Monetary Union, Economic Union and Political Union

The repeated crises in the Eurozone and the prolonged stagnation had not only an economic impact but also profound social and political consequences. Unemployment rose to levels unprecedented in the new century, especially affecting the weakest members of the labour market, for example, young people (see Chap. 5). Social discontent increased, leading to disaffection with the EU project. Populist movements achieved growing success, partly reflected in the most recent elections for the European Parliament and in several national elections. The ‘Brexit’ process, which began with the result of the June 2016 referendum in the UK, may be a first step towards the EU’s dramatic disintegration; or conversely it could be an opportunity to redesign the functioning and policies of the EU’s institutions and, especially, to move the Eurozone towards a truly sustainable path.

A lack of unity in the EU - or apparently diverging policy proposals by individual members - has concerned not only the economic sphere but also strictly political levels. Suffice it to consider the difficulties of achieving a common position on policies for defence - also in response to the terrorist attacks in 2015 and 2016 - and migration. The closure of frontiers, in some countries, even against asylum seekers escaping from massacres and wars, has endangered some of the EU’s basic principles like the free movement of people (as reiterated in the Schengen agreements). On the contrary, the common and effective management of external borders could be the proper solution.³⁶

All the mentioned radical changes needed in EU governance (as discussed in the previous section) should be decided and implemented rapidly; although, to be realistic, they will require some time, adequate financial resources and consistent institutional reforms (new treaties should be approved). In June 2012 - together with the Presidents of the EU Commission, Eurogroup and ECB - EU President van Rompuy presented a document ( ‘Toward a genuine economic and monetary union’: EC 2012), forecasting a stronger integration, by means of: (i) a bank union, (ii) a budget union, (iii) an economic union and (iv) (at the end) a political union.³⁷ So far, limited progress has been achieved only on the bank union, also in this case after many compromises (as we saw in Chap. 6, the ECB’s direct supervision is limited to the biggest banks and financial institutions, and the bank union is not yet completed).

It is even more disappointing that a similar document, presented in June 2015, the ‘Five Presidents’ Report’ (the President of the European Parliament has been added) is still vague and hesitant, especially for the short-run developments and excluding for the immediate future treaty’s changes (see EC 2015). The document is apparently far reaching, since it includes subsequent steps to be achieved by specific deadlines: a genuine economic union, then a financial union (comprising the banking union and the capital markets union), later a fiscal union and finally a political union, not excluding a future ‘United States of Europe’. In the first stage, to be completed by June 2017, called ‘deepening by doing’ and to be developed in the framework of the existing treaties, the aims are these: completing the financial union, achieving and maintaining responsible fiscal policies at national and euro area level and enhancing democratic accountability. In the second stage (completing EMU), by binding through a set of commonly agreed benchmarks for convergence, the member states will be in a position ‘to participate in a shock absorption mechanism’. In the final stage, to be completed by 2025, ‘a deep and genuine EMU would provide a stable and prosperous place’.

We can observe that the emphasis placed on ‘a new boost to convergence, jobs and growth’, already in the first stage, is correct; once again, the biggest drawback is that there is no indication of additional resources or specific instruments with which to achieve the stated goal (apart from the proposal of new bureaucratic bodies like the envisaged ‘system of Competitiveness Authorities’). Regarding completion of the banking union, the document recognises that a common deposit insurance would increase the resilience against future crises and this ‘should be a priority already in Stage 1 ’. But we have seen that, until now, the statement has remained a dead letter. For the longer term, the document foresees a ‘stabilisation function’ for the euro area, but it is more explicit on what such a ‘function’ must not do than on its characteristics and funding. The concluding section alludes to a ‘future euro area treasury’ for the long term without any specification of its power and features, but only a final warning (which is obvious): joint decision-making on fiscal policy would not mean centralisation of all aspects of revenue and expenditure policy.

On the contrary, the recent literature contains some proposals on how to build a new ‘economic union’ (e.g. Baldwin and Giavazzi 2016). It is commonly recognised that in normal times ECB monetary policy should bear the primary responsibility for cyclical stabilisation. But in exceptional circumstances, for example, during large recessions, an additional tool with which to manage aggregate demand and stabilisation policies is required, also in view of the mentioned limitations of monetary policy. Instruments like the ESM have been important for facing the sovereign debt crisis in some small countries, but - in the current design - they are insufficient to deal with large systemic crises and to support ‘effective aggregate demand’, specifically public investment on a large scale.

