The EU in an identity crisis

At the latest since the Brexit vote, the EU has been in an existential crisis. The 27 member states that will remain after a UK exit in approx. two years’ time are tussling to come up with a coherent strategy for how the EU should be structured in future. However, the opinions as to what changes are necessary and what form they should be given diverge greatly.

The main bone of contention is whether the convergence criteria should in future be relaxed. France and Italy are spearheading the member states that want to see government-driven economic policy. The German federal government is of the opposite opinion. There are also differences on the question of whether there should be greater EU integration. While the individual member states predominantly insist Brussels should now shed competences, the EU Commission prioritises more integration.

A key institutional problem the EU faces is that its citizens have only a very limited influence on the compositions of the European Council as the most important decision-making body in the EU. The heads of state and government as members of that body feel accountable above all to support the cause of their own respective electorate and therefore national interests, which not infrequently makes decision-making hard.

Great Britain’s exit threatens not only to dampen the EU economically but also to prompt the political balance within the community to shift. Since the United Kingdom, and this is not dissimilar to the situation in Germany, tends to champion a more liberal and fiscally restrictive approach, the balance is now shifting in favour of the advocates of a more lax interpretation of the convergence criteria.

If the member states scale back their efforts to save, it will be important how the financial resources are then allocated. If a member state increases investments it will be decisive whether the resulting revenues are higher or lower than the costs of the investment. However, it must be deemed problematic if a government for political reasons scales back its efforts to save in favour of higher public or state financed consumption, a trend already to be seen in some EMU member states such as Portugal. A unilateral increase in consumption at the cost of investments may satisfy an electorate in the short term, but is not infrequently accompanied by weaker growth prospects.

The different political interests and the rising risk that existing rules will be ignored more often than in the past given the crisis constitute one of the main risks facing the future of the EU. This could mark the beginning of a dangerous race within the community in which each member state tries to bag particular benefits to the disadvantage of the community as a whole in order to secure domestic advantages and thus keep anti-European forces at bay.

In order to secure the survival of the EU it is therefore essential in the context of reform for all member states to agree on a mutual institutional basis, the rules of which must be strictly obeyed. The convergence criteria constitute a negative example in this regard. Germany and France both broke these rules in the early Noughties and this was not sanctioned, meaning that all the countries that have since run deficits have cited this precedence in their favour.

The current crisis therefore also offers an opportunity. All the EU member states agree that maintaining the status quo is not a meaningful option, although the reform ideas have hitherto pointed in various directions. However, should agreement be successfully reached on a new set of basic rules, then there will be new political legitimation and no negative precedence, spelling the chance of adherence to the rules meeting with greater acceptance. Under certain conditions, from the viewpoint of economic policy it may even make sense to agree on less stringent rules than hitherto if they can be more consistently abided by or abuse of them is more strictly sanctioned.

Should the convergence criteria be amended or requirements for structural reforms be introduced one should not overlook the fact that the ECB’s expansionary monetary policy, which is also intended to help the countries in crisis, can only have a real impact if it is meaningfully flanked by economic and fiscal policy.

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