, EU citizens are still not on board. The Standard Eurobarometer 89 of 2018 (published in March 2018) indicates that 42% of EU citizens have trust in the EU. While this proportion has increased since 2015 when it was at 32%, it remains far from its level of 2007 when almost 60% of EU citizens expressed confidence in the EU. It was in 2011 that a large majority of citizens began to turn away from the EU, at a time, one might think, when the EU Member States were proving resolutely incapable of proposing a coordinated and effective strategy to get out of the crisis and when the bloc was once again plunging into recession. The divide between the core and the periphery of the EA is clearly visible in national responses to the survey: while the Germans and the Dutch show relatively high confidence—with 50% of their citizens trusting the EU—, the Greeks, the Italians, the Cypriots and also the French are much more skeptical. While the discontent vis-à-vis the EU seems uneven between the Member States, it translates quite uniformly into the well-documented rise of right and left populist parties throughout the continent, the latest episode of which has shaken Italy for the last months.
The relief brought by the defeat of Marine Le Pen has in fact been quickly clouded by the view of 93 far-right MPs making their entry into the German Bundestag on 24 October 2017. The general trend is very clear and far from reassuring, as shown by the data from TIMBRO Authoritarian Populism Index 2017: on average, 20% of Europeans now vote for a populist party, a share that has roughly doubled since the early 2000s. In the latest rounds of general elections, 55 million Europeans have voted for a populist party (more than 21%).
Finally, the EU faces a risk of territorial dislocation. The success of the single market inherited from the Treaty of Rome (1957) has been paradoxical: it brought countries closer together but led to divergence between the regions (and more generally local jurisdictions or territories). It can for instance be shown that in the EU the gap in economic development between regions is stronger than the gap between countries. This spatial fracture within Europe’s countries, which is found in other countries outside Europe but which the single market has undoubtedly accentuated by the powerful agglomeration effects it generates, has two perilous consequences for the unity of Nation states: it fosters secession temptations of rich regions; it segregates and polarizes the electorate. While Catalogna might not succeed in its attempt to escape the authority of Madrid, it is the symptom of how cultural identity and economic separatism combined can fracture the EU. As for spatial polarization, one only needs to look at the map of votes in recent elections or referenda in UK, France or Austria to see that because European citizens do not live in the same area, they might end up not living the same era.
Twenty years after the completion of monetary union, the European project thus needs new positive narratives to survive. This reinvention should start by a re-visitation: how was the euro actually achieved? What are today its biggest challenges? How can it inspire future European endeavors? The different chapters in this volume intend to answer these questions.
Chapter 2 by Jacques Le Cacheux reviews the various, and sometimes contradictory, economic ideas and doctrines that have influenced the design of the European Monetary Union (EMU). Among these, quite importantly the macroeconomic and monetary framework adopted in Germany under the influence of ordo-liberalism, and the New Classical views about the functioning of market economies, with a clear distrust of political interferences and a strong aversion toward inflation. The European treaties have embedded very specific economic doctrines into institutional and stringent policy rules. The Great Recession and the subsequent sovereign debt crisis in the EA have shaken these certainties and require new thinking of macroeconomic and monetary matters.
Chapter 3 by Jérôme Creel recalls that the history of the euro is intrinsically related to the Maastricht Treaty, which defined the objectives and statutes of the ECB that shaped the institutional architecture of EA economic policies—the dominance of monetary policy over fiscal policies —, the characteristics of the implemented monetary policy—a form of inflation-targeting—and its performances that have been rather disappointing, most certainly since the global financial crisis. While the objectives and statutes were prepared for a stable environment, the upheaval following the crisis required many changes in the implementation of monetary and fiscal policies, which have taken time to emerge and enhance the EA performance.
Bridging the history and the current challenges of the EA, Chap. 4 by Jacques Le Cacheux analyzes the intrinsic risk of building a monetary union. For those who supported the project, monetary union was seen as the completion of economic integration and of the single market. This combination was expected to boost economic growth and foster economic convergence among EU economies. It has led to a significant intensification of economic and financial integration: trade in goods and services has increased, cross-border provision of services and labor commuting too; labor and capital have become more mobile. But for the lack of significant progress in political integration and collective decision-making, member state governments have been prone to resort to tax competition and other non-cooperative strategies. Although this has tended to increase economic inequalities and asymmetries among EU member states, the outlook for more cooperative strategies is not mixed: tensions tend to exacerbate and public opinions are expecting collective action, but agreement on common policies is made more difficult by existing differences in economic situations and performance.
Chapter 5 by Jérôme Creel and Francesco Saraceno goes on to argue that the design of constraints on the fiscal policy in the EMU is not intrinsically linked to the implementation of the single currency, but it is the result of the dominant New-Keynesian macroeconomic framework at the time of the Maastricht treaty. This framework gives almost no role to fiscal policy, viewed as a disturbance to market adjustments. The application of fiscal rules in the Stability and Growth Pact and the recent Fiscal Compact fare rather poorly in terms of the classic criteria for the optimality of fiscal rules though. This is due to the fact that the existence of these rules has produced a poor performance of the EA economy including during the recent crisis. The current reform debate should thus take stock of the recent theoretical and empirical developments, most notably on the size of multipliers, to revamp the rules and improve counter-cyclicality. Meanwhile, fiscal reforms should not underestimate the possible role of fiscal policy on potential output.
Chapter 6 by Christophe Blot, Paul Hubert and Fabien Labondance analyzes the deep reforms of the ECB , in terms of its prerogatives and objectives, since the subprime and sovereign debt crises. The ECB has taken over the objective of financial stability, it has expanded the range of its instruments, and it is in charge of the supervision of significant banks within the Banking Union. Strikingly, these changes took place without a treaty change. The ECB has behaved pragmatically and adapted its operational framework to fix the many dimensions of the crisis. While some of its actions have had some fiscal consequences, the legality of its decisions was contested. Reforms are thus necessary to clarify the role of the ...