A complete ‘EMU’ should include, in the long run, also a ‘fiscal union’.³⁸ According to a far-sighted but still ‘conservative’ view (Tabellini 2016a), most of the government functions and capacities will have to remain national. Thus, its key purposes and priorities would include: (i) instruments for fiscal stabilisation at the Eurozone level; (ii) resources to weather systemic financial crisis (banking crisis and sovereign debt crisis). If this moderate view is accepted, the implication for the revenue side of the budget is that limited - although permanent - fiscal transfers between member states would be enough. Specific tax revenues³⁹ would only be required to back a common debt (e.g. ‘stability bonds’) issued by the Eurozone.

In our view, a fiscal union should have risk-sharing functions also towards individuals; functions that are currently performed by national governments. For example, some economists and policymakers have proposed a European ‘unemployment insurance’ system (e.g. Dullien 2013; Alcidi and Thirion 2015; Beblavy et al. 2015), that is, a common mechanism with which to face asymmetric shocks and mitigate cyclical unemployment. Structural unemployment would still be under the responsibility of individual countries (apart from the aid coming from the EU structural funds). Here, as with other proposals, risk sharing goes hand in hand with risk reduction. To limit moral hazard problems or permanent transfers from some countries to others, appropriate incentives can be designed (e.g. De Grauwe and Ji 2016). The countries that are not direct beneficiaries would benefit in any case from the more stable environment. This European ‘unemployment benefit system’ would also strengthen the social dimension of EU policies.

Stabilisation functions, common defence systems and external policies (including border controls), large-scale investments (e.g. trans-European networks and large infrastructural projects) together with many micro investments (as previously specified), and scientific research works are some examples of public goods with significant international spillovers: they can be more efficiently provided at the community level, consistently also with the Subsidiarity Principle.

Especially after the ‘Brexit’ result of the UK referendum,⁴⁰ as on previous occasions in the history of European integration, ‘more Europe’ is not a choice. Unless there is a vigorous step forward in the direction of more integration, the present situation cannot be preserved, and there is a risk of retreat or even total disintegration of the Eurozone, or indeed the entire EU. The UK referendum was a negative event for European integration not only because of its result but also because it suggested that a country can bargain and obtain some exceptional benefits, and that exit from the EU is a real option to be considered by other countries. Many current problems are caused by lack of trust and the recurrence of nationalism, as was the case in the early days of the integration process.⁴¹

As already mentioned, the ‘Brexit’ could paradoxically favour a more rapid move towards a complete and genuine EMU (at least among the countries with a greater interest in more advanced integration).⁴² In the end, a monetary union cannot be maintained without continuous progress towards an economic and political union. De Grauwe and Ji (2016), while agreeing that a ‘political union’ is now out of reach, argue that we should try anyway to move in that direction, perhaps following a strategy of ‘small steps’.⁴³ Even in the post-Brexit scenario, there is a prevailing view (e.g. Resilience Authors 2016) that more ambitious steps would improve Eurozone’s resilience further, but these will have to wait for a political breakthrough; so these authors stress the actions needed to be taken soon, nevertheless admitting that also the long-term questions need to be discussed without delay. In our view, a ‘federal union’, although unrealistic at the moment, should be the ultimate goal, as dreamed by the ‘founding fathers’ of the European Community.⁴⁴

All the (previously discussed) delays and mistakes in the integration process are worrisome, particularly because in a globalised world, where the economic and political power is shifting to other world regions (in America, Asia and other continents), a fragmented Europe would certainly fail. Thus, our hope is that open-minded policymakers will be able to introduce the required radical reforms, leading to a truly ‘genuine’ economic union, and in the end to a ‘United States of Europe’. The eventual achievement of this final ambitious step will be possible only if the European politicians regain without delay a high consensus from citizens, by means of appropriate and innovative policies (including the ‘public investment shock’ previously proposed), thus allowing a rapid recovery, satisfactory net job creation and an improvement in social cohesion